FOR0M 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, 2004
--------------
Commission File Number 0-50272
-------
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 03-0407557
(State or other jurisdiction of (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
-- ----
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition at
March 31, 2004 and December 31,
2003 (unaudited). 3
Statements of Income and Expenses
and Partners' Capital for the three
months ended March 31, 2004 and
2003 (unaudited). 4
Statements of Cash Flows for the three
months ended March 31, 2004
and 2003 (unaudited) 5
Notes to Financial Statements,
including the Financial Statements of
SB AAA Master Fund LLC (unaudited). 6 - 16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 17 - 19
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 20 - 21
Item 4. Controls and Procedures 22
PART II - Other Information 23
2
PART I
Item 1. Financial Statements
SALOMON SMITH BARNEY AAA ENERGY FUND L.P II
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, December 31,
2004 2003
----------- ------------
Assets:
Investment in the Master, at fair value $98,140,322 $98,995,554
Cash 94,212 42,632
----------- -----------
$98,234,534 $99,038,186
=========== ===========
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Management fees $ 166,304 $ 168,162
Administrative fees 41,576 42,041
Other 61,380 39,589
Redemptions payable 2,672,801 2,185,482
---------- ----------
2,942,061 2,435,274
---------- ----------
Partners' Capital:
General Partner, 2,476.2826 Unit equivalents
outstanding in 2004 and 2003 2,139,072 1,954,753
Limited Partners, 108,951.6200 and 119,900.7712 Redeemable Units of
Limited Partnership Interest outstanding in 2004 and 2003, respectively 93,153,401 94,648,159
--------- -----------
95,292,473 96,602,912
---------- -----------
$98,234,534 $99,038,186
========== ===========
See Accompanying Notes to Unaudited Financial Statements.
3
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2004 2003
--------------------------
Income:
Realized gains (losses) on closed positions
from Master $9,398,089 $(58,954,942)
Change in unrealized gains (losses) on open positions
from Master (495,383) 13,181,502
Interest income allocated from Master 169,351 345,289
Expenses allocated from Master (878,831) (2,864,066)
--------- -------------
8,193,226 (48,292,217)
--------- -------------
Expenses:
Management fees 479,986 577,144
Administrative fees 119,997 144,285
Other expenses 27,791 12,104
--------- -------------
627,774 733,533
--------- -------------
Net income (loss) 7,565,452 (49,025,750)
Additions - 22,441,000
Redemptions (8,875,891) (2,927,642)
----------- -------------
Net decrease in Partners' capital (1,310,439) (29,512,392)
Partners' capital, beginning of period 96,602,912 126,845,282
----------- -------------
Partners' capital, end of period $95,292,473 $97,332,890
========== =============
Net asset value per Redeemable Unit
(111,427.9026 and 135,236.4651 Redeemable Units outstanding
at March 31, 2004 and 2003, respectively) $ 855.19 $ 719.72
=========== =============
Net income (loss) per Redeemable Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 65.80 $ (361.41)
---------- -------------
Redemption value per Redeemable Unit $ 855.19 $ 719.36
========== =============
See Accompanying Notes to Unaudited Financial Statements
4
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
---------------------------
2004 2003
---------------------------
Cash flows from operating activities:
Net income (loss) $7,565,452 $(49,025,750)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Changes in operating assets and liabilities:
Investment in Master Fund, at fair value 855,232 30,329,371
Accrued expenses:
Decrease in management fees (1,858) (51,507)
Decrease in administrative fees (465) (12,877)
Due to GCM - (5,853)
Increase in other 21,791 11,662
Increase (decrease) in redemptions payable 487,319 (739,737)
------------ ------------
Net cash provided by (used in) operating
activities 8,927,471 (19,494,691)
------------ ------------
