UNITED STATES COMMODITY FUNDS LLC

General Partner of the United States Natural Gas Fund, LP

 

March 18, 2013

 

Dear United States Natural Gas Fund, LP Investor,

 

Enclosed with this letter is your copy of the 2012 financial statements for the United States Natural Gas Fund, LP (ticker symbol “UNG”). We have mailed this statement to all investors in UNG who held shares as of December 31, 2012 to satisfy our annual reporting requirement under federal commodities laws. In addition, we have enclosed a copy of the current UNG Privacy Policy. Additional information concerning UNG’s 2012 results may be found by referring to UNG’s Annual Report on Form 10-K (the “Form 10-K”), which has been filed with the U.S. Securities and Exchange Commission (the “SEC”). You may obtain a copy of the Form 10-K by going to the SEC’s website at www.sec.gov, or by going to UNG’s own website at www.unitedstatesnaturalgasfund.com. You may also call UNG at 1-800-920-0259 to speak to a representative and request additional material, including a current UNG Prospectus.

 

United States Commodity Funds LLC is the general partner of UNG. United States Commodity Funds LLC is also the general partner or sponsor and manager of several other commodity based exchange traded security funds. These other funds are referred to in the attached financial statements and include:

 

United States Oil Fund, LP	(ticker symbol: USO)	United States Brent Oil Fund, LP	(ticker symbol: BNO)
United States 12 Month Oil Fund, LP	(ticker symbol: USL)	United States Commodity Index Fund	(ticker symbol: USCI)
United States Gasoline Fund, LP	(ticker symbol: UGA)	United States Copper Index Fund	(ticker symbol: CPER)
United States Diesel-Heating Oil Fund, LP	(ticker symbol: UHN)	United States Agriculture Index Fund	(ticker symbol: USAG)
United States Short Oil Fund, LP	(ticker symbol: DNO)	United States Metals Index Fund	(ticker symbol: USMI)
United States 12 Month Natural Gas Fund, LP	(ticker symbol: UNL)

 

Information about these other funds is contained within the Annual Report as well as in the current UNG Prospectus. Investors in UNG who wish to receive additional information about these other funds may do so by going to their respective websites.* The websites may be found at:

 

www.unitedstatesoilfund.com	www.unitedstatesbrentoilfund.com
www.unitedstates12monthoilfund.com	www.unitedstatescommodityindexfund.com
www.unitedstatesgasolinefund.com	www.unitedstatescopperindexfund.com
www.unitedstatesdieselheatingoilfund.com	www.unitedstatesagricultureindexfund.com
www.unitedstatesshortoilfund.com	www.unitedstatesmetalsindexfund.com
www.unitedstates12monthnaturalgasfund.com

 

You may also call United States Commodity Funds LLC at 1-800-920-0259 to request additional information.

 

Thank you for your continued interest in UNG.

 

Regards,

 

/s/ Nicholas Gerber

Nicholas Gerber

President and CEO

United States Commodity Funds LLC

 

* This letter is not an offer to buy or sell securities. Investment in any of these other funds is only made by prospectus. Please consult the relevant prospectus for a description of the risks and expenses involved in any such investment.

 

 

PRIVACY POLICY OF

 

UNITED STATES COMMODITY FUNDS LLC

AS GENERAL PARTNER OF:

 

UNITED STATES OIL FUND, LP

UNITED STATES NATURAL GAS FUND, LP

UNITED STATES 12 MONTH OIL FUND, LP

UNITED STATES 12 MONTH NATURAL GAS FUND, LP

UNITED STATES GASOLINE FUND, LP

UNITED STATES DIESEL-HEATING OIL FUND, LP (FORMERLY, UNITED STATES HEATING OIL FUND, LP)

UNITED STATES SHORT OIL FUND, LP

UNITED STATES BRENT OIL FUND, LP

 

AS SPONSOR OF UNITED STATES COMMODITY INDEX FUNDS TRUST AND THE FOLLOWING SERIES THEREIN:

 

UNITED STATES COMMODITY INDEX FUND

UNITED STATES COPPER INDEX FUND

UNITED STATES AGRICULTURE INDEX FUND

UNITED STATES METALS INDEX FUND

 

AS SPONSOR OF THE UNITED STATES COMMODITY FUNDS TRUST I AND THE FOLLOWING SERIES THEREIN:

 

UNITED STATES SUGAR FUND

UNITED STATES GASOIL FUND

UNITED STATES NATURAL GAS DOUBLE INVERSE FUND

UNITED STATES ASIAN COMMODITIES BASKET FUND

 

AND AS SPONSOR OF THE UNITED STATES CURRENCY FUNDS TRUST AND THE FOLLOWING SERIES THEREIN:

 

US GOLDEN CURRENCY FUND

 

 

This privacy policy explains the policies of United States Commodity Funds LLC (the “Company”), a commodity pool operator registered with the Commodity Futures Trading Commission, and (i) the statutory trusts for which the Company acts as sponsor, United States Commodity Index Funds Trust (the “Index Funds Trust”), and United States Commodity Funds Trust I (“Trust I”) and United States Currency Funds Trust (the “Currency Funds Trust” and together with the “Index Funds Trust” and “Trust I”, the “Trusts”) and (ii) each of the funds for which the Company serves as the general partner or series within the Trusts for which the Company serves as sponsor (each a “Fund” and together, the “Funds”) each as referenced above relating to the collection, maintenance and use of nonpublic personal information about the Funds’ investors, as required under federal legislation. This privacy policy applies to the nonpublic personal information of investors who are individuals and who obtain financial products or services primarily for personal, family or household purposes.

 

Collection of Investor Information

 

Units of the Funds are registered in the name of Cede & Co., as nominee for the Depository Trust Company. However, the Company may collect or have access to personal information about Fund investors for certain purposes relating to the operation of the Funds, including for the distribution of certain required tax reports to investors. This information may include information received from investors and information about investors’ holdings and transactions in units of the Funds.

 

Disclosure of Nonpublic Personal Information

 

The Company does not sell or rent investor information. The Company does not disclose nonpublic personal information about Fund investors, except as required by law or as described below. Specifically, the Company may share nonpublic personal information in the following situations:

 

•

To service providers in connection with the administration and servicing of the Trust and the Funds, which may include attorneys, accountants, auditors and other professionals. The Company may also share information in connection with the servicing or processing of Trust and Fund transactions.

 

•

To respond to subpoenas, court orders, judicial process or regulatory authorities;

 

•

To protect against fraud, unauthorized transactions (such as money laundering), claims or other liabilities; and

 

•

Upon consent of an investor to release such information, including authorization to disclose such information to persons acting in a fiduciary or representative capacity on behalf of the investor.

 

Fund investors have no right to opt out of the Company’s disclosure of non-public personal information under the circumstances described above.

