FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2000
Commission File Number 000-25921
SMITH BARNEY AAA ENERGY FUND L.P.
(Exact name of registrant as specified in its charter)
New York 13-3986032
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
--------------------------------------------------------------------------------
(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
<PAGE>
SMITH BARNEY AAA ENERGY FUND L.P.
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition
at September 30, 2000 and December 31,
1999 (unaudited). 3
Statement of Income and Expenses and Partners'
Capital for the three and nine months ended
September 30, 2000
and 1999 (unaudited). 4
Notes to Financial Statements
(unaudited). 5 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 10 - 11
Item 3. Quantitative and Qualitative
Disclosures of Market Risk 12 - 13
PART II - Other Information 14
2
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PART I
Item 1. Financial Statements
Smith Barney AAA Energy Futures Fund L.P.
Statement of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -------------
<S> <C> <C>
Assets:
Equity in commodity futures trading account:
Cash $ 59,080,130 $ 78,368,723
Net unrealized depreciation
on open contracts (15,692,007) (751,259)
Net unrealized appreciation (depreciation)
on open swaps contracts 3,458,883 (623,631)
Commodity options owned, at market value
(cost $15,708,100 and $15,880,430, respectively ) 31,297,651 8,992,060
------------ ------------
78,144,657 85,985,893
Interest receivable 245,775 255,849
Due from broker 960,377 --
------------ ------------
$ 79,350,809 $ 86,241,742
============ ============
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 378,369 $ 908,487
Management fees 111,686 128,962
Other fees 54,648 46,760
Due to broker -- 808,761
Redemptions payable 394,204 1,485,873
Commodity options written, at market value
(premium $9,909,222 and $11,396,728, respectively ) 10,789,360 8,556,476
------------ ------------
11,728,267 11,935,319
------------ ------------
Partners' Capital:
General Partner, 704.3292 and 682.3138 Unit equivalents
outstanding in 2000 and 1999, respectively 869,924 774,815
Limited Partners, 54,045.6759 and 64,753.0149
Units of Limited Partnership Interest
outstanding in 2000 and 1999, respectively 66,752,618 73,531,608
------------ ------------
67,622,542 74,306,423
------------ ------------
$ 79,350,809 $ 86,241,742
============ ============
</TABLE>
See Notes to Financial Statements.
3
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SMITH BARNEY AAA ENERGY FUND L.P.
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions $ 2,269,089 $(12,799,773) $ 1,114,076 $ 32,481,837
Change in unrealized gains (losses) on open
positions 1,763,122 7,362,081 7,899,297 (14,306,469)
------------ ------------ ------------ ------------
4,032,211 (5,437,692) 9,013,373 18,175,368
Less, brokerage commissions including clearing
fees of $224,293, $462,339, $793,016 and
$1,115,853, respectively (1,630,534) (4,130,505) (5,872,382) (9,356,848)
------------ ------------ ------------ ------------
Net realized and unrealized gains (losses) 2,401,677 (9,568,197) 3,140,991 8,818,520
Interest income 792,889 897,462 2,312,158 2,546,874
------------ ------------ ------------ ------------
3,194,566 (8,670,735) 5,453,149 11,365,394
------------ ------------ ------------ ------------
Expenses:
Management fee 320,384 482,242 1,008,780 1,407,767
Other 28,585 13,469 110,652 41,867
------------ ------------ ------------ ------------
348,969 495,711 1,119,432 1,449,634
------------ ------------ ------------ ------------
Net income (loss) 2,845,597 (9,166,446) 4,333,717 9,915,760
Allocation to the Special Limited Partner -- 2,012,782 -- (1,473,777)
Redemptions (3,740,323) (344,672) (15,497,598) (3,098,628)
Additions - Limited Partners -- -- 4,455,000 --
- General Partner -- -- 25,000 --
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital (894,726) (7,498,336) (6,683,881) 5,343,355
Partners' capital, beginning of period 68,517,268 92,569,031 74,306,423 79,727,340
------------ ------------ ------------ ------------
Partners' capital, end of period $ 67,622,542 $ 85,070,695 $ 67,622,542 $ 85,070,695
------------ ------------ ------------ ------------
Net asset value per Unit
(54,750.0051 and 64,903.9481 Units
outstanding at September 30, 2000 and
1999, respectively) $ 1,235.11 $ 1,310.72 $ 1,235.11 $ 1,310.72
------------ ------------ ------------ ------------
Net income (loss) per Unit of Limited
Partnership Interest and General
Partner Unit equivalent $ 58.05 $ (109.83) $ 99.54 $ 126.39
------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
4
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SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. General:
Smith Barney AAA Energy Fund L.P. (the "Partnership") is a limited
partnership organized on January 5, 1998 under the partnership laws of the State
of New York to engage in the speculative trading of a diversified portfolio of
commodity interests, including commodity options and commodity futures contracts
on United States exchanges and certain foreign exchanges. The Partnership may
trade commodity futures and options contracts of any kind but intends initially
to trade solely energy and energy related products. In addition, the Partnership
may enter into swap contracts on energy related products. The commodity
interests that are traded by the Partnership are volatile and involve a high
degree of market risk.