Cash flows from financing activities:
Proceeds from additions - 22,441,000
Payments for redemptions (8,875,891) (2,927,642)
------------ ------------
Net cash provided by (used in) financing
activities (8,875,891) 19,513,358
------------ ------------
Net change in cash 51,580 18,667
Cash, at beginning of period 42,632 31,597
------------ ------------
Cash, at end of period $ 94,212 $ 50,624
============ ============
See Accompanying Notes to Unaudited Financial Statements
5
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
1. General:
Salomon Smith Barney AAA Energy Fund L.P. II (the "Partnership") is a limited
partnership organized on March 25, 2002 under the partnership laws of the State
of New York to engage directly or indirectly in the speculative trading of a
diversified portfolio of commodity interests, including commodity options and
commodity futures contracts on United States exchanges and certain foreign
exchanges. The Partnership may trade commodity futures and options contracts of
any kind but currently trades solely energy and energy related products. In
addition, the Partnership may enter into swap contracts on energy related
products. The commodity interests that are traded by the Partnership are
volatile and involve a high degree of market risk. During the initial offering
period (May 31, 2002 through July 1, 2002), the Partnership sold 93,975
redeemable units of Limited Partnership Interest ("Redeemable Units"). The
Partnership commenced trading on July 1, 2002.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management LLC,
acts as the General Partner (the "General Partner") of the Partnership and the
managing member of the Master. The Partnership's/Master's commodity broker is
Citigroup Global Markets Inc. ("CGM"), formerly Salomon Smith Barney Inc. CGM is
an affiliate of the General Partner. The General Partner is wholly owned by
Citigroup Global Markets Holdings Inc. ("CGMHI"), formerly Smith Barney Holdings
Inc., which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup").
Effective July 1, 2002, the Partnership allocated all of its capital to the SB
AAA Master Fund LLC, a New York Limited Liability Company (the "Master"). With
this cash, the Partnership purchased 64,945.0387 Units of the Master with a fair
value of $94,925,000. The Master was formed in order to permit commodity pools
managed 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 the Advisor, including the
Partnership (collectively, the "Feeder Funds"), are permitted to be non-managing
members of the Master. The General Partner and the Advisor, believe that trading
through this master/feeder structure should promote efficiency and economy in
the trading process. Expenses to investors as a result of the investment in the
Master are approximately the same and redemption rights are not affected.
As of March 31, 2004, the Partnership owns approximately 37.7% 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, Condensed Schedule of
Investments and Statement of Cash Flows are included herein.
6
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
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, 2004 and December 31, 2003 and the results of its
operations and cash flows for the three months ended March 31, 2004 and 2003.
These financial statements present the results of interim periods and do not
include all disclosures normally provided in annual financial statements. You
should read these financial statements together with the financial statements
and notes included in the Partnership's annual report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2003.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
Certain prior period amounts have been reclassified to conform to current period
presentation.
7
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
The Master's Statements of Financial Condition as of March 31, 2004 and December
31, 2003, Condensed Schedules of Investments as of March 31, 2004 and December
31, 2003, Statements of Income and Expenses and Members' Capital and Statements