 

Protection of Investor Information

 

The Company holds Fund investor information in the strictest confidence. Accordingly, the Company’s policy is to require that all employees, financial professionals and companies providing services on its behalf keep client information confidential.

 

The Company maintains safeguards that comply with federal standards to protect investor information. The Company restricts access to the personal and account information of investors to those employees who need to know that information in the course of their job responsibilities. Third parties with whom the Company shares investor information must agree to follow appropriate standards of security and confidentiality, which includes safeguarding such information physically, electronically and procedurally.

 

The Company’s privacy policy applies to both current and former investors. The Company will only disclose nonpublic personal information about a former investor to the same extent as for a current investor.

 

Changes to Privacy Policy

 

The Company may make changes to its privacy policy in the future. The Company will not make any change affecting Fund investors without first sending investors a revised privacy policy describing the change. In any case, the Company will send Fund investors a current privacy policy at least once a year as long as they continue to be Fund investors.

 

 

UNITED STATES NATURAL GAS FUND, LP

A Delaware Limited Partnership

 

FINANCIAL STATEMENTS

 

For the years ended December 31, 2012, 2011 and 2010

 

AFFIRMATION OF THE COMMODITY POOL OPERATOR

 

To the Unitholders of the United States Natural Gas Fund, LP:

 

Pursuant to Rule 4.22(h) under the Commodity Exchange Act, the undersigned represents that, to the best of his knowledge and belief, the information contained in this Annual Report for the years ended December 31, 2012, 2011 and 2010 is accurate and complete.

 

By: /s/ Nicholas Gerber

Nicholas Gerber

United States Natural Gas Fund, LP

President & CEO of United States Commodity Funds LLC

(General Partner of United States Natural Gas Fund, LP)

 

5251 SOUTH QUEBEC STREET • SUITE 200

GREENWOOD VILLAGE, COLORADO 80111

TELEPHONE: (303) 753-1959

FAX: (303) 753-0338

www.spicerje ries.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Partners of

United States Natural Gas Fund, LP

 

We have audited the accompanying statements of financial condition of United States Natural Gas Fund, LP (the “Fund”) as of December 31, 2012 and 2011, including the schedule of investments as of December 31, 2012 and 2011, and the related statements of operations, changes in partners’ capital and cash flows for the years ended December 31, 2012, 2011 and 2010. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United States Natural Gas Fund, LP as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years ended December 31, 2012, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the Fund’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commision and our report dated February 27, 2013 expressed an unqualified opinion on the Fund’s internal control over financial reporting.

 

Greenwood Village, Colorado

February 27, 2013

 

 

United States Natural Gas Fund, LP

Statements of Financial Condition

At December 31, 2012 and 2011

 

		2012				2011
Assets
Cash and cash equivalents (Notes 2 and 5)		$	1,100,510,722			$	938,678,961
Equity in UBS Securities LLC trading accounts:
Cash and cash equivalents			144,803,499				206,627,904
Unrealized loss on open commodity futures contracts and cleared swap contracts			(14,596,843	)			(48,992,305	)
Unrealized loss on open swap contracts			(3,470,939	)			(12,805,692	)
Receivable for units sold			19,007,766				-
Dividend receivable			16,356				8,866
Interest receivable			-				174
Other assets			11,953				17,216
Total assets		$	1,246,282,514			$	1,083,535,124
Liabilities and Partners’ Capital
Investment payable		$	-			$	772
Payable for units redeemed			57,644,550				8,523,736
Professional fees payable			1,602,883				2,064,537
General Partner management fees payable (Note 3)			585,420				599,523
Brokerage commissions payable			122,250				166,250
License fees payable			46,200				57,489
Directors’ fees payable			8,402				7,103
Interest payable			153				153
Other liabilities			-				19,388
Total liabilities			60,009,858				11,438,951
Commitments and Contingencies (Notes 3, 4 and 5)
Partners’ Capital
General Partner			-				-
Limited Partners			1,186,272,656				1,072,096,173
Total Partners’ Capital			1,186,272,656				1,072,096,173
Total liabilities and partners’ capital		$	1,246,282,514			$	1,083,535,124
Limited Partners’ units outstanding			62,866,476				41,399,457	*
Net asset value per unit		$	18.87			$	25.88	*
Market value per unit		$	18.90			$	25.84	*

 

* On February 21, 2012, there was a 4-for-1 reverse unit split. Historical units outstanding, net asset value per unit and market value per unit have been adjusted to reflect the 4-for-1 reverse unit split on a retroactive basis.

 

See accompanying notes to financial statements.

 

 

 

United States Natural Gas Fund, LP

Schedule of Investments

At December 31, 2012

 

						Unrealized
						Loss
						on Open				% of
		Number of				Commodity				Partners’
		Contracts				Contracts				Capital
Open Cleared Swap Contracts – Long
Foreign Contracts
ICE Natural Gas Cleared Swap ICE LOT February 2013 contracts, expiring January 2013			30,192			$	(3,698,520	)			(0.31	)
Open Futures Contracts - Long
United States Contracts
NYMEX Natural Gas Futures NG February 2013 contracts, expiring January 2013			17,891				(8,753,720	)			(0.74	)
NYMEX Natural Gas Futures NN February 2013 contracts, expiring January 2013			17,952				(2,144,603	)			(0.18	)
			35,843				(10,898,323	)			(0.92	)
Total Open Cleared Swap and Futures Contracts			66,035			$	(14,596,843	)			(1.23	)

 

		Principal				Market
		Amount				Value
Cash Equivalents
United States Treasury Obligations
U.S. Treasury Bills:
0.09%, 1/17/2013*		$	100,000,000			$	99,995,899				8.43
0.10%, 1/17/2013			130,000,000				129,994,668				10.96
0.05%, 5/02/2013			100,000,000				99,981,771				8.43
Total Treasury Obligations							329,972,338				27.82
United States - Money Market Funds
Fidelity Institutional Government Portfolio - Class I			101,608,278				101,608,278				8.56
Goldman Sachs Financial Square Funds - Government Fund - Class FS			150,508,087				150,508,087				12.69
Morgan Stanley Institutional Liquidity Fund - Government Portfolio			200,495,952				200,495,952				16.90
Wells Fargo Advantage Government Money Market Fund - Class I			100,001,712				100,001,712				8.43
Total Money Market Funds							552,614,029				46.58
Total Cash Equivalents						$	882,586,367				74.40

 

Open Over-the-Counter Total Return Swap Contracts
		Notional				Market				Unrealized				Termination
		Amount**				Value				Loss				Dates
Swap agreement to receive return on the Custom Natural Gas Index (UNG) - Excess Return		$	105,862,329			$	(2,294,037	)		$	(2,294,037	)		4/23/2013
Swap agreement to receive return on the NYMEX Henry Hub Natural Gas Futures Contract			81,073,731				(1,176,902	)			(1,176,902	)		8/31/2013
Total unrealized loss on open swap contracts										$	(3,470,939	)

 

* Security or partial security segregated as collateral for open over-the-counter total return swap contracts.

