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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 June 30, 2014

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 0-50272

AAA CAPITAL ENERGY FUND L.P. II

 

(Exact name of registrant as specified in its charter)

 

New York

  

03-0407557

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue - 14th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(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 July 31, 2014, 34,397.0653 Limited Partnership Redeemable Units were outstanding.


Table of Contents

AAA CAPITAL ENERGY FUND L.P. II

FORM 10-Q

INDEX

 

         

Page
Number

PART I - Financial Information:

     

Item 1.

   Financial Statements:   
   Statements of Financial Condition at June 30, 2014 (unaudited) and December 31, 2013    3
   Statements of Income and Expenses and Changes in Partners’ Capital for the three and six months ended June 30, 2014 and 2013 (unaudited)    4
   Notes to Financial Statements, including the Financial Statements of AAA Master Fund LLC (unaudited)      5 – 23

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    24 – 26

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    26 – 27

Item 4.

   Controls and Procedures    28

PART II - Other Information

     

Item 1.

   Legal Proceedings    29 – 35

Item 1A.

   Risk Factors    36

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    36

Item 5.

   Other Information    36

Item 6.

   Exhibits    37 – 38

 

2


Table of Contents

PART I

Item 1. Financial Statements

AAA Capital Energy Fund L.P. II

Statements of Financial Condition

 

     (Unaudited)         
     June 30,
2014
     December 31,
2013
 

Assets:

     

Investment in the Master, at fair value

   $ 125,757,802       $ 151,255,621   

Cash

     102,488         137,787   
  

 

 

    

 

 

 

Total assets

   $ 125,860,290       $ 151,393,408   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Ongoing selling agent fees

   $ 207,045       $ 175,039   

Management fees

     157,017         188,922   

Administrative fees

     52,339         62,974   

Other

     39,389         81,072   

Redemptions payable

     2,251,751         3,498,823   
  

 

 

    

 

 

 

Total liabilities

     2,707,541         4,006,830   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 567.5379 unit equivalents outstanding at June 30, 2014 and
December 31, 2013

     1,971,566         2,027,779   

Special Limited Partner, 464.0795 Redeemable Units outstanding at June 30, 2014 and December 31, 2013

     1,612,162         1,658,128   

Limited Partners, 34,419.3238 and 40,219.2068 Redeemable Units outstanding at June 30, 2014 and December 31, 2013, respectively

     119,569,021         143,700,671   
  

 

 

    

 

 

 

Total partners’ capital

     123,152,749         147,386,578   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 125,860,290       $ 151,393,408   
  

 

 

    

 

 

 

Net asset value per unit

   $ 3,473.89       $ 3,572.94   
  

 

 

    

 

 

 

See Accompanying Notes to Financial Statements.

 

3


Table of Contents

AAA Capital Energy Fund L.P. II

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2014     2013     2014     2013  
                          

Investment income:

        

Interest income allocated from Master

   $ 4,093      $ 9,543      $ 12,883      $ 35,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Expenses allocated from Master

     83,819        326,658        164,308        715,329   

Ongoing selling agent fees

     207,683        891,154        381,585        1,974,100   

Management fees

     488,647        831,355        1,024,928        1,756,661   

Administrative fees

     162,882        277,118        341,643        585,553   

Other

     65,252        64,787        136,649        123,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,008,283        2,391,072        2,049,113        5,154,943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (1,004,190)        (2,381,529     (2,036,230)        (5,119,336
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

        

Net realized gains (losses) on closed contracts allocated from Master

     267,911        (5,845,950     4,591,773        (16,043,932

Change in net unrealized gains (losses) on open contracts allocated from Master

     (1,519,019     7,725,722        (6,177,992     364,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results allocated from Master

     (1,251,108     1,879,772        (1,586,219     (15,678,936
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (2,255,298     (501,757     (3,622,449     (20,798,272

Subscriptions — Limited Partners

     444,543        904,999        1,498,078        4,382,776   

Redemptions — Limited Partners

     (7,304,449     (36,028,438     (22,109,458     (56,570,759

Redemptions — General Partner

     —          (403,713     —          (403,713
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in Partners’ Capital

     (9,115,204     (36,028,909     (24,233,829     (73,389,968

Partners’ Capital, beginning of period

     132,267,953        230,104,550        147,386,578        267,465,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, end of period

   $ 123,152,749      $ 194,075,641      $ 123,152,749      $ 194,075,641   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit (35,450.9412 and 51,918.5242 units outstanding at June 30, 2014 and 2013, respectively)

   $ 3,473.89      $ 3,738.08      $ 3,473.89      $ 3,738.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit*

   $ (63.92)      $ (7.95)      $ (99.05)      $ (317.42)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

     36,751.8229        59,188.9002        38,469.9322        62,061.3855   
  

 

 

   

 

 

   

 

 

   

 

 

 

  

 

* Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

4


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

1. General:

AAA Capital Energy Fund L.P. II (the “Partnership”) is a limited partnership organized on March 25, 2002 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including commodity options, commodity futures contracts on U.S. exchanges and certain foreign exchanges and swaps. The Partnership, through its investment in the AAA Master Fund LLC (the “Master”), intends to trade only energy and energy-related products, as well as the Goldman Sachs Commodity Index (an index future comprised of energy and other products) traded on the Chicago Mercantile Exchange, but is authorized to trade commodity futures, swaps and options contracts of any kind. In addition, the Partnership, through its investment in the Master, may engage in swap transactions involving crude oil and other energy-related products. The Partnership commenced trading on July 1, 2002. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”). There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, 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”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. 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 Inc. As of June 30, 2014, all trading decisions for the Partnership are made by AAA Capital Management Advisors, Ltd. (the “Advisor”).

On July 1, 2002, the Partnership allocated substantially all of its capital to the Master, a New York limited liability company. The Partnership purchased 64,945.0387 units of the Master with a fair value of $94,925,000. The Master permits commodity pools managed now or in the future by 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 is also the managing member of the Master (in such capacity, the “Managing Member”). Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be non-managing members of the Master. 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. During the six months ended June 30, 2014, the Partnership’s/Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During prior periods covered by this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker. The Master may trade commodity futures and option 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. 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 June 30, 2014.