of Cash Flows for the three months ended March 31, 2004 and 2003 are presented
below:
SB AAA Master Fund LLC
Statements of Financial Condition
(Unaudited)
March 31, December 31,
2004 2003
------------ --------------
Assets:
Equity in commodity futures trading account:
Cash (restricted $31,423,756 and $48,471,997, respectively) $250,595,531 $231,361,103
Net unrealized appreciation on open futures positions 8,109,469 8,845,539
Unrealized appreciation on open swaps positions 40,162,655 50,093,912
Commodity options owned, at fair value
(cost $30,530,491 and $49,687,512, respectively) 36,117,993 42,630,230
------------ ------------
334,985,648 332,930,784
Due from brokers 1,011,299 2,148,690
Interest receivable 170,348 159,050
------------ ------------
$336,167,295 $335,238,524
============ ============
Liabilities and Members' Capital:
Liabilities:
Unrealized depreciation on open swap positions $ 27,993,038 $ 18,654,566
Commodity options written, at market value
(premium received $41,392,687 and $47,549,852, respectively) 45,325,611 57,804,597
Accrued expenses:
Commissions 1,733,248 1,670,425
Professional fees 51,065 59,625
Due to brokers 336,875 1,815,015
Due to CGM 22,978 22,978
Distribution payable 167,702 153,681
------------ ------------
75,630,517 80,180,887
------------ ------------
Members' Capital:
Members' Capital, 198,036.9344 and 211,023.7320 Units
outstanding in 2004 and 2003, respectively 260,536,778 255,057,637
------------ ------------
$336,167,295 $335,238,524
============ ============
8
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
SB AAA Master Fund LLC
Condensed Schedule of Investments
March 31, 2004
(Unaudited)
Number of
Sector Contracts Contract Fair Value
- ------- ---------- ----------------------------------- ----------
Energy Futures contracts purchased 12.09%
4,601 NYMEX Natural Gas Jun. 04 - Mar. 06 11.42% $29,747,052
Other 0.67% 1,738,999
Futures contracts sold (8.97)% (23,376,582)
-----------
Total futures contracts 3.12% 8,109,469
Options owned 13.86%
6,318 NYMEX Natural Gas May 04 - Apr.05 9.37% 24,408,789
Other 4.49% 11,709,204
----------
36,117,993
Options written (17.40)%
4,529 NYMEX Natural Gas May 04 - Dec. 04 (11.39)% (29,673,208)
Other (6.01)% (15,652,403)
-----------
(45,325,611)
Unrealized appreciation on Swaps contracts 15.41%
NYMEX Gasoline Dec. 05 5.41% 14,104,977
Other 10.00% 26,057,678
----------
40,162,655
Unrealized depreciation on Swaps contracts (10.74)%
NYMEX Gasoline Dec. 05 (7.47)% (19,457,370)
Other (3.27)% (8,535,668)
-----------
(27,993,038)
-----------
Total Energy Fair Value 4.25% $11,071,468
===========
Investments at % of Investments at
Country Composition Fair Value Fair Value
- -------------------- ------------- ------------
United Kingdom $ (618,055) (5.58)%
United States 11,689,523 105.58
----------- -------
$ 11,071,468 100.00%
============ ======
Percentages are based on Members' Capital unless otherwise indicated
9
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2003
(Unaudited)
Number of
Sector Contracts Contract Fair Value
- ------ --------- -------- -----------
Energy Futures contracts purchased 5.35% $13,637,465
Futures contracts sold (1.88)% (4,791,926)
-----------
Total futures contracts 3.47% 8,845,539
Options owned 16.71%
6,488 NYMEX Natural Gas Put Feb. 04 - Oct. 04 8.98% 22,900,060
Other 7.73% 19,730,170
-----------
42,630,230
Options written (22.66)%
7,335 NYMEX Natural Gas Call Feb. 04 - Dec. 04 (16.04)% (40,916,710)
Other (6.62)% (16,887,887)
-----------
(57,804,597)
Unrealized appreciation on Swaps contracts 19.64%
1,000 HH Natural Gas Feb. 04 8.22% 20,967,521
Other 11.42% 29,126,391
-----------
50,093,912
Unrealized depreciation on Swaps contracts (7.31)% (18,654,566)
-----------
Total Energy Fair Value 9.85% $25,110,518
===========
Investments at % of Investments at
Country Composition Fair Value Fair Value
-------------------- ------------- -----------------
United Kingdom $(113,943) (0.45)%
United States 25,224,461 100.45
----------- ------
$25,110,518 100.00%
========== ======
Percentages are based on Members' Capital unless otherwise indicated.
