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 June 30, 2002
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Commission File Number 000-25921
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SMITH BARNEY AAA ENERGY FUND L.P.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3986032
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
- -------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
(212) 723-5424
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(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
----- ----
SMITH BARNEY AAA ENERGY FUND L.P.
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition
at June 30, 2002 and December 31,
2001 (unaudited). 3
Statement of Income and Expenses
and Partners' Capital for the three
and six months ended June 30, 2002
and 2001 (unaudited). 4
Notes to Financial Statements,
including the Financial Statements of
SB AAA Master Fund LLC (unaudited). 5 - 15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 16 - 18
Item 3. Quantitative and Qualitative
Disclosures of Market Risk 19 - 20
PART II - Other Information 21
2
PART I
Item 1. Financial Statements
Smith Barney AAA Energy Fund L.P.
Statement of Financial Condition
(Unaudited)
June 30, December 31,
2002 2001
------------------------ -----------------------
Assets:
Investment in Master Fund $ 183,462,925 $ 143,835,729
Cash, in commodity futures trading account 76,517 11,680
------------------------ -----------------------
183,539,442 143,847,409
Interest receivable 200,599 164,303
------------------------ -----------------------
$ 183,740,041 $ 144,011,712
======================== =======================
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 1,654,033 $ 519,842
Management fees 299,180 243,694
Other fees 84,871 27,093
Due to Special Limited Partner 8,340,834 -
Redemptions payable 2,004,389 8,333,262
------------------------ -----------------------
12,383,307 9,123,891
------------------------ -----------------------
Partners' Capital:
General Partner, 913.9790 Unit equivalents
outstanding in 2002 and 2001 2,161,003 1,734,028
Limited Partners, 71,559.8603 and 70,183.3406
Units of Limited Partnership Interest
outstanding in 2002 and 2001, respectively 169,195,731 133,153,793
------------------------ -----------------------
171,356,734 134,887,821
------------------------ -----------------------
$ 183,740,041 $ 144,011,712
======================== =======================
See Notes to Financial Statements.
3
SMITH BARNEY AAA ENERGY FUND L.P.
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
2002 2001 2002 2001
------------- ------------- ----------- ------------
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions $ 33,831,669 $ 1,947,880 $ 39,662,542 $ 55,260,155
Change in unrealized gains (losses) on open
positions (9,875,387) 5,001,153 11,869,032 (34,387,816)
Income allocated from Master 14,905 - 22,758 -
Expenses allocated from Master (4,258,324) - (8,124,013) -
------------- ------------- ----------- ------------
19,712,863 6,949,033 43,430,319 20,872,339
Interest income 593,517 747,548 1,085,795 1,307,918
------------- ------------- ----------- ------------
Net realized and unrealized gains 20,306,380 7,696,581 44,516,114 22,180,257
------------- ------------- ----------- ------------
Expenses:
Brokerage commissions including clearing
fees of $560,345, $192,525, $833,144 and
$371,367, respectively - 1,598,496 * - 2,830,662 *
Management fee 890,578 460,473 1,627,022 880,639
Other expenses 31,625 29,039 76,373 40,226
------------- ------------- ----------- ------------
922,203 2,088,008 1,703,395 3,751,527
------------- ------------- ----------- ------------
Net income 19,384,177 5,608,573 42,812,719 18,428,730
Allocation to the Special Limited Partner (3,755,152) (972,205) (8,340,834) (3,424,162)
Redemptions -Limited Partner (3,028,370) (2,495,108) (3,864,971) (3,609,827)
-Special Limited Partner - (681,980) - (681,980)
Additions - Limited Partner - - 5,862,000 -
- General Partner - - - -
------------- ------------- ----------- ------------
Net increase in Partners' capital 12,600,655 1,459,280 36,468,914 10,712,761
Partners' capital, beginning of period 158,756,079 83,580,145 134,887,821 74,326,664
------------- ------------- ----------- ------------
Partners' capital, end of period $171,356,734 $ 85,039,425 $171,356,735 $ 85,039,425
------------- ------------- ----------- ------------
Net asset value per Unit
(72,473.8393 and 50,221.1013 Units
outstanding at June 30, 2002 and
2001, respectively) $ 2,364.39 $ 1,693.30 $ 2,364.39 $ 1,693.30
------------- ------------- ----------- ------------
Net income per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 211.99 $ 88.45 $ 467.16 $ 285.08
------------- ------------- ----------- ------------
* Amount reclassified for comparative purposes
See Notes to Financial Statements
4
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
1. General:
Smith Barney AAA Energy Fund L.P. (the "Partnership") is a limited
partnership organized on January 5, 1998 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 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 intends initially to
trade 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. The Partnership commenced trading on March 16, 1998. From
March 16, 1998 to August 31, 2001, the Partnership engaged directly in the
speculative trading of a diversified portfolio of commodity interests.
