Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-25921

AAA CAPITAL 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 Ceres Managed Futures LLC

522 Fifth Avenue – 14^th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(212) 296-1999

 

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		Accelerated filer		Non-accelerated filer    X		Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    No X

As of April 30, 2012, 16,640.9817 Limited Partnership Redeemable Units were outstanding.

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Table of Contents

AAA CAPITAL ENERGY FUND L.P.

FORM 10-Q

INDEX

 

										Page Number
PART I - Financial Information:
						Item 1.		Financial Statements:
								Statements of Financial Condition at March 31, 2012 (unaudited) and December 31, 2011		3
								Statements of Income and Expenses and Changes in Partners’ Capital for the three months ended March 31, 2012 and 2011 (unaudited)		4
								Notes to Financial Statements, including the Financial Statements of AAA Master Fund LLC (unaudited)		5 – 17
						Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18 –20
						Item 3.		Quantitative and Qualitative Disclosures about Market Risk		21
						Item 4.		Controls and Procedures		22
PART II - Other Information										23 – 25
Exhibits
Exhibit 31.1 Certification
Exhibit 31.2 Certification
Exhibit 32.1 Certification
Exhibit 32.2 Certification
101. INS				XBRL Instance Document.
101. SCH				XBRL Taxonomy Extension Schema Document.
101. CAL				XBRL Taxonomy Extension Calculation Linkbase Document.
101. LAB				XBRL Taxonomy Extension Label Linkbase Document.
101. PRE				XBRL Taxonomy Extension Presentation Linkbase Document.

 

2

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PART I

Item 1. Financial Statements

AAA Capital Energy Fund L.P.

Statements of Financial Condition

 

		(Unaudited) March 31,				December 31,
		2012				2011
Assets:
Investment in Master, at fair value		$	182,868,631			$	194,591,148
Cash			162,130				145,664
Total assets		$	183,030,761			$	194,736,812
Liabilities and Partners’ Capital:
Liabilities:
Accrued expenses:
Brokerage commissions		$	588,990			$	691,682
Management fees			303,829				323,228
Other			144,604				108,253
Redemptions payable			3,119,280				5,609,345
Total liabilities			4,156,703				6,732,508
Partners’ Capital:
General Partner, 218.7937 unit equivalents outstanding at March 31, 2012 and December 31, 2011			2,279,730				2,302,616
Special Limited Partner, 118.5047 Redeemable Units outstanding at March 31, 2012 and December 31, 2011			1,234,764				1,247,160
Limited Partners, 16,829.8792 and 17,526.7992 Redeemable Units outstanding at March 31, 2012 and December 31, 2011, respectively			175,359,564				184,454,528
Total partners’ capital			178,874,058				188,004,304
Total liabilities and partners’ capital		$	183,030,761			$	194,736,812
Net asset value per unit		$	10,419.54			$	10,524.14

See accompanying notes to financial statements.

 

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AAA Capital Energy Fund L.P.

Statements of Income and Changes in Expenses and Partners’ Capital

(Unaudited)

 

		Three Months Ended
		March 31,
		2012				2011
Investment income:
Interest income allocated from Master		$	11,073			$	38,146
Expenses:
Expenses allocated from Master			184,711				187,559
Brokerage commissions			567,087				665,728
Management fees			927,128				1,130,179
Other			45,421				60,409
Total expenses			1,724,347				2,043,875
Net investment income (loss)			(1,713,274	)			(2,005,729	)
Trading Results:
Net realized gains (losses) on closed contracts allocated from Master			18,361,955				9,399,307
Change in net unrealized gains (losses) on open contracts allocated from Master			(18,486,607	)			(3,812,879	)
Total trading results allocated from Master			(124,652	)			5,586,428
Net income (loss)			(1,837,926	)			3,580,699
Redemptions—Limited Partners			(7,292,320	)			(16,701,239	)
Redemptions—General Partner			—				(250,000	)
Net increase (decrease) in Partners’ Capital			(9,130,246	)			(13,370,540	)
Partners’ Capital, beginning of period			188,004,304				231,421,521
Partners’ Capital, end of period		$	178,874,058			$	218,050,981
Net asset value per unit (17,167.1776 and 21,102.9629 units outstanding at March 31, 2012 and 2011, respectively)		$	10,419.54			$	10,332.72
Net income (loss) per unit*		$	(104.60	)		$	160.66
Weighted average units outstanding			17,672.8246				21,891.1039

 

 

*	Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

1.    General:

AAA Capital 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 interests, including commodity options, commodity futures contracts on U.S. exchanges and certain foreign exchanges. The Partnership, through its investment in the Master (defined below), may trade commodity futures and options contracts of any kind. In addition, the Partnership, through its investment in the Master, may enter into swap contracts on energy-related products. During the initial offering period (February 12, 1998 through March 15, 1998), the Partnership sold 49,538 redeemable units of limited partnership interest (“Redeemable Units”). 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. The Partnership no longer offers Redeemable Units for sale.