10
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
SB AAA Master Fund LLC
Statements of Income and Expenses and Member's Capital
(Unaudited)
Three Months Ended
March 31,
------------------------------
2004 2003
----------------------------
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions $ 24,591,283 $(143,773,821)
Change in unrealized gains (losses) on open
positions (1,039,194) 32,010,513
------------- -------------
23,552,089 (111,763,308)
Interest income 459,513 822,408
------------- -------------
24,011,602 (110,940,900)
------------- -------------
Expenses:
Brokerage commissions including clearing fees
of $269,728 and $1,036,546, respectively 2,327,297 6,497,159
Other expenses 11,740 9,194
------------- -------------
2,339,037 6,506,353
------------- -------------
Net income (loss) 21,672,565 (117,447,253)
Additions 1,539,508 32,986,186
Redemptions (17,282,974) (21,494,026)
Distribution of interest to feeder funds (449,958) (780,227)
------------- -------------
Net increase (decrease) in Members Interest 5,479,141 (106,735,320)
Members' capital, beginning of period 255,057,637 350,283,453
------------ -------------
Members' capital, end of period $ 260,536,778 $ 243,548,133
============= =============
Net asset value per Unit
(198,036.9344 and 224,062.2088 Units outstanding
in March 31, 2004 and 2003, respectively) $ 1,315.61 $ 1,086.49
============= =============
Net income (loss) per Unit of Member Interest $ 109.18 $ (530.48)
============= =============
11
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
SB AAA Master Fund LLC
Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2004 2003
--------------- ----------------
Cash flows from operating activities:
Net income (loss) $21,672,565 $(117,447,253)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Changes in operating assets and liabilities:
Net unrealized appreciation on open futures positions 736,070 15,511,411
Unrealized appreciation on open swaps positions 9,931,257 (7,200,789)
Commodity options owned, at fair value 6,512,237 (18,025,816)
Due from brokers 1,137,391 (1,331,133)
(Increase) decrease in interest receivable (11,298) 44,349
Unrealized depreciation on open swaps positions 9,338,472 (17,803,498)
Commodity options written, at fair value (12,478,986) (13,542,641)
Accrued Expenses:
Increase (decrease) in commissions 62,823 (1,672,096)
Increase (decrease) in professional fees (8,560) 9,193
Due to brokers (1,478,140) 7,163,242
Increase (decrease)in distribution of
interest to feeder funds 14,021 (42,499)
--------------- ----------------
Net cash provided by (used in) operating
activities 35,427,852 (154,337,530)
--------------- ----------------
Cash flows from financing activities:
Proceeds from additions 1,539,508 32,986,186
Payments for redemptions (17,282,974) (21,494,026)
Distribution of interest to feeder funds (449,958) (780,227)
--------------- ----------------
Net cash provided by (used in) financing
activities (16,193,424) 10,711,933
--------------- ----------------
Net change in cash 19,234,428 (143,625,597)
Cash, at beginning of period 231,361,103 330,218,077
--------------- ----------------
Cash, at end of period $250,595,531 $ 186,592,480
=============== ================
12
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit of Partnership Interest for
the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
---------------------
2004 2003
---------------------
Net realized and unrealized gains (losses)* $69.72 $(358.52)
Interest income 1.43 2.55
Expenses** (5.35) (5.44)
------- ---------
Increase (decrease) for the period 65.80 (361.41)
Net Asset Value per Redeemable Unit, beginning of period 789.39 1,078.66
Redemption/ subscription value per Unit versus net
asset value per Redeemable Unit - 2.47
------- ---------
Net Asset Value per Redeemable Unit,
end of period $855.19 $719.72
------- ---------
Redemption/ subscription value per Redeemable Unit,
end of period*** $855.19 $719.96
======= ========
* Includes commissions expense allocated from Master.
** Excludes commissions expense allocation from Master and includes incentive
fee allocation to special limited partner.
*** For the purpose of a redemption/subscription, any remaining accrued
liability for reimbursement of offering costs will not reduce
redemption/subscription net asset value per Redeemable Unit.