During the third quarter of 2013, the Master entered into a futures brokerage account agreement with MS&Co. and commenced futures trading through an account at MS&Co. on or about September 9, 2013.

 

5


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

Effective October 29, 2013, the Partnership entered into a futures brokerage account agreement with MS&Co. and began transferring the brokerage account of the Partnership from CGM to MS&Co. As of October 29, 2013, the Partnership ceased paying a brokerage commission to CGM and began paying a brokerage commission to MS&Co. equal to $18.00 per round-turn on futures transactions, up to an equivalent amount for swaps and $9.00 per side on options transactions. The brokerage commissions were inclusive of applicable floor brokerage fees. Also effective October 29, 2013, the Partnership entered into a selling agreement with Morgan Stanley Smith Barney LLC (d/b/a Morgan Stanley Wealth Management).

Effective March 1, 2014, the Partnership entered into a new futures brokerage account agreement with MS&Co. and ceased paying brokerage commissions to MS&Co. Effective that same date, the Partnership terminated its existing selling agent agreement and entered into a new selling agreement with Morgan Stanley Wealth Management (the “Selling Agreement”). Pursuant to the Selling Agreement, Morgan Stanley Wealth Management receives a monthly ongoing selling agent fee, the amount of which is calculated by multiplying the Partnership’s round turn futures transactions by $18.00 each, swaps by up to an equivalent amount and options transactions by $9.00 each per side. The ongoing selling agent fee amount is reduced by applicable floor brokerage. Morgan Stanley Wealth Management pays a portion of its ongoing selling agent fees to other properly licensed and/or registered selling agents and to financial advisers who have sold Redeemable Units in the Partnership.

The Partnership, through its investment in the Master, pays MS&Co. trading fees for the clearing and, where applicable, execution of transactions.

Certain prior period amounts have been reclassified to conform to current period presentation. Amounts reported separately on the Statements of Income and Expenses and Changes in Partners’ Capital as ongoing selling agent fees and clearing fees were previously combined and presented as brokerage commissions.

As of June 30, 2014, the Partnership owned approximately 32.2% of the Master. As of December 31, 2013, the Partnership owned approximately 32.7% of the Master. It is the Partnership’s intention to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master’s trading of futures, swap and option contracts, as applicable, is done primarily on U.S. and foreign commodity exchanges. During the period covered by this report, the Master engaged in such trading through a commodity brokerage account maintained with MS&Co. During prior periods covered by this report, the Master engaged in such trading through commodity brokerage accounts 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, if any, net of distributions and losses, if any.

 

6


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

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 June 30, 2014 and December 31, 2013, and the results of its operations and changes in partners’ capital for the three and six months ended June 30, 2014 and 2013. 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, 2013.

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 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.

 

7


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of June 30, 2014 and December 31, 2013 and Statements of Income and Expenses and Changes in Members’ Capital for the three and six months ended June 30, 2014 and 2013 are presented below:

AAA Master Fund LLC

Statements of Financial Condition

 

    

(Unaudited)

June 30,

     December 31,  
     2014      2013  

Assets:

     

Equity in trading account:

     

Cash

   $ 373,992,346       $ 427,829,581   

Cash margin

     12,390,555         20,401,097   

Net unrealized appreciation on open futures and exchange-cleared swap contracts

     —           3,968,683   

Options purchased, at fair value (cost $41,621,597 and $49,583,260, respectively)

     28,904,360         25,074,590   

Receivable from Orion

     —           34,249   
  

 

 

    

 

 

 

Total assets

   $ 415,287,261       $ 477,308,200   
  

 

 

    

 

 

 

Liabilities and Members’ Capital:

     

Liabilities:

     

Net unrealized depreciation on open futures and exchange-cleared swap contracts

   $ 20,800,620       $ —     

Options premium received, at fair value (premium $20,201,995 and $35,897,312, respectively)

     4,028,086         14,379,750   

Accrued expenses:

     

Clearing fees due to MS&Co.

     9,443         3,782   

Professional fees

     317,148         179,064   
  

 

 

    

 

 

 

Total liabilities

     25,155,297         14,562,596   
  

 

 

    

 

 

 

Members’ Capital:

     

Members’ Capital, 42,476.5618 and 49,663.4600 units outstanding at June 30, 2014 and December 31, 2013, respectively

     390,131,964         462,745,604   
  

 

 

    

 

 

 

Total liabilities and members’ capital

   $ 415,287,261       $ 477,308,200   
  

 

 

    

 

 

 

Net asset value per unit

   $ 9,184.64       $ 9,317.63   
  

 

 

    

 

 

 

 

8


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

AAA Master Fund LLC

Condensed Schedule of Investments

June 30, 2014

(Unaudited)

     Number of            % of Members’  
     Contracts      Fair Value     Capital  
       

Futures and Exchange-Cleared Swap Contracts Purchased

       

Energy

     1,315       $ 6,085,030        1.56
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts purchased

        6,085,030        1.56   
     

 

 

   

 

 

 

Futures and Exchange-Cleared Swap Contracts Sold

       

Energy

       

NYMEX LT Crude Oil Aug 14 - Dec 16

     3,222         (24,526,249     (6.29

Other

     1,529         (2,359,401     (0.60
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts sold

        (26,885,650     (6.89
     

 

 

   

Net unrealized depreciation on open futures and exchange-cleared swap contracts

        (20,800,620     (5.33
     

 

 

   

 

 

 

Options Purchased

       

Call

       

Energy

       

NYMEX LT Crude Oil Dec 14

     2,945         30,895,280        7.92   

Other

     1,906         195,170        0.05   
     

 

 

   

 

 

 

Call options purchased

        31,090,450        7.97   
     

 

 

   

 

 

 

Put

       

Energy

     6,557         (2,186,090     (0.56
     

 

 

   

 

 

 

Put options purchased

        (2,186,090     (0.56
     

 

 

   

 

 

 

Total options purchased

        28,904,360        7.41   
     

 

 

   

 

 

 

Options Premium Received

       

Call

       

Energy

     1,493         (1,090,293     (0.28
     

 

 

   

 

 

 