** The aggregate notional amount of USNG’s over-the-counter swap transactions represented 15.00% of USNG’s total assets as of December 31, 2012.

 

See accompanying notes to financial statements.

 

 

United States Natural Gas Fund, LP

Schedule of Investments

At December 31, 2011

 

						Unrealized
						Loss
						on Open				% of
		Number of				Commodity				Partners’
		Contracts				Contracts				Capital
Open Cleared Swap Contracts – Long
Foreign Contracts
ICE Natural Gas Cleared Swap ICE LOT February 2012 contracts, expiring January 2012			44,808			$	(20,361,043	)			(1.90	)
Open Futures Contracts - Long
United States Contracts
NYMEX Natural Gas Futures NG February 2012 contracts, expiring January 2012			11,855				(20,554,950	)			(1.92	)
NYMEX Natural Gas Futures NN February 2012 contracts, expiring January 2012			17,950				(8,076,312	)			(0.75	)
			29,805				(28,631,262	)			(2.67	)
Total Open Cleared Swap and Futures Contracts			74,613			$	(48,992,305	)			(4.57	)

 

		Principal				Market
		Amount				Value
Cash Equivalents
United States Treasury Obligation
U.S. Treasury Bill, 0.03%, 6/21/2012*		$	250,020,000			$	249,984,166				23.32
United States - Money Market Funds
Fidelity Institutional Government Portfolio - Class I			201,595,923				201,595,923				18.80
Goldman Sachs Financial Square Funds - Government Fund - Class SL			150,476,458				150,476,458				14.04
Morgan Stanley Institutional Liquidity Fund - Government Portfolio			250,418,419				250,418,419				23.36
Total Money Market Funds							602,490,800				56.20
Total Cash Equivalents						$	852,474,966				79.52

 

Open Over-the-Counter Total Return Swap Contracts
		Notional				Market				Unrealized				Termination
		Amount**				Value				Loss				Dates
Swap agreement to receive return on the Custom Natural Gas Index (UNG) - Excess Return		$	146,699,945			$	(6,210,104	)		$	(6,210,104	)		4/25/2012
Swap agreement to receive return on the NYMEX Henry Hub Natural Gas Futures Contract			114,926,147				(6,595,588	)			(6,595,588	)		8/31/2012
Total unrealized loss on open swap contracts										$	(12,805,692	)

 

* Security or partial security segregated as collateral for open over-the-counter total return swap contracts.

** The aggregate notional amount of USNG’s over-the-counter swap transactions represented 24.15% of USNG’s total assets as of December 31, 2011.

 

See accompanying notes to financial statements.

 

 

United States Natural Gas Fund, LP

Statements of Operations

For the years ended December 31, 2012, 2011 and 2010

 

		Year ended				Year ended				Year ended
		December 31, 2012				December 31, 2011				December 31, 2010
Income
Gain (loss) on trading of commodity contracts:
Realized loss on closed futures contracts		$	(243,672,550	)		$	(361,823,498	)		$	(785,428,575	)
Realized loss on closed swap contracts			(75,525,786	)			(275,985,809	)			(905,660,856	)
Change in unrealized gain (loss) on open futures contracts			34,395,462				(136,397,585	)			129,182,545
Change in unrealized gain (loss) on open swap contracts			9,334,753				(40,005,918	)			66,608,914
Dividend income			131,491				192,988				907,351
Interest income			237,662				238,141				457,225
Other income			216,000				146,000				204,000
Total loss			(274,882,968	)			(813,635,681	)			(1,493,729,396	)
Expenses
General Partner management fees (Note 3)			6,154,688				10,074,913				16,067,219
Brokerage commissions			3,499,652				4,718,066				6,257,135
Professional fees			1,318,461				1,927,195				2,074,119
License fees			156,103				430,375				717,332
Directors’ fees			107,604				145,465				553,511
Other expenses			46,645				259,011				170,929
Total expenses			11,283,153				17,555,025				25,840,245
Net loss		$	(286,166,121	)		$	(831,190,706	)		$	(1,519,569,641	)
Net loss per limited partnership unit		$	(7.01	)		$	(22.12	)*		$	(32.52	)**
Net loss per weighted average limited partnership unit		$	(5.39	)		$	(18.88	)*		$	(29.72	)**
Weighted average limited partnership units outstanding			53,045,948				44,028,303	*			51,142,945	**

 

* On February 21, 2012, there was a 4-for-1 reverse unit split. The Statements of Operations have been adjusted for the period shown to reflect the 4-for-1 reverse unit split on a retroactive basis.

** On February 21, 2012, there was a 4-for-1 reverse unit split. On March 8, 2011, there was a 2-for-1 reverse unit split. The Statements of Operations have been adjusted for the period shown to reflect the 4-for-1 and the 2-for-1 reverse unit splits on a retroactive basis.

 

See accompanying notes to financial statements.

 

 

United States Natural Gas Fund, LP

Statements of Changes in Partners’ Capital

For the years ended December 31, 2012, 2011 and 2010

 

		General Partner				Limited Partners				Total
Balances, at December 31, 2009		$	-			$	4,525,107,163			$	4,525,107,163
Addition of 38,412,500 partnership units**			-				1,983,872,580				1,983,872,580
Redemption of 39,025,000 partnership units**			-				(2,322,053,265	)			(2,322,053,265	)
Net loss			-				(1,519,569,641	)			(1,519,569,641	)
Balances, at December 31, 2010			-				2,667,356,837				2,667,356,837
Addition of 34,187,500 partnership units**			-				1,349,602,961				1,349,602,961
Redemption of 48,363,043 partnership units**			-				(2,113,672,919	)			(2,113,672,919	)
Net loss			-				(831,190,706	)			(831,190,706	)
Balances, at December 31, 2011			-				1,072,096,173				1,072,096,173
Addition of 134,625,000 partnership units*			-				2,558,402,142				2,558,402,142
Redemption of 113,157,981 partnership units*			-				(2,158,059,538	)			(2,158,059,538	)
Net loss			-				(286,166,121	)			(286,166,121	)
Balances, at December 31, 2012		$	-			$	1,186,272,656			$	1,186,272,656
Net Asset Value Per Unit:
At December 31, 2009										$	80.52	**
At December 31, 2010										$	48.00	**
At December 31, 2011										$	25.88	*
At December 31, 2012										$	18.87

 

* On February 21, 2012, there was a 4-for-1 reverse unit split. The Statements of Changes in Partners’ Capital have been adjusted for the period shown to reflect the 4-for-1 reverse unit split on a retroactive basis.