Between February 12, 1998 (the commencement of the offering period) and
March 14, 1998, 49,538 Units of limited partnership interest were sold at $1,000
per Unit. The proceeds of the offering were held in an escrow account until
March 15, 1998, at which time they were turned over to the Partnership for
trading.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc.("SSB"). SSB is an affiliate of the General Partner.
The General Partner is wholly owned by Salomon Smith Barney Holdings Inc.
("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of
Citigroup Inc. All trading decisions are made by AAA Capital Management LLC (the
"Advisor"). The Principal of the Advisor is an employee of SSB.
The accompanying financial statements are unaudited but, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at September 30, 2000 and December 31, 1999 and the results of its
operations for the three and nine months ended September 30, 2000 and 1999.
These financial statements present the results of interim periods and do not
include all disclosures normally provided in annual financial statements. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes included in the Partnership's annual report on
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1999.
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.
5
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SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Continued)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three and nine months
ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
Net realized and unrealized
gains (losses) $ 50.22 $ (146.90) $ 80.06 4 131.49
Interest income 14.02 13.78 37.56 38.90
Expenses (6.19) 23.29 (18.08) (44.00)
--------- --------- --------- ---------
Increase (decrease) for Period 58.05 (109.83) 99.54 126.39
Net Asset Value per Unit,
Beginning of period 1,177.06 1,420.55 1,135.57 1,184.33
--------- --------- --------- ---------
Net Asset Value per Unit,
End of Period $ 1,235.11 $ 1,310.72 $ 1,235.11 $ 1,310.72
========= ========= ========= =========
</TABLE>
6
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SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Continued)
3. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
The Customer Agreement between the Partnership and SSB gives the
Partnership the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair value during the periods ended September 30,
2000 and December 31, 1999, based on a monthly calculation, was $2,953,305 and
$(6,771,852), respectively. The fair value of these commodity interests,
including options and swaps thereon, if applicable, at September 30, 2000 and
December 31, 1999 was $8,275,167 and $(939,306), respectively, as detailed
below.
Fair Value
September 30, December 31,
2000 1999
--------- ---------
Energy $4,816,284 $(315,675)
Energy Swaps 3,458,883 (623,631)
---------- ---------
Total $8,275,167 $(939,306)
========== =========
4. Financial Instrument Risk:
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
may include forwards, futures and options, whose value is based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, to purchase or sell other
financial instruments at specific terms at specified future dates, or, in the
case of derivative commodity instruments, to have a reasonable possibility to be
settled in cash, through physical delivery or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts.
7
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SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Continued)
OTC contracts are negotiated between contracting parties and include forwards
and certain options. Each of these instruments is subject to various risks
similar to those related to the underlying financial instruments including
market and credit risk. In general, the risks associated with OTC contracts are
greater than those associated with exchange traded instruments because of the
greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure
of a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the transactions.
The Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SSB. As of September 30, 2000, the only
counterparties to the Partnership's swap contracts were Citibank, N.A., which is
affiliated with the Partnership, Morgan Stanley Capital Group Inc., J. Aron &
Company and Hess Energy Trading Company, LLC.
The General Partner monitors and controls the Partnership'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 is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
8
<PAGE>
SMITH BARNEY AAA ENERGY FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Continued)
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. The majority of these instruments mature
within one year of September 30, 2000. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its
only assets are its equity in its commodity futures trading account, consisting
of cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures and forward contracts, commodity options and interest receivable.
Because of the low margin deposits normally required in commodity futures
trading, relatively small price movements may result in substantial losses to
the Partnership. While substantial losses could lead to a substantial decrease
in liquidity, no such losses occurred in the Partnership's third quarter of
2000.
The Partnership's capital consists of capital contributions, as
increased or decreased by gains or losses on commodity futures trading and
expenses, interest income, redemptions of Units and distributions of profits, if
any.