Call options premium received

        (1,090,293     (0.28
     

 

 

   

 

 

 

Put

       

Energy

     7,806         (2,937,793     (0.76
     

 

 

   

 

 

 

Put options premium received

        (2,937,793     (0.76
     

 

 

   

 

 

 

Total options premium received

        (4,028,086     (1.04
     

 

 

   

 

 

 

Net fair value

      $ 4,075,654        1.04
     

 

 

   

 

 

 

 

 

9


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

AAA Master Fund LLC

Condensed Schedule of Investments

December 31, 2013

 

     Number of
Contracts
     Fair Value     % of
Members'
Capital
 

Futures and Exchange-Cleared Swap Contracts Purchased

       

Energy

     3,671       $ 1,617,462        0.35
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts purchased

        1,617,462        0.35   
     

 

 

   

 

 

 

Futures and Exchange-Cleared Swap Contracts Sold

       

Energy

     4,485         2,351,221        0.51   
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts sold

        2,351,221        0.51   
     

 

 

   

 

 

 

Net unrealized appreciation on open futures and exchange-cleared swap contracts

        3,968,683        0.86   
     

 

 

   

 

 

 

Options Purchased

       

Call

       

Energy

     4,990         18,832,170        4.07   
     

 

 

   

 

 

 

Call options purchased

        18,832,170        4.07   
     

 

 

   

 

 

 

Put

       

Energy

     2,263         6,242,420        1.35   
     

 

 

   

 

 

 

Put options purchased

        6,242,420        1.35   
     

 

 

   

 

 

 

Total options purchased

        25,074,590        5.42   
     

 

 

   

 

 

 

Options Premium Received

       

Call

       

Energy

     4,443         (3,471,110     (0.75
     

 

 

   

 

 

 

Call options premium received

        (3,471,110     (0.75
     

 

 

   

 

 

 

Put

       

Energy

     3,090         (10,908,640     (2.36
     

 

 

   

 

 

 

Put options premium received

        (10,908,640     (2.36
     

 

 

   

 

 

 

Total options premium received

        (14,379,750     (3.11
     

 

 

   

 

 

 

Net fair value

      $ 14,663,523        3.17
     

 

 

   

 

 

 

 

10


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

AAA Master Fund LLC

Statements of Income and Expenses and Changes in Members’ Capital

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

Investment income:

        

Interest income

   $ 14,172      $ 34,266      $ 43,309      $ 125,430   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Clearing fees

     136,867        922,068        262,652        2,040,592   

Professional fees

     119,513        120,782        230,997        210,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     256,380        1,042,850        493,649        2,250,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (242,208     (1,008,584     (450,340     (2,125,287
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading results:

        

Net gains (losses) on trading of commodity interests:

        

Net realized gains (losses) on closed contracts

     547,562        (18,681,459     13,065,211        (50,416,448

Change in net unrealized gains (losses) on open contracts

     (4,703,525     24,875,100        (18,321,523     2,315,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

     (4,155,963     6,193,641        (5,256,312     (48,100,507
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (4,398,171     5,185,057        (5,706,652     (50,225,794

Subscriptions

     10,510,419        9,473,871        19,010,266        32,831,819   

Redemptions

     (25,129,597     (78,520,824     (85,873,945     (136,170,518

Distribution of interest to feeder funds

     (14,172     (34,266     (43,309     (125,430
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in Members’ Capital

     (19,031,521     (63,896,162     (72,613,640     (153,689,923

Members’ Capital, beginning of period

     409,163,485        752,964,392        462,745,604        842,758,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Members’ Capital, end of period

   $ 390,131,964      $ 689,068,230      $ 390,131,964      $ 689,068,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit (42,476.5618 and 71,776.9756 units outstanding in June 30, 2014 and 2013, respectively)

   $ 9,184.64      $ 9,600.13      $ 9,184.64      $ 9,600.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit*

   $ (102.66   $ 68.40      $ (132.01   $ (619.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

     43,613.4523        76,990.8136        45,559.6947        79,462.4536   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

* Based on change in net asset value per unit before distribution of interest income to feeder funds.

 

11


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

2. Financial Highlights:

Changes in the net asset value per unit for the three and six months ended June 30, 2014 and 2013 were as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net realized and unrealized gains (losses)*

   $ (43.47   $ 12.35      $ (58.31   $ (277.17

Interest income allocated from Master

     0.10        0.17        0.32        0.58   

Expenses**

     (20.55     (20.47     (41.06     (40.83
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     (63.92     (7.95     (99.05     (317.42

Net asset value per unit, beginning of period

     3,537.81        3,746.03        3,572.94        4,055.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 3,473.89      $ 3,738.08      $ 3,473.89      $ 3,738.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes ongoing selling agent fees and clearing fees. Net realized and unrealized gains (losses) excluding ongoing selling agent fees and clearing fees for the three months ended June 30, 2014 and 2013, and for the six months ended June 30, 2014 and 2013, were $(36.56), $32.14, $(46.00) and $(235.23), respectively.
** Excludes ongoing selling agent fees and clearing fees and includes allocation to Special Limited Partner in the three and six months ended June 30, 2014 and 2013, if any. Total expenses including ongoing selling agent fees and clearing fees for the three months ended June 30, 2014 and 2013, and for the six months ended June 30, 2014 and 2013, were $(27.46), $(40.26), $(53.37) and $(82.77), respectively.

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2014     2013     2014     2013  

Ratios to Average Net Assets:***

        

Net investment income (loss)

     (3.1 )%      (4.5 )%      (3.0 )%      (4.5 )% 

Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss) before allocation to Special Limited Partner****

     (3.1 )%      (4.5 )%      (3.0 )%      (4.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     3.1     4.5     3.1     4.5

Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and allocation to Special Limited Partner

     3.1     4.5     3.1     4.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

        

Total return before allocation to Special Limited Partner

     (1.8 )%      (0.2 )%      (2.8 )%      (7.8 )% 

Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return after allocation to Special Limited Partner

     (1.8 )%      (0.2 )%      (2.8 )%      (7.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*** 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 each limited partner’s share of income, expenses and average net assets.