** On February 21, 2012, there was a 4-for-1 reverse unit split. On March 8, 2011, there was a 2-for-1 reverse unit split. The Statements of Changes in Partners’ Capital have been adjusted for the periods shown to reflect the 4-for-1 and the 2-for-1 reverse unit splits on a retroactive basis.

 

See accompanying notes to financial statements.

 

 

United States Natural Gas Fund, LP

Statements of Cash Flows

For the years ended December 31, 2012, 2011 and 2010

 

		Year ended				Year ended				Year ended
		December 31, 2012				December 31, 2011				December 31, 2010
Cash Flows from Operating Activities:
Net loss		$	(286,166,121	)		$	(831,190,706	)		$	(1,519,569,641	)
Adjustments to reconcile net loss to net cash used in operating activities:
Decrease in commodity futures trading account - cash and cash equivalents			61,824,405				107,996,312				419,069,448
Unrealized (gain) loss on futures contracts			(34,395,462	)			136,397,585				(129,182,545	)
Unrealized (gain) loss on swap contracts			(9,334,753	)			40,005,918				(66,608,914	)
(Increase) decrease in investment receivable			-				16,538,472				(16,538,472	)
(Increase) decrease in dividend receivable			(7,490	)			45,320				56,049
(Increase) decrease in interest receivable			174				(174	)			-
Decrease in other assets			5,263				146,208				29,334
Increase (decrease) in investment payable			(772	)			772				(19,112,096	)
Decrease in professional fees payable			(461,654	)			(268,442	)			(277,002	)
Decrease in General Partner management fees payable			(14,103	)			(623,973	)			(694,671	)
Decrease in brokerage commissions payable			(44,000	)			(70,000	)			(20,000	)
Decrease in license fees payable			(11,289	)			(101,208	)			(72,648	)
Increase (decrease) in directors’ fees payable			1,299				(17,205	)			(23,836	)
Increase (decrease) in interest payable			-				153				(20,751	)
Increase (decrease) in other liabilities			(19,388	)			19,388				-
Net cash used in operating activities			(268,623,891	)			(531,121,580	)			(1,332,965,745	)
Cash Flows from Financing Activities:
Addition of partnership units			2,539,394,376				1,349,602,961				1,983,872,580
Redemption of partnership units			(2,108,938,724	)			(2,200,548,198	)			(2,226,654,250	)
Net cash provided by (used in) financing activities			430,455,652				(850,945,237	)			(242,781,670	)
Net Increase (Decrease) in Cash and Cash Equivalents			161,831,761				(1,382,066,817	)			(1,575,747,415	)
Cash and Cash Equivalents, beginning of year			938,678,961				2,320,745,778				3,896,493,193
Cash and Cash Equivalents, end of year		$	1,100,510,722			$	938,678,961			$	2,320,745,778

 

See accompanying notes to financial statements.

 

 

United States Natural Gas Fund, LP

Notes to Financial Statements

For the years ended December 31, 2012, 2011 and 2010

 

NOTE 1 - ORGANIZATION AND BUSINESS

The United States Natural Gas Fund, LP (“USNG”) was organized as a limited partnership under the laws of the state of Delaware on September 11, 2006. USNG is a commodity pool that issues limited partnership units (“units”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). Prior to November 25, 2008, USNG’s units traded on the American Stock Exchange (the “AMEX”). USNG will continue in perpetuity, unless terminated sooner upon the occurrence of one or more events as described in its Third Amended and Restated Agreement of Limited Partnership dated as of December 31, 2010 (the “LP Agreement”). The investment objective of USNG is for the daily changes in percentage terms of its units’ per unit net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of natural gas delivered at the Henry Hub, Louisiana as measured by the daily changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange (the “NYMEX”) that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case the futures contract will be the next month contract to expire (the “Benchmark Futures Contract”), less USNG’s expenses. It is not the intent of USNG to be operated in a fashion such that the per unit NAV will equal, in dollar terms, the spot price of natural gas or any particular futures contract based on natural gas. It is not the intent of USNG to be operated in a fashion such that its per unit NAV will reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day. United States Commodity Funds LLC (“USCF”), the general partner of USNG, believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts (as defined below) and Other Natural Gas-Related Investments (as defined below). USNG accomplishes its objective through investments in futures contracts for natural gas, crude oil, diesel-heating oil, gasoline and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other natural gas-related investments such as cash-settled options on Futures Contracts, forward contracts for natural gas, cleared swap contracts and over-the-counter transactions that are based on the price of natural gas, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Natural Gas-Related Investments”). As of December 31, 2012, USNG held 17,891 NG Futures Contracts, 17,952 NN Financially Settled Futures Contracts traded on the NYMEX, 30,192 cleared swap contracts traded on the ICE Futures and over-the-counter swap transactions with two counterparties, JP Morgan Chase Bank, NA (“JPMorgan”) and Deutsche Bank AG (“Deutsche Bank”).

 

USNG commenced investment operations on April 18, 2007 and has a fiscal year ending on December 31. USCF is responsible for the management of USNG. USCF is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective December 1, 2005. USCF is also the general partner of the United States Oil Fund, LP (“USOF”), the United States 12 Month Oil Fund, LP (“US12OF”), the United States Gasoline Fund, LP (“UGA”) and the United States Diesel-Heating Oil Fund, LP (formerly, the United States Heating Oil Fund, LP) (“USDHO”), which listed their limited partnership units on the AMEX under the ticker symbols “USO” on April 10, 2006, “USL” on December 6, 2007, “UGA” on February 26, 2008 and “UHN” on April 9, 2008, respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of USOF’s, US12OF’s, UGA’s and USDHO’s units commenced trading on the NYSE Arca on November 25, 2008. USCF is also the general partner of the United States Short Oil Fund, LP (“USSO”), the United States 12 Month Natural Gas Fund, LP (“US12NG”) and the United States Brent Oil Fund, LP (“USBO”), which listed their limited partnership units on the NYSE Arca under the ticker symbols “DNO” on September 24, 2009, “UNL” on November 18, 2009 and “BNO” on June 2, 2010, respectively. USCF is also the sponsor of the United States Commodity Index Fund (“USCI”), the United States Copper Index Fund (“CPER”), the United States Agriculture Index Fund (“USAG”) and the United States Metals Index Fund (“USMI”), each a series of the United States Commodity Index Funds Trust. USCI, CPER, USAG and USMI listed their units on the NYSE Arca under the ticker symbol “USCI” on August 10, 2010, “CPER” on November 15, 2011, “USAG” on April 13, 2012 and “USMI” on June 19, 2012, respectively. All funds listed previously are referred to collectively herein as the “Related Public Funds.” USCF has also filed registration statements to register units of the United States Sugar Fund (“USSF”), the United States Natural Gas Double Inverse Fund (“UNGD”), the United States Gasoil Fund (“USGO”) and the United States Asian Commodities Basket Fund (“UAC”), each a series of the United States Commodity Funds Trust I, and the US Golden Currency Fund (“HARD”), a series of the United States Currency Funds Trust.

