Item 1. Condensed Financial Statements.
Index to Condensed Financial Statements
United States 12 Month Natural Gas Fund, LP
Condensed Statements of Financial Condition
At
March 31, 2020 (Unaudited) and December 31, 2019
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (at cost $2,490,391 and $2,990,732, respectively) (Notes 2 and 5)
|
|
$
|
2,490,391
|
|
|
$
|
2,990,732
|
|
Equity in trading accounts:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (at cost $908,142 and $803,973, respectively)
|
|
|
908,142
|
|
|
|
803,973
|
|
Unrealized gain (loss) on open commodity futures contracts
|
|
|
(402,186
|
)
|
|
|
(435,678
|
)
|
Receivable from General Partner (Note 3)
|
|
|
90,324
|
|
|
|
74,302
|
|
Dividends receivable
|
|
|
76
|
|
|
|
658
|
|
Interest receivable
|
|
|
109
|
|
|
|
247
|
|
Prepaid insurance
|
|
|
391
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,087,247
|
|
|
$
|
3,434,354
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Partners' Capital
|
|
|
|
|
|
|
|
|
General Partner management fees payable (Note 3)
|
|
$
|
2,258
|
|
|
$
|
2,759
|
|
Professional fees payable
|
|
|
33,298
|
|
|
|
57,027
|
|
Brokerage commissions payable
|
|
|
451
|
|
|
|
571
|
|
Directors' fees payable
|
|
|
59
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,066
|
|
|
|
60,460
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 3, 4 and 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' Capital
|
|
|
|
|
|
|
|
|
General Partner
|
|
|
—
|
|
|
|
—
|
|
Limited Partners
|
|
|
3,051,181
|
|
|
|
3,373,894
|
|
Total Partners' Capital
|
|
|
3,051,181
|
|
|
|
3,373,894
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners' capital
|
|
$
|
3,087,247
|
|
|
$
|
3,434,354
|
|
|
|
|
|
|
|
|
|
|
Limited Partners' shares outstanding
|
|
|
400,000
|
|
|
|
400,000
|
|
Net asset value per share
|
|
$
|
7.63
|
|
|
$
|
8.43
|
|
Market value per share
|
|
$
|
7.67
|
|
|
$
|
8.39
|
|
See accompanying notes to condensed
financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Schedule of Investments (Unaudited)
At March 31, 2020
|
|
Notional
Amount
|
|
|
Number of
Contracts
|
|
|
Value/
Unrealized Gain
(Loss) on Open
Commodity
Contracts
|
|
|
% of
Partners'
Capital
|
|
Open Futures Contracts - Long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX Natural Gas Futures NG May 2020 contracts, expiring April 2020
|
|
$
|
287,311
|
|
|
|
11
|
|
|
$
|
(106,911
|
)
|
|
|
(3.50
|
)
|
NYMEX Natural Gas Futures NG June 2020 contracts, expiring May 2020
|
|
|
311,571
|
|
|
|
12
|
|
|
|
(100,851
|
)
|
|
|
(3.31
|
)
|
NYMEX Natural Gas Futures NG July 2020 contracts, expiring June 2020
|
|
|
280,517
|
|
|
|
11
|
|
|
|
(70,197
|
)
|
|
|
(2.30
|
)
|
NYMEX Natural Gas Futures NG August 2020 contracts, expiring July 2020
|
|
|
303,009
|
|
|
|
12
|
|
|
|
(65,649
|
)
|
|
|
(2.15
|
)
|
NYMEX Natural Gas Futures NG September 2020 contracts, expiring August 2020
|
|
|
254,751
|
|
|
|
11
|
|
|
|
(34,091
|
)
|
|
|
(1.12
|
)
|
NYMEX Natural Gas Futures NG October 2020 contracts, expiring September 2020
|
|
|
294,317
|
|
|
|
12
|
|
|
|
(45,917
|
)
|
|
|
(1.51
|
)
|
NYMEX Natural Gas Futures NG November 2020 contracts, expiring October 2020
|
|
|
266,953
|
|
|
|
11
|
|
|
|
(14,503
|
)
|
|
|
(0.48
|
)
|
NYMEX Natural Gas Futures NG December 2020 contracts, expiring November 2020
|
|
|
296,301
|
|
|
|
11
|
|
|
|
(8,651
|
)
|
|
|
(0.28
|
)
|
NYMEX Natural Gas Futures NG January 2021 contracts, expiring December 2020
|
|
|
321,794
|
|
|
|
12
|
|
|
|
6,886
|
|
|
|
0.23
|
|
NYMEX Natural Gas Futures NG February 2021 contracts, expiring January 2021
|
|
|
292,142
|
|
|
|
11
|
|
|
|
5,518
|
|
|
|
0.18
|
|
NYMEX Natural Gas Futures NG March 2021 contracts, expiring February 2021
|
|
|
271,840
|
|
|
|
11
|
|
|
|
14,600
|
|
|
|
0.48
|
|
NYMEX Natural Gas Futures NG April 2021 contracts, expiring March 2021
|
|
|
265,500
|
|
|
|
12
|
|
|
|
17,580
|
|
|
|
0.58
|
|
Total Open Futures Contracts*
|
|
$
|
3,446,006
|
|
|
|
137
|
|
|
$
|
(402,186
|
)
|
|
|
(13.18
|
)
|
United States 12 Month Natural
Gas Fund, LP
Condensed Schedule of Investments (Unaudited)(Continued)
At March 31, 2020
|
|
Principal
Amount
|
|
|
Market
Value
|
|
|
% of
Partners'
Capital
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Treasury Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills:
|
|
|
|
|
|
|
|
|
|
|
|
|
1.70%, 4/02/2020
|
|
$
|
100,000
|
|
|
$
|
99,995
|
|
|
|
3.28
|
|
1.64%, 4/09/2020
|
|
|
100,000
|
|
|
|
99,964
|
|
|
|
3.28
|
|
1.60%, 4/16/2020
|
|
|
100,000
|
|
|
|
99,934
|
|
|
|
3.28
|
|
1.60%, 4/23/2020
|
|
|
100,000
|
|
|
|
99,903
|
|
|
|
3.27
|
|
1.59%, 4/30/2020
|
|
|
100,000
|
|
|
|
99,873
|
|
|
|
3.27
|
|
1.54%, 5/07/2020
|
|
|
100,000
|
|
|
|
99,847
|
|
|
|
3.27
|
|
1.55%, 5/14/2020
|
|
|
100,000
|
|
|
|
99,816
|
|
|
|
3.27
|
|
1.55%, 5/21/2020
|
|
|
100,000
|
|
|
|
99,787
|
|
|
|
3.27
|
|
1.58%, 5/28/2020
|
|
|
100,000
|
|
|
|
99,751
|
|
|
|
3.27
|
|
1.53%, 6/04/2020
|
|
|
100,000
|
|
|
|
99,730
|
|
|
|
3.27
|
|
1.53%, 6/11/2020
|
|
|
100,000
|
|
|
|
99,700
|
|
|
|
3.27
|
|
1.54%, 6/18/2020
|
|
|
100,000
|
|
|
|
99,670
|
|
|
|
3.27
|
|
1.57%, 6/25/2020
|
|
|
100,000
|
|
|
|
99,632
|
|
|
|
3.27
|
|
1.54%, 7/02/2020
|
|
|
100,000
|
|
|
|
99,610
|
|
|
|
3.26
|
|
1.51%, 7/09/2020
|
|
|
100,000
|
|
|
|
99,587
|
|
|
|
3.26
|
|
1.54%, 7/16/2020
|
|
|
100,000
|
|
|
|
99,549
|
|
|
|
3.26
|
|
1.53%, 7/23/2020
|
|
|
100,000
|
|
|
|
99,524
|
|
|
|
3.26
|
|
1.53%, 7/30/2020
|
|
|
100,000
|
|
|
|
99,493
|
|
|
|
3.26
|
|
1.53%, 8/06/2020
|
|
|
100,000
|
|
|
|
99,464
|
|
|
|
3.26
|
|
1.52%, 8/13/2020
|
|
|
100,000
|
|
|
|
99,439
|
|
|
|
3.26
|
|
1.52%, 8/20/2020
|
|
|
100,000
|
|
|
|
99,409
|
|
|
|
3.26
|
|
1.42%, 8/27/2020
|
|
|
100,000
|
|
|
|
99,420
|
|
|
|
3.26
|
|
Total Cash Equivalents
|
|
|
|
|
|
$
|
2,193,097
|
|
|
|
71.88
|
|
|
*
|
Collateral
amounted to $908,142 on open futures contracts.