 

12


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

Financial Highlights of the Master:

 

     Three Months Ended
June 30,
    Six Months Ended
June  30,
 
     2014     2013     2014     2013  

Net realized and unrealized gains (losses)*

   $ (100.19   $ 69.57      $ (127.72   $ (617.92

Interest income

     0.33        0.45        0.98        1.59   

Expenses **

     (2.80     (1.62     (5.27     (2.75
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     (102.66     68.40        (132.01     (619.08

Distribution of interest income to feeder funds

     (0.33     (0.45     (0.98     (1.59

Net asset value per unit, beginning of period

     9,287.63        9,532.18        9,317.63        10,220.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 9,184.64      $ 9,600.13      $ 9,184.64      $ 9,600.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes clearing fees.
** Excludes clearing fees.

 

     Three Months Ended
June 30,
    Six Months Ended
June  30,
 
     2014     2013     2014     2013  

Ratios to average net assets:***

        

Net investment income (loss)****

     (0.2 )%      (0.6 )%      (0.2 )%      (0.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     0.3     0.6     0.2     0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return

     (1.1 )%      0.7     (1.4 )%      (6.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*** Annualized.

 

**** Interest income less total expenses.

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

 

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 MS&Co. Customer Agreement with the Partnership and the Master gives, and the CGM Customer Agreement with the Partnership and the Customer Agreement between CGM and the Master each gave, the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures and exchange-cleared swaps contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and exchange-cleared swaps contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210-20, “Balance Sheet,” have been met.

 

13


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

Brokerage commissions previously paid to MS&Co. and CGM were, and ongoing selling agent fees paid to MS&Co. are, based on the number of trades executed by the Advisor and the Partnership’s ownership percentage of the Master.

Trading and transaction fees are based on the number of trades executed by the Advisor and the Partnership’s ownership of the Master.

All trading, exchange, clearing, user, give-up and National Futures Association fees (collectively, the “clearing fees”) are borne by the Master and allocated to its members, including the Partnership.

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 June 30, 2014 and 2013 were 7,952 and 45,323, respectively. The monthly average number of futures and exchange-cleared swap contracts traded during the six months ended June 30, 2014 and 2013 were 8,691 and 46,021, respectively. The monthly average number of option contracts traded during the three months ended June 30, 2014 and 2013 were 13,574 and 58,260, respectively. The monthly average number of option contracts traded during the six months ended June 30, 2014 and 2013 were 12,996 and 57,321, respectively.

On January 1, 2013, the Partnership adopted Accounting Standards Update (“ASU”) 2011-11, “Disclosure about Offsetting Assets and Liabilities” and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 created a new disclosure requirement about the nature of an entity’s rights to setoff and the related arrangements associated with its financial instruments and derivative instruments, while ASU 2013-01 clarified the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. 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 these disclosures 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 International Financial Reporting Standards (“IFRS”). The new guidance did not have a significant impact on the Partnership’s financial statements.

The following tables summarize the valuation of the Master’s investments as of June 30, 2014 and December 31, 2013, respectively.

 

     Gross
Amounts
Recognized
    Gross
Amounts
Offset in
the
Statement
of Financial
Condition
    Amounts
Presented  in

the Statement
of Financial
Condition
    Gross Amounts not
Offset in the Statement
of Financial Condition
        

June 30, 2014

         Financial
Instruments
    Cash
Collateral
Received
     Net Amount  

Assets

             

Futures

   $ 8,445,429      $ (8,445,429   $ —        $ —        $ —         $ —     

Options purchased

     28,904,360        —          28,904,360        (4,028,086     —           24,876,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

     37,349,789        (8,445,429    
28,904,360
  
    (4,028,086     —           24,876,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

             

Futures

   $ (29,246,049   $ 8,445,429      $ (20,800,620   $ —        $ —         $ (20,800,620

Options premium received

     (4,028,086    
—  
  
    (4,028,086     4,028,086        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

     (33,274,135     8,445,429        (24,828,706     4,028,086        —           (20,800,620
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net fair value

              $ 4,075,654   
             

 

 

 

 

14


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

    Gross
Amounts
Recognized
    Gross
Amounts
Offset in

the
Statement
of Financial
Condition
    Amounts
Presented in
the Statement
of Financial
Condition
    Gross Amounts not
Offset in the Statement
of Financial Condition
        

December 31, 2013

        Financial
Instruments
    Cash
Collateral
Received
     Net Amount  

Assets

            

Futures

  $ 8,128,408      $ (4,159,725   $ 3,968,683      $ —        $ —         $ 3,968,683   

Options purchased

    25,074,590        —          25,074,590        (14,379,750     —           10,694,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

    33,202,998        (4,159,725     29,043,273        (14,379,750     —           14,663,523   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

            

Futures

  $ (4,159,725   $ 4,159,725      $ —        $ —        $ —         $ —     

Options premium received

    (14,379,750     —          (14,379,750     14,379,750        —           —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

    (18,539,475     4,159,725        (14,379,750     14,379,750        —           —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net fair value

             $ 14,663,523   
            

 

 

 

The following tables indicate the Master’s gross fair values of derivative instruments of futures and exchange-cleared swap and option contracts as separate assets and liabilities as of June 30, 2014 and December 31, 2013.

 

     June 30, 2014  

Assets

  
Futures and Exchange-Cleared Swap Contracts   

Energy

   $ 8,445,429   
  

 

 

 

Total unrealized appreciation on open futures and exchange-cleared swap contracts

     8,445,429   
  

 

 

 

Liabilities

  
Futures and Exchange-Cleared Swap Contracts   

Energy

     (29,246,049
  

 

 

 

Total unrealized depreciation on open futures and exchange-cleared swap contracts

     (29,246,049
  

 

 

 

Net unrealized depreciation on open futures and exchange-cleared swap contracts

   $ (20,800,620 )* 
  

 

 

 

Assets

  
Options Purchased   

Energy

   $ 28,904,360   
  

 

 

 

Total options purchased

   $ 28,904,360 ** 
  

 

 

 

Liabilities

  
Options Premium Received   

Energy

   $ (4,028,086
  

 

 

 

Total options premium received

   $ (4,028,086 )*** 
  

 

 

 

 

 

* 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.