 

USNG issues units to certain authorized purchasers (“Authorized Purchasers”) by offering baskets consisting of 100,000 units (“Creation Baskets”) through ALPS Distributors, Inc., as the marketing agent (the “Marketing Agent”). The purchase price for a Creation Basket is based upon the NAV of a unit calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket is properly received.

 

In addition, Authorized Purchasers pay USNG a $1,000 fee for each order placed to create one or more Creation Baskets or to redeem one or more baskets (“Redemption Baskets”), consisting of 100,000 units. Units may be purchased or sold on a nationally recognized securities exchange in smaller increments than a Creation Basket or Redemption Basket. Units purchased or sold on a nationally recognized securities exchange are not purchased or sold at the per unit NAV of USNG but rather at market prices quoted on such exchange.

 

In April 2007, USNG initially registered 30,000,000 units on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”). On April 18, 2007, USNG listed its units on the AMEX under the ticker symbol “UNG”. On that day, USNG established itsinitial per unit NAV by setting the price at $50.00 per unit and issued 200,000 units in exchange for $10,001,000. USNG also commenced investment operations on April 18, 2007 by purchasing Futures Contracts traded on the NYMEX based on natural gas. As of December 31, 2012, USNG had registered a total of 1,480,000,000 units.

 

On March 8, 2011, after the close of trading on the NYSE Arca, USNG effected a 2-for-1 reverse unit split and post-split units of USNG began trading on March 9, 2011. As a result of the reverse unit split, every two pre-split units of USNG were automatically exchanged for one post-split unit. Immediately prior to the reverse split, there were 447,200,000 units of USNG issued and outstanding, representing a per unit NAV of $5.16. Immediately after the reverse unit split, the number of issued and outstanding units of USNG decreased to 223,600,000, not accounting for fractional units, and the per unit NAV increased to $10.31. In connection with the reverse split, the CUSIP number of USNG’s units changed to 912318110. USNG’s ticker symbol, “UNG,” remains the same.

 

 

On February 21, 2012, after the close of trading on the NYSE Arca, USNG effected a 4-for-1 reverse unit split and post-split units of U SNG began trading on February 22, 2012. As a result of the reverse unit split, every four pre-split units of USNG were automatically exchanged for one post-split unit. Immediately prior to the reverse split, there were 174,297,828 units of USNG issued and outstanding, representing a per unit NAV of $5.51. Immediately after the reverse unit split, the number of issued and outstanding units of USNG decreased to 43,574,457, not accounting for fractional units, and the per unit NAV increased to $22.04. In connection with the reverse unit split, the CUSIP number of USNG’s units changed to 912318201. USNG’s ticker symbol, “UNG,” remains the same.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Commodity futures contracts, forward contracts, physical commodities, and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized gains or losses on open contracts are reflected in the statements of financial condition and represent the difference between the original contract amount and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the financial statements. Changes in the unrealized gains or losses between periods are reflected in the statements of operations. USNG earns interest on its assets denominated in U.S. dollars on deposit with the futures commission merchant at the overnight Federal Funds Rate less 32 basis points. In addition, USNG earns income on funds held at the custodian or futures commission merchant at prevailing market rates earned on such investments.

 

Investments in over-the-counter swap contracts (see Note 5) are arrangements to exchange a periodic payment for a market-linked return, each based on a notional amount. To the extent that the total return of the security or index underlying the transaction exceedsor falls short of the offsetting periodic payment obligation, USNG receives a payment from, or makes a payment to, the swap counterparty. The over-the-counter swap contracts are valued daily based upon the appreciation or depreciation of the underlying securities subsequent to the effective date of the contract. Changes in the value of the swaps are reported as unrealized gains and losses and periodic payments are recorded as realized gains or losses in the accompanying statements of operations.

 

Brokerage Commissions

Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.

 

Swap Premiums

Upfront fees paid by USNG for over-the-counter swap contracts are reflected on the statements of financial condition and represent payments made upon entering into a swap agreement to compensate for differences between the stated terms of the agreement and prevailing market conditions. The fees are amortized daily over the term of the swap agreement.

 

Income Taxes

USNG is not subject to federal income taxes; each partner reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax return.

 

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), USNG is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any tax related appeals or litigation processes, based on the technical merits of the position. USNG files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states. USNG is not subject to income tax return examinations by major taxing authorities for years before 2009. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in USNG recording a tax liability that reduces net assets. However, USNG’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analysis of and changes to tax laws, regulations and interpretations thereof. USNG recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the year ended December 31, 2012.

 

Creations and Redemptions

Authorized Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in blocks of 100,000 units at a price equal to the NAV of the units calculated shortly after the close of the core trading session on the NYSE Arca on the day the order is placed.

 

USNG receives or pays the proceeds from units sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in USNG’s statements of financial condition as receivable for units sold, and amounts payable to Authorized Purchasers upon redemption are reflected as payable for units redeemed.

 

 

Partnership Capital and Allocation of Partnership Income and Losses

Profit or loss shall be allocated among the partners of USNG in proportion to the number of units each partner holds as of the close of each month. USCF may revise, alter or otherwise modify this method of allocation as described in the LP Agreement.

 

Calculation of Per Unit Net Asset Value

USNG’s per unit NAV is calculated on each NYSE Arca trading day by taking the current market value of its total assets, subtracting any liabilities and dividing that amount by the total number of units outstanding. USNG uses the closing price for the contracts on the relevant exchange on that day to determine the value of contracts held on such exchange.

 

Net Income (Loss) Per Unit

Net income (loss) per unit is the difference between the per unit NAV at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units added and redeemed based on the amount of time the units were outstanding during such period. There were no units held by USCF at December 31, 2012.

 

Offering Costs

Offering costs incurred in connection with the registration of additional units after the initial registration of units are borne by USNG. These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings. These costs are accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted.

 

Cash Equivalents

Cash equivalents include money market funds and overnight deposits or time deposits with original maturity dates of six months or less.

 

Reclassification

Certain amounts in the accompanying financial statements were reclassified to conform to the current presentation.

 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires USCF to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions.

 

Other

On March 8, 2011, after the close of the NYSE Arca, USNG effected a 2-for-1 reverse unit split and post-split units of USNG began trading on March 9, 2011. The audited financial statements in this annual report on Form 10-K are presented in accordance with Accounting Standards Codification 260 for purposes of presenting the 2-for-1 reverse split on a historical basis for all periods reported.

 

On February 21, 2012, after the close of the NYSE Arca, USNG effected a 4-for-1 reverse unit split and post-split units of USNG began trading on February 22, 2012. The audited financial statements in this annual report on Form 10-K are presented in accordance with Accounting Standards Codification 260 for purposes of presenting the 4-for-1 reverse split on a historical basis for all periods reported.