Ceres Managed Futures LLC (“CMF”), a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). Morgan Stanley, indirectly through various subsidiaries, owns a majority equity interest in MSSB Holdings. Citigroup Inc. (“Citigroup”), indirectly, owns a minority equity interest in MSSB Holdings. Citigroup also indirectly owns Citigroup Global Markets Inc. (“CGM”), the commodity broker for the Partnership. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup. As of March 31, 2012, all trading decisions for the Partnership are made by the Advisor (defined below).

On September 1, 2001, the Partnership allocated substantially all of its capital to AAA Master Fund LLC (the “Master”), a New York limited liability company. The Partnership purchased 128,539.1485 units of the Master with a fair value of $128,539,149 (including unrealized appreciation of $7,323,329). The Master was formed in order to permit commodity pools managed now or in the future by AAA Capital Management Advisors, Ltd. (the “Advisor”) using the Energy Program—Futures and Swaps, a proprietary, discretionary trading program, to invest together in one trading vehicle. In addition, the Advisor is a special limited partner of the Partnership (in its capacity as special limited partner, the “Special Limited Partner”). The General Partner and the Advisor believe that trading through this master/feeder structure promotes 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. The Master’s commodity broker is CGM and its managing member is CMF. The Master may trade commodity futures and options contracts of any kind, but trades solely energy, energy-related products, grains, indices, lumber and softs. In addition, the Master may enter into swap contracts or trade in energy-related products. The commodity interests that are traded by the Partnership through its investment in the Master are volatile and involve a high degree of market risk.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended March 31, 2012.

At March 31, 2012, the Partnership owned approximately 18.9% of the Master. At December 31, 2011, the Partnership owned approximately 19.9% 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 trading of futures, swaps and options contracts, as applicable, is done primarily on U.S. and foreign commodity exchanges. The Master engages in such trading through a commodity brokerage account maintained with CGM. The Master’s Statements of Financial Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Members’ Capital are included herein.

The General Partner and each limited partner share in the profits and losses of the Partnership, after the allocation to the Special Limited Partner, in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contribution and profits or losses, if any, net of distributions.

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at March 31, 2012 and December 31, 2011, and the results of its operations and changes in partners’ capital for the three months ended March 31, 2012 and 2011. 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 (the “SEC”) for the year ended December 31, 2011.

The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

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.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of March 31, 2012 and December 31, 2011 and Statements of Income and Expenses and Changes in Members’ Capital for the three months ended March 31, 2012 and 2011 are presented below:

AAA Master Fund LLC

Statements of Financial Condition

 

		(Unaudited) March 31,				December 31,
		2012				2011
Assets:
Equity in trading account:
Cash		$	752,723,294			$	671,605,055
Cash margin			23,754,430				33,580,718
Options purchased, at fair value (cost $371,675,296 and $394,712,745, respectively)			283,370,684				374,133,088
Total assets		$	1,059,848,408			$	1,079,318,861
Liabilities and Members’ Capital:
Liabilities:
Net unrealized depreciation on open futures and exchange-cleared swap contracts		$	14,548,014			$	6,062,595
Options premium received, at fair value (premium $182,986,089 and $223,316,821, respectively)			76,093,376				96,374,598
Accrued expenses:
Professional fees			397,081				371,076
Total liabilities			91,038,471				102,808,269
Members’ Capital:
Members’ Capital, 95,808.0532 and 96,401.5933 units outstanding at March 31, 2012 and December 31, 2011, respectively			968,809,937				976,510,592
Total liabilities and members’ capital		$	1,059,848,408			$	1,079,318,861
Net Asset Value per Unit		$	10,111.99			$	10,129.61

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

AAA Master Fund LLC

Condensed Schedule of Investments

March 31, 2012

(Unaudited)

 

