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, 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
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 _____
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
September 30, 2003 and December 31,
2002 (unaudited). 3
Statements of Income and Expenses
and Partners' Capital for the three
and nine months ended September 30,
2003 and 2002 (unaudited). 4
Notes to Financial Statements,
including the Financial Statements
of SB AAA Master Fund LLC (unaudited). 5 - 17
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 18 - 21
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 22 - 23
Item 4. Controls and Procedures 24
PART II - Other Information 25
2
PART I
Item 1. Financial Statements
Smith Barney AAA Energy Futures Fund L.P.
Statements of Financial Condition
(Unaudited)
September 30, December 31,
2003 2002
------------- -------------
Assets:
Investment in Master, at fair value $133,797,046 $194,537,976
Cash 3,859 5,181
------------ ------------
133,800,905 194,543,157
Interest receivable -- 154,185
------------ ------------
$133,800,905 $194,697,342
============ ============
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Management fees $219,932 $330,695
Other 8,983 13,813
Redemptions payable 1,342,999 12,501,176
------------ ------------
1,571,914 12,845,684
------------ ------------
Partners' Capital:
General Partner, 913.9790 Unit equivalents
outstanding in 2003 and 2002 1,885,767 2,365,908
Limited Partners, 63,173.7767 and 69,337.6030 Redeemable Units
of Limited Partnership Interest
outstanding in 2003 and 2002, respectively 130,343,224 $179,485,750
------------ ------------
132,228,991 181,851,658
------------ ------------
$133,800,905 $194,697,342
============ ============
See Accompanying Notes to Unaudited Financial Statements.
3
SMTIH BARNEY AAA ENERGY FUND L.P.
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------------- -----------------------------
Income:
Realized gains (losses) on closed positions from Master $5,394,158 $19,148,810 $(42,967,004) $58,811,352
Change in unrealized gains (losses) on open
positions from Master (2,278,610) (8,860,519) 12,139,092 3,008,513
Interest income allocated from Master 238,868 605,568 912,409 1,714,121
Expenses allocated from Master (863,962) (2,389,609) (5,613,066) (10,496,655)
------------- ------------- ------------- -------------
2,490,454 8,504,250 (35,528,569) 53,037,331
------------- ------------- ------------- -------------
Expenses:
Management fees 673,527 904,785 2,036,711 2,531,807
Other expenses 64,797 31,165 118,802 124,506
------------- ------------- ------------- -------------
738,324 935,950 2,155,513 2,656,313
------------- ------------- ------------- -------------
Net income (loss) 1,752,130 7,568,300 (37,684,082) 50,381,018
Additions - Limited Partner -- -- -- 5,862,000
Redemptions -Limited Partner (3,051,005) (3,180,353) (11,938,585) (7,045,324)
Allocation to the Special Limited Partner -- (1,392,546) -- (9,733,380)
------------- ------------- ------------- -------------
Net (decrease) increase in Partners' capital (1,298,875) 2,995,401 (49,622,667) 39,464,314
Partners' capital, beginning of period 133,527,866 171,356,734 181,851,658 134,887,821
------------- ------------- ------------- -------------
Partners' capital, end of period $132,228,991 $174,352,135 $132,228,991 $174,352,135
============ =========== =========== ===========
Net asset value per Unit
(64,087.7557 and 71,125.7567 Redeemable Units outstanding
at September 30, 2003 and 2002, respectively) $2,063.25 $2,451.32 $2,063.25 $2,451.32
============ =========== =========== ===========
Net income (loss) per Redeemable Unit of Limited Partnership
Interest and General Partner Redeemable Unit equivalent $26.91 $86.93 $(525.33) $554.09
============ =========== =========== ===========
See Accompanying Notes to Unaudited Financial Statements.
4
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 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, 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 depreciation 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. Individual and pooled
accounts currently managed by AAA, including the Partnership (collectively, the
"Feeder Funds"), are permitted to be non-managing members of the Master. The
General Partner and AAA 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.
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 the investment in the Master are approximately the same and
redemption rights are not affected.
(Continued)
5
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(Continued
As of September 30, 2003, the Partnership owns approximately 47.5% 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 Members' Capital and Condensed
Schedule of Investments are included herein.