 

NOTE 3 - FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS USCF Management Fee

Under the LP Agreement, USCF is responsible for investing the assets of USNG in accordance with the objectives and policies of USNG. In addition, USCF has arranged for one or more third parties to provide administrative, custody, accounting, transfer agency and other necessary services to USNG. For these services, USNG is contractually obligated to pay USCF a fee, which is paid monthly, that is equal to 0.60% per annum of average daily total net assets of $1,000,000,000 or less and 0.50% per annum of average daily total net assets that are greater than $1,000,000,000.

 

Ongoing Registration Fees and Other Offering Expenses

USNG pays all costs and expenses associated with the ongoing registration of its units subsequent to the initial offering. These costs include registration or other fees paid to regulatory agencies in connection with the offer and sale of units, and all legal, accounting, printing and other expenses associated with such offer and sale. For the years ended December 31, 2012, 2011 and 2010, USNG incurred $0, $113,150 and $93,970, respectively, in registration fees and other offering expenses.

 

Directors’ Fees and Expenses

USNG is responsible for paying its portion of the directors’ and officers’ liability insurance for USNG and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USNG and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust.

 

 

USNG shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses for the year ended December 31, 2012 were $540,586 for USNG and the Related Public Funds. USNG’s portion of such fees and expenses for the year ended December 31, 2012 was $172,838. For the year ended December 31, 2011, these fees and expenses were $607,582 for USNG and the Related Public Funds. USNG’s portion of such fees and expenses for the year ended December 31, 2011 was $290,377. For the year ended December 31, 2010, these fees and expenses $1,107,140 for USNG and the Related Public Funds, other than USCI, CPER, USAG and USMI. USNG’s portion of such fees and expenses for the year ended December 31, 2010 was $629,670. Effective as of April 1, 2010, USNG also became responsible for paying its portion of any payments that may become due to the independent directors pursuant to the deferred compensation agreements entered into between the independent directors, USCF, USNG and the Related Public Funds, except USCI, CPER, USAG and USMI.

 

Licensing Fees

As discussed in Note 4 below, USNG entered into a licensing agreement with the NYMEX on April 10, 2006, as amended on October 20, 2011. Pursuant to the agreement, through October 19, 2011, USNG and the Related Public Funds, other than USBO, USCI, CPER, USAG and USMI, paid a licensing fee that was equal to 0.04% for the first $1,000,000,000 of combined net assets of the funds and 0.02% for combined net assets above $1,000,000,000. On and after October 20, 2011, USNG and the Related Public Funds, other than USBO, USCI, CPER, USAG and USMI, pay a licensing fee that is equal to 0.015% on all net assets. During the years ended December 31, 2012, 2011 and 2010, USNG incurred $156,103, $430,375 and $717,332, respectively, under this arrangement.

 

Investor Tax Reporting Cost

The fees and expenses associated with USNG’s audit expenses and tax accounting and reporting requirements are paid by USNG. These costs were approximately $1,900,000, $2,100,000 and $2,450,000 for the years ended December 31, 2012, 2011 and 2010.

 

Other Expenses and Fees

In addition to the fees described above, USNG pays all brokerage fees, transaction costs for over-the-counter swaps, taxes and other expenses in connection with the operation of USNG, excluding costs and expenses paid by USCF as outlined in Note 4 below.

 

NOTE 4 - CONTRACTS AND AGREEMENTS

USNG is party to a marketing agent agreement, dated as of April 17, 2007, as amended from time to time, with the Marketing Agent and USCF, whereby the Marketing Agent provides certain marketing services for USNG as outlined in the agreement. The fees of the Marketing Agent, which are borne by USCF, are equal to 0.06% on USNG’s assets up to $3 billion and 0.04% on USNG’s assets in excess of $3 billion.

 

The above fees do not include the following expenses, which are also borne by USCF: the cost of placing advertisements in various periodicals; web construction and development; or the printing and production of various marketing materials.

 

USNG is also party to a custodian agreement, dated March 5, 2007, as amended from time to time, with Brown Brothers Harriman & Co. (“BBH&Co.”) and USCF, whereby BBH&Co. holds investments on behalf of USNG. USCF pays the fees of the custodian, which are determined by the parties from time to time. In addition, USNG is party to an administrative agency agreement, dated March 5, 2007, as amended from time to time, with USCF and BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and registrar for USNG. USCF also pays the fees of BBH&Co. for its services under such agreement and such fees are determined by the parties from time to time.

 

Currently, USCF pays BBH&Co. for its services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration services rendered to USNG and each of the Related Public Funds, as well as a $20,000 annual fee for its transfer agency services. In addition, USCF pays BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of USNG’s, USOF’s, US12OF’s, UGA’s, USDHO’s, USSO’s, US12NG’s, USBO’s, USCI’s, CPER’s, USAG’s and USMI’s combined net assets, (b) 0.0465% for USNG’s, USOF’s, US12OF’s, UGA’s, USDHO’s, USSO’s, US12NG’s, USBO’s, USCI’s, CPER’s, USAG’s and USMI’s combined net assets greater than $500 million but less than $1 billion, and (c) 0.035% once USNG’s, USOF’s, US12OF’s, UGA’s, USDHO’s, USSO’s, US12NG’s, USBO’s, USCI’s, CPER’s, USAG’s and USMI’s combined net assets exceed $1 billion. The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. USCF also pays transaction fees ranging from $7 to $15 per transaction.

 

USNG has entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”). The agreement requires UBS Securities to provide services to USNG in connection with the purchase and sale of Futures Contracts and Other Natural Gas-Related Investments that may be purchased and sold by or through UBS Securities for USNG’s account. In accordance with the agreement, UBS Securities charges USNG commissions of approximately $7 to $15 per round-turn trade, including applicable exchange and NFA fees for Futures Contracts and options on Futures Contracts. Such fees include those incurred when purchasing Futures Contracts and options on Futures Contracts when USNG issues units as a result of a Creation Basket, as well as fees incurred when selling Futures Contracts and options on Futures Contracts when USNG redeems units as a result of a Redemption Basket. Such fees are also incurred when Futures Contracts and options on Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio. USNG also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Natural Gas-Related Investments or short-term obligations of the United States of two years or less (“Treasuries”). During the year ended December 31, 2012, total commissions accrued to brokers amounted to $3,499,652. Of this amount, approximately $2,954,424 was a result of rebalancing costs and approximately $545,228 was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2011, total commissions accrued to brokers amounted to $4,718,066. Of this amount, approximately $4,442,086 was a result of rebalancing costs and approximately $275,980 was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2010, total commissions accrued to brokers amounted to $6,257,135. Of this amount, approximately $5,931,931 was a result of rebalancing costs and $325,204 was the result of trades necessitated by creation and redemption activity. The decrease in the total commissions accrued to brokers for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was primarily a function of decreased brokerage fees due to a lower number of Natural Gas Interests being held and traded during the year ended December 31, 2012. The decrease in the total commissions accrued to brokers for the year ended December 31, 2011 as compared to the year ended December 31, 2010, was primarily a function of decreased brokerage fees due to a fewer number of Natural Gas Interests being held and traded. As an annualized percentage of average daily total net assets, the figure for the year ended December 31, 2012 represents approximately 0.33% of average daily total net assets. By comparison, the figure for the year ended December 31, 2011 represented approximately 0.26% of average daily total net assets and the figure for the year ended December 31, 2010 represented approximately 0.21% of average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.