For the nine months ended September 30, 2000, Partnership capital
decreased 9.0% from $74,306,423 to $67,622,542. This decrease was attributable
to the redemption of 14,630.4789 Units totaling $15,497,598 which was partially
offset by the net income from operations of $4,333,717 and additional sales of
3,945.1553 Units totaling $4,480,000. Future redemptions can impact the amount
of funds available for investments in commodity contract positions in subsequent
periods.
Results of Operations
During the Partnership's third quarter of 2000, the net asset value per
unit increased 4.9% from $1,177.06 to $1,235.11, as compared to an decrease of
7.7% in the third quarter of 1999. The Partnership experienced a net trading
gain before brokerage commissions and related fees in the third quarter of 2000
of $4,032,211. Gains were primarily attributable to the trading of energy swaps,
NYMEX Crude Oil, NYMEX Unleaded Gas and NYMEX Heating Oil and were partially
offset by losses in NYMEX Natural Gas, IPE Gas Oil and IPE Brent Crude. The
Partnership experienced a net trading loss before brokerage commissions and
related fees in the third quarter of 1999 of $5,437,692. Losses were primarily
attributable to the trading of NYMEX Natural Gas, NYMEX Unleaded Gas, NYMEX
Heating Oil, IPE Brent Crude and energy swaps and were partially offset by gains
in NYMEX Crude Oil and IPE Gas Oil.
Commodity futures markets are highly volatile. Broad price
fluctuations and rapid inflation increase the risks involved in commodity
trading, but also increase the possibility of profit. The profitability of the
Partnership depends on the existence of major price trends and the ability of
10
<PAGE>
the Advisors to identify correctly those price trends. Price trends 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 market trends exist and the Advisors are able to
identify them, the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily average equity
maintained in cash was earned at a 30-day U.S. Treasury bill rate determined
weekly by SSB based on the average non-competitive yield on 3-month U.S.
Treasury bills maturing in 30 days. Interest income for the three and nine
months ended September 30, 2000 decreased by $104,573 and $234,716,
respectively, as compared to the corresponding periods in 1999. The decrease in
interest income is primarily the result of the effect of redemptions on the
Partnership's equity maintained in cash during the nine month period ended
September 30, 2000.
Brokerage commissions are based on the number of trades executed by
the Advisor. Commissions and fees for the three and nine months ended September
30, 2000 decreased by $2,499,971 and $3,484,466, respectively, as compared to
the corresponding periods in 1999.
Management fees are calculated as a percentage of the Partnership's
net asset value as of the end of each month and are affected by trading
performance and redemptions. Management fees for the three and nine months ended
September 30, 2000 decreased by $161,858 and $398,987, respectively, as compared
to the corresponding periods in 1999.
11
<PAGE>
Item. 3 Quantitative and Qualitative Disclosures of Market Risk
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors.
These primarily include factors which affect energy price levels, including
supply factors and weather conditions, but could also include 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 Partnership's open positions and the liquidity of the markets in which it
trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership'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
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
12
<PAGE>
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of September 30, 2000. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of September 30, 2000, the
Partnership's total capitalization was $67,622,542. There has been no material
change in the trading Value at Risk information previously disclosed in the Form
10-K for the year ended December 31, 1999.
September 30, 2000
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
--------------------------------------------------------------------------------
Energy $4,986,559 7.37% $13,408,693 $ 0
Energy Swaps 2,865,891 4.24% 7,158,350 2,865,891
----------- -------
Total $7,852,450 11.61%
=========== =======
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
For information concerning the matter entitled MKP Master Fund,
LDC et al. v. Salomon Smith Barney Inc., see the description that
appears in the ninth paragraph under the caption "Legal Proceedings"
of the Annual Report on Form 10-K of the Partnership for the year
ended December 31, 1999. In September 2000, the court denied
plaintiffs' motion to dismiss SSB's counterclaims based on
indemnification and contribution.
Item 2. Changes in Securities and Use of Proceeds -
For the nine months ended September 30, 2000, there were
additional sales of 3,923.1399 Units totaling $4,455,000 and
contributions by the General Partner representing 22.0154 Unit
equivalents totaling $25,000. There were no additional sales during
the three months ended September 30, 1999.
Proceeds from the sale of additional Units are used in the
trading of commodity interests including futures contracts, options,
forwards and swap contracts.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. (a) Exhibits - None
(b) Reports on Form 8-K - None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY AAA ENERGY FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/00
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/00
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/14/00