|
See accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Statements of Operations (Unaudited)
For
the three months ended March 31, 2020 and 2019
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
Income
|
|
|
|
|
|
|
|
|
Gain (loss) on trading of commodity futures contracts:
|
|
|
|
|
|
|
|
|
Realized gain (loss) on closed futures contracts
|
|
$
|
(361,302
|
)
|
|
$
|
(8,587
|
)
|
Change in unrealized gain (loss) on open futures contracts
|
|
|
33,492
|
|
|
|
104,608
|
|
Dividend income
|
|
|
958
|
|
|
|
3,902
|
|
Interest income*
|
|
|
11,093
|
|
|
|
23,636
|
|
ETF transaction fees
|
|
|
—
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Total income (loss)
|
|
|
(315,759
|
)
|
|
|
123,909
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
General Partner management fees (Note 3)
|
|
|
5,794
|
|
|
|
9,096
|
|
Professional fees
|
|
|
16,699
|
|
|
|
21,915
|
|
Brokerage commissions
|
|
|
131
|
|
|
|
372
|
|
Directors' fees and insurance
|
|
|
236
|
|
|
|
328
|
|
License fees
|
|
|
116
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
22,976
|
|
|
|
31,893
|
|
|
|
|
|
|
|
|
|
|
Expense waiver (Note 3)
|
|
|
(16,022
|
)
|
|
|
(20,977
|
)
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
6,954
|
|
|
|
10,916
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(322,713
|
)
|
|
$
|
112,993
|
|
Net income (loss) per limited partnership share
|
|
$
|
(0.80
|
)
|
|
$
|
0.24
|
|
Net income (loss) per weighted average limited partnership share
|
|
$
|
(0.81
|
)
|
|
$
|
0.25
|
|
Weighted average limited partnership shares outstanding
|
|
|
400,000
|
|
|
|
460,000
|
|
|
*
|
Interest
income does not exceed paid in kind of 5%.
|
See
accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Statement of Changes in Partners' Capital (Unaudited)
For
the three months ended March 31, 2020
|
|
General Partner
|
|
|
Limited Partners
|
|
|
Total
|
|
Balances, at December 31, 2019
|
|
$
|
—
|
|
|
$
|
3,373,894
|
|
|
$
|
3,373,894
|
|
Net income (loss)
|
|
|
—
|
|
|
|
(322,713
|
)
|
|
|
(322,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, at March 31, 2020
|
|
$
|
—
|
|
|
$
|
3,051,181
|
|
|
$
|
3,051,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
|
|
|
$
|
8.43
|
|
At March 31, 2020
|
|
|
|
|
|
|
|
|
|
$
|
7.63
|
|
See
accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Statements of Cash Flows (Unaudited)
For
the three months ended March 31, 2020 and 2019
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(322,713
|
)
|
|
$
|
112,993
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on open futures contracts
|
|
|
(33,492
|
)
|
|
|
(104,608
|
)
|
(Increase) decrease in receivable from General Partner
|
|
|
(16,022
|
)
|
|
|
(20,976
|
)
|
(Increase) decrease in dividends receivable
|
|
|
582
|
|
|
|
1,600
|
|
(Increase) decrease in interest receivable
|
|
|
138
|
|
|
|
(206
|
)
|
(Increase) decrease in prepaid insurance
|
|
|
(271
|
)
|
|
|
(29
|
)
|
(Increase) decrease in other assets
|
|
|
—
|
|
|
|
(490
|
)
|
Increase (decrease) in payable due to Broker
|
|
|
—
|
|
|
|
(81,581
|
)
|
Increase (decrease) in General Partner management fees payable
|
|
|
(501
|
)
|
|
|
(645
|
)
|
Increase (decrease) in professional fees payable
|
|
|
(23,729
|
)
|
|
|
(13,919
|
)
|
Increase (decrease) in brokerage commissions payable
|
|
|
(120
|
)
|
|
|
—
|
|
Increase (decrease) in directors' fees payable
|
|
|
(44
|
)
|
|
|
(21
|
)
|
Increase (decrease) in insurance payable
|
|
|
—
|
|
|
|
(516
|
)
|
Net cash provided by (used in) operating activities
|
|
|
(396,172
|
)
|
|
|
(108,398
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Redemption of partnership shares
|
|
|
—
|
|
|
|
(1,032,818
|
)
|
Net cash provided by (used in) financing activities
|
|
|
—
|
|
|
|
(1,032,818
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(396,172
|
)
|
|
|
(1,141,216
|
)
|
|
|
|
|
|
|
|
|
|
Total Cash, Cash Equivalents and Equity in Trading Accounts, beginning of period
|
|
|
3,794,705
|
|
|
|
5,763,922
|
|
Total Cash, Cash Equivalents and Equity in Trading Accounts, end of period
|
|
$
|
3,398,533
|
|
|
$
|
4,622,706
|
|
|
|
|
|
|
|
|
|
|
Components of Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
2,490,391
|
|
|
$
|
3,644,470
|
|
Equity in Trading Accounts:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
908,142
|
|
|
|
978,236
|
|
Total Cash, Cash Equivalents and Equity in Trading Accounts
|
|
$
|
3,398,533
|
|
|
$
|
4,622,706
|
|
See accompanying notes to condensed
financial statements.
United States 12 Month Natural Gas Fund, LP
Notes to Condensed Financial Statements
For the period ended March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
The
United States 12 Month Natural Gas Fund, LP (“UNL”) was organized as a limited partnership under the laws of the state
of Delaware on June 27, 2007. UNL is a commodity pool that issues limited partnership shares (“shares”) that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). UNL will continue in perpetuity, unless terminated sooner
upon the occurrence of one or more events as described in its Third Amended and Restated Agreement of Limited Partnership dated
as of December 15, 2017 (the “LP Agreement”). The investment objective of UNL is for the daily changes in percentage
terms of its shares’ per share net asset value (“NAV”) to reflect the daily changes in percentage terms of the
spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the daily changes in the average of the
prices of 12 futures contracts for natural gas traded on the New York Mercantile Exchange (the “NYMEX”), consisting
of the near month contract to expire and the contracts for the following 11 months for a total of 12 consecutive months’
contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures
contract that is the next month contract to expire and the contracts for the following 11 consecutive months (the “Benchmark
Futures Contracts”), plus interest earned on UNL’s collateral holdings, less UNL’s expenses. When calculating
the daily movement of the average price of the 12 contracts, each contract month is equally weighted.
UNL’s
investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of natural gas
or any particular futures contract based on natural gas, nor is UNL’s investment objective for the percentage change
in its NAV to reflect the percentage change of the price of any particular futures contract as measured over a time period greater
than one day.