 

 

USNG and the NYMEX entered into a licensing agreement on April 10, 2006, as amended on October 20, 2011, whereby USNG was granted a non-exclusive license to use certain of the NYMEX’s settlement prices and service marks. Under the licensing agreement, USNG and the Related Public Funds, other than USBO, USCI, CPER, USAG and USMI, pay the NYMEX an asset-based fee for the license, the terms of which are described in Note 3. USNG expressly disclaims any association with the NYMEX or endorsement of USNG by the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are registered trademarks of the NYMEX.

 

NOTE 5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES

USNG engages in the trading of futures contracts, options on futures contracts, cleared swaps and over-the-counter swaps (collectively, “derivatives”). USNG is exposed to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure by another party to perform according to the terms of a contract.

 

USNG may enter into futures contracts, options on futures contracts, cleared swaps and over-the-counter swaps to gain exposure to changes in the value of an underlying commodity. A futures contract obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. Cleared swaps are over-the-counter agreements that are eligible to be cleared by a clearinghouse, e.g., ICE Clear Europe., but which are not traded on an exchange. A cleared swap is created when the parties to an off-exchange over-the-counter swap transaction agree to extinguish their OTC contract and replace it with a cleared swap. Cleared swaps are intended to provide the efficiencies and benefits that centralized clearing on an exchange offers to traders of futures contracts, including credit risk intermediation and the ability to offset positions initiated with different counterparties.

 

The purchase and sale of futures contracts, options on futures contracts and cleared swaps require margin deposits with a futures commission merchant. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires a futures commission merchant to segregate all customer transactions and assets from the futures commission merchant’s proprietary activities.

 

Futures contracts and cleared swaps involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure USNG has in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for a futures contract.

 

All of the futures contracts held by USNG were exchange-traded futures contracts, cleared swaps or fully-collateralized over-the-counter swaps through December 31, 2012. The liquidity and credit risks associated with exchange-traded contracts and cleared swaps are generally perceived to be less than those associated with over-the-counter swap transactions since, in over-the-counter swap transactions, a party must rely solely on the credit of its respective individual counterparties. As of December 31, 2012, USNG maintained overthe-counter swap transactions with two counterparties, JPMorgan and Deutsche Bank. Over-the counter swap transactions subject USNG to the credit risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain, if any, on the transaction. USNG has credit risk under its futures contracts since the sole counterparty to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded. However, as compared to its over-the-counter swap transactions, it may more easily realize value by reselling its futures contracts. In addition, USNG bears the risk of financial failure by the clearing broker.

 

At December 31, 2012, USNG’s counterparties posted $1,700,020 in cash and $0 in securities as collateral with USNG’s custodian, as compared with $990,210 in cash and $0 in securities for the year ended December 31, 2011. Under these agreements, USNG posted collateral with respect to its obligations of $15,511,111 in cash and $16,454,930 in securities, such as Treasuries, at December 31, 2012, as compared with $27,143,621 in cash and $26,431,111 in securities at December 31, 2011.

 

USNG’s cash and other property, such as Treasuries, deposited with a futures commission merchant are considered commingled with all other customer funds, subject to the futures commission merchant’s segregation requirements. In the event of a futures commission merchant’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of a futures commission merchant could result in the complete loss of USNG’s assets posted with that futures commission merchant; however, the majority of USNG’s assets are held in Treasuries, cash and/or cash equivalents with USNG’s custodian and would not be impacted by the insolvency of a futures commission merchant. The failure or insolvency of USNG’s custodian, however, could result in a substantial loss of USNG’s assets.

 

 

USCF invests a portion of USNG’s cash in money market funds that seek to maintain a stable per unit NAV. USNG is exposed to any risk of loss associated with an investment in such money market funds. As of December 31, 2012 and December 31, 2011, USNG held investments in money market funds in the amounts of $552,614,029 and $602,490,800, respectively. USNG also holds cash deposits with its custodian. Pursuant to a written agreement with BBH&Co., uninvested overnight cash balances are swept to offshore branches of U.S. regulated and domiciled banks located in Toronto, Canada, London, United Kingdom, Grand Cayman, Cayman Islands and Nassau, Bahamas, which are subject to U.S. regulation and regulatory oversight. As of December 31, 2012 and December 31, 2011, USNG held cash deposits and investments in Treasuries in the amounts of $692,700,192 and $542,816,065, respectively, with the custodian and futures commission merchant. Some or all of these amounts may be subject to loss should USNG’s custodian and/or futures commission merchant cease operations.

 

For derivatives, risks arise from changes in the market value of the contracts. Theoretically, USNG is exposed to market risk equal to the value of futures contracts purchased and unlimited liability on such contracts sold short. As both a buyer and a seller of options, USNG 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.

 

USNG’s policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and procedures. In addition, USNG has a policy of requiring review of the credit standing of each broker or counterparty with which it conducts business.

 

The financial instruments held by USNG are reported in its statements of financial condition at market or fair value, or at carrying amounts that approximate fair value, because of their highly liquid nature and short-term maturity.

 

NOTE 6 - FINANCIAL HIGHLIGHTS

The following table presents per unit performance data and other supplemental financial data for the years ended December 31, 2012, 2011 and 2010. This information has been derived from information presented in the financial statements.

 

		Year ended				Year ended				Year ended
		December 31, 2012				December 31, 2011				December 31, 2010
Per Unit Operating Performance:
Net asset value, beginning of year		$	25.88	*		$	48.00	**		$	80.52	**
Total income (loss)			(6.80	)			(21.72	)*			(32.00	)**
Total expenses			(0.21	)			(0.40	)*			(0.52	)**
Net decrease in net asset value			(7.01	)			(22.12	)*			(32.52	)**
Net asset value, end of year		$	18.87			$	25.88	*		$	48.00	**
Total Return			(27.09	)%			(46.08	)%			(40.42	)%
Ratios to Average Net Assets
Total income (loss)			(26.42	)%			(44.83	)%			(49.57	)%
Expenses excluding management fees			0.49	%			0.41	%			0.33	%
Management fees			0.59	%			0.55	%			0.53	%
Net income (loss)			(27.50	)%			(45.79	)%			(50.43	)%

 

* On February 21, 2012, there was a 4-for-1 reverse unit split. The Financial Highlights have been adjusted for the periods shown to reflect the 4-for-1 reverse unit split on a retroactive basis.