Effective September 1, 2001, the Partnership transferred substantially all
of its assets (including unrealized appreciation of $(7,323,329) in exchange for
128,539.1485 Units and a fair value of $128,539,149 as a tax-free transfer to
the SB AAA Master Fund LLC, a New York limited liability company (the "Master").
The Master was formed in order to permit accounts managed now or in the future
by AAA Capital Management LLC (the "Advisor") using the Energy Program (Futures
and Swaps), the Advisor's proprietary trading program, to invest together in one
trading vehicle. Smith Barney Futures Management LLC (the "General Partner") is
the general partner of the Partnership and the managing member of the Master.
The Partnership is a non-managing member of the Master and the Advisor is a
special limited partner. Expenses to investors as a result of investment in the
Master are approximately the same and redemption rights are not affected.
As of June 30, 2002 , the Partnership owns approximately 92.2% 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 financial statements of the
Master are included in this report and should be read together with the
Partnership's financial statements.
5
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
Prior to September 1, 2001, the Partnership's commodity broker was Salomon
Smith Barney Inc. ("SSB"). The Master's commodity broker is SSB. SSB is an
affiliate of the General Partner. The General Partner is wholly owned by Salomon
Smith Barney Holdings Inc. ("SSBHI"), which is the sole owner of SSB. SSBHI is a
wholly owned subsidiary of Citigroup Inc.
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 June 30, 2002 and December 31, 2001 and the results of its
operations for the three and six months ended June 30, 2002 and 2001. 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, 2001.
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.
6
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
The Master's Statement of Financial Condition as of June 30, 2002 and
December 31, 2001 and its Statement of Income and Expenses and Members' Capital
for the three and six months ended June 30, 2002 were:
SB AAA Master Fund LLC
Statement of Financial Condition
(Unaudited)
June 30, 2002 December 31,2001
------------- ---------------
Assets:
Equity in commodity futures trading account:
Cash $ 181,267,497 $ 156,846,978
Net unrealized appreciation
on open positions 6,242,443 1,084,800
Net unrealized depreciation
on open swaps positions (1,169,729) (606,310)
Commodity options owned, at
fair value (cost $49,589,138
and $3,003,750, respectively) 44,745,806 2,135,700
------------- -------------
231,086,017 159,461,168
Due from brokers 796,750 481,935
Interest Income 5,396 2,911
------------- -------------
$ 231,888,163 $ 159,946,014
============= =============
Liabilities and Members' Capital:
Liabilities:
Commodity options written, at
fair value (premium received
$44,930,089 and $8,994,064,
respectively) $ 30,309,742 $ 6,501,746
Accrued Expenses:
Commissions 915,168 261,717
Professional fees 52,940 38,000
Due to brokers 1,670,706 906,850
Due to SSB 22,978 22,978
------------- -------------
32,971,534 7,731,291
------------- -------------
Members' Capital 198,916,629 152,214,723
------------- -------------
$ 231,888,163 $ 159,946,014
============= =============
See Notes to Financial Statements
7
SB AAA Master Fund LLC
Condensed Schedule of Investments
June 30, 2002
(Unaudited)
Sector Number of Contracts Contract Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
Energy
Futures contracts purchased - 1.77% 3,517,881
Futures contracts sold - 1.37% 2,724,562
Options owned - 22.56%
3,230 NYMEX Natural Gas Call - 12.87%, Aug 2002 - June 2003 25,594,780
2,263 NYMEX Light Sweet Crude Call - 7.25%, Oct 2002 - Mar 2003 14,424,620
Other - 2.44% 4,851,527
Options written - (15.30)%
3,200 NYMEX Light Sweet Crude Call - (6.27)%, Aug 2002 - Dec 2002 (12,465,820)
9,335 NYMEX Natural Gas Call - (6.27)%, Aug 2002 - Mar 2003 (12,475,090)
Other - (2.76)% (5,493,952)
Swaps contracts purchased - 2.05% 4,075,097
Swaps contracts purchased - (2.63)% (5,231,640)
Swap options purchased - (0.01)% (13,187)
--------------------
Total Energy - 9.81% 19,508,778
--------------------
Total Fair Value - 9.81% $ 19,508,778
=====================
Country Composition Investments at Fair Value % of Investments at Fair Value
- --------------------------- ----------------------------------- ---------------------
United States $ 19,508,778 100.00%
Percentages are based on Members' Capital unless otherwise indicated.
