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 March 31, 2003
Commission File Number 000-25921
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 Citigroup Managed Futures LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(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 _____
SMITH BARNEY AAA ENERGY FUND L.P.
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition
at March 31, 2003 and December 31,
2002 (unaudited). 3
Statements of Income and Expenses
and Partners' Capital for the three
months ended March 31, 2003 and 2002
(unaudited). 4
Notes to Financial Statements,
including the Financial Statements of
SB AAA Master Fund LLC (unaudited). 5 - 14
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
Item 4. Controls and Procedures 21
PART II - Other Information 22
2
PART I
Item 1. Financial Statements
Smith Barney AAA Energy Futures Fund L.P.
Statements of Financial Condition
(Unaudited)
March 31, December 31,
2003 2002
------------------------ -----------------------
Assets:
Investment in Master, at fair value $ 120,742,772 $ 194,537,976
Cash 30,244 5,181
------------------------ -----------------------
120,773,016 194,543,157
Interest receivable 101,721 154,185
------------------------ -----------------------
$ 120,874,737 $ 194,697,342
======================== =======================
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Management fees $ 205,255 $ 330,695
Other 38,877 13,813
Redemptions payable 3,015,558 12,501,176
------------------------ -----------------------
3,259,690 12,845,684
------------------------ -----------------------
Partners' Capital:
General Partner, 913.9790 Unit equivalents
outstanding in 2003 and 2002 1,583,268 2,365,908
Limited Partners, 66,982.2150 and 70,183.3406 Units
of Limited Partnership Interest
outstanding in 2003 and 2002, respectively 116,031,779 $ 179,485,750
------------------------ -----------------------
117,615,047 181,851,658
------------------------ -----------------------
$ 120,874,737 $ 194,697,342
======================== =======================
See Accompanying Notes to Unaudited Financial Statements.
3
SMITH BARNEY AAA ENERGY FUND L.P.
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------------
2003 2002
------------------- -------------------
Income:
Realized (losses) gains on closed positions from Master $(72,922,156) $ 5,830,873
Change in unrealized gains on open positions from Master 16,584,915 21,744,419
Income allocated from Master 42,182 7,853
Expenses allocated from Master (3,190,521) (3,865,689)
------------------- -------------------
(59,485,580) 23,717,456
Interest income 353,135 492,278
------------------- -------------------
(59,132,445) 24,209,734
------------------- -------------------
Expenses:
Management fees 710,681 736,444
Other expenses 29,699 44,749
------------------- -------------------
740,380 781,193
------------------- -------------------
Net (loss) income before allocation to the Special Limited Partner (59,872,825) 23,428,541
------------------- -------------------
Allocation to the Special Limited Partner - (4,585,682)
Additions - Limited Partner - 5,862,000
Redemptions - Limited Partner (4,363,786) (836,601)
------------------- -------------------
Net (decrease) increase in Partners' capital (64,236,611) 23,868,258
Partners' capital, beginning of period 181,851,658 134,887,821
------------------- -------------------
Partners' capital, end of period $ 117,615,047 $ 158,756,079
=================== ===================
Net asset value per Unit
(67,896.1940 and 73,757.6956 Units outstanding
at March 31, 2003 and 2002, respectively) $ 1,732.28 $ 2,152.40
=================== ===================
Net (loss) income per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (856.30) $ 255.17
=================== ===================
See Accompanying Notes to Unaudited Financial Statements.
4
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(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, 2002, the Partnership engaged directly in the
speculative trading of a diversified portfolio of commodity interests.
Effective September 1, 2002, 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, 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. 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. 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 March 31, 2003, the Partnership owns approximately 51.0% 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 Statement of Financial
Condition, Statement of Income and Expenses and Member's Capital and Condensed
Schedule of Investments are included herein.
5
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
(Continued)
On April 7, 2003, Smith Barney Futures Management LLC changed its name to
Citigroup Managed Futures LLC. The 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.
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 March 31, 2003 and December 31, 2002 and the results of its
operations for the three months ended March 31, 2003 and 2002. 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, 2002.