		Number of								% of Members’
		Contracts				Fair Value				Capital
Futures and Exchange-Cleared Swap Contracts Purchased
Energy			27,981			$	(63,285,651	)			(6.53	)%
Grains			73				(33,063	)			(0.00	) *
Lumber			32				(78,670	)			(0.01	)
Softs			227				(130,297	)			(0.02	)
Total futures and exchange-cleared swap contracts purchased							(63,527,681	)			(6.56	)
Futures and Exchange-Cleared Swap Contracts Sold
Energy			20,745				48,793,809				5.03
Grains			147				95,767				0.01
Lumber			32				90,091				0.01
Total futures and exchange-cleared swap contracts sold							48,979,667				5.05
Options Purchased
Call
Energy
NYMEX LT Crude Oil May 12 - Dec 14			14,363				150,806,440				15.56
Other			5,143				40,075,119				4.14
Call options purchased							190,881,559				19.70
Put
Energy
NYMEX LT Crude Oil May 12 - Dec 14			12,082				50,534,120				5.22
Other			7,539				41,735,317				4.31
Grains			74				219,688				0.02
Put options purchased							92,489,125				9.55
Total options purchased							283,370,684				29.25
Options Premium Received
Call
Energy			21,837				(72,568,975	)			(7.49	)
Grains			71				(106,088	)			(0.01	)
Call options premium received							(72,675,063	)			(7.50	)
Put
Energy			16,368				(3,412,163	)			(0.35	)
Grains			6				(6,150	)			(0.00	) *
Put options premium received							(3,418,313	)			(0.35	)
Total options premium received							(76,093,376	)			(7.85	)
Net fair value						$	192,729,294				19.89	%

 

*	Due to rounding.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

AAA Master Fund LLC

Condensed Schedule of Investments

December 31, 2011

 

		Number of Contracts				Fair Value				% of  Members’ Capital
Futures and Exchange-Cleared Swap Contracts Purchased
Energy			31,887			$	(119,406,111	)			(12.23	)%
Indices			60				(5,232	)			(0.00	)*
Lumber			41				21,365				0.00	*
Softs			430				(815,575	)			(0.08	)
Total futures and exchange-cleared swap contracts purchased							(120,205,553	)			(12.31	)
Futures and Exchange-Cleared Swap Contracts Sold
Energy
NYMEX HH Swap Mar 12 – Dec 14			10,565				79,310,347				8.12
Other			17,763				35,201,407				3.60
Grains			153				(331,229	)			(0.03	)
Lumber			41				(37,567	)			(0.00	)*
Total futures and exchange-cleared swap contracts sold							114,142,958				11.69
Options Purchased
Call
Energy
NYMEX LT Crude Oil Feb 12 – Dec 14			9,179				97,782,830				10.01
Other			8,590				38,624,446				3.96
Indices			120				189,600				0.02
Call options purchased							136,596,876				13.99
Put
Energy
NYMEX LT Crude Oil Feb 12 – Dec 14			15,707				105,386,170				10.79
NYMEX Natural Gas E Feb 12 – Jan 13			3,022				84,054,102				8.61
Other			6,764				46,428,317				4.75
Grains			70				300,563				0.03
Indices			1,348				1,367,060				0.14
Put options purchased							237,536,212				24.32
Total options purchased							374,133,088				38.31
Options Premium Received
Call
Energy			25,531				(42,662,618	)			(4.37	)
Grains			164				(169,713	)			(0.01	)
Indices			270				(449,100	)			(0.05	)
Call options premium received							(43,281,431	)			(4.43	)
Put
Energy			25,561				(53,008,680	)			(5.43	)
Indices			585				(84,487	)			(0.01	)
Put options premium received							(53,093,167	)			(5.44	)
Total options premium received							(96,374,598	)			(9.87	)
Net fair value						$	271,695,895				27.82	%

 

*	Due to rounding.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

AAA Master Fund LLC

Statements of Income and Expenses and Changes in Members’ Capital

(Unaudited)

 

		Three Months Ended
		March 31,
		2012				2011
Investment income:
Interest income		$	64,436			$	178,367
Expenses:
Clearing fees			861,449				642,017
Professional fees			103,445				171,605
Total expenses			964,894				813,622
Net investment income (loss)			(900,458	)			(635,255	)
Trading results:
Net gains (losses) on trading of commodity interests:
Net realized gains (losses) on closed contracts			95,567,573				41,580,310
Change in unrealized gains (losses) on open contracts			(96,259,884	)			(17,643,378	)
Total trading results			(692,311	)			23,936,932
Net income (loss)			(1,592,769	)			23,301,677
Subscriptions			25,306,289				52,476,738
Redemptions			(31,349,739	)			(68,909,014	)
Distribution of interest to feeder funds			(64,436	)			(178,367	)
Net increase (decrease) in Members’ Capital			(7,700,655	)			6,691,034
Members’ Capital, beginning of period			976,510,592				980,369,638
Members’ Capital, end of period		$	968,809,937			$	987,060,672
Net asset value per unit (95,808.0532 and 101,499.2392 units outstanding in March 31, 2012 and 2011, respectively)		$	10,111.99			$	9,724.81
Net income (loss) per unit*		$	(16.95	)		$	228.99
Weighted average units outstanding			96,963.5268				104,045.6041

 

 

*	Based on change in net asset value per unit.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

2.    Financial Highlights:

Changes in the net asset value per unit for the three months ended March 31, 2012 and 2011 were as follows:

 

		Three Months Ended March 31,
		2012				2011
Net realized and unrealized gains (losses) *		$	(49.08	)		$	215.13
Interest income			0.63				1.73
Expenses and allocation to Special Limited Partner**			(56.15	)			(56.20	)
Increase (decrease) for the period			(104.60	)			160.66
Net asset value per unit, beginning of period			10,524.14				10,172.06
Net asset value per unit, end of period		$	10,419.54			$	10,332.72

 

*	Includes brokerage commissions and clearing fees allocated from the Master.