 

15


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

 

     December 31, 2013  

Assets

  

Futures and Exchange-Cleared Swap Contracts

  

Energy

   $ 8,128,408   
  

 

 

 

Total unrealized appreciation on open futures and exchange-cleared swap contracts

     8,128,408   
  

 

 

 

Liabilities

  

Futures and Exchange-Cleared Swap Contracts

  

Energy

     (4,159,725
  

 

 

 

Total unrealized depreciation on open futures and exchange-cleared swap contracts

     (4,159,725
  

 

 

 

Net unrealized appreciation on open futures and exchange-cleared swap contracts

   $ 3,968,683
  

 

 

 

Assets

  

Options Purchased

  

Energy

   $ 25,074,590   
  

 

 

 

Total options purchased

   $ 25,074,590 ** 
  

 

 

 

Liabilities

  

Options Premium Received

  

Energy

   $ (14,379,750
  

 

 

 

Total options premium received

   $ (14,379,750 )*** 
  

 

 

 

 

* This amount is in “Net unrealized appreciation 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 and six months ended June 30, 2014 and 2013.

 

Sector

   Three Months Ended
June 30, 2014
Gain (loss) from trading
    Three Months Ended
June 30, 2013
Gain (loss) from trading
    Six Months Ended
June 30, 2014
Gain (loss) from trading
    Six Months Ended
June 30, 2013
Gain (loss) from trading
 

Energy

   $ (4,155,963   $ 6,193,641      $ (5,256,312   $ (48,100,507
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (4,155,963 )****    $ 6,193,641 ****    $ (5,256,312 )****    $ (48,100,507 )**** 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

16


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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, 2013.

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 and liabilities.

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.

On October 1, 2012, the Financial Accounting Standards Board (the “FASB”) issued ASU 2012-04, “Technical Corrections and Improvements,” which makes minor technical corrections and clarifications to ASC 820, “Fair Value Measurements and Disclosures.” When the FASB issued Statement 157 (codified in ASC 820), it conformed the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and disclosure requirements” of ASC 820. ASU 2012-04 also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820.

The Partnership values its investments 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 June 30, 2014 and December 31, 2013, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the six months ended June 30, 2014 and for the year end December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

17


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

           

Quoted Prices in

Active Markets for
Identical Assets

and Liabilities

     Significant Other
Observable Inputs
    

Significant

Unobservable Inputs

 
     June 30, 2014      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Investment in Master

   $ 125,757,802       $ —         $ 125,757,802       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 125,757,802       $ —         $ 125,757,802       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

           

Quoted Prices in
Active Markets for
Identical Assets

and Liabilities

     Significant Other
Observable
Inputs
     Significant
Unobservable Inputs
 
     December 31, 2013      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Investment in Master

   $ 151,255,621       $ —         $ 151,255,621       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 151,255,621       $ —         $ 151,255,621       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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. 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 Master’s Level 2 assets and liabilities.

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.

 

18


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The Master considers prices for exchange-traded commodity futures, option contracts and swaps to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of non-exchange-traded swaps and certain option 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 June 30, 2014 and December 31, 2013, 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 and liabilities 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 six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

     June 30, 2014      Quoted Prices in
Active  Markets for
Identical Assets
and Liabilities

(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable  Inputs
(Level 3)
 

Assets

           

Futures and Exchange-Cleared Swaps

   $ 8,445,429       $ 8,445,429       $ —         $ —     

Options purchased

     28,904,360         28,904,360         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     37,349,789         37,349,789         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures and Exchange-Cleared Swaps

   $ 29,246,049       $ 29,246,049       $ —         $ —     

Options premium received

     4,028,086         4,028,086         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilites

     33,274,135         33,274,135         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 4,075,654       $ 4,075,654       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013      Quoted Prices in
Active  Markets for
Identical Assets
and Liabilities

(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable  Inputs
(Level 3)
 

Assets

           

Futures and Exchange-Cleared Swaps

   $ 8,128,408       $ 8,128,408       $ —         $ —     

Options purchased

     25,074,590         25,074,590         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     33,202,998         33,202,998         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures and Exchange-Cleared Swaps

   $ 4,159,725       $ 4,159,725       $ —         $ —     

Options premium received

     14,379,750         14,379,750         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     18,539,475         18,539,475         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 14,663,523       $ 14,663,523       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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 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, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain 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. None of the Partnership’s/Master’s current contracts are traded OTC, although contracts may be traded OTC in the future.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net 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 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 had credit risk and concentration risk during the reporting period and prior periods included in this report, as CGM and/or MS&Co. or their affiliates were the sole counterparties or brokers 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 or MS&Co. or their affiliates, the Partnership’s/Master’s counterparty is an exchange or clearing organization. The Partnership/Master continues to be subject to such risks.

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 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.

 

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AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

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 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.

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 the Master’s 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, 2013.

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 falls in its entirety 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 June 30, 2014 and December 31, 2013, 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). During the six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

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Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

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 and liabilities (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 June 30, 2014 and December 31, 2013, 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 and liabilities 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 six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

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.

Ongoing Selling Agent Fees. Ongoing selling agent fees to open and close futures and exchange-traded swap contracts were expensed at the time the positions were opened. Ongoing selling agent fees on option contracts are expensed at the time the positions were established and when the option contracts were closed.

 

22


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

Investment Company Status. Effective January 1, 2014, the Partnership adopted ASU 2013-08,Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements.” ASU 2013-08 changes the approach to the investment company assessment, requires non-controlling ownership interests in other investment companies to be measured at fair value, and requires additional disclosures about the investment company’s status as an investment company. ASU 2013-08 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this ASU did not have a material impact on the Partnership’s financial statements. Based on management’s assessment, the Partnership has been deemed to be an investment company since inception. It has all of the fundamental characteristics of an investment company. Although, the Partnership does not possess all of the typical characteristics of an investment company, its activities are consistent with those of an investment company.

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 2010 through 2013 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.

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

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

 

23


Table of Contents

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, net unrealized appreciation on open futures and exchange-cleared swap contracts and options purchased at fair value. Because of the low margin deposits normally required in commodity 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 second quarter of 2014.