See Notes to Financial Statements
8
SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2001
Number of Contract Fair Value
Sector Contracts
Energy Futures contracts purchased - (10.53)%
5,210 NYMEX Natural Gas - (8.61)%, Apr. 2002 - Nov. 2003 $(13,102,072)
Other - (1.92)% (2,924,740)
Futures contracts sold - 11.24%
5,550 NYMEX Natural Gas - 8.73%, Feb. 2002 - June 2004 13,281,102
Other - 2.51% 3,830,510
Options owned - 1.40% 2,135,700
Options written - (4.27)% (6,501,746)
Swaps contracts purchased - (1.50)% (2,277,251)
Swaps contracts sold - 1.11% 1,670,941
-----------
Total Energy - (2.55)% (3,887,556)
-----------
Total Fair Value - (2.55)% $(3,887,556)
=========
Investments at % of Investments at
Country Composition Fair Value Fair Value
------------------- ------------- ------------
United States $(3,887,556) 100.00%
=========== ======
Percentages are based on Members' Capital unless otherwise indicated.
See notes to financial statements.
9
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
SB AAA Master Fund LLC
Statement of Income and Expenses and Members' Capital
For the Three For the Six
Months Ended Months Ended
June 30, 2002 June 30, 2002
--------------- --------------
Income:
Net gains on trading of Commodity interests:
Realized gains on closed
positions $ 36,634,699 $ 42,816,561
Change in unrealized gains
(losses) on open positions (10,702,971) 12,746,971
------------- -------------
25,931,728 55,563,532
Interest income 15,033 23,455
------------- -------------
25,946,761 55,586,987
------------- -------------
Expenses:
Brokerage commissions including
clearing fees of $606,653 and
$1,098,861, respectively 4,277,310 7,521,526
Professional fees 9,092 18,286
------------- -------------
4,286,402 7,539,812
------------- -------------
Net Income 21,660,359 48,047,175
Additions 2,396,264 11,162,417
Redemptions (2,840,699) (12,507,686)
------------- -------------
Net increase in Members'
Capital 21,215,924 46,701,906
Members' capital, beginning of
period 177,700,705 152,214,723
------------- -------------
Members' capital, end of period $ 198,916,629 $ 198,916,629
============= =============
Net asset value per Unit
(136,093.2122 Units outstanding
at June 30, 2002 ) $ 1,461.6205 $ 1,461.6205
============= =============
Net income per Unit of Member
Interest $ 158.4599 $ 352.3802
============= =============
10
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in net asset value per Unit for the three and six months ended
June 30, 2002 and 2001 were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- ------- ---------
Net realized and unrealized
Gains * $ 267.30 $ 101.94 $ 588.51 $ 342.62
Interest income 8.27 14.52 15.07 25.16
Expenses ** (63.58) (28.01) (136.42) (82.70)
---------- ---------- ---------- ----------
Increase for period 211.99 88.45 467.16 285.08
Net Asset Value per Unit,
Beginning of period 2,152.40 1,604.85 1,897.23 1,408.22
---------- ---------- ---------- -----------
Net Asset Value per Unit,
End of period $2,364.39 $1,693.30 $2,364.39 $1,693.30
========== ========== ========== ===========
* Net realized and unrealized gains (losses) is net of commission expense.