 

**	Excludes brokerage commissions, clearing fees allocated from the Master and includes allocation to Special Limited Partner in the three months ended March 31, 2012 and 2011 if any.

 

		Three Months Ended March 31,
		2012				2011***
Ratios to average net assets:****
Net investment income (loss)			(3.7	)%			(3.7	)%
Allocation to Special Limited Partner			—	%			—	%
Net investment income (loss) before allocation to Special Limited Partner*****			(3.7	)%			(3.7	)%
Operating expenses			3.8	%			3.7	%
Allocation to Special Limited Partner			—	%			—	%
Total expenses and allocation to Special Limited Partner			3.8	%			3.7	%
Total return:
Total return before allocation to Special Limited Partner			(1.0	)%			1.6	%
Allocation to Special Limited Partner			—	%			—	%
Total return after allocation to Special Limited Partner			(1.0	)%			1.6	%

 

***	The ratios are shown net and gross of allocation to Special Limited Partner to conform to current period presentation.

 

****	Annualized (except for allocation to Special Limited Partner, if applicable).

 

*****

Interest income allocated from Master less total expenses (exclusive of allocation to Special Limited Partner, if applicable).

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

Financial Highlights of the Master:

 

		Three Months Ended March 31,
		2012				2011
Net realized and unrealized gains (losses)*		$	(16.54	)		$	228.93
Interest income			0.67				1.75
Expenses **			(1.08	)			(1.69	)
Increase (decrease) for the period			(16.95	)			228.99
Distribution of interest income to feeder funds			(0.67	)			(1.75	)
Net asset value per unit, beginning of period			10,129.61				9,497.57
Net asset value per unit, end of period		$	10,111.99			$	9,724.81

 

*	Includes clearing fees.

 

**	Excludes clearing fees.

 

		Three Months Ended March 31,
		2012				2011
Ratios to average net assets:***
Net investment income (loss)****			(0.4	)%			(0.3	)%
Operating expenses			0.4	%			0.3	%
Total return			(0.2	)%			2.4	%

 

***	Annualized.

 

****	Interest income less total expenses.

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the non-managing member class using the non-managing member’s share of income, expenses and average net assets.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

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 substantially all of its assets through a “master/feeder” structure. The Partnership’s pro rata share of the results of the Master’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The 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 on open futures and exchange-cleared swap contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and exchange-cleared swap contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210-20, “Balance Sheet,” have been met.

Brokerage commissions are based on the number of trades executed by the Advisor and the Partnership’s ownership percentage of the Master.

All of the commodity interests owned by the Master are held for trading purposes. The monthly average number of futures and exchange-cleared swap contracts traded during the three months ended March 31, 2012 and 2011 were 54,166 and 93,866, respectively. The monthly average number of options contracts traded during the three months ended March 31, 2012 and 2011 were 84,309 and 122,134, respectively.

The following tables indicate the gross fair values of derivative instruments of futures and exchange-cleared swaps and options contracts as separate assets and liabilities as of March 31, 2012 and December 31, 2011.

 

		March 31, 2012
Assets
Futures and Exchange-Cleared Swap Contracts
Energy		$	89,125,251
Grains			97,517
Lumber			90,091
Softs			48,575
Total unrealized appreciation on open futures and exchange-cleared swap contracts		$	89,361,434
Liabilities
Futures and Exchange-Cleared Swap Contracts
Energy		$	(103,617,093	)
Grains			(34,813	)
Lumber			(78,670	)
Softs			(178,872	)
Total unrealized depreciation on open futures and exchange-cleared swap contracts		$	(103,909,448	)
Net unrealized depreciation on open futures and exchange-cleared swap contracts		$	(14,548,014	)*
Assets
Options Purchased
Energy		$	283,150,996
Grains			219,688
Total options purchased		$	283,370,684	**
Liabilities
Options Premium Received
Energy		$	(75,981,138	)
Grains			(112,238	)
Total options premium received		$	(76,093,376	)***

 

 

*	This amount is in “Net unrealized depreciation on open futures and exchange-cleared swap contracts” on the Master’s Statements of Financial Condition.