Ratios to average net assets:****
Net investment loss before incentive fee allocation***** (5.7)% (11.1)%
==== ====
Operating expenses 6.4% 12.2%
Incentive fee allocation - -
---- ----
Total expenses and incentive fee allocation 6.4% 12.2%
==== ====
Total return:
Total return before incentive fee allocation 8.3% (33.3)%
Incentive fee allocation - -
---- ----
Total return after incentive fee allocation 8.3% (33.3)%
==== ====
**** Annualized (except for incentive fee allocation)
***** Interest income less total expenses (exclusive of incentive fee
allocation)
The above ratios may vary for individual investors based on the timing of
capital transactions during the year. Additionally, these ratios are calculated
for the Limited Partner class using the Limited Partners' share of income,
expenses and average net assets.
13
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
Financial Highlights of the Master:
Three Months Ended
March 31,
-------------------------
2004 2003
------------------------
Net realized and unrealized gains (losses)* $106.95 $(534.16)
Interest income 2.27 3.72
Expenses** (0.04) (0.04)
--------- ---------
Increase (decrease) for the period 109.18 (530.48)
Distributions (2.23) (3.52)
Net Asset Value per Unit, beginning of period 1,208.66 1,620.49
--------- ---------
Net Asset Value per Unit, end of period $1,315.61 $1,086.49
========= ========
* Includes brokerage commissions
** Excludes brokerage commissions
Ratios to average net assets:***
Net investment loss **** (3.0)% (7.6)%
=== ====
Operating expenses 3.7% 8.7%
=== ====
Total return: 9.0% (32.7)%
=== ====
*** Annualized
**** Interest income less total expenses
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
14
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(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 Agreements between the Partnership and CGM and the
Master and CGM give the Partnership and the Master, respectively, the legal
right to net unrealized gains and losses.
All of the commodity interests owned by the Master are held for trading
purposes. The average fair values of these interests during the three and twelve
months ended March 31, 2004 and December 31, 2003, based on a monthly
calculation, were $3,338,717 and $39,703,607, respectively. The fair values of
these commodity interests, including options and swaps thereon, if applicable,
at March 31, 2004 and December 31, 2003 were $11,071,468 and $25,110,518,
respectively. Fair values for exchange traded commodity futures and options are
based on quoted market prices for those futures and options. Fair values for all
other financial instruments for which market quotations are not readily
available are based on calculations approved by the General Partner.
4. Financial Instrument Risks:
In the normal course of its business, the Partnership, through its investment in
the Master, is party to financial instruments with off-balance sheet risk,
including derivative financial instruments and derivative commodity instruments.
These financial instruments may include forwards, futures, options and swaps,
whose values are based upon an underlying asset, index, or reference rate, and
generally represent future commitments to exchange currencies or cash flows, to
purchase or sell other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity instruments, to have a
reasonable possibility to be settled in cash, through physical delivery or with
another financial instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each of
these instruments is subject to various risks similar to those related to the
underlying financial instruments including market and credit risk. In general,
the risks associated with OTC contracts are greater than those associated with
exchange traded instruments because of the greater risk of default by the
counterparty to an OTC contract. The Master's swaps contracts are OTC contracts.
15
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
(Continued)
Market risk is the potential for changes in the value of the financial
instruments traded by the Master due to market changes, including interest and
foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's/Master's risk of loss in the event of counterparty default is
typically limited to the amounts recognized in the statements of financial
condition and not represented by the contract or notional amounts of the
instruments. The Partnership, through its investment in the Master, has
concentration risk because the sole counterparty or broker with respect to the
Master's assets is CGM.
The General Partner monitors and controls the Partnership's/Master's risk
exposure on a daily basis through financial, credit and risk management
monitoring systems, and accordingly believes that it has effective procedures
for evaluating and limiting the credit and market risks to which the
Partnership/Master is subject. These monitoring systems allow the General
Partner to statistically analyze actual trading results with risk adjusted
performance indicators and correlation statistics. In addition, on-line
monitoring systems provide account analysis of futures, forwards and options
positions by sector, margin requirements, gain and loss transactions and
collateral positions.