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
March 31, 2003
(Unaudited)
(Continued)
The Master's Statement of Financial Condition as of March 31, 2003 and December
31, 2002, Condensed Schedule of Investments as of March 31, 2003 and 2002 and
its Statement of Income and Expenses and Members' Capital for the three months
ended March 31, 2003 and 2002 are presented below:
SB AAA Master Fund LLC
Statements of Financial Condition
(Unaudited)
March 31, December 31,
2003 2002
Assets:
Equity in commodity futures
trading account:
Cash (restricted $6,200,000 and
$53,522,255 in 2003 and 2002,
respectively) $186,592,480 $330,218,077
Net unrealized (depreciation)
appreciation on open positions (6,322,928) 9,188,483
Net unrealized appreciation on
open swaps positions 45,212,560 38,011,771
Commodity options owned, at fair
value (cost $65,247,420 and
$63,879,907, respectively) 101,277,918 83,252,102
----------- -----------
326,760,030 460,670,433
Due from brokers 13,926,925 12,595,792
Interest receivable 4,862 6,712
----------- ------------
$340,691,817 $473,272,937
=========== ============
Liabilities and Members' Capital:
Liabilities:
Unrealized depreciation on open
swap positions $ 30,666,724 $ 48,470,222
Commodity options written, at
market value (premium $51,982,879
and $59,666,185 in 2003 and 2002,
respectively) 54,182,136 67,724,777
Accrued Expenses:
Commissions 3,538,071 5,210,167
Professional fees 29,310 20,117
Due to brokers 8,704,465 1,541,223
Due to CMG 22,978 22,978
----------- ------------
97,143,684 122,989,484
----------- ------------
Members' Capital:
Members' Capital, 224,082.2089
and 216,158.4103 Units outstanding
in 2003 and 2002, respectively 243,548,333 350,283,453
----------- ------------
$340,691,817 $473,272,937
=========== ===========
7
SMITH BARNEY AAA ENERGY FUND L.P.
Notes to Financial Statemenst
March 31, 2003
(Unaudited)
SB AAA Master Fund LLC
Condensed Schedule of Investments
March 31, 2003
(Unaudited)
Number of
Sector Contracts Contract Fair Value
- -------------- ----------
Energy Futures contracts purchased (5.69)%
6,077 NYMEX Light Sweet Crude Oil (3.11)% May. 03 - Dec 04 $ (7,562,635)
1,192 NYMEX Natural Gas (4.47)% Feb. 03 - Feb. 04 (10,891,558)
Other 1.89% 4,604,196
--------------
(13,849,997)
Futures contracts sold 3.09% 7,527,069
Options owned 41.58%
3,956 NYMEX Natural Gas Call 15.99% May. 03 - June 03 38,936,610
2,381 NYMEX Natural Gas Put 5.08% June 03 12,371,580
7,783 NYMEX Light Sweet Crude Oil Put 11.97% May. 03 - Dec 03 29,152,770
1,789 NYMEX Natural Gas Call 3.28% May. 03 - Dec 03 7,999,750
Other 5.26% 12,817,208
--------------
101,277,918
Options written 22.25%
10,539 NYMEX Natural Gas Call 9.42% May 03 - June 04 (22,939,580)
814 NYMEX Light Sweet Crude Call 5.58% May 03 - Dec. 03 (13,581,770)
5,165 NYMEX Light Sweet Crude Put 4.11% May 03 - Dec 03 (10,011,780)
Other 3.14% (7,649,006)
--------------
(54,182,136)
Unrealized appreciation on Swaps contracts 18.56%
3,381 NYMEX Natural Gas 14.67% 35,723,929
Other 3.89% 9,488,631
--------------
45,212,560
Unrealized depreciation on Swaps contracts 12.59%
681 NYMEX Natural Gas 8.55% (20,817,903)
Other 4.04% (9,848,821)
--------------
(30,666,724)
Total Energy 92.38% 55,318,690
---------------
Total Fair Value 92.38% $ 55,318,690
===============
Investment at % of Investment at
Country Composition Fair Value Fair Value
-------------------- ---------------- --------------------
United Kingdom $ 6,509,584 11.77%
United States 48,809,106 88.23%
----------------- ------
$ 55,318,690 100.00%
================= ======
Percentages are based on Members' Capital unless otherwise indicated
8
SMITH BARNEY AAA ENERGY FUND L.P.