United
States Commodity Funds LLC (“USCF”), the general partner of UNL, believes that it is not practical to manage the portfolio
to achieve such an investment goal when investing in Futures Contracts (as defined below) and Other Natural Gas-Related Investments
(as defined below). UNL accomplishes its objective through investments in futures contracts for natural gas, crude oil, diesel-heating
oil, gasoline and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively,
“Futures Contracts”) and other natural gas-related investments such as cash-settled options on Futures Contracts, forward
contracts for natural gas, cleared swap contracts and over-the-counter (“OTC”) transactions that are based on the price
of natural gas, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively,
“Other Natural Gas-Related Investments”). As of March 31, 2020, UNL held 137 Futures Contracts for natural gas
traded on the NYMEX and did not hold any Futures Contracts traded on ICE Futures US.
UNL
commenced investment operations on November 18, 2009 and has a fiscal year ending on December 31. USCF is responsible for the management
of UNL. USCF is a member of the National Futures Association (the “NFA”) and became registered as a commodity pool
operator with the Commodity Futures Trading Commission (the “CFTC”) effective December 1, 2005 and a swaps firm on
August 8, 2013.
USCF
is also the general partner of the United States Oil Fund, LP (“USO”), the United States Natural Gas Fund, LP (“UNG”),
the United States 12 Month Oil Fund, LP (“USL”) and the United States Gasoline Fund, LP (“UGA”), which
listed their limited partnership shares on the American Stock Exchange (the “AMEX”) under the ticker symbols “USO”
on April 10, 2006, “UNG” on April 18, 2007, “USL” on December 6, 2007 and “UGA” on February
26, 2008, respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of USO’s, UNG’s, USL’s
and UGA’s shares commenced trading on the NYSE Arca on November 25, 2008. USCF is also the general partner of the United
States Brent Oil Fund, LP (“BNO”), which listed its limited partnership shares on the NYSE Arca under the ticker symbol
“BNO” on June 2, 2010. USCF previously served as the general partner for the United States Short Oil Fund, LP
(“DNO”) and the United States Diesel-Heating Oil Fund, LP (“UHN”), both of which were liquidated in 2018.
USCF is also the sponsor of the United
States Commodity Index Fund (“USCI”), the United States Copper Index Fund (“CPER”) and the USCF Crescent
Crypto Index Fund (“XBET”), each a series of the United States Commodity Index Funds Trust (“USCIFT”).
USCF previously served as the sponsor for the United States Agricultural Index Fund (“USAG”) a series of USCIFT which
was liquidated in 2018. XBET is currently in registration and has not commenced operations. USCI and CPER listed their shares on
the NYSE Arca under the ticker symbols “USCI” on August 10, 2010 and “CPER” on November 15, 2011, respectively.
In addition, USCF was the sponsor of the
USCF Funds Trust, a Delaware statutory trust, and each of its series, the United States 3x Oil Fund (“USOU”) and the
United States 3x Short Oil Fund (“USOD”), which listed their shares on the NYSE Arca on July 20, 2017 under the ticker
symbols “USOU” and “USOD”, respectively. Each of USOU and USOD liquidated all of its assets and distributed
cash pro rata to all remaining shareholders in December 2019.
USO, UNG, UGA, UNL, USL, BNO, USCI and
CPER are referred to collectively herein as the “Related Public Funds.”
UNL
issues shares to certain authorized purchasers (“Authorized Participants”) by offering baskets consisting of 50,000
shares (“Creation Baskets”) through ALPS Distributors, Inc., as the marketing agent (the “Marketing Agent”).
The purchase price for a Creation Basket is based upon the NAV of a share calculated shortly after the close of the core trading
session on the NYSE Arca on the day the order to create the basket is properly received.
Authorized Participants pay UNL a $350
transaction fee for each order placed to create one or more Creation Baskets or to redeem one or more baskets (“Redemption
Baskets”), consisting of 50,000 shares. Shares may be purchased or sold on a nationally recognized securities exchange in
smaller increments than a Creation Basket or Redemption Basket. Shares purchased or sold on a nationally recognized securities
exchange are not purchased or sold at the per share NAV of UNL but rather at market prices quoted on such exchange.
In
November 2009, UNL initially registered 30,000,000 shares on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”).
On November 18, 2009, UNL listed its shares on the NYSE Arca under the ticker symbol “UNL”. On that day, UNL established
its initial per share NAV by setting the price at $50.00 and issued 200,000 shares in exchange for $10,000,000. UNL also commenced
investment operations on November 18, 2009, by purchasing Futures Contracts traded on the NYMEX based on natural gas. As
of March 31, 2020, UNL had registered a total of 30,000,000 shares.
The accompanying unaudited condensed financial
statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include
all information and footnote disclosure required under generally accepted accounting principles in the United States of America
(“U.S. GAAP”). The financial information included herein is unaudited; however, such financial information reflects
all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of USCF, necessary for the fair presentation
of the condensed financial statements for the interim period.
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The
condensed financial statements have been prepared in conformity with U.S. GAAP as detailed in the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification. UNL is an investment company and follows the accounting
and reporting guidance in FASB Topic 946.
Revenue Recognition
Commodity
futures contracts, forward contracts, physical commodities and related options are recorded on the trade date. All such transactions
are recorded on the identified cost basis and marked to market daily. Unrealized gains or losses on open contracts are reflected
in the condensed statements of financial condition and represent the difference between the original contract amount
and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices
at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of
the year or as of the last date of the condensed financial statements. Changes in the unrealized gains or losses between periods
are reflected in the condensed statements of operations. UNL earns income on funds held at the custodian or a futures
commission merchant (“FCM”) at prevailing market rates earned on such investments.
Brokerage Commissions
Brokerage commissions on all open commodity
futures contracts are accrued on a full-turn basis.
Income Taxes
UNL
is not subject to federal income taxes; each partner reports his/her allocable share of income, gain, loss deductions
or credits on his/her own income tax return.
In
accordance with U.S. GAAP, UNL is required to determine whether a tax position is more likely than not to be sustained
upon examination by the applicable taxing authority, including resolution of any tax related appeals or litigation processes,
based on the technical merits of the position. UNL files an income tax return in the U.S. federal jurisdiction and may file
income tax returns in various U.S. states. UNL is not subject to income tax return examinations by major taxing authorities
for years before 2016. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in UNL
recording a tax liability that reduces net assets. However, UNL's conclusions regarding this policy may be subject to review and
adjustment at a later date based on factors including, but not limited to, on-going analysis of and changes to tax laws, regulations
and interpretations thereof. UNL recognizes interest accrued related to unrecognized tax benefits and penalties related to
unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of
and for the period ended March 31, 2020.
Creations and Redemptions
Authorized
Participants may purchase Creation Baskets or redeem Redemption Baskets only in blocks of 50,000 shares at a price
equal to the NAV of the shares calculated shortly after the close of the core trading session on the NYSE Arca on the day the order
is placed.
UNL
receives or pays the proceeds from shares sold or redeemed within two business days after the trade date of the purchase
or redemption. The amounts due from Authorized Participants are reflected in UNL's condensed statements of financial condition
as receivable for shares sold and amounts payable to Authorized Participants upon redemption are reflected as payable for shares
redeemed.
Authorized Participants pay UNL a $350 transaction fee for each order placed to create one or more Creation Baskets
or to redeem one or more Redemption Baskets.
Partnership Capital and Allocation of Partnership
Income and Losses
Profit or loss shall be allocated among
the partners of UNL in proportion to the number of shares each partner holds as of the close of each month. USCF may
revise, alter or otherwise modify this method of allocation as described in the LP Agreement.
Calculation of Per Share NAV
UNL's
per share NAV is calculated on each NYSE Arca trading day by taking the current market value of its total assets, subtracting any
liabilities and dividing that amount by the total number of shares outstanding. UNL uses the closing price for the contracts on
the relevant exchange on that day to determine the value of contracts held on such exchange.
Net Income (Loss) Per Share
Net
income (loss) per share is the difference between the per share NAV at the beginning of each period and at the end of each period.