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 September 30, 2003 and December 31, 2002 and the results of its
operations for the three and nine months ended September 30, 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.
Certain prior period amounts have been reclassified to conform to current
year presentation.
6
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(Continued)
The Master's Statements of Financial Condition as of September 30, 2003 and
December 31, 2002, Condensed Schedules of Investments as of September 30, 2003
and December 31, 2002 and its Statements of Income and Expenses and Members'
Capital for the three and nine months ended September 30, 2003 and 2002 are
presented below:
SB AAA Master Fund LLC
Statements of Financial Condition
(Unaudited)
September 30, December 31,
2003 2002
Assets:
Equity in commodity futures trading
account:
Cash (restricted $25,465,159 and
$53,522,255, respectively) $262,575,170 $330,218,077
Net unrealized appreciation
on open positions 6,303,842 9,188,483
Unrealized appreciation on
open swaps positions 33,482,194 38,011,771
Commodity options owned, at fair
value (cost $32,963,177 and
$63,879,907, respectively) 33,691,360 83,252,102
336,052,566 460,670,433
----------- -----------
Due from brokers 489,055 12,595,792
Interest receivable 180,564 6,712
----------- -----------
$336,722,185 $473,272,937
=========== ===========
Liabilities and Members' Capital:
Liabilities:
Unrealized depreciation on open
swap positions $17,897,668 $48,470,222
Commodity options written, at
market value (premium $44,320,523
and $59,666,185, respectively) 34,673,623 67,724,777
Accrued Expenses:
Commissions 1,904,325 5,210,167
Professional fees 4 20,117
Due to brokers 657,700 1,541,223
Due to CGM 22,978 22,978
Distribution Payable 174,830 -
----------- -----------
55,331,128 122,989,484
Members' Capital:
Members' Capital, 215,995.4878 and
216,355.0521 Units outstanding
in 2003 and 2002, respectively 281,391,057 350,283,453
----------- -----------
$336,722,185 $473,272,937
=========== ===========
7
SMITH BARNEY AAA ENERGY FUND L.P.
Notes to Financial Statements
September 30, 2003
(Unaudited)
SB AAA Master Fund LLC
Condensed Schedule of Investments
September 30, 2003
(Unaudited)
Number of
Sector Contracts Contract Fair Value
- -------------- ------------------------------ ---------------------------------- -------------------
Energy Futures contracts purchased 0.33% $ 917,999
Futures contracts sold 1.95% 5,385,843
--------------------
Total futures contracts 2.28% 6,303,842
Options owned 11.97%
4,084 NYMEX Natural Gas Put 7.73% Nov. 03 - Oct 04 21,740,320
Other 4.24% 11,951,040
--------------------
33,691,360
Options written (12.32)%
7,842 NYMEX Natural Gas Call (7.79)% Aug 03 - Dec 04 (21,926,650)
Other (4.53)% (12,746,973)
--------------------
(34,673,623)
Unrealized appreciation on Swaps contracts 11.90%
HH Natural Gas 6.86% 19,305,725
Other 5.04% 14,176,469
---------------------
33,482,194
Unrealized depreciation on Swaps contracts (6.36)%
NYMEX Natural Gas (17,897,668)
--------------------
Total Energy 7.47% $ 20,906,105
====================
Total Fair Value 7.47%
Investment at % of Investment at
Country Composition Fair Value Fair Value
-------------------- ------------- -------------------
United Kingdom $ (1,532,097) (7.33)%
United States 22,438,202 107.33
------------- -------
$ 20,906,105 100.00 %
============== =====
Percentages are based on Members' Capital unless otherwise indicated
8
SMITH BARNEY AAA ENERGY FUND L.P.