Notes to Financial Statemenst
March 31, 2003
(Unaudited)
SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2002
Number of Contract Fair Value
Sector Contracts
Energy Futures contracts purchased 17.92%
6,228 IPE Gas Oil 5.45% Jan. - Feb. 2003 $19,089,003
Other 12.47% 43,677,214
------------
62,766,217
Futures contracts sold (15.30)%
13,454 NYMEX Light Sweet Crude Oil (7.22)% Feb. 03 - June 04 (25,271,391)
7,578 NYMEX Natural Gas (6.05)% Feb. 03 - Feb. 04 (21,203,640)
Other (2.03)% (7,102,703)
------------
(53,577,734)
Options owned 23.77%
7,293 NYMEX Natural Gas Call 10.40% Feb. 03 - June 03 36,430,400
5,325 NYMEX Natural Gas Put 5.37% Feb. 03 - June 03 18,812,110
Other 8.00% 28,009,592
------------
83,252,102
Options written (19.33)%
12,086 NYMEX Light Sweet Crude Call (6.90)% Feb. 03 - June 03 (24,193,640)
Other (12.43)% (43,531,137)
------------
(67,724,777)
Unrealized appreciation on Swaps contracts 10.85%
3,354 NYMEX Natural Gas 5.46% 19,130,237
Other 5.39% 18,881,534
------------
38,011,771
Unrealized depreciation on Swaps contracts (13.84)%
1,809 NYMEX Natural Gas (5.17)% (18,107,814)
Other (8.67)% (30,362,408)
------------
(48,470,222)
------------
Total Energy 4.07% 14,257,357
------------
Total Fair Value 4.07% $14,257,357
==========
Investments at % of Investments at
Country Composition Fair Value Fair Value
-------------------- ----------- ---------------
United Kingdom $25,728,485 180.46%
United States (11,471,128) (80.46)
------------ ------
$14,257,357 100.00%
============ ======
Percentages are based on Members' Capital unless otherwise indicated.
See Accompanying Notes to Financial Statements.
9
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
SB AAA Master Fund LLC
Statements of Income and Expenses and Members' Capital
THREE-MONTHS ENDED
MARCH 31,
2003 2002
Income:
Net gain(losses)on trading of
commodity interest:
Realized(losses) gains on closed
positions $(143,773,821) $ 6,181,862
Change in unrealized gains on
open positions 32,010,513 23,449,942
(111,763,308) 29,631,804
Interest Income 42,181 8,422
------------ -----------
(111,721,127) 29,640,226
------------ -----------
Expenses:
Brokerage commissions, including
clearing fees of $1,901,143 and
$492,208 in 2003 and 2002,
respectively 6,497,159 3,244,216
Professional fees 9,194 9,194
------------ -----------
6,506,353 3,253,410
------------ -----------
Net (loss) income (118,227,480) 26,386,816
Additions 32,986,186 8,766,153
Redemptions (21,494,026) (9,666,987)
------------ -----------
Net (decrease) increase in Members
Interest (106,735,320) 25,485,982
Members' Capital, beginning of
period 350,283,453 152,214,723
------------ -----------
Members' Capital, end of period $ 243,548,133 $ 177,700,705
=========== ===========
Net asset per Unit (224,062.2088
and 52,079.7917 Units outstanding
in March 31, 2003 and 2002,
respectively) $1,094.93 $1,303.16
=========== ===========
Net (loss) income per Unit of
Member Interest $ (525.86) $ 193.92
=========== ===========
10
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
2. Financial Highlights:
Changes in net asset value per Unit for the three months ended March 31, 2003
and 2002 were as follows:
THREE-MONTHS ENDED
MARCH 31,
2003 2002
Net realized and unrealized (losses)
gains* $ (851.37) $321.21
Interest income 5.64 6.80
Expenses** (10.57) (72.84)
------ -------
(Decrease) increase for period (856.30) 255.17
Net Asset Value per Unit,
beginning of period 2,588.58 1,897.23
-------- --------
Net Asset Value per Unit,
end of period $1,732.28 $2,152.40
======== ========
* Includes brokerage commissions
**Excludes brokerage commissions
Ratio to average net assets: ***
Net investment loss before incentive
fee allocation **** (1.0)% (0.7)%
===== =====
Operation expenses 8.6% 10.0%
Incentive fee allocation 0.0% 0.0%
---- -----
Total expenses 8.6% 10.0%
===== =====
Total return:
Total return before incentive
fee allocation (33.1)% 13.5%
Incentive fee allocation 0.0% 0.0%
------ -------
Total return after incentive fee
allocation (33.1)% 13.5%
===== =====
*** Annualized
**** Interest income less total expenses (exclusive of incentive fees)
11
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Financial Highlights of the Master:
THREE-MONTHS ENDED
MARCH 31,
2003 2002
Ratio to average net assets:
Net investment loss* (8.7)% (2.0)%
Operating expenses 8.8% 8.3%
Total return (32.4)% 17.5%
* Interest income less total expenses
The above ratios may vary for individual investors based on the timing of
capital transactions during the period.