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 six months ended June 30, 2014, Partnership capital decreased 16.4% from $147,386,578 to $123,152,749. This decrease was attributable to redemptions of 6,219.1840 Redeemable Units resulting in an outflow of $22,109,458, coupled with the net loss of $3,622,449, which was partially offset by the subscriptions of 419.3010 Redeemable Units totaling $1,498,078. 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 trading and by expenses, interest income, redemptions of units and distributions of profits, if any.

For the six months ended June 30, 2014, the Master’s capital decreased 15.7% from $462,745,604 to $390,131,964. This decrease was attributable to the redemptions of 9,200.1504 units totaling $85,873,945 and distribution of interest income to feeder funds totaling $43,309, coupled with the net loss of $5,706,652, which was partially offset by the subscriptions of 2,013.2522 units totaling $19,010,266. Future redemptions could 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.

 

24


Table of Contents

Results of Operations

During the Partnership’s second quarter of 2014, the net asset value per unit decreased 1.8% from $3,537.81 to $3,473.89 as compared to a decrease of 0.2% in the same period of 2013. The Partnership, for its own account, through its investment in the Master experienced a net trading loss before fees and expenses in the second quarter of 2014 of $1,251,108. Losses were primarily attributable to the Master’s trading of commodity futures in Brent Crude Oil and NYMEX Gasoline and were partially offset by gains in NYMEX Crude Oil, NYMEX Heating Oil and NYMEX Natural Gas. 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 second quarter of 2013 of $1,879,772. Gains were primarily attributable to the Master’s trading of commodity futures in IPE Gas Oil and NYMEX Natural Gas and were partially offset by losses in NYMEX Crude Oil, IPE Brent Crude Oil, NYMEX Gasoline and NYMEX Heating Oil.

The most significant losses were incurred during May from short positions in Brent crude oil futures as prices advanced amid speculation geopolitical turmoil in Eastern Europe would diminish supplies from Russia. Additional losses were recorded during May from long positions in natural gas futures as prices declined during the first half of the month as U.S. stockpiles increased more than previously predicted. Losses were also recorded during June from short positions in Brent crude oil futures as prices rose after uprisings in Iraq and Libya threatened to curtail exports from the Middle East. These losses were partially offset by gains recorded during May from short positions in RBOB gasoline futures as prices declined on increased production from U.S. refineries. Additional gains were achieved during June from long positions in heating oil futures as prices advanced as the energy markets reacted to increased hostilities in Ukraine and the Middle East.

During the six months ended June 30, 2014, the net asset value per unit decreased 2.8% from $3,572.94 to $3,473.89 as compared to a decrease of 7.8% in the same period of 2013. 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 six months ended June 30, 2014 of $1,586,219. Losses were primarily attributable to the Master’s trading of commodity futures in IPE Brent Crude Oil and were partially offset by gains in NYMEX Crude Oil, NYMEX Heating Oil, NYMEX Gasoline and NYMEX Natural Gas. 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 six months ended June 30, 2013 of $15,678,936. Losses were primarily attributable to the Master’s trading of commodity futures in IPE Brent Crude Oil, NYMEX Crude Oil, NYMEX Gasoline, NYMEX Energy Swaps and IPE Gas Oil, and were partially offset by gains in NYMEX Heating Oil and NYMEX Natural Gas.

The most significant losses were recorded during May from short positions in Brent crude oil futures as prices moved higher as tensions between Ukraine and Russia increased speculation of potential sanctions against Russia. Additional losses were incurred during June from short positions in Brent crude oil futures as prices rose after uprisings in Iraq and Libya threatened to curtail exports from the Middle East. A portion of the Partnership’s losses during the first six months of the year was offset by gains achieved during April from long positions in natural gas futures as prices advanced as reports indicated U.S. storage levels were far lower than previously forecast. During February, gains were recorded from long natural gas positions as prices rallied early in the month after cold weather in the U.S. increased demand for heating homes and businesses. Additional gains during February were recorded from long positions in heating oil futures as prices advanced on increased demand in the U.S. due to persistent, prolonged cold weather throughout much of the country. Long positions in gasoline futures also recorded gains during February as prices moved higher after Energy Information Administration data indicated crude stockpiles declined during January.

Commodity 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.

Ongoing selling agent fees/brokerage commissions are based on the number of trades executed by the Advisor and the Partnership’s ownership percentage of the Master. Accordingly, they must be compared in relation to the number of trades executed during the period. Ongoing selling agent fees/brokerage commissions for the three and six months ended June 30, 2014 decreased by $683,471 and $1,592,515, respectively, as compared to the corresponding periods in 2013. This decrease is primarily due to a decrease in the number of trades during the three and six months ended June 30, 2014 as compared to the corresponding periods in 2013.

Interest income on 80% of the Partnership’s average daily equity allocated to it by the Master during each month was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average noncompetitive yield on 3-month Treasury bills maturing in 30 days or at the monthly average of the 4-week U.S. Treasury bill discount rate. Interest income allocated from the Master for the three and six months ended June 30, 2014 decreased by $5,450 and $22,724, respectively, as compared to the corresponding periods in 2013. 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 and six months ended June 30, 2014 as compared to the corresponding periods in 2013. 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 Partnership’s (or the Partnership’s allocable portion of the Master’s account) and upon interest rates over which the Partnership, the Master and MS&Co. have no control.

 

25


Table of Contents

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, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Management fees for the three and six months ended June 30, 2014 decreased by $342,708 and $731,733, respectively, as compared to the corresponding periods in 2013. The decrease in management fees is due to a decrease in average net assets during the three and six months ended June 30, 2014 as compared to the corresponding periods in 2013.

Administrative 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, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Administrative fees for the three and six months ended June 30, 2014 decreased by $114,236 and $243,910, respectively, as compared to the corresponding periods in 2013. The decrease in administrative fees is due to a decrease in average net assets during the three and six months ended June 30, 2014 as compared to the corresponding periods in 2013.

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 agreements among the Partnership, the General Partner and the Advisor. There were no profit share allocations made for the three and six months ended June 30, 2014 and 2013. The Special Limited Partner 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.