The majority of these instruments mature within one year of March 31, 2004.
However, due to the nature of the Partnership's/Master's business, these
instruments may not be held to maturity.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its investment in the Master, cash and interest receivable. The
Master does not engage in the sale of goods or services. Because of the low
margin deposits normally required in commodity futures trading, relatively small
price movements may result in substantial losses to the Partnership while
substantial losses could lead to a decrease in liquidity, no such losses
occurred during the first quarter of 2004.
The Partnership's capital consists of the capital contributions of the partners
as increased or decreased by its investment in the Master, expenses, interest
income, redemptions of Units and distributions of profits, if any.
For the three months ended March 31, 2004, Partnership capital decreased 1.4%
from $96,602,912 to $95,292,473. This decrease was attributable to the
redemptions of 10,949.1512 Redeemable Units totaling $8,875,891, which was
partially offset by the net income from operations of $7,565,452. 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, 2004, the Master's capital increased 2.1%
from $255,057,637 to $260,536,778. This increase was attributable to net income
from operations of $21,672,565 coupled with additions of 1,257.1846 Units
totaling $1,539,508, which was partially offset by the redemptions of
14,243.9822 Units totaling $17,282,974 and distributions of interest of $449,958
to the non-managing members of the Master. Future redemptions can impact the
amount of funds available for investments in commodity contract positions in
subsequent periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statement of financial condition at fair value on the last business day of the
period, which represents market value for those commodity interests for which
market quotations are readily available or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
and foreign currencies for which market quotations are not readily available,
including dealer quotes for swaps and certain option contracts. Investments in
17
commodity interests denominated in foreign currencies are translated into U.S.
dollars at the exchange rates prevailing on the last business day of the period.
Realized gains (losses) and changes in unrealized values on commodity interests
and foreign currencies are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on trading of
commodity interests.
Foreign currency contracts are those contracts where the Partnership agrees to
receive or deliver a fixed quantity of foreign currency for an agreed-upon price
on an agreed future date. Foreign currency contracts are valued daily, and the
Partnership's net equity therein, representing unrealized gain or loss on the
contracts as measured by the difference between the forward foreign exchange
rates at the dates of entry into the contracts and the forward rates at the
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statements of income and expenses and partners'
capital.
Results of Operations
During the Partnership's first quarter of 2004, the net asset value per
Redeemable Unit increased 8.3% from $789.39 to $855.19 The Partnership
experienced a net trading gain before brokerage commission and related fees in
the first quarter of 2004 of $8,902,706. Gains were primarily attributable to
the Master's trading of commodity futures in energy swaps, NYMEX Crude Oil,
NYMEX Natural Gas and NYMEX Unleaded Gas and were partially offset by losses in
IPE Brent Crude and NYMEX Heating Oil. The Partnership experienced a net trading
loss before brokerage commissions and related fees in the first quarter of 2003
of $45,773,440. 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 losses in energy swaps, NYMEX
Crude Oil and IPE Gas Oil.
After a slow start to the year the first quarter of 2004 ended with solid gains.
The year began with a fairly static January performance. Losses early in the
month forced some scale back of position size in both petroleum and natural gas.
But, soft cash markets finally prevailed over weather, and natural gas prices
dropped nearly $2.00/MM BTU. This was in line with expectations and allowed for
gains in natural gas which brought performance for the month back to near break
even.
The month of February saw a strong performance across the energy markets with
solid gains accrued in both natural gas and petroleum positions. The lion's
share of the February gain was tied to trading in easing US natural gas markets.
Bear spreads on the front end of the natural gas price curve yielded strong
results as prices declined toward $5.00 per MMBTU. Natural gas gains also
benefited from the long dated portion of the price curve (beyond mid 2004),
where the advisor had much of its long term length, actually edged higher during
February even as cash and spot futures prices retreated.