 

**	This amount is in “Options purchased, at fair value” on the Master’s Statements of Financial Condition.

 

***	This amount is in “Options premium received, at fair value” on the Master’s Statements of Financial Condition.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

 

		December 31, 2011
Assets
Futures and Exchange-Cleared Swap Contracts
Energy		$	149,194,744
Indices			5,735
Lumber			21,365
Softs			583,472
Total unrealized appreciation on open futures and exchange-cleared swap contracts		$	149,805,316
Liabilities
Futures and Exchange-Cleared Swap Contracts
Energy		$	(154,089,101	)
Grains			(331,229	)
Indices			(10,967	)
Lumber			(37,567	)
Softs			(1,399,047	)
Total unrealized depreciation on open futures and exchange-cleared swap contracts		$	(155,867,911	)
Net unrealized depreciation on open futures and exchange-cleared swap contracts		$	(6,062,595	)*
Assets
Options Purchased
Energy		$	372,275,865
Grains			300,563
Indices			1,556,660
Total options purchased		$	374,133,088	**
Liabilities
Options Premium Received
Energy		$	(95,671,298	)
Grains			(169,713	)
Indices			(533,587	)
Total options premium received		$	(96,374,598	)***

 

*	This amount is in “Net unrealized depreciation on open futures and exchange-cleared swap contracts” on the Master’s Statements of Financial Condition.

 

**	This amount is in “Options purchased, at fair value” on the Master’s Statements of Financial Condition.

 

***	This amount is in “Options premium received, at fair value” on the Master’s Statements of Financial Condition.

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three months ended March 31, 2012 and 2011.

 

Sector		Three Months  Ended March 31, 2012 Gain(loss) from trading				Three Months  Ended March 31, 2011 Gain(loss) from trading
Energy		$	481,388			$	23,835,329
Grains			476,533				—
Indices			(1,274,969	)			—
Lumber			55,126				101,603
Softs			(430,389	)			—
Total		$	(692,311	)****		$	23,936,932	****

 

 

****	This amount is in “Total trading results” on the Master’s Statements of Income and Expenses and Changes in Members’ Capital.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

4.    Fair Value Measurements:

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2 of the Master’s notes to the annual financial statements as of December 31, 2011.

Partnership’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s Level 2 assets.

The Partnership will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards” (“IFRS”). The amendments within this ASU change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between GAAP and IFRS. However, some of the amendments clarify FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This new guidance did not have a significant impact on the Partnership’s/Master’s financial statements.

The Partnership values its investment in the Master with no rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended March 31, 2012 and December 31, 2011, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). There were no transfers of assets and liabilities between Level 1 and Level 2 during the quarter ended March 31, 2012.

 

		March 31, 2012				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Investment in Master		$	182,868,631			$	—			$	182,868,631			$	—
Net fair value		$	182,868,631			$	—			$	182,868,631			$	—

 

		December 31, 2011				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Investment in Master		$	194,591,148			$	—			$	194,591,148			$	—
Net fair value		$	194,591,148			$	—			$	194,591,148			$	—

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

Master’s Investments. All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Members’ Capital.

Master’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, the Master’s Level 1 assets and liabilities are actively traded.

The Master will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Master considers prices for exchange-traded commodity futures and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange traded swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended March 31, 2012 and December 31, 2011, the Master did not hold any derivative instruments for which market quotations were not readily available and which were priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the period January 1, 2012 to March 31, 2012, there were no Level 3 assets and liabilities, and there were no transfers of assets or liabilities between Level 1 and Level 2.

 

		March 31, 2012				Quoted Prices  in Active Markets for Identical Assets (Level 1)				Significant  Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Futures and Exchange-Cleared Swaps		$	89,361,434			$	89,361,434			$	—			$	—
Options purchased			283,370,684				283,370,684				—				—
Total assets			372,732,118				372,732,118				—				—
Liabilities
Futures and Exchange-Cleared Swaps		$	103,909,448			$	103,909,448			$	—			$	—
Options premium received			76,093,376				76,093,376				—				—
Total liabilities			180,002,824				180,002,824				—				—
Net fair value		$	192,729,294			$	192,729,294			$	—			$	—

 

		December 31, 2011				Quoted Prices  in Active Markets for Identical Assets (Level 1)				Significant  Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Futures and Exchange-Cleared Swaps		$	149,805,316			$	149,805,316			$	—			$	—
Options purchased			374,133,088				374,133,088				—				—
Total assets			523,938,404				523,938,404				—				—
Liabilities
Futures and Exchange-Cleared Swaps		$	155,867,911			$	155,867,911			$	—			$	—
Options premium received			96,374,598				96,374,598				—				—
Total liabilities			252,242,509				252,242,509				—				—
Net fair value		$	271,695,895			$	271,695,895			$	—			$	—

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

5.    Financial Instrument Risks:

In the normal course of 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 balances, or 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 forward and option contracts. OTC contracts are negotiated between contracting parties and include forwards, swaps and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer, or seller, of an option has unlimited risk. 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 risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/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 by the Partnership/Master. The Partnership/Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

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. The Partnership’s/Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Master has credit risk and concentration risk as CGM or a CGM affiliate is the sole counterparty or broker with respect to the Partnership’s/Master’s assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Partnership’s/Master’s counterparty is an exchange or clearing organization.