** Expenses exclude commission expense.
11
MITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
Financial Highlights continued:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
--------- -------- ------- ----------
Ratio to average net assets:
Net income before incentive fee 47.1% 26.3% 56.0% 44.8%
Incentive fee (9.1)% (4.6)% (10.9)% (8.3)%
--------- -------- -------- ---------
Net income after incentive fee 38.0% 21.7% 45.1% 36.5%
========= ======== ======== ==========
Operating expenses 12.6% 9.8% 12.9% 9.1%
Incentive fee 9.1% 4.6% 10.9% 8.3%
--------- -------- -------- ---------
Total expenses and incentive fees 21.7% 14.4% 23.8% 17.4%
========= ======== ======== =========
Total return:
Total return before incentive fee 15.1% 9.8% 30.6% 25.1%
Incentive fee (1.7)% (4.2)% (6.0)% (4.8)%
--------- --------- -------- ----------
Total return after incentive fee 13.4% 5.6% 24.6% 20.3%
======== ======== ======== ========
- -----------------------------------------------------------------------------------------
Financial Highlights of the Master:
Total return 12.2% 31.8%
Ratio of expenses, including brokerage
commissions, to average net assets 9.1% 8.8%
Ratio of net income to average
net assets 46.1% 55.9%
12
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
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 Statement of Income and
Expenses and Partners' Capital and are discussed herein Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The respective Customer Agreement between the Partnership and SSB and the
Master and SSB 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 value during the six months ended June 30, 2002 and
the period from September 1, 2001 (commencement of operations) to December 31,
2001, respectively, based on a monthly calculation, were $11,508,292 and
$(927,070), respectively. The fair value of these commodity interests, including
options and swaps thereon, if applicable, at June 30,2002 and December 31, 2001
was $19,508,778 and $(3,887,556), 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.
4. Financial Instrument Risk:
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, in the normal course
of its business. 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,
13
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
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.
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
Master's risk of loss in the event of counterparty default is typically limited
to the amounts recognized as unrealized appreciation in the statement 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 SSB.
The General Partner monitors and controls the 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 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.
14
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Master's
involvement in these instruments. The majority of these instruments mature
within one year of June 30, 2002. However, due to the nature of the Master's
business, these instruments may not be held to maturity.
15
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 cash and interest receivable. 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 in the
second quarter of 2002.
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 Units and distributions of profits, if any.
For the six months ended June 30, 2002, Partnership capital increased 27.0%
from $134,887,821 to $171,356,734. This increase was attributable to net income
from operations of $34,471,885 after the allocation to the special limited
partner of $8,340,834, coupled with additional sales of 3,071.2548 Units
totaling $5,862,000, which was partially offset by the redemption of 1,283.8563
Units resulting in an outflow of $3,864,971. 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 gains or losses on commodity futures trading,
expenses, interest income, redemptions of Units and distributions of profits, if
any.
For the six months ended June 30, 2002, the Master's capital increased
30.7% from $152,214,723 to $198,916,629. This increase was attributable to net
income from operations of $48,047,175, coupled with additions of 9,924.5628
Units totaling $11,162,417, which was partially offset by the redemption of
11,055.6501 Units totaling $12,507,686. 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 requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities in
the financial statements and accompanying notes.
16
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. 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 statement of income and expenses and partners' capital.
Results of Operations
During the Partnership's second quarter of 2002, the net asset value per
unit increased 9.8% from $2,152.40 to $2,364.39 as compared to an increase of
5.5% in the second quarter of 2001. The Partnership experienced a net trading
gain in the second quarter of 2002 of $19,712,863. Gains were primarily
attributable to the Master's trading of commodity futures in NYMEX Natural Gas,
NYMEX Crude Oil, NYMEX Unleaded Gas and NYMEX Heating Oil and were partially
offset by losses in energy swaps, IPE Brent Crude Oil and IPE Gas Oil. The
Partnership experienced a net trading gain in the second quarter of 2001 of
$6,949,033. Gains were primarily attributable to the trading of NYMEX Natural
Gas, NYMEX Crude Oil, NYMEX Heating Oil and energy swaps and were partially
offset by losses in IPE Gas Oil and NYMEX Unleaded Gas.