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 capital is 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.

 

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Table of Contents

Exchange margin requirements have been used by the Master as the measure of its Value at Risk. 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. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

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 June 30, 2014 and December 31, 2013, and the highest, lowest and average value during the three months ended June 30, 2014 and for the twelve months ended December 31, 2013. 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, 2013.

As of June 30, 2014, the Master’s total capitalization was $390,131,964 and the Partnership owned approximately 32.2% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of June 30, 2014 was as follows:

June 30, 2014

 

                  Three Months Ended June 30, 2014  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Energy

   $ 37,928,936         9.72   $ 37,928,936       $ 24,028,358       $ 32,991,673   
  

 

 

    

 

 

         

Total

   $ 37,928,936         9.72        
  

 

 

    

 

 

         

 

 

* Average monthly Values at Risk.

As of December 31, 2013, the Master’s total capitalization was $462,745,604 and the Partnership owned approximately 32.7% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2013 was as follows:

December 31, 2013

 

                   Twelve Months Ended December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Energy

   $ 27,869,465         6.02   $ 79,359,618       $ 22,538,703       $ 39,574,084   
  

 

 

    

 

 

         

Total

   $ 27,869,465         6.02        
  

 

 

    

 

 

         

 

 

* 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 (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 President 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 President 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 June 30, 2014 and, based on that evaluation, the General Partner’s President 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 President 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 and correction 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 June 30, 2014 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

There are no material legal proceedings pending against the Partnership nor the General Partner.

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, 2013, as updated by the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC.

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the Securities and Exchange Commission as required by the Exchange Act, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2013, 2012, 2011, 2010 and 2009.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of NFA.

On May 7, 2009, MS&Co. was named as a defendant in a purported class action lawsuit brought under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, which is now styled In re Morgan Stanley Mortgage Pass-Through Certificates Litigation and is pending in the United States District Court for the Southern District of New York (“SDNY”). The third amended complaint, filed on September 30, 2011, alleges, among other things, that the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 contained false and misleading information concerning the pools of residential loans that backed these securitizations. The plaintiffs seek, among other relief, class

 

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certification, unspecified compensatory and rescissionary damages, costs, interest and fees. On July 22, 2014, the parties reached an agreement in principle to settle the litigation. The settlement is subject to court approval.

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On October 18, 2010, defendants filed a motion to dismiss the action. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied MS&Co.’s individual motion to dismiss the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $55 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $55 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against MS&Co. and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010 allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s claims brought under the Securities Act of 1933, as amended, were dismissed with prejudice. The defendants filed answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. A bellwether trial is currently scheduled to begin in January 2015. MS&Co. is not a defendant in connection with the securitizations at issue in that trial. On May 23, 2014, plaintiff and the defendants in the bellwether trial filed motions for summary adjudication. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $301 million, and the certificates had incurred actual losses of approximately $6 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $301 million unpaid balance of these certificates (plus any losses

 

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incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. in this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court granted plaintiff leave to file an amended complaint. MS&Co. filed its answer on December 21, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $56 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $56 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle, were named as defendants in a purported class action related to securities issued by the special purpose vehicle in Singapore, commonly referred to as Pinnacle Notes. The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and is pending in the SDNY. An amended complaint was filed on October 22, 2012. The court denied defendants’ motion to dismiss the amended complaint on August 22, 2013 and granted class certification on October 17, 2013. On October 30, 2013, defendants filed a petition for permission to appeal the court’s decision granting class certification. On January 31, 2014, plaintiffs filed a second amended complaint. The second amended complaint alleges that the defendants engaged in a fraudulent scheme to defraud investors by structuring the Pinnacle Notes to fail and benefited subsequently from the securities’ failure. In addition, the second amended complaint alleges that the securities’ offering materials contained material misstatements or omissions regarding the securities’ underlying assets and the alleged conflicts of interest between the defendants and the investors. The second amended complaint asserts common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement in principle to settle the litigation. The settlement is subject to court approval.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates

 

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allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United States District Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss the amended complaint, which was granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. On July 16, 2014, plaintiff voluntarily dismissed its claims against MS&Co. with respect to one of the securitizations at issue. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $67 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $67 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of the State of New York, New York County (“Supreme Court of NY, NY County”), styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to plaintiffs by MS&Co. was approximately $104 million. The complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with plaintiffs’ purchases of such certificates. On March 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint, which order MS&Co. appealed on April 11, 2013. On May 3, 2013, MS&Co. filed its answer to the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $99 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $99 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, and common law and seeks, among other things, to rescind the

 

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plaintiffs’ purchases of such certificates. MS&Co. filed its answer on August 17, 2012. Trial is currently scheduled to begin in July 2015. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $113 million, and the certificates had incurred actual losses of approximately $2 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $113 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin Bank S.S.B., filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B. v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to the plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. The complaints each raised claims under both federal securities law and the Texas Securities Act and each seeks, among other things, compensatory damages associated with plaintiff’s purchase of such certificates. On March 20, 2012, MS&Co. filed answers to the complaints in both cases. On June 7, 2012, the two cases were consolidated. On January 10, 2013, MS&Co. filed a motion for summary judgment and special exceptions with respect to plaintiff’s claims. On February 6, 2013, the FDIC filed an amended consolidated complaint. On February 25, 2013, MS&Co. filed a motion for summary judgment and special exceptions, which motion was denied in substantial part on April 26, 2013. On May 3, 2013, the FDIC filed a second amended consolidated complaint. Trial is currently scheduled to begin in November 2014. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $46 million, and the certificates had incurred actual losses of approximately $5 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $46 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. is approximately $1 billion. The complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud and tortious interference with contract and seeks, among other things, compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’ purchases of such certificates. On October 16, 2012, plaintiffs filed an amended complaint which, among other things, increases the total amount of the certificates at issue by

 

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approximately $80 million, adds causes of action for fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On April 26, 2013, the defendants filed an answer to the amended complaint. On June 5, 2014, the defendants filed a renewed motion to dismiss the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $623 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $623 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On April 22, 2014, the defendants’ motion to dismiss was denied in substantial part. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $75 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $75 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $694 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court denied defendants’ motion to dismiss. On July 10, 2014, MS&Co. filed a renewed motion to dismiss with respect to two certificates at issue in the case. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $284 million, and the certificates had incurred actual losses of approximately $52 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $284 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