The weighted average number of shares outstanding was computed for purposes of disclosing net income (loss) per weighted average
share. The weighted average shares are equal to the number of shares outstanding at the end of the period, adjusted proportionately
for shares added and redeemed based on the amount of time the shares were outstanding during such period. There were no shares
held by USCF at March 31, 2020.
Offering Costs
Offering
costs incurred in connection with the registration of additional shares after the initial registration of shares are
borne by UNL. These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses
associated with such offerings. These costs are accounted for as a deferred charge and thereafter amortized to expense over
twelve months on a straight-line basis or a shorter period if warranted.
Cash Equivalents
Cash equivalents include money market funds
and overnight deposits or time deposits with original maturity dates of six months or less.
Reclassification
Certain
amounts in the accompanying condensed financial statements were reclassified to conform to the current presentation.
Use of Estimates
The
preparation of condensed financial statements in conformity with U.S. GAAP requires USCF to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
condensed financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results
may differ from those estimates and assumptions.
NOTE
3 — FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
USCF Management Fee
Under
the LP Agreement, USCF is responsible for investing the assets of UNL in accordance with the objectives and policies
of UNL. In addition, USCF has arranged for one or more third parties to provide administrative, custody, accounting, transfer agency
and other necessary services to UNL. For these services, UNL is contractually obligated to pay USCF a fee, which is paid
monthly, equal to 0.75% per annum of average daily total net assets.
Ongoing Registration Fees and Other Offering Expenses
UNL pays all costs and expenses associated
with the ongoing registration of its shares subsequent to the initial offering. These costs include registration or other fees
paid to regulatory agencies in connection with the offer and sale of shares, and all legal, accounting, printing and other expenses
associated with such offer and sale. For the three months ended March 31, 2020 and 2019, UNL did not incur registration fees and
other offering expenses.
Independent Directors’ and Officers’
Expenses
UNL
is responsible for paying its portion of the directors’ and officers’ liability insurance for UNL and the Related
Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of UNL and the Related
Public Funds. UNL shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based
on the relative assets of each Related Public Fund computed on a daily basis. These fees and expenses for the year ending
December 31, 2020 are estimated to be a total of $1,000 for UNL and, in the aggregate for UNL and the Related Public
Funds, $574,000.
Licensing Fees
As discussed in Note 4 below, UNL entered into a licensing agreement with the NYMEX on December 4, 2007, as amended on October
20, 2011. Pursuant to the agreement, UNL and the Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee that
is equal to 0.015% on all net assets. During the three months ended March 31, 2020 and 2019, UNL incurred $116 and $182, respectively,
under this arrangement.
Investor Tax Reporting Cost
The
fees and expenses associated with UNL's audit expenses and tax accounting and reporting requirements are paid by UNL. These
costs are estimated to be $72,000 for the year ending December 31, 2020. Tax reporting costs fluctuate between years due to the
number of shareholders during any given year.
Other Expenses and Fees and Expense Waivers
In
addition to the fees described above, UNL pays all brokerage fees and other expenses in connection with the operation of
UNL, excluding costs and expenses paid by USCF as outlined in Note 4 – Contracts and Agreements below. USCF paid
certain expenses on a discretionary basis typically borne by UNL, where expenses exceed 0.15% (15 basis points) of UNL’s
NAV, on an annualized basis. USCF has no obligation to continue such payments into subsequent periods. For the three months ended
March 31, 2020, USCF waived $16,022 of UNL’s expenses. This voluntary expense waiver is in addition to those amounts USCF
is contractually obligated to pay as described in Note 4 – Contracts and Agreements.
NOTE 4 — CONTRACTS AND AGREEMENTS
Marketing Agent Agreement
UNL is party to a marketing agent agreement,
dated as of October 30, 2009, as amended from time to time, with the Marketing Agent and USCF, whereby the Marketing Agent provides
certain marketing services for UNL as outlined in the agreement. The fee of the Marketing Agent, which is borne by USCF, is equal
to 0.06% on UNL's assets up to $3 billion and 0.04% on UNL's assets in excess of $3 billion. In no event may the aggregate compensation
paid to the Marketing Agent and any affiliate of USCF for distribution-related services exceed 10% of the gross proceeds of UNL's
offering.
The above fee does not include website
construction and development, which are also borne by USCF.
Custody, Transfer Agency and Fund Administration
and Accounting Services Agreements
UNL is also party to a custodian
agreement, dated November 3, 2009, as amended from time to time, with Brown Brothers Harriman & Co. (“BBH&Co.”)
and USCF, whereby BBH&Co. holds investments on behalf of UNL. USCF pays the fees of the custodian, which are determined
by the parties from time to time. In addition, UNL is party to an administrative agency agreement, dated November 3, 2009,
as amended from time to time, with USCF and BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and
registrar for UNL. USCF also pays the fees of BBH&Co. for its services under such agreement and such fees are determined
by the parties from time to time.
Currently, USCF pays BBH&Co. for
its services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration
services rendered to UNL and each of the Related Public Funds, as well as a $20,000 annual fee for its transfer agency services.
In addition, USCF pays BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of the Related Public Funds’
combined net assets, (b) 0.0465% for the Related Public Funds’ combined net assets greater than $500 million but less than
$1 billion, and (c) 0.035% once the Related Public Funds’ combined net assets exceed $1 billion. The annual minimum amount
will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. USCF also pays BBH&Co. transaction
fees ranging from $7 to $15 per transaction. The custody and transfer agency services rendered by BBH&Co. to UNL and each
of the Related Public Funds terminated on March 31, 2020 and fund accounting and fund administration services rendered by BBH&Co.
to UNL and each of the Related Public Funds will terminate on May 31, 2020 to allow for certain reporting and other services
to continue in connection with the transition to The Bank of New York Mellon.
USCF has engaged The Bank of New York Mellon,
a New York corporation authorized to do a banking business (“BNY Mellon”), to provide UNL and each of the Related Public
Funds with certain custodial, administrative and accounting, and transfer agency services, pursuant to the following agreements
with BNY Mellon dated as of March 20, 2020 (together, the “BNY Mellon Agreements”), which were effective as of April
1, 2020: (i) a Custody Agreement; (ii) a Fund Administration and Accounting Agreement; and (iii) a Transfer Agency and Service
Agreement.
Brokerage and Futures Commission Merchant
Agreements
On October 8, 2013, UNL entered into a
brokerage agreement with RBC Capital Markets LLC (“RBC”) to serve as UNL's FCM effective October 10, 2013. The
agreement with RBC requires it to provide services to UNL in connection with the purchase and sale of Futures Contracts and
Other Natural Gas-Related Investments that may be purchased and sold by or through RBC for UNL's account. In accordance with the
agreement, RBC charges UNL commissions of approximately $7 to $8 per round-turn trade, including applicable exchange,
clearing and NFA fees for Futures Contracts and options on Futures Contracts. Such fees include those incurred when purchasing Futures
Contracts and options on Futures Contracts when UNL issues shares as a result of a Creation Basket, as well as fees incurred
when selling Futures Contracts and options on Futures Contracts when UNL redeems shares as a result of a Redemption Basket.
Such fees are also incurred when Futures Contracts and options on Futures Contracts are purchased or redeemed for the
purpose of rebalancing the portfolio. UNL also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other
Natural Gas-Related Investments or short-term obligations of the United States of two years or less (“Treasuries”).
|
|
For the three months
ended
March 31, 2020
|
|
|
For the three months
ended
March 31, 2019
|
|
Total commissions accrued to brokers
|
|
$
|
131
|
|
|
$
|
372
|
|
Total commissions as annualized percentage of average total net assets
|
|
|
0.02
|
%
|
|
|
0.03
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
131
|
|
|
$
|
274
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
100.00
|
%
|
|
|
73.66
|
%
|
Commissions accrued as a result of creation and redemption activity
|
|
|
—
|
|
|
$
|
98
|
|
Percentage of commissions accrued as a result of creation and redemption activity
|
|
|
—
|
%
|
|
|
26.34
|
%
|
The decrease in total commissions accrued
to brokers for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily
to a lower number of natural gas futures contracts being held and traded.