Notes to Financial Statements
September 30, 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
September 30, 2003
(UNAUDITED)
SB AAA MASTER FUND LLC
STATEMENTS OF INCOME AND EXPENSES AND MEMBERS' CAPITAL
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------------- -----------------------------
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions $11,364,220 $32,530,758 $(81,204,492) $75,347,319
Change in unrealized gains (losses) on open
positions (4,834,883) (14,289,808) 22,219,816 (1,542,837)
------------- ------------- ------------- -------------
Net realized and unrealized gains (losses) 6,529,337 18,240,950 (58,984,676) 73,804,482
Interest income 527,067 694,206 1,946,481 1,934,222
------------- ------------- ------------- -------------
7,056,404 18,935,156 (57,038,195) 75,738,704
------------- ------------- ------------- -------------
Expenses:
Brokerage commissions including clearing fees
of $398,062, $606,653, $1,434,608 and $1,098,861, respectively 1,638,456 4,705,739 11,424,814 12,227,265
Professional fees 195,727 9,399 214,218 27,685
------------- ------------- ------------- -------------
1,834,183 4,715,138 11,639,032 12,254,950
------------- ------------- ------------- -------------
Net income (loss) 5,222,221 14,220,018 (68,677,227) 63,483,754
------------- ------------- ------------- -------------
Additions 6,258,158 122,115,230 51,437,472 133,277,647
Redemptions (10,907,469) (7,953,501) (49,779,551) (20,461,187)
Distributions (511,012) (673,613) (1,873,090) (1,890,174)
------------- ------------- ------------- -------------
Net increase (decrease) in Members' Interest 61,898 127,708,134 (68,892,396) 174,410,040
Members' capital, beginning of period 281,329,159 198,916,629 350,283,453 152,214,723
------------- ------------- ------------- -------------
Members' capital, end of period $281,391,057 $326,624,763 $281,391,057 $326,624,763
============ =========== =========== ===========
Net asset value per Unit
(215,995.4878 and 214,373.0803 Units outstanding at
September 30, 2003 and 2002, respectively) $1,302.76 $1,523.63 $1,302.76 $1,523.63
============ =========== =========== =========
Net income (loss) per Unit of Member Interest $24.07 $65.15 $(309.06) $423.21
============ =========== =========== ===========
10
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
2. Financial Highlights:
Changes in net asset value per Redeemable Unit for the three and nine
months ended September 30, 2003 and 2002 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------------------- ------------------------
Net realized and unrealized
gains(losses) * $ 35.99 $ 111.15 $ (505.23) $ 699.66
Interest income 3.66 8.42 13.45 23.49
Expenses ** (12.74) (32.64) (33.55) (169.06)
------ ------- --------- --------
Increase(decrease) for period 26.91 86.93 (525.33) 554.09
Net Asset Value per Redeemable
Unit, beginning of period 2,036.34 2,364.39 2,588.58 1,897.23
-------- ------- --------- --------
Net Asset Value per Redeemable
Unit, end of period $2,063.25 $2,451.32 $2,063.25 $2,451.32
======== ======== ======== ========
* Includes expenses allocated from Master.
** Excludes expenses allocated from Master.
11
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Financial Highlights continued:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------------------- ------------------------
Ratio to average net assets: ***
Net investment loss before
incentive fees **** (3.9)% (6.3)% (6.8)% (9.6)%
======== ====== ======= ========
Operating expenses 4.8% 7.8% 7.5% 11.0%
Incentive fee allocation 0.0% 3.3% 0.0% 8.2%
-------- ------- --------- --------
Total expenses and incentive fee
allocation 4.8% 11.1% 7.5% 19.2%
======== ====== ======= ========
Total return:
Total return before incentive fee
allocation 1.3% 4.5 (20.3)% 36.4%
Incentive fee allocation 0.0% (0.8)% 0.0% (7.2)%
-------- ------- --------- --------
Total return after incentive fee allocation 1.3% 3.7% (20.3)% 29.2%
======== ====== ======= ========
*** Annualized
**** Interest income less total expenses (exclusive of incentive fees)
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
September 30, 2003
(Unaudited)
Financial Highlights from the Master:
Changes in net asset value per Unit for the three and nine months ended
September 30, 2003 and 2002 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------------------- ------------------------
Net realized and unrealized
gains(losses)* $ 22.68 $ 61.95 $ (317.27) $ 414.30
Interest income 2.44 3.24 9.01 9.02
Expenses** (1.05) (0.04) (0.80) (0.11)
-------- ------- --------- --------
Increase(decrease) for period 24.07 65.15 (309.06) 423.21
Distributions (2.37) (3.14) (8.67) (8.82)
Net Asset Value per Unit,
beginning of period 1,281.06 1,461.62 1,620.49 1,109.24
======== ====== ======= ========
Net Asset Value per Unit,
end of period $1,302.76 $1,523.63 $1,302.76 $1,523.63
======== ====== ======= ========
* Includes brokerage commissions.