March's positive performance came from a number of sectors including long dated
crude futures positions (long Dec 2005), length in gasoline spreads and gasoline
options. One of the largest contributors to the positive bottom line came from
the natural gas sector. Specifically, a bearish short option/volatility position
on the front end of the market combined with a long futures position in the
summer months yielded solid results as the curve weakened amid general market
inactivity and contracting option premiums.
18
Commodity futures markets are highly volatile. The potential for broad and rapid
price fluctuations increases the risks involved in commodity trading, but also
increases the possibility of profit. The profitability of the Partnership (and
the Master Fund) depends on the Advisor's ability to forecast price changes in
energy and energy related commodities. Such price changes are influenced by,
among other things, changing supply and demand relationships, weather,
governmental, agricultural, commercial and trade programs and policies, national
and international political and economic events and changes in interest rates.
To the extent that the Advisor correctly makes such forecasts, the Partnership
(and the Master Fund) expects to increase capital through operations.
Interest income on 80% of the Partnership's average daily equity allocated to it
by the Master was earned at a 30-day U.S. Treasury bill rate determined weekly
by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills
maturing in 30 days. CGM may continue to maintain the Master's assets in cash
and/or place all of the Master's assets in 90-day Treasury bills and pay the
Partnership 80% of the interest earned on the Treasury bills purchased. CGM will
retain 20% of any interest earned on Treasury bills purchased. Interest income
allocated from Master for the three months ended March 31, 2004 decreased by
$175,938, as compared to the corresponding period in 2003. The decrease in
interest income is primarily due to a decrease in interest rates during the
three months ended March 30, 2004.
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, 2004 decreased
by $97,158, as compared to the corresponding period in 2003. The decrease in
management fees is due to a decrease in assets during the three months ended
March 31, 2004.
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 allocations accrued for the three months ended March 31, 2004 and 2003.
19
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.
20
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of March 31, 2004 and the highest
and lowest value at any point during the three months ended March 31, 2004. All
open position trading risk exposures of the Master have been included in
calculating the figures set forth below. As of March 31, 2004, the Master's
total capitalization was $260,536,778. 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, 2003.
March 31, 2004
Year to Date
--------------------------------------------------
% of Total High Low Average Value at
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Risk
- -------------- ------------- ------------------- ----------------- ----------------- -------------
Energy $18,998,850 7.29% $29,837,388 $10,894,859 $16,381,705
Energy Swaps 1,988,189 0.76% $6,027,189 $1,988,189 $3,188,189
--------- -----
Total $20,987,039 8.05%
=========== =====
21
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of March 31, 2004, the Chief Financial 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 during the first
quarter of 2004.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth
under Item 3 "Legal Proceedings" in the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003.
Regulatory Matters.
Both the Department of Labor and the IRS have advised CGM that they were or
are reviewing transactions in which Ameritech Pension Trust purchased from CGM
and certain affiliates approximately $20.9 million in participations in a
portfolio of motels owned by Motels of America, Inc. and Best Inns, Inc. With
respect to the IRS review, CGM and certain affiliated entities have consented to
extensions of time for the assessment of excise taxes that may be claimed to be
due with respect to the transactions for the years 1987, 1988 and 1989.
ENRON CORP.
In July 2002, Citigroup, CGM and certain officers were named as defendants
in an alleged class action filed in the United States District Court for the
Southern District of New York, brought on behalf of purchasers of Citigroup
common stock between July 24, 1999 and July 23, 2002. The complaint seeks
unspecified compensatory and punitive damages for alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and for common law
fraud. Fourteen virtually identical complaints have been filed and consolidated.
The complaints allege that Citigroup misstated the extent of its Enron-related
exposure, and that Citigroup's stock price fell once the true extent of the
company's Enron involvements became known. Plaintiffs filed an amended complaint
on March 10, 2003, which incorporated the allegations in the 15 separate actions
and added new material as well. The amended complaint focuses on certain
transaction Citigroup did with Enron and alleged analyst conflicts of interest.