NYMEX Licensing Agreement
UNL and the NYMEX entered into a licensing agreement on December 4, 2007, as amended
on October 20, 2011, whereby UNL was granted a non-exclusive license to use certain of the NYMEX’s settlement prices and
service marks. Under the licensing agreement, UNL and the Related Public Funds, other than BNO, USCI and CPER, pay the NYMEX an
asset-based fee for the license, the terms of which are described in Note 3. UNL expressly disclaims any association with the
NYMEX or endorsement of UNL by the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange”
are registered trademarks of the NYMEX.
NOTE 5 — FINANCIAL INSTRUMENTS,
OFF-BALANCE SHEET RISKS AND CONTINGENCIES
UNL may engage in the trading of futures
contracts, options on futures contracts, cleared swaps and OTC swaps (collectively, “derivatives”). UNL is exposed
to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the
risk of failure by another party to perform according to the terms of a contract.
UNL may enter into futures contracts, options
on futures contracts and cleared swaps to gain exposure to changes in the value of an underlying commodity. A futures contract
obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity
at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in
cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the
underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange
before the designated date of delivery. Cleared swaps are agreements that are eligible to be cleared by a clearinghouse, e.g.,
ICE Clear Europe, and provide the efficiencies and benefits that centralized clearing on an exchange offers to traders of futures
contracts, including credit risk intermediation and the ability to offset positions initiated with different counterparties.
The purchase and sale of futures contracts,
options on futures contracts and cleared swaps require margin deposits with an FCM. Additional deposits may be necessary for any
loss on contract value. The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s
proprietary activities.
Futures contracts, options on futures contracts
and cleared swaps involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss
in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure UNL has
in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation
between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of
an illiquid market for a futures contract. Buying and selling options on futures contracts exposes investors to the risks of purchasing
or selling futures contracts.
All of the futures contracts held by UNL
through March 31, 2020 were exchange-traded. The risks associated with exchange-traded contracts are generally perceived to be
less than those associated with OTC swaps since, in OTC swaps, a party must rely solely on the credit of its respective individual
counterparties. However, in the future, if UNL were to enter into non-exchange traded contracts, it would be subject to the credit
risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments
is the net unrealized gain, if any, on the transaction. UNL has credit risk under its futures contracts since the sole counterparty
to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded.
In addition, UNL bears the risk of financial failure by the clearing broker.
UNL's cash and other property, such
as Treasuries, deposited with an FCM are considered commingled with all other customer funds, subject to the FCM’s segregation
requirements. In the event of an FCM’s insolvency, recovery may be limited to a pro rata share of segregated funds available.
It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of an
FCM could result in the complete loss of UNL's assets posted with that FCM; however, the majority of UNL's assets are held
in investments in Treasuries, cash and/or cash equivalents with UNL's custodian and would not be impacted by the insolvency
of an FCM. The failure or insolvency of UNL's custodian, however, could result in a substantial loss of UNL's assets.
USCF invests a portion of UNL's cash
in money market funds that seek to maintain a stable per share NAV. UNL is exposed to any risk of loss associated with an
investment in such money market funds. As of March 31, 2020, UNL did not hold any investments in money market funds. As of December
31, 2019, UNL held investments in money market funds in the amount of $500,000. UNL also holds cash deposits with
its custodian. Pursuant to a written agreement with BBH&Co., uninvested overnight cash balances are swept to offshore branches
of U.S. regulated and domiciled banks located in Toronto, Canada; London, United Kingdom; Grand Cayman, Cayman Islands; and Nassau,
Bahamas; which are subject to U.S. regulation and regulatory oversight. As of March 31, 2020 and December 31, 2019, UNL held cash
deposits and investments in Treasuries in the amounts of $3,398,533 and $3,294,705, respectively, with the custodian and FCM. Some
or all of these amounts may be subject to loss should UNL's custodian and/or FCM cease operations.
For derivatives, risks arise from changes
in the market value of the contracts. Theoretically, UNL is exposed to market risk equal to the value of futures contracts
purchased and unlimited liability on such contracts sold short. As both a buyer and a seller of options, UNL 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.
UNL's policy is to continuously monitor
its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting
controls and procedures. In addition, UNL has a policy of requiring review of the credit standing of each broker or counterparty
with which it conducts business.
The financial instruments held by UNL
are reported in its condensed statements of financial condition at market or fair value, or at carrying amounts that approximate
fair value, because of their highly liquid nature and short-term maturity.
NOTE 6 — FINANCIAL HIGHLIGHTS
The following table presents per share
performance data and other supplemental financial data for the three months ended March 31, 2020 and 2019 for the shareholders.
This information has been derived from information presented in the condensed financial statements.
|
|
For the three months ended
March 31, 2020
(Unaudited)
|
|
|
For the three months ended
March 31, 2019
(Unaudited)
|
|
Per Share Operating Performance:
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
8.43
|
|
|
$
|
10.26
|
|
Total income (loss)
|
|
|
(0.78
|
)
|
|
|
0.26
|
|
Net expenses
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
Net increase (decrease) in net asset value
|
|
|
(0.80
|
)
|
|
|
0.24
|
|
Net asset value, end of period
|
|
$
|
7.63
|
|
|
$
|
10.50
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
(9.49
|
)%
|
|
|
2.34
|
%
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
Total income (loss)
|
|
|
(10.16
|
)%
|
|
|
2.52
|
%
|
Management fees*
|
|
|
0.75
|
%
|
|
|
0.75
|
%
|
Total expenses excluding management fees*
|
|
|
2.22
|
%
|
|
|
1.88
|
%
|
Expenses waived*
|
|
|
(2.07
|
)%
|
|
|
(1.73
|
)%
|
Net expenses excluding management fees*
|
|
|
0.15
|
%
|
|
|
0.15
|
%
|
Net income (loss)
|
|
|
(10.39
|
)%
|
|
|
2.30
|
%
|
Total returns are calculated based on the
change in value during the period. An individual shareholder’s total return and ratio may vary from the above total returns
and ratios based on the timing of contributions to and withdrawals from UNL.
NOTE 7
— FAIR VALUE OF FINANCIAL INSTRUMENTS
UNL
values its investments in accordance with Accounting Standards Codification 820 – Fair Value Measurements and Disclosures
(“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurement. The changes to past practice resulting from the application of
ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair
value measurement. ASC 820 establishes a fair value hierarchy that distinguishes between: (1) market participant assumptions developed
based on market data obtained from sources independent of UNL (observable inputs) and (2) UNL's own assumptions about
market participant assumptions developed based on the best information available under the circumstances (unobservable inputs).
The three levels defined by the ASC 820 hierarchy are as follows:
Level I – Quoted prices (unadjusted)
in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement
date.
Level II – Inputs other than quoted
prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include
the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability,
and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated
inputs).
Level III – Unobservable pricing
input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent
that observable inputs are not available.
In some instances, the inputs used to measure
fair value might fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the
fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair
value measurement in its entirety.
The following table summarizes the valuation of UNL’s securities at March 31, 2020 using the fair value hierarchy:
|
|
|
|
|
At March 31, 2020
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Short-Term Investments
|
|
$
|
2,193,097
|
|
|
$
|
2,193,097
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Exchange-Traded Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
(402,186
|
)
|
|
|
(402,186
|
)
|
|
|
—
|
|
|
|
—
|
|
The following table summarizes the valuation of UNL’s securities at December 31, 2019 using the fair value hierarchy:
|
|
|
|
|
At December 31, 2019
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Short-Term Investments
|
|
$
|
3,289,117
|
|
|
$
|
3,289,117
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Exchange-Traded Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
(435,678
|
)
|
|
|
(435,678
|
)
|
|
|
—
|
|
|
|
—
|
|
Effective January 1, 2009, UNL adopted
the provisions of Accounting Standards Codification 815 — Derivatives and Hedging, which require presentation of qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains
and losses on derivatives.