The Advisor will concentrate the Partnership’s/Master’s trading in energy-related markets. Concentration in a limited number of commodity interests may subject the Partnership’s/Master’s account to greater volatility than if a more diversified portfolio of contracts were traded on behalf of the Partnership/Master.

As both a buyer and seller of options, the Partnership/Master pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Master to potentially unlimited liability; for purchased options, the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Master does not consider these contracts to be guarantees.

The General Partner/managing member monitors and attempts to control 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 may be subject. These monitoring systems generally allow the General Partner/managing member to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures and exchange-cleared swaps, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.

 

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AAA Capital Energy Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

6.    Critical Accounting Policies:

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2 of the Master’s notes to the annual financial statements as of December 31, 2011.

Partnership’s and the Master’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Master’s Level 1 assets and liabilities are actively traded.

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities.

The Partnership and the Master will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Partnership values its investment in the Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended March 31, 2012 and December 31, 2011, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

The Master considers prices for exchange-traded commodity futures and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non–exchange-traded swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended March 31, 2012 and December 31, 2011, the Master did not hold any derivative instruments for which market quotations are not readily available, and are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

Futures Contracts. The Master trades futures contracts and exchange-cleared swaps. Exchange-cleared swaps are swaps that are traded as futures. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Members’ Capital.

Options. The Master may purchase and write (sell), both exchange-listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Master purchases an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Members’ Capital.

Brokerage Commissions. Commission charges to open and close futures and exchange-traded swap contracts are expensed at the time the positions are opened. Commission charges on option contracts are expensed at the time the position is established and when the option contract is closed.

Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.

GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.

The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2008 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Subsequent Events. The General Partner evaluates events that occur after the balance sheet date but before financial statements are filed. The General Partner has assessed the subsequent events through the date of filing and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.

Recent Accounting Pronouncements. In October 2011, FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company. Under longstanding GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes being proposed by FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. In addition to the changes to the criteria for determining whether an entity is an investment company, FASB also proposes that an investment company consolidate another investment company if it holds a controlling financial interest in the entity. The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.

In December 2011, FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership should also provide the disclosures retrospectively for all comparative periods presented. The Partnership is currently evaluating the impact that the pronouncement would have on the financial statements.

Net Income (Loss) per unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.

 

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Item 2.    Management’s

Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in the sale of goods or services. The Master’s only assets are its equity in its trading accounts, consisting of cash, cash margin and options purchased at fair value. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the first quarter of 2012.

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

For the three months ended March 31, 2012, Partnership capital decreased 4.9% from $188,004,304 to $178,874,058. This decrease was attributable to redemptions of 696.9200 Redeemable Units resulting in an outflow of $7,292,320, coupled with the net loss from operations of $1,837,926. Future redemptions could 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 and by expenses, interest income, redemptions of units and distributions of profits, if any.

For the three months ended March 31, 2012, the Master’s capital decreased 0.8% from $976,510,592 to $968,809,937. This decrease was attributable to the redemptions of 3,090.4271 Units of Member Interest totaling $31,349,739 and distribution of interest income to feeder funds totaling $64,436 to the non-managing members of the Master, coupled with the net loss from operations of $1,592,769, which was partially offset by the subscriptions of 2,496.8870 Units of Member Interest totaling $25,306,289. 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 GAAP 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 income and expense during the reporting period. Management believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 6 of the Financial Statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains(losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Results of Operations

During the Partnership’s first quarter of 2012, the net asset value per unit decreased 1.0% from $10,524.14 to $10,419.54 as compared to an increase of 1.6% in the first quarter of 2011. The Partnership, for its own account, through its investment in the Master, experienced a net trading loss before brokerage commissions and related fees in the first quarter of 2012 of $124,652. Losses were primarily attributable to the Master’s trading of commodity futures in IPE Brent Crude Oil, NYMEX Crude Oil, Indices and Softs and were partially offset by gains in NYMEX Energy Swaps, IPE Gas Oil, NYMEX Gasoline, NYMEX Natural Gas, NYMEX Heating Oil, Corn and Lumber. The Partnership, for its own account, through its investment in the Master, experienced a net trading gain before brokerage commissions and related fees in the first quarter of 2011 of $5,586,428. Gains were primarily attributable to the Master’s trading of commodity futures in IPE Brent Crude Oil, IPE Gas Oil, NYMEX Gasoline and Lumber and were partially offset by losses in NYMEX Crude Oil, NYMEX Energy Swaps, NYMEX Natural Gas and NYMEX Heating Oil.