12
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(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 in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The respective Customer Agreement 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 value during the three and twelve months ended March
31, 2003 and December 31, 2002, respectively, based on a monthly calculation,
was $52,969,726 and $13,217,805, respectively. The fair value of these commodity
interests, including options and swaps thereon, if applicable, at March 31, 2003
and December 31, 2002 was $55,318,690 and $14,257,357, 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:
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
13
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
(Continued)
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
Partnership's/Master's risk of loss in the event of counterparty default is
typically limited to the amounts recognized 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 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.
14
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
(Continued)
The majority of these instruments mature within one year of March 31, 2003.
However, due to the nature of the Partnership's/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. In the
first quarter of 2003, the Master experienced a cumulative loss of approximately
25%. This loss was primarily attributable to extraordinary price activity in
U.S. natural gas markets at the end of February which let to losses in the
Master's energy market positions. The Masters' liquidity was not hindered as a
result of these market movements.
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 three months ended March 31, 2003, Partnership capital decreased
35.3% from $181,851,658 to $117,615,047. This decrease was attributable to net
loss from operations of $59,872,825 coupled with redemptions of 2,355.3880 Units
resulting in an outflow of $4,363,786. 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 three months ended March 31, 2003, the Master's capital decreased
30.5% from $350,283,453 to $243,548,133. This decrease was attributable to net
loss from operations of $118,227,480, coupled with redemptions of 13,685.3744
Units totaling $21,494,026 which was partially offset by the additions of
21,589.1729 Units totaling $32,986,186. 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 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 first quarter of 2003, the net asset value per
unit decreased 33.1% from $2,588.58 to $1,732.28 as compared to an increase of
13.4% in the first quarter of 2002. The Partnership experienced a net trading
loss in the first quarter of 2003 of $59,485,580. Losses were primarily
attributable to the Master's trading of commodity futures in NYMEX Natural Gas,
IPE Brent Crude Oil, NYMEX Unleaded Gas and NYMEX Heating Oil and were partially
offset by gains in energy swaps, NYMEX Crude Oil and IPE Gas Oil. The
Partnership experienced a net trading gain in the first quarter of 2002 of
$23,717,456. Gains were primarily attributable to the Master's trading of
commodity futures in NYMEX Natural Gas, IPE Brent Crude Oil, IPE Gas Oil and
swaps and were partially offset by losses in NYMEX Crude Oil, NYMEX Heating 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
17
(and Master) depends on the existence of major price trends and the ability of
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 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
assets in cash and/or place all of the Master assets in 90-day Treasury bills
and pay the Partnership 80% of the interest earned on the Treasury bills
purchased. CGM will retain 20% of any interest earned on Treasury bills.
Interest income for the three months ended March 31, 2003 decreased by $139,143
as compared to the corresponding period in 2002. The decrease in interest income
is primarily due to a decrease in interest rates during the three months ended
March 31, 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 months ended March 31, 2003
decreased by $25,763 as compared to the corresponding period in 2002. The
decrease in management fees is due to an decrease in assets during the three
months ended March 31, 2003.
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. There
were no incentive fees earned for the three months ended March 31, 2003 and
2002.
18
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 March 31, 2003 and the highest
and lowest value at any point during the three months ended March 31, 2003. All
open position trading risk exposures of the Master have been included in
calculating the figures set forth below. As of March 31, 2003 , the Master's
total capitalization was $243,548,133. 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, 2002.