** Excludes brokerage commissions.
13
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(Continued)
Financial Highlights of the Master:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------------------- ------------------------
Ratio to average net assets: *
Net investment loss ** (2.1)% (6.6)% (4.4)% (6.4)%
Operating expenses 2.6% 6.7% 4.9% 7.7%
Total return 1.8% 4.5% (19.3)% 38.1%
* Annualized
** Interest income less total expenses
The above ratios may vary for individual investors based on the timing of
capital transactions during the period.
14
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 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 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 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 on open futures positions.
All of the commodity interests owned by the Master are held for trading
purposes. The average fair values during the nine and twelve months ended
September 30, 2003 and December 31, 2002, respectively, based on a monthly
calculation, were assets of $44,681,256 and $13,217,805, respectively. The fair
values of these commodity interests, including options and swaps thereon, if
applicable, at September 30, 2003 and December 31, 2002 were assets of
$20,906,105 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
15
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 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.
16
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(Continued)
The majority of these instruments mature within one year of September 30,
2003. However, due to the nature of the Partnership's/Master's business, these
instruments may not be held to maturity.
17
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
22%. This loss was primarily attributable to extraordinary price activity in
U.S. natural gas markets at the end of February which led 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 nine months ended September 30, 2003, Partnership capital decreased
27.3% from $181,851,658 to $132,228,991. This decrease was attributable to net
loss from operations of $37,684,082 coupled with redemptions of 6,163.8263
Redeemable Units resulting in an outflow of $11,938,585. 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, 2003, the Master's capital
decreased 19.7% from $350,283,453 to $281,391,057. This decrease was
attributable to net loss from operations of $68,677,227, coupled with
redemptions of 37,354.7361 Units totaling $49,779,551 and distribution of
interest of $1,873,090 to the Partnerships, which was partially offset by the
addition of 37,191.8136 Units totaling $51,437,472. 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
18
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 statement of income and expenses and partners'
capital.
Results of Operations
During the Partnership's third quarter of 2003, the net asset value per
Redeemable Unit increased 1.3% from $2,036.34 to $2,063.25 as compared to an
increase of 3.7% in the third quarter of 2002. The Partnership experienced a net
trading gain in the third quarter of 2003 of $2,490,454. Gains were primarily
attributable to the Master's trading of commodity futures in energy swaps, NYMEX
Crude Oil, NYMEX Heating Oil and and NYMEX Natural Gas and were partially offset
by losses in IPE Brent Crude Oil and NYMEX Unleaded Gas. The Partnership
experienced a net trading gain in the third quarter of 2002 of $8,504,250. Gains
19
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.
During the nine months ended September 30, 2003, the Partnership's net
asset value per Unit decreased 20.3% from $2,588.58 to $2,063.25 as compared to
an increase of 29.2% in the nine months ended September 30, 2002. The
Partnership experienced a net trading loss in the nine months ended September
30, 2003 of $35,528,569. Losses were primarily attributable to the Master's
trading of commodity futures in NYMEX Natural Gas, NYMEX Unleaded Gas and NYMEX
Heating Oil were partially offset by gains in NYMEX Crude Oil and IPE Brent
Crude Oil. The Partnership experienced a net trading gain in the nine months
ended September 30, 2002 of $53,037,331. Gains were primarily attributable to
the Master's trading of commodity futures in NYMEX Natural Gas, NYMEX Crude Oil
and IPE Brent Crude Oil and were partially offset by losses in NYMEX Unleaded
Gas and NYMEX Heating Oil.
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 extend 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 as
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%, its allocated share 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 the Master for the three and
nine months ended September 30, 2003 decreased by $366,700 and $801,712,
respectively, as compared to the corresponding periods in 2002. The decrease in
interest income is primarily due to a decrease in interest rates during the
three and nine months ended September 30, 2003 as compared to 2002.