The most significant losses were incurred within the energies complex during January and February as short futures positions in Brent crude oil were negatively impacted as potential supply disruptions from Iran helped push prices higher. Further losses were incurred from short call options in Brent crude oil as prices rallied during January and February which also detracted from performance. Short futures positions in Light Sweet crude oil also incurred losses during February as prices strengthened on potential supply disruptions and an expected increase in demand. Additional losses were incurred within the energies complex from short futures positions in RBOB gasoline as prices rallied in March despite significant open long interest in the market and weaker demand numbers in the United States. Trading in equity indices also experienced losses as long put options on the S&P 500 Index were negatively impacted during January and February as the U.S. equity markets rallied given renewed optimism about the economy. Lastly, long futures positions in ethanol were negatively impacted during January and March as prices fell sharply during these two months as increased volatility in global commodities markets affected prices.

A portion of these losses was offset by gains from trading in agricultural commodities as the Partnership benefited from tactically trading in corn futures as the market continued to trade in a sideways manner given concerns on crop yields and weather disruptions to the harvest in February and March.

 

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Commodity futures markets are highly volatile. Broad and rapid price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility for profit or loss. The profitability of the Partnership (and the Master) 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) expects to increase capital through operations.

Brokerage commissions are based on the number of trades executed by the Advisor and the Partnership’s ownership percentage of the Master. Brokerage commissions for the three months ended March 31, 2012 decreased by $98,641 as compared to the corresponding period in 2011. The decrease in brokerage commissions is primarily due to a decrease in the number of trades during the three months ended March 31, 2012 as compared to the corresponding period in 2011.

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. Interest income allocated from the Master for the three months ended March 31, 2012 decreased by $27,073 as compared to the corresponding period in 2011. The decrease in interest income is primarily due to lower average daily equity and lower U.S. Treasury bill rates for the Partnership during the three months ended March 31, 2012 as compared to the corresponding period in 2011. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Master’s account and upon interest rates over which the Partnership, the Master and CGM have no control.

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, 2012 decreased by $203,051 as compared to the corresponding period in 2011. The decrease in management fees is due to lower average net assets during the three months ended March 31, 2012, as compared to the corresponding period in 2011.

Special Limited Partner profit share allocations are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement among the Partnership, the General Partner and the Advisor. There were no profit share allocations made for the three months ended March 31, 2012 and 2011. The Advisor will not be allocated a profit share until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considers the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.

 

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

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

The limited partners will not be liable for losses exceeding the current net asset value of their investment.

Market movements result in frequent changes in the fair value of the Master’s open positions and, consequently, in its earnings and cash balances. The Master’s and the Partnership’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 market value of financial instruments and contracts, the diversification effects among the Master’s open contracts and the liquidity of the markets in which the Master 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.

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Master’s open positions by market category as of March 31, 2012 and December 31, 2011, and the highest, lowest and average value during the three months ended March 31, 2012 and for the twelve months ended December 31, 2011. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.

As of March 31, 2012, the Master’s total capitalization was $968,809,937 and the Partnership owned approximately 18.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of March 31, 2012 was as follows:

March 31, 2012

 

										Three Months Ended March 31, 2012
Market Sector		Value at Risk				% of Total Capitalization				High Value at Risk				Low Value at Risk				Average Value at  Risk*
Energy		$	42,216,264				4.36	%		$	74,809,915			$	26,234,892			$	47,763,839
Grains			334,150				0.03				417,240				257,513				305,750
Lumber			32,000				0.00	**			96,000				1,600				32,000
Softs			357,525				0.04				2,042,500				357,525				847,508
Total		$	42,939,939				4.43	%

 

 

*	Average monthly Values at Risk.

**	Due to rounding.

As of December 31, 2011, the Master’s total capitalization was $976,510,592 and the Partnership owned approximately 19.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2011 was as follows:

December 31, 2011

 

										Twelve Months Ended December 31, 2011
Market Sector		Value at Risk				% of Total Capitalization				High Value at Risk				Low Value at Risk				Average Value at  Risk*
Energy		$	55,102,501				5.64	%		$	94,389,860			$	26,234,892			$	59,052,953
Grains			296,485				0.03				301,619				53,188				150,902
Indices			1,456,343				0.15				2,900,159				17,268				1,177,895
Lumber			41,000				0.01				156,000				1,600				50,692
Softs			2,042,500				0.21				2,261,000				108,000				1,188,141
Total		$	58,938,829				6.04	%

 

 

*	Annual average of month-end Values at Risk.