March 31, 2003
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
Energy $32,602,846 13.39% $131,820,411 $32,602,846
Energy Swaps 6,200,000 2.54% 33,232,031 900,000
---------- ----
Total $38,802,846 13.64%
========== ======
20
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of a date within 90 days of the filing of this report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
21
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
The following information supplements and amends our discussion set
forth under Part I, Item 3 "Legal Proceedings" in the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.
Settlement Of Certain Regulatory Matters
On April 28, 2003, Salomon Smith Barney Inc. (SSB), now named
Citigroup Global Markets Inc., announced final agreements with the
Securities and Exchange Commission, the National Association of Securities
Dealers, the New York Stock Exchange and the New York Attorney General (as
lead state among the 50 states, the District of Columbia and Puerto Rico)
to resolve on a civil basis all of their outstanding investigations into
its research and IPO allocation and distribution practices. As part of the
settlements, SSB has consented to the entry of (1) an injunction under the
federal securities laws to be entered in the United States District Court
for the Southern District of New York, barring SSB from violating
provisions of the federal securities laws and related NASD and NYSE rules
relating to research, certain IPO allocation practices, the safeguarding of
material nonpublic information and the maintenance of required books and
records, and requiring SSB to adopt and enforce new restrictions on the
operation of research; (2) an NASD Acceptance Waiver and Consent requiring
SSB to cease and desist from violations of corresponding NASD rules and
requiring SSB to adopt and enforce the same new restrictions; (3) an NYSE
Stipulation and Consent requiring SSB to cease and desist from violations
of corresponding NYSE rules and requiring SSB to adopt and enforce the same
new restrictions; and (4) an Assurance of Discontinuance with the New York
Attorney General containing substantially the same or similar restrictions.
As required by the settlements, SSB expects to enter into related
settlements with each of the other states, the District of Columbia and
Puerto Rico. Consistent with the settlement-in-principle announced in
December 2002, these settlements require SSB to pay $300 million for
retrospective relief, plus $25 million for investor education, and commit
to spend $75 million to provide independent third-party research to its
clients at no charge. SSB reached these final settlement agreements without
admitting or denying any wrongdoing or liability. The settlements do not
establish wrongdoing or liability for purposes of any other proceeding. The
$300 million was accrued during the fourth quarter of 2002.
Enron:
New Power Holdings Actions
On April 17, 2003, the motion to dismiss the complaints in the
putative class actions relating to the New Power Holdings common stock was
denied.
Additional Actions
On March 5, 2003, an action was brought on behalf of the purchasers of
the Yosemite Notes and Enron Credit Linked Notes, alleging violations of
federal securities laws.
On April 9, 2003, an action was brought by a group of related mutual
funds that purchased certain Yosemite Notes, alleging violations of state
securities law and common law claims.
Research:
In Re At&T Corporation Securities Litigation
By order dated March 27, 2003, the court denied plaintiffs' leave to
amend their complaint to add as defendants Citigroup, SSB, and certain of
their executive officers and current and former employees.
22
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 months ended March 31, 2003
there were no additional sales. For the three months ended March 31, 2002
there were additional sales of 3,071.2548 Units totaling $5,862,000.
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. 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 Report on Form 10-K for the period
ended December 31, 2002.
(a) Exhibit - 99.1 Certificate of Chief Executive Officer.
Exhibit - 99.2 Certificate of Chief Financial Officer.
(b) Reports on Form 8-K - None
23
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: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel
President and Director
Date: 5/14/03
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: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel
President and Director
Date: 5/14/03
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 5/14/03
24
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney AAA
Energy Fund L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
25
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/David J. Vogel
David J. Vogel
President and Director
26
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney AAA Energy Fund L.P.
(the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, David J. Vogel, President and Director of Citigroup Managed Futures LLC,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/ David J.Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
May 14, 2003
27
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney AAA
Energy Fund L.P.;
2 Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
28
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
29
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney AAA Energy Fund L.P.
(the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Daniel R. McAuliffe, Jr., Chief Financial Officer and Director of Citigroup
Managed Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Partnership.
/s/ Daniel R. McAuliffe , Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
May 14, 2003
30