** On March 8, 2011, there was a 2-for-1 reverse unit split, and on February 21, 2012, there was a 4-for-1 reverse unit split. The Financial Highlights have been adjusted for the periods shown to reflect the 2-for-1 reverse unit split and the 4-for-1 reverse unit split on a retroactive basis.

 

Total returns are calculated based on the change in value during the period. An individual unitholder’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from USNG.

 

 

NOTE 7 - QUARTERLY FINANCIAL DATA (Unaudited)

The following summarized (unaudited) quarterly financial information presents the results of operations and other data for threemonth periods ended March 31, June 30, September 30 and December 31, 2012 and 2011.

 

		First				Second				Third				Fourth
		Quarter 2012				Quarter 2012				Quarter 2012				Quarter 2012
Income (Loss)		$	(427,733,740	)		$	188,407,967			$	106,408,494			$	(141,965,689	)
Total Expenses			2,758,767				2,655,813				2,884,646				2,983,927
Net Income (Loss)		$	(430,492,507	)		$	185,752,154			$	103,523,848			$	(144,949,616	)
Net Income (Loss) per Unit		$	(9.87	)		$	3.26			$	2.09			$	(2.49	)

 

		First				Second				Third				Fourth
		Quarter 2011				Quarter 2011				Quarter 2011				Quarter 2011
Total Loss		$	(58,122,255	)		$	(50,307,922	)		$	(301,862,513	)		$	(403,342,991	)
Total Expenses			5,563,087				4,774,133				3,564,611				3,653,194
Net Loss		$	(63,685,342	)		$	(55,082,055	)		$	(305,427,124	)		$	(406,996,185	)
Net Loss per Unit		$	(2.00	)*		$	(1.92	)*		$	(8.08	)*		$	(10.12	)*

 

* Adjusted to give effect to the reverse unit split of 2-for-1 executed on March 8, 2011 and the reverse unit split of 4-for-1 executed on February 21, 2012.

 

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

USNG values its investments in accordance with Accounting Standards Codification 820 - Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from sources independent of USNG (observable inputs) and (2) USNG’s own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the ASC 820 hierarchy are as follows:

 

Level I - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level II - Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly.

 

Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

 

Level III - Unobservable pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

In some instances, the inputs used to measure fair value might fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.

 

The following table summarizes the valuation of USNG’s securities at December 31, 2012 using the fair value hierarchy:

 

At December 31, 2012		Total				Level I				Level II				Level III
Short-Term Investments		$	882,586,367			$	882,586,367			$	-			$	-
Exchange-Traded Futures Contracts			(10,898,323	)			(10,898,323	)			-				-
Exchange-Traded Cleared Swap Contracts			(3,698,520	)			(3,698,520	)			-				-
Over-the-Counter Total Return Swap Transactions			(3,470,939	)			-				-				(3,470,939	)

 

During the year ended December 31, 2012, there were no transfers between Level I and Level II.

 

 

 

Following is a reconciliation of assets in which significant observable inputs (Level 3) were used in determining fair value as of December 31, 2012:

 

Total Return Swap Contracts
Beginning balance as of 12/31/11		$	(12,805,692	)
Realized gain (loss)*			-
Change in unrealized gain (loss)			9,334,753
Ending balance as of 12/31/12		$	(3,470,939	)

 

* The realized gain (loss) incurred during the fiscal year ended December 31, 2012 for total return swaps was $(75,525,786).

 

The following table summarizes the valuation of USNG’s securities at December 31, 2011 using the fair value hierarchy:

 

At December 31, 2011		Total				Level I				Level II				Level III
Short-Term Investments		$	852,474,966			$	852,474,966			$	-			$	-
Exchange-Traded Futures Contracts			(28,631,262	)			(28,631,262	)			-				-
Exchange-Traded Cleared Swap Contracts			(20,361,043	)			(20,361,043	)			-				-
Over-the-Counter Total Return Swap Transactions			(12,805,692	)			-				-				(12,805,692	)

 

During the year ended December 31, 2011, there were no transfers between Level I and Level II.

 

Following is a reconciliation of assets in which significant observable inputs (Level 3) were used in determining fair value as of December 31, 2011:

 

Total Return Swap Contracts
Beginning balance as of 12/31/10		$	27,200,226
Realized gain (loss)*			-
Change in unrealized gain (loss)			(40,005,918	)
Ending balance as of 12/31/11		$	(12,805,692	)

 

* The realized gain (loss) incurred during the fiscal year ended December 31, 2011 for total return swaps was $(275,985,809).

 

 

 

Effective January 1, 2009, USNG adopted the provisions of Accounting Standards Codification 815—Derivatives and Hedging, which require presentation of qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivatives.

 

Fair Value of Derivative Instruments

 

Derivatives not		Statements of
Accounted		Financial		Fair Value				Fair Value
for as Hedging		Condition		At				At
Instruments		Location		December 31, 2012				December 31, 2011
Futures - Commodity Contracts		Assets		$	(14,596,843	)		$	(48,992,305	)
Swaps - Commodity Contracts
		Assets			(3,470,939	)			(12,805,692	)

  

The Effect of Derivative Instruments on the Statements of Operations

 

For the year ended

For the year ended

For the year ended

December 31, 2012

December 31, 2011

December 31, 2010

Change in

Change in

Change in

Location of

Realized Gain

Unrealized

Realized Gain

Unrealized

Realized Gain

Unrealized

Gain or

or (Loss) on

Gain or

or (Loss) on

Gain or

or (Loss) on

Gain or

Derivatives

(Loss) on

Derivatives

(Loss) on

Derivatives

(Loss) on

Derivatives

(Loss) on

not Accounted

Derivatives

Recognized

Derivatives

Recognized

Derivatives

Recognized

Derivatives

for as Hedging

Recognized

in

Recognized

in

Recognized

in

Recognized

Instruments

in Income

Income

in Income

Income

in Income

Income

in Income

Futures - Commodity Contracts

Realized loss on closed futures positions

$

(243,672,550

)

$

(361,823,498

)

$

(785,428,575

)

Change in unrealized gain (loss) on open futures positions

$

34,395,462

$

(136,397,585

)

$

129,182,545

Swaps - Commodity Contracts

Realized loss on closed swap contracts

(75,525,786

)

(275,985,809

)

(905,660,856

)

Change in unrealized gain (loss) on open swap contracts

9,334,753

(40,005,918

)

66,608,914

 

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU No. 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. USCF is currently evaluating the impact ASU No. 2011-11 will have on USNG’s financial statements.

 

NOTE 10 - SUBSEQUENT EVENTS

USNG has performed an evaluation of subsequent events through the date the financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.