Fair Value of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not
Accounted for
as Hedging
Instruments
|
|
Condensed
Statements of
Financial
Condition Location
|
|
Fair Value
At March 31,
2020
|
|
|
Fair Value
At December 31,
2019
|
|
Futures - Commodity Contracts
|
|
Assets
|
|
$
|
(402,186
|
)
|
|
$
|
(435,678
|
)
|
The Effect of Derivative Instruments on the Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31, 2020
|
|
|
For the three months ended
March 31, 2019
|
|
Derivatives not
Accounted for
as Hedging
Instruments
|
|
Location of
Gain (Loss)
on Derivatives
Recognized in
Income
|
|
Realized
Gain (Loss)
on Derivatives
Recognized in
Income
|
|
|
Change in
Unrealized
Gain (Loss) on
Derivatives
Recognized in
Income
|
|
|
Realized
Gain (Loss)
on Derivatives
Recognized in
Income
|
|
|
Change in
Unrealized
Gain (Loss) on
Derivatives
Recognized in
Income
|
|
Futures - Commodity Contracts
|
|
Realized gain (loss) on
closed positions
|
|
$
|
(361,302
|
)
|
|
|
|
|
|
$
|
(8,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
gain (loss) on open
positions
|
|
|
|
|
|
$
|
33,492
|
|
|
|
|
|
|
$
|
104,608
|
|
NOTE 8 — RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the FASB issued Accounting
Standards Update (“ASU”) No. 2018-13, which changes certain fair value measurement disclosure requirements. The new
ASU, in addition to other modifications and additions, removes the requirement to disclose the amount and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, and the Funds’ policy for the timing of transfers between levels.
The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. The Fund has evaluated the implications of certain provisions of the ASU and has determined that there
will be no material impacts to the financial statements.
NOTE 9 — SUBSEQUENT EVENTS
UNL
has performed an evaluation of subsequent events through the date the condensed financial statements were issued. This evaluation
resulted in the following disclosure.
An outbreak of infectious respiratory illness
caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now been detected globally.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Subsequently, COVID-19 has resulted in
numerous deaths, travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere,
disruption of and delays in healthcare service preparation and delivery, prolonged quarantines and the imposition of both local
and more widespread “work from home” measures, cancellations, supply chain disruptions, and lower consumer demand,
as well as general concern and uncertainty. The ongoing spread of COVID-19 has had, and is expected to continue to have, a material
adverse impact on local economies in the affected jurisdictions and also on the global economy, as cross border commercial activity
and market sentiment are increasingly impacted by the outbreak and government and other measures seeking to contain its spread.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect individual
issuers and capital markets in ways that cannot necessarily be foreseen. In addition, actions taken by government and quasi-governmental
authorities and regulators throughout the world in response to the COVID-19 outbreak, including significant fiscal and monetary
policy changes, may affect the value, volatility, pricing and liquidity of some investments or other assets, including those held
by or invested in by the UNL. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political,
social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its ultimate impact on UNL
and, on the global economy, cannot be determined with certainty. The COVID-19 pandemic and its effects may last for an extended
period of time, and could result in significant and continued market volatility, exchange trading suspensions and closures, declines
in global financial markets, higher default rates, and a substantial economic downturn or recession. The foregoing could impair
UNL's ability to maintain operational standards (such as with respect to satisfying redemption requests), disrupt the operations
of UNL's service providers, adversely affect the value and liquidity of UNL's investments, and negatively impact UNL's performance
and your investment in UNL. The extent to which COVID-19 will affect UNL and UNL's service providers and portfolio investments
will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge
concerning the severity of COVID-19 and the actions taken to contain COVID-19. Given the significant economic and financial market
disruptions associated with the COVID-19 pandemic, the valuation and performance of UNL's investments could be impacted adversely.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion should be read
in conjunction with the condensed financial statements and the notes thereto of the United States 12 Month Natural Gas Fund, LP
(“UNL”) included elsewhere in this quarterly report on Form 10-Q:
Forward-Looking Information
This quarterly report on Form 10-Q, including
this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking
statements regarding the plans and objectives of management for future operations. This information may involve known and unknown
risks, uncertainties and other factors that may cause UNL’s actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe UNL’s future plans, strategies and expectations, are generally identifiable
by use of the words “may,” “will,” “should,” “expect,” “anticipate,”
“estimate,” “believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect,
and UNL cannot assure investors that the projections included in these forward-looking statements will come to pass. UNL’s
actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various
factors.
UNL
has based the forward-looking statements included in this quarterly report on Form 10-Q on information available to it on the date
of this quarterly report on Form 10-Q, and UNL assumes no obligation to update any such forward-looking statements. Although UNL
undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events
or otherwise, investors are advised to consult any additional disclosures that UNL may make directly to them or through reports
that UNL files in the future with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Introduction
UNL,
a Delaware limited partnership, is a commodity pool that issues shares that may be purchased and sold on the NYSE Arca, Inc. (the
“NYSE Arca”). The investment objective of UNL is for the daily changes in percentage terms of its shares’ per
share net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of natural gas delivered
at the Henry Hub, Louisiana, as measured by the daily changes in the average of the prices of 12 futures contracts for natural
gas traded on the New York Mercantile Exchange (the “NYMEX”), consisting of the near month contract to expire and the
contracts for the following 11 months for a total of 12 consecutive months’ contracts, except when the near month contract
is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to
expire and the contracts for the following 11 consecutive months (the “Benchmark Futures Contracts”), plus interest
earned on UNL’s collateral holdings, less UNL’s expenses. “Near month contract” means the next contract
traded on the NYMEX due to expire. “Next month contract” means the first contract traded on the NYMEX due to expire
after the near month contract. When calculating the daily movement of the average price of the 12 contracts, each contract month
is equally weighted.
UNL’s
investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of natural gas
or any particular futures contract based on natural gas, nor is UNL’s investment objective for the percentage change
in its NAV to reflect the percentage change of the price of any particular futures contract as measured over a time period greater
than one day. The general partner of UNL, United States Commodity Funds LLC (“USCF”), believes that it is not practical
to manage the portfolio to achieve such an investment goal when investing in Natural Gas Futures Contracts (as defined below) and
Other Natural Gas-Related Investments (as defined below).
UNL
invests primarily in natural gas futures contracts that are traded on the NYMEX, ICE Futures Exchange (“ICE Futures”)
or other U.S. and foreign exchanges (collectively, “Natural Gas Futures Contracts”) and to a lesser extent, in order
to comply with regulatory requirements or in view of market conditions, other natural gas-related investments such as cash-settled
options on Natural Gas Futures Contracts, forward contracts for natural gas, cleared swap contracts and non-exchange traded over-the-counter
(“OTC”) swaps that are based on the price of natural gas, crude oil and other petroleum-based fuels and indices based
on the foregoing (collectively, “Other Natural Gas-Related Investments”). Market conditions that USCF currently anticipates
could cause UNL to invest in Other Natural Gas-Related Investments include those allowing UNL to obtain greater liquidity or to
execute transactions with more favorable pricing. For convenience and unless otherwise specified, Natural Gas Futures Contracts
and Other Natural Gas-Related Investments collectively are referred to as “Natural Gas Interests” in this quarterly
report on Form 10-Q.