 

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On September 23, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleges that defendants made untrue statements of material fact or omitted to state material facts in the sale to plaintiffs of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs was approximately $417 million. The complaint alleges causes of action against MS&Co. for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, as amended, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks, among other things, rescissory and compensatory damages. The defendants filed a motion to dismiss the complaint on November 13, 2013. On January 22, 2014, the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933, as amended, and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. On April 28, 2014, the court granted in part and denied in part plaintiff’s motion to strike certain of the defendants’ affirmative defenses. On July 11, 2014, the defendants filed a motion for reconsideration of the court’s order on the motion to dismiss the complaint or, in the alternative, for certification of interlocutory appeal and a stay of all proceedings. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $215 million, and the certificates had incurred actual losses of approximately $26 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $215 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime residential mortgage-backed security transactions sponsored and underwritten by those entities in 2007. Pursuant to the settlement, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.

 

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Item 1A.   Risk Factors

There have been no material changes to the risk factors set forth under Part 1, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

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

For the three months ended June 30, 2014, there were additional subscriptions of 124.9940 Redeemable Units totaling $444,543. The Redeemable Units and Special Limited Partner equivalents were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. These Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemptions, the General Partner relied on the fact that the Redeemable Units and Special Limited Partner equivalents were purchased by accredited investors in a private offering.

Net offering proceeds were used for the trading of commodity interests, including futures contracts, options and swap contracts.

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

 

April 1, 2014 -

April 30, 2014

     767.7600       $ 3,631.17         N/A         N/A   

May 1, 2014 -

May 31, 2014

     645.0690       $ 3,510.99         N/A         N/A   

June 1, 2014 -

June 30, 2014

     648.1930       $ 3,473.89         N/A         N/A   
        2,061.0220       $ 3,544.09         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 can 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 end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

Item 3.    Defaults Upon Senior Securities – None

Item 4.     Mine Safety Disclosures – Not applicable

Item 5.    Other Information

Effective October 1, 2014, the monthly ongoing selling agent fee will be reduced from $18.00 each for round turn futures transactions and swaps to $15.00 each for round turn futures transactions and swaps, and from $9.00 each per side for options transactions to $7.50 each per side for options transactions. As of the same date, the administrative fee will be increased from an annual rate of 0.50% to an annual rate of 0.75%. The October 1, 2014 fee changes are not expected to have a materially adverse effect on the fees payable by the Partnership.

 

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Item 6.    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 March 21, 2002 (filed as Exhibit 3.1 to the general form for registration of securities on Form 10 filed on May 1, 2003 and incorporated herein by reference).

 

(a)   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 May 21, 2003 (filed as Exhibit 3.1(a) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(b)   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 21, 2005 (filed as Exhibit 3.1(b) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(c)   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 19, 2008 (filed as Exhibit 3.1(c) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(d)   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 August 27, 2008 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 2, 2008 and incorporated herein by reference).
(e)   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 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).
(f)   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 June 29, 2010 (filed as Exhibit 3.1(f) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).
(g)   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 Current Report on Form 8-K filed on September 7, 2011 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 August 7, 2013 (filed as Exhibit 3.1(h) to the quarterly report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).
3.2   Third Amended and Restated Limited Partnership Agreement, dated May 19, 2010 (filed as Exhibit 3.2 to the Current Report on Form 8-K filed on May 24, 2010 and incorporated herein by reference).
10.1(a)   Customer Agreement among the Partnership and Salomon Smith Barney Inc., and for limited purposes Smith Barney AAA Master Fund LLC, dated May 31, 2002 (filed as Exhibit 10 to the general form for registration of securities on Form 10 filed on May 1, 2003 and incorporated herein by reference).
       (b)   Commodity Futures Customer Agreement between the Partnership and MS&Co., effective October 29, 2013 (filed as Exhibit 10.1(b) to the quarterly report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).
       (c)   Commodity Futures Customer Agreement between the Partnership and MS&Co., effective March 1, 2014 (filed as Exhibit 10.1(c) to the annual report on Form 10-K filed on March 28, 2014 and incorporated herein by reference).

 

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10.2    Form of Subscription Agreement (filed as Exhibit 10.2 to the Form 10-Q filed on November 14, 2012 and incorporated herein by reference).
10.3    Advisory Agreement among the Partnership, the General Partner and AAA Capital Management Advisors, Ltd., dated April 3, 2006 (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(a)    Letter from the General Partner extending Advisor Agreement for 2012, dated June 1, 2012 (filed as Exhibit 10.3(a) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).
(b)    Letter from the General Partner amending the Advisory Agreement by and among the Partnership, the General Partner and the Advisor, dated December 20, 2012 (filed as Exhibit 10.1 to the current report on Form 8-K filed on January 7, 2013 and incorporated herein by reference).
10.4(a)    Amended and Restated Agency Agreement among the Partnership, the General Partner, Morgan Stanley Smith Barney LLC, and CGM, dated November 11, 2009 (filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
       (b)    Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 29, 2013 (filed as Exhibit 10.4(b) to the quarterly report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).
       (c)    Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective March 1, 2014 (filed as Exhibit 10.4(c) to the annual report on Form 10-K filed on March 28, 2014 and incorporated herein by reference).
       (d)    Letter amending the Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2014 (filed herewith).
31.1    — Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) (filed herewith).
31.2    — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer) (filed herewith).
32.1    — Section 1350 Certification (Certification of President and Director) (filed herewith).
32.2    — Section 1350 Certification (Certification of Chief Financial Officer) (filed herewith).

 

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.
101. DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

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Table of Contents

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. II

 

By:   Ceres Managed Futures LLC
  (General Partner)
By:   /s/ Alper Daglioglu
 

Alper Daglioglu

President and Director

Date:  

August 13, 2014

By:   /s/ Steven Ross
 

Steven Ross

Chief Financial Officer

(Principal Accounting Officer)

Date:  

August 13, 2014

 

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