20
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, 2003 and 2002 decreased by $231,258 and $495,096, respectively, as compared
to the corresponding periods in 2002. The decrease in management fees is due to
a decrease in assets during the three and nine months ended September 30, 2003.
Special limited partner profit share allocations are based on the new
trading profits generated by the Advisor at the end of the year, as defined in
the advisory agreement between the Partnership, the General Partner and the
Advisor. There were no profit share allocations earned for the three and nine
months ended September 30, 2003. Trading profits for the three and nine months
ended September 30, 2002 resulted in a profit share allocation of $1,392,546 and
$9,733,380, respectively.
21
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.
22
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of September 30, 2003 and the
highest and lowest value at any point during the three and nine months ended
September 30, 2003. All open position trading risk exposures of the Master have
been included in calculating the figures set forth below. As of September 30,
2003 , the Master's total capitalization was $281,391,057. 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.
September 30, 2003
(Unaudited)
Year to Date
------------------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Value at Risk
Energy $18,415,548 6.54% $131,820,411 $12,880,254 $39,599,399
Energy Swaps 5,727,000 2.04% 33,232,031 900,000 8,473,995
----------- ------
Total $24,142,548 8.58%
=========== ======
23
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of September 30, 2003, 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.
24
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 Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002, as updated by our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003 and
our Current Report on Form 8-K dated April 28, 2003.
ENRON
TITTLE, ET AL. v. ENRON CORP., ET AL.
On September 30, 2003, all of the claims against Citigroup in this
litigation were dismissed. Additional Actions
Several additional actions, previously identified, have been consolidated
or coordinated with the Newby action and are stayed, except with respect to
certain discovery, until after the court's decision on class certification. In
addition, on August 15, 2003, a purported class action was brought by purchasers
of Enron stock alleging state law claims of negligent misrepresentation, fraud,
breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. On
August 29, 2003, an investment company filed a lawsuit alleging that Citigroup,
CGM and several other defendants (including, among others, Enron's auditor,
financial institutions, outside law firms and rating agencies) engaged in a
conspiracy, which purportedly caused plaintiff to lose credit (in the form of a
commodity sales contract) it extended to an Enron subsidiary in purported
reliance on Enron's financial statements. On September 24, 2003, Enron filed an
adversary proceeding in its chapter 11 bankruptcy proceedings to recover alleged
preferential payments and fraudulent transfers involving Citigroup, CGM and
other entities, and to disallow or to subordinate bankruptcy claims that
Citigroup, CGM and other entities have filed against Enron.
Research
In connection with the global research settlement, on October 31, 2003,
final judgment was entered against CGM and nine other investment banks. In
addition, CGM has entered into separate settlement agreements with numerous
states and certain U.S. territories.
25
WORLDCOM
Citigroup and/or CGM are now named in approximately 35 individual state
court actions brought by pension funds and other institutional investors based
on underwriting of debt securities of WorldCom. Most of these actions have been
removed to federal court and transferred to the United States District Court for
the Southern District of New York for centralized pretrial hearings with other
WorldCom actions. On October 24, 2003, the court granted plaintiffs' motion to
have this matter certified as a class action.
OTHER
On November 3, 2003, the United States District Court for the Southern
District of New York granted the Company's motion to dismiss the consolidated
amended complaint asserting violations of certain federal and state antitrust
laws by CGM and other investment banks in connection with the allocation of
shares in initial public offerings underwritten by such parties.
Item 2. Changes in Securities and Use of Proceeds - None
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 - 31.1 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of President and Director)
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of Chief financial Officer and Director)
Exhibit - 32.1 - Section 1350 Certifications (Certification of
President and Director).
Exhibit - 32.2 - Section 1350 Certifications (Certification of Chief
Financial Officer and Director).
(b) Reports on Form 8-K - None
26
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: 11/13/03
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: 11/13/03
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 11/13/03
27
Exhibit 31.1
CERTIFICATIONS
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. (the "registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
28
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 13, 2003
/s/ David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
29
Exhibit 31.2
CERTIFICATIONS
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. (the "registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
30
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 13, 2003
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
31
Exhibit 32.1
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 September 30, 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
November 13, 2003
32
Exhibit 32.2
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 September 30, 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
November 13, 2003
33