USCF believes that market arbitrage opportunities
will cause daily changes in UNL’s share price on the NYSE Arca on a percentage basis to closely track daily changes in UNL’s
per share NAV on a percentage basis. USCF further believes that daily changes in prices of the Benchmark Futures Contracts have
historically closely tracked the daily changes in spot price of natural gas. USCF believes that the net effect of these relationships
will be that the daily changes in the price of UNL’s shares on the NYSE Arca on a percentage basis will closely track the
daily changes in the spot price of a MMBtu of natural gas on a percentage basis, plus interest earned on UNL’s collateral
holdings, less UNL’s expenses.
UNL
seeks to achieve its investment objective by investing so that the average daily percentage change in UNL’s NAV for any period
of 30 successive valuation days will be within plus/minus ten percent (10%) of the average daily percentage change in the price
of the Benchmark Futures Contracts over the same period.
Regulatory Disclosure
Accountability
Levels, Position Limits and Price Fluctuation Limits. Designated contract markets (“DCMs”), such as the
NYMEX and ICE Futures, have established accountability levels and position limits on the maximum net long or net short futures
contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which
an investment by UNL is not) may hold, own or control. These levels and position limits apply to the futures contracts that UNL
invests in to meet its investment objective. In addition to accountability levels and position limits, the NYMEX and ICE Futures
also set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount
that the price of a futures contract may vary either up or down from the previous day’s settlement price. Once the daily
price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
The
accountability levels for the Benchmark Futures Contracts and other Natural Gas Futures Contracts traded on U.S.-based futures
exchanges such as the NYMEX are not a fixed ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny
and control over an investor’s positions. The current accountability level for investments for any one-month in the Benchmark
Futures Contracts is 6,000 net contracts. In addition, the NYMEX imposes an accountability levels for all months of 12,000 net
futures contracts for investments in futures contracts for natural gas. In addition, the ICE Futures maintains the same accountability
levels, position limits and monitoring authority for its natural gas contracts as the NYMEX. If UNL and the Related Public Funds
exceed these accountability levels for investments in the futures contract for natural gas, the NYMEX and ICE Futures will monitor
UNL’s and the Related Public Funds’ exposure and may ask for further information on their activities, including the
total size of all positions, investment and trading strategy, and the extent of liquidity resources of UNL and the Related Public
Funds. If deemed necessary by the NYMEX and/or ICE Futures, UNL and the Related Public Funds could be ordered to reduce their
aggregate net futures contracts back to the accountability level. As of March 31, 2020, UNL held 137 Natural Gas Futures
NG contracts traded on the NYMEX and did not hold any ICE Natural Gas Futures contracts. For the three months ended March 31,
2020, UNL did not exceed accountability levels imposed by the NYMEX and ICE Futures, however, the aggregated total of certain
of the Related Public Funds did exceed the accountability levels. No action was taken by NYMEX and UNL did not reduce the number
of Natural Gas Futures Contracts held as a result.
Position
limits differ from accountability levels in that they represent fixed limits on the maximum number of futures contracts that any
person may hold and cannot allow such limits to be exceeded without express CFTC authority to do so. In addition to accountability
levels and position limits that may apply at any time, the NYMEX and ICE Futures impose position limits on contracts held in the
last few days of trading in the near month contract to expire. It is unlikely that UNL will run up against such position limits
because UNL’s investment strategy is to close out its positions and “roll” from the near month contract to expire
and the eleven following months to the next month contract to expire and the eleven following months during one day each month.
For the three months ended March 31, 2020, UNL did not exceed any position limits imposed by the NYMEX and the ICE Futures.
The regulation of commodity interest trading
in the United States and other countries is an evolving area of the law. The various statements made in this summary are subject
to modification by legislative action and changes in the rules and regulations of the SEC, Financial Industry Regulatory Authority
(“FINRA”), CFTC, NFA, the futures exchanges, clearing organizations and other regulatory bodies.
Futures Contracts and Position Limits
The CFTC is generally prohibited by statute
from regulating trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing
of non-U.S. futures contracts in the United States. These regulations permit certain contracts on non-U.S. exchanges to be offered
and sold in the United States.
The
CFTC has proposed to adopt limits on speculative positions in 25 physical commodity futures and option contracts as well as swaps
that are economically equivalent to such contracts in the agriculture, energy and metals markets, which rules were recently re-proposed
in January 2020 (the “Position Limit Rules”). The Position Limit Rules would, among other things: identify which contracts
are subject to speculative position limits; set thresholds that restrict the size of speculative positions that a person may hold
in the spot month, other individual months, and all months combined; create an exemption for positions that constitute bona fide
hedging transactions; impose responsibilities on DCMs and swap execution facilities (“SEFs”) to establish position
limits or, in some cases, position accountability rules; and apply to both futures and swaps across four relevant venues: OTC,
DCMs, SEFs as well as certain non-U.S. located platforms. The CFTC’s first attempt at finalizing the Position Limit Rules,
in 2011, was successfully challenged by market participants in 2012 and, since then, the CFTC has re-proposed them and solicited
comments from market participants multiple times. At this time, it is unclear how the Position Limit Rules may affect UNL,
but the effect may be substantial and adverse. By way of example, the Position Limit Rules may negatively impact the ability of UNL
to meet its investment objectives through limits that may inhibit USCF’s ability to sell additional Creation Baskets of UNL.
Until
such time as the Position Limit Rules are adopted, the regulatory architecture in effect prior to the adoption of the Position
Limit Rules will govern transactions in commodities and related derivatives. Under that system, the CFTC enforces federal limits
on speculation in nine agricultural products (e.g., corn, wheat and soy), while futures exchanges establish and enforce position
limits and accountability levels for other agricultural products and certain energy products (e.g., oil and natural gas).
As a result, UNL may be limited with respect to the size of its investments in any commodities subject to these limits.
Under existing and recently adopted CFTC
regulations, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions,
to aggregate all positions for which that participant controls the trading decisions with all positions for which that participant
has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting
pursuant to an express or implied agreement or understanding with that participant (the “Aggregation Rules”). The Aggregation
Rules will also apply with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.
OTC Swaps
In October 2015, the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and the Federal
Housing Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules
to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap
dealers, and major security-based swap participants (“Swap Entities”) that are subject to the jurisdiction of one of
the Agencies (such entities, “Covered Swap Entities”, and the joint final rules, the “Final Margin Rules”).
The Final Margin Rules will subject non-cleared
swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities, and between Covered Swap Entities and
financial end users that have material swaps exposure (i.e., an average daily aggregate notional of $8 billion or more in non-cleared
swaps calculated in accordance with the Final Margin Rules), to a mandatory two-way minimum initial margin requirement. The minimum
amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity
using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a
percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming
to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap
Entity. The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for non-cleared
swaps and non-cleared security-based swaps with financial end users (generally cash, certain government, government-sponsored enterprise
securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold); and sets forth haircuts
for certain collateral asset classes.
The Final Margin Rules require minimum
variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities
and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular
financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the swap to the Covered
Swap Entity, taking into account variation margin previously posted or collected. For non-cleared swaps and security-based swaps
between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral
that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party
custodian, and may, if permitted by contract, be rehypothecated.
The initial margin requirements of the
Final Margin Rules are being phased in over time, and the variation margin requirements of the Final Margin Rules are currently
in effect. The Fund is not a Covered Swap Entity under the Final Margin Rules, but it is a financial end-user. Accordingly, the
Fund is currently subject to the variation margin requirements of the Final Margin Rules. However, the Fund does not have
material swaps exposure and, accordingly, the Fund will not be subject to the initial margin requirements of the Final Margin Rules.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) required the CFTC and the SEC to adopt their own margin rules to apply to
a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap
participants that are not subject to the jurisdiction of one of the Agencies. On December 16, 2015 the CFTC finalized its margin
rules, which are substantially the same as the Final Margin Rules and have the same implementation timeline. The SEC adopted margin
rules for security-based swap dealers and major security-based swap participants on June 21, 2019. The SEC’s margin rules
are generally aligned with the Final Margin Rules and the CFTC’s margin rules, but they differ in a few key respects relating
to timing for compliance and the manner in which initial margin must be segregated. UNL does not currently engage in security-based
swap transactions and, therefore, the SEC’s margin rules are not expected to apply to UNL.