The class period for the consolidated amended complaint is July 24, 1999 to
December 11, 2002. On June 2, 2003, Citigroup filed a motion to dismiss the
consolidated amended complaint. Plaintiffs' response was filed on July 30, and
Citigroup's reply was filed on October 3, 2003. Oral argument before Judge Swain
was held on November 20, 2003.
Mutual Funds.
In 2003, several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The Company has received subpoenas and
other requests for information from various government regulators regarding
market timing, fees, sales practices and other mutual fund issues in connection
with various investigations, including an investigation by the SEC and a United
States Attorney into the arrangements under which CGMH became the transfer agent
for many of the mutual funds in the Smith Barney fund complex. CGMH is
cooperating fully with all such reviews.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The Partnership no longer offers Redeemable Units at the net asset
value per Redeemable Units at the end of each month. For the three
months ended March 31, 2003 there were additional sales of 21,548.2982
Redeemable Units totaling $22,441,000.
23
Proceeds from the sale of additional Redeemable Units are used in the
trading of commodity interests including futures contracts, options,
forwards and swap contracts.
The following chart sets forth the purchases of Redeemable Units by
the Partnership.
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum Number
Shares (or Units) Paid per Share (or Shares (or Units) (or Approximate
Purchased* Unit)** Purchased as Part of Dollar Value) of
Publicly Announced Shares (or Units)
Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
January 1, 2004 - January 31, 4,437.9763 $779.74 N/A N/A
2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
February 1, 2004 - February 3,385.7864 $810.04 N/A N/A
29, 2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
March 1, 2004 - March 31, 2004 3,125.3885 $855.19 N/A N/A
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Total 10,949.1512 $814.99 N/A N/A
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
* Generally, Limited Partners are permitted to redeem their Redeemable Units as
of the end of each month on 10 days' notice to the General Partner. Under
certain circumstances, the General Partner can compel redemption but to date the
General Partner has not exercised this right. Purchases of Redeemable Units by
the Partnership reflected in the chart above were made in the ordinary course of
the Partnership's business in connection with effecting redemptions for Limited
Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month
at the Net Asset Value per Redeemable Unit as of that day.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) The exhibits required to be filed by Item 601 of Regulation S-K
are incorporated herein by reference to the exhibit index of the
Partnership's Annual Report on Form 10-K for the period ended
December 31, 2003.
Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certification
(Certification of President and Director).
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certification
(Certification of Chief Financial Officer and Director).
24
Exhibit - 32.1 - Section 1350 Certification (Certification of
President and Director).
Exhibit - 32.2 - Section 1350 Certification (Certification of
Chief Financial Officer and Director).
(b) Reports on Form 8-K - None
25
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.
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
By: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
---------------
David J. Vogel, President and Director
Date: May 10, 2004
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: May 10, 2004
By: /s/ Daniel R. McAuliffe, Jr.
-----------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: May 10, 2004
26
Exhibit 31.1
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salomon Smith Barney
AAA Energy Fund L.P. II (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, results of operations and cash flows 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 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 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):
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: May 10, 2004
/s/ David J. Vogel
--------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
27
Exhibit 31.2
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salomon Smith Barney
AAA Energy Fund L.P. II (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, results of operations and cash flows 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 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 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):
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: May 10, 2004
/s/ Daniel R. McAuliffe, Jr.
-----------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
28
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 Salomon Smith Barney AAA Energy Fund
L.P. II (the "Partnership") on Form 10-Q for the period ending March 31, 2004 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, results of operations and
cash flows of the Partnership.
/s/ David J. Vogel
-------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
May 10, 2004
29
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 Salomon Smith Barney AAA Energy Fund
L.P. II (the "Partnership") on Form 10-Q for the period ending March 31, 2004 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, results of operations and
cash flows of the Partnership.
/s/ Daniel R. McAuliffe, Jr.
----------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
May 10, 2004
30