 

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Item 4.    Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2012 and, based on that evaluation, the General Partners CEO and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:

 

•

pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

 

•

provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and

 

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended March 31, 2012 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The following information supplements and amends the discussion set forth under Part I, Item 3. “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. There are no material legal proceedings pending against the Partnership and the General Partner.

Subprime Mortgage-Related Litigation and Other Matters

On March 15, 2012, the United States Court of Appeals for the Second Circuit granted a stay of the district court proceedings pending resolution of the appeals in SEC v. CGMI. Additional information relating to this matter is publicly available in court filings under docket numbers 11 Civ. 7387 (S.D.N.Y.) (Rakoff, J.) and 11-5227 (2d Cir.).

 

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Item 1A.    Risk Factors

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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

The Partnership no longer offers Redeemable Units at the net asset value per Redeemable Unit as of the end of each month.

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

 

Period		(a) Total Number of Redeemable  Units Purchased*				(b) Average Price Paid per Redeemable Unit**				(c) Total Number of Redeemable Units Purchased as Part of Publicly Announced Plans or Programs				(d) Maximum Number (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the Plans or Programs
January 1, 2012 — January 31, 2012			176.2674			$	10,542.58				N/A				N/A
February 1, 2012 — February 29, 2012			221.2843			$	10,460.42				N/A				N/A
March 1, 2012 — March 31, 2012			299.3683			$	10,419.54				N/A				N/A
			696.9200			$	10,463.64				N/A				N/A

* Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner may compel redemption, although 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.    Mine Safety Disclosures – None

Item 5.    Other Information – None

 

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Item 6.    Exhibits

Exhibits:

3.1 — Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York, dated December 30, 1997 (filed as Exhibit 3.1 to the Partnership Form 10 filed on April 30, 1999 and incorporated herein by reference).

 

(a)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated October 1, 1999 (filed as Exhibit 3.1(a) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(b)

Certificate of Change of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, effective January 31, 2000 (filed as Exhibit 3.1(b) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(c)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.1(c) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(d)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(d) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(e)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(e) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(f)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on September 30, 2009 and incorporated herein by reference).

 

(g)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 30, 2010 (filed as Exhibit 3.1(g) to the Form 8-K filed on July 2, 2010 and incorporated herein by reference).

 

(h)

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Form 8-K filed on September 7, 2011 and incorporated herein by reference).

3.2 — Amended and Restated Limited Partnership Agreement, dated September 30, 2006 (filed as Exhibit 10.1 to the Form 10-Q filed on November 14, 2006 and incorporated herein by reference).

10.1 — Customer Agreement between the Partnership and Smith Barney Inc., dated February 12, 1998 (filed as Exhibit 10.B to the Form 10 filed on April 30, 1999 and incorporated herein by reference).

10.2 — Agency Agreement among the Partnership, Smith Barney Futures Management Inc. and Smith Barney Inc., dated February 12, 1998 (filed as Exhibit 10.2 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

10.3 — Joinder Agreement among the Partnership, the General Partner, CGM and Morgan Stanley Smith Barney LLC, dated June 1, 2009 (filed as Exhibit 10 to the Form 10-Q filed on August 14, 2009 and incorporated herein by reference).

10.4 — Escrow Agreement among the Partnership, Smith Barney Futures Management Inc., Smith Barney Inc. and European American Bank, dated February 9, 1998 (filed as Exhibit 10.4 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

10.5 — Advisory Agreement among the Partnership, the General Partner and AAA Capital Management Advisors, Ltd., dated April 3, 2006 (filed as Exhibit 33 to the Form 10-Q filed on August 14, 2006 and incorporated herein by reference).

 

(a)

Letter from the General Partner extending Advisory Agreement with AAA Capital Management Advisors, Ltd. for 2011, dated June 1, 2011 (filed as Exhibit 10.5(a) to the Form 10-K filed on March 30, 2012 and incorporated herein by reference).

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

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

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

32.2 Section 1350 Certification (Certification of Chief Financial Officer).

 

101. INS		XBRL Instance Document.
101. SCH		XBRL Taxonomy Extension Schema Document.
101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101. LAB		XBRL Taxonomy Extension Label Linkbase Document.
101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AAA Capital Energy Fund L.P.

 

By:		Ceres Managed Futures LLC
		(General Partner)
By:      /s/  Walter Davis
		Walter Davis
		President and Director
Date:   May 15, 2012
By:      /s/  Brian Centner
		Brian Centner
		Chief Financial Officer
		(Principal Accounting Officer)
Date:  May 15, 2012

 

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