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 Master) depends on the existence of major price trends and the ability of
17
the Advisor to correctly identify those price trends. Price trends 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 market trends exist and the Advisor is able to
identify them, the Partnership (and Master) expect 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 SSB based on the average non-competitive yield on 3-month U.S.
Treasury bills maturing in 30 days. Salomon Smith Barney may continue to
maintain the Partnership assets in cash and/or to place all of the Fund assets
in 90-day Treasury bills and pay the Partnership 80% of the interest earned on
the Treasury bills purchased. Salomon Smith Barney will retain 20% of any
interest earned on Treasury bills. Interest income for the three and six months
ended June 30, 2002 decreased by $154,031 and $222,123, respectively, as
compared to the corresponding periods in 2001. The decrease in interest income
is primarily due to a decrease in interest rates during the period ended June
30, 2002.
Brokerage commissions are allocated by the Master and are based on the
number of trades executed by the Advisor. Commissions and fees allocated to the
Partnership for the three and six months ended June 30, 2002 increased by
$2,659,828 and $5,293,351, respectively, as compared to the corresponding
periods in 2001.
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 six months ended June 30,
2002 increased by $430,105 and $746,383, respectively, as compared to the
corresponding periods in 2001.
Special limited partner allocations 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. Trading
performance for the three and six months ended June 30, 2002 resulted in an
accrual of Special Limited Partner allocations of $3,755,152 and $8,340,834,
respectively. Trading performance for the three and six months ended June 30,
2001 resulted in an accrual of Special Limited Partner allocations of $972,205
and $3,424,162, respectively.
18
20
Item 3. Quantitative and Qualitative Disclosures of 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
intervals. 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.
19
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of June 30, 2002 . All open
position trading risk exposures of the Master have been included in calculating
the figures set forth below. As of June 30, 2002 , the Master's total
capitalization was $198,916,629. There has been no material change in the
trading Value at Risk information previously disclosed in the Form 10-K for the
year ended December 31, 2001.
June 30, 2002
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- -----------------------------------------------------------------------------------
Energy $28,596,761 14.38% $64,130,606 $5,737,107
Energy Swaps 3,521,443 1.77% 9,119,561 1,395,629
------------ ------
Total $32,118,204 16.15%
============ ======
20
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
In April 2002, consolidated amended complaints were filed against
Salomon Smith Barney Inc and other investment banks named in numerous
putative class actions filed in the United States District Court for
the Southern District of New York alleging violations of certain
federal securities laws (including Section 11 of the Securities Act of
1933, as amended, and Section 10(b) of the Securities Exchange Act of
1934, as amended) with respect to the allocation of shares for certain
initial public offerings and related aftermarket transactions and
damage to investors caused by allegedly biased research analyst
reports. Also pending in the Southern District of New York against
Salomon Smith Barney Inc and other investment banks are several
putative class actions which have been consolidated into a single
class action alleging violations of certain federal and state
antitrust laws in connection with the allocation of shares in initial
public offerings when acting as underwriters.
Item 2. Changes in Securities and Use of Proceeds -
The Partnership no longer offers units at the net asset value per
Unit as of the end of each month. For the three and six months ended
June 30, 2002 there were additional sales of 3,071.2548 Units totaling
$5,862,000. There were no additional sales during the three and six
months ended June 30, 2001.
Proceeds from the sale of additional Units are used in the
trading of commodity interests including futures contracts, options,
forwards and swap contracts.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. (a) Exhibit - 99.1 Certificate of Chief Executive Officer.
Exhibit - 99.2 Certificate of Chief Financial Officer.
(b) Reports on Form 8-K - None with respect to the second quarter of
2002. On July 17, 2002 the Partnership filed a notice on Form 8-K
to report a change in accountants from PricewaterhouseCoopers LLP
to KPMG LLP.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
SMITH BARNEY AAA ENERGY FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 8/14/02
-------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 8/14/02
------------
By: /s/ Daniel R. McAuliffe, Jr.
----------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 8/14/02
-----------
22