Mandatory Trading and Clearing of Swaps
CFTC regulations require that certain swap
transactions be executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing
organizations (“derivative clearing organizations” (“DCOs”)), if the CFTC mandates the central clearing
of a particular class of swap and such swap is “made available to trade” on a swap execution facility. Currently, swap
dealers, major swap participants, commodity pools, certain private funds and entities predominantly engaged in activities that
are financial in nature are required to execute on a swap execution facility, and clear, certain interest rate swaps and index-based
credit default swaps. As a result, if UNL enters into an interest rate or index-based credit default swap that is subject
to these requirements, such swap will be required to be executed on a swap execution facility and centrally cleared. Mandatory
clearing and “made available to trade” determinations with respect to additional types of swaps are expected in the
future, and, when finalized, could require UNL to electronically execute and centrally clear certain OTC instruments presently
entered into and settled on a bi-lateral basis. If a swap is required to be cleared, initial and variation margin requirements
are set by the relevant clearing organization, subject to certain regulatory requirements and guidelines. Additional margin may
be required and held by UNL's FCM.
Other Requirements for Swaps
In addition to the margin requirements
described above, swaps that are not required to be cleared and executed on a SEF but that are executed bilaterally are also subject
to various requirements pursuant to CFTC regulations, including, among other things, reporting and recordkeeping requirements
and, depending on the status of the counterparties, trading documentation requirements and dispute resolution requirements.
Derivatives Regulations in Non-U.S.
Jurisdictions
In addition to U.S. laws and regulations, UNL
may be subject to non-U.S. derivatives laws and regulations if it engages in futures and/or swap transactions with non-U.S. persons.
For example, UNL may be impacted by European laws and regulations to the extent that it engages in futures transactions on
European exchanges or derivatives transactions with European entities. Other jurisdictions impose requirements applicable to futures
and derivatives that are similar to those imposed by the U.S., including position limits, margin, clearing and trade execution
requirements.
Money
Market Funds
The
SEC adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended ("1940 Act") which
became effective in 2016, to reform money market funds (“MMFs”). While the rule applies only to MMFs, it may indirectly
affect institutional investors such as UNL. A portion of UNL's assets that are not used for margin or collateral in the Futures
Contracts currently are invested in government MMFs. UNL does not hold any non-government MMFs and does not anticipate investing
in any non-government MMFs. However, if UNL invests in other types of MMFs besides government MMFs in the future, UNL could be
negatively impacted by investing in an MMF that does not maintain a stable $1.00 NAV or that has the potential to impose redemption
fees and gates (temporary suspension of redemptions).
Although
such government money market funds seek to preserve the value of an investment at $1.00 per share, there is no guarantee that they
will be able to do so and UNL may lose money by investing in a government money market fund. An investment in a government
money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation, referred to herein as the FDIC, or
any other government agency. The share price of a government money market fund can fall below the $1.00 share price. UNL cannot
rely on or expect a government money market fund’s adviser or its affiliates to enter into support agreements or take other
actions to maintain the government money market fund’s $1.00 share price. The credit quality of a government money market
fund’s holdings can change rapidly in certain markets, and the default of a single holding could have an adverse impact on
the government money market fund’s share price. Due to fluctuations in interest rates, the market value of securities held
by a government money market fund may vary. A government money market fund’s share price can also be negatively affected
during periods of high redemption pressures and/or illiquid markets.
Price Movements
Natural
gas futures prices were volatile during the three months ended March 31, 2020. The average price of
the Benchmark Futures Contracts started the period at $2.330 per million British thermal shares (“MMBtu”). The
high of the period was on January 13, 2020 when the average price of the Benchmark Futures Contracts reached $2.337 per MMBtu.
The average low price of the period was on February 28, 2020 when the average price of the Benchmark Futures Contracts
dropped to $2.050 per MMBtu. The period ended with the average price of the Benchmark Futures Contracts at $2.223 per
MMBtu, a decrease of approximately (4.59)% over the period. UNL’s per share NAV began the period at $8.43
and ended the period at $7.63 on March 31, 2020, a decrease of approximately (9.49)% over the period. UNL’s
per share NAV reached its high for the period on January 10, 2020 at $8.46 and reached its low for the period
on February 28, 2020 at $7.12. The average Benchmark Futures Contracts prices listed above began with the February
2020 to January 2021 contracts and ended with the May 2020 to March 2021 contracts. The decrease of approximately (4.59)%
on the average price of the Benchmark Futures Contracts listed above is a hypothetical return only and could not actually
be achieved by an investor holding Futures Contracts. An investment in Futures Contracts would need to be rolled forward
during the time period described in order to simulate such a result. Furthermore, the change in the nominal price of these differing
Futures Contracts, measured from the start of the period to the end of the period, does not represent the actual benchmark
results that UNL seeks to track, which are more fully described below in the section titled “Tracking UNL's Benchmark.”
During the
three months ended March 31, 2020, the natural gas futures market experienced states of both contango and backwardation.
When the market is in a state of contango, the price near month natural gas futures contract is lower than the price of the
next month natural gas futures contract, or contracts further away from expiration. During periods of backwardation the price
of the near month natural gas futures contract is higher than the price of the next month natural gas futures contract, or
contracts further away from expiration. For a discussion of the impact of backwardation and contango on total returns, see “Term
Structure of Natural Gas Futures Prices and the Impact on Total Returns” below.
Valuation of Natural Gas Futures Contracts and the Computation of the Per Share NAV
The per share NAV of UNL’s shares
is calculated once each NYSE Arca trading day. The per share NAV for a particular trading day is released after 4:00 p.m. New
York time. Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. UNL’s administrator
uses the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts
held on the NYMEX, but calculates or determines the value of all other UNL investments, including cleared swaps or other Futures
Contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.
Results of Operations and the Natural
Gas Market
Results
of Operations. On November 18, 2009, UNL listed its shares on the NYSE Arca under the ticker symbol “UNL.”
On that day, UNL established its initial offering price at $50.00 per share and issued 200,000 shares to the initial Authorized
Participant in exchange for $10,000,000 in cash.
Since its initial offering of 30,000,000
shares, UNL has not registered any subsequent offerings of its shares. As of March 31, 2020, UNL had issued 5,600,000 shares, 400,000
of which were outstanding. As of March 31, 2020, there were 24,400,000 shares registered but not yet issued.
More shares may have been issued by UNL
than are outstanding due to the redemption of shares. Unlike funds that are registered under the 1940 Act, shares that have been
redeemed by UNL cannot be resold by UNL. As a result, UNL contemplates that additional offerings of its shares will be registered
with the SEC in the future in anticipation of additional issuances and redemptions.
As of March 31, 2020, UNL had the following
Authorized Participants: Citadel Securities LLC, Citigroup Global Markets Inc., Credit Suisse Securities USA LLC, JP Morgan Securities
Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Inc., Nomura Securities International Inc., RBC Capital
Markets LLC, SG Americas Securities LLC and Virtu Financial BD LLC.
For
the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019
|
|
For the three
months ended
March 31, 2020
|
|
|
For the three
months ended
March 31, 2019
|
|
Average daily total net assets
|
|
$
|
3,107,057
|
|
|
$
|
4,918,570
|
|
Dividend and interest income earned on Treasuries, cash and/or cash equivalents
|
|
$
|
12,051
|
|
|
$
|
27,538
|
|
Annualized yield based on average daily total net assets
|
|
|
1.56
|
%
|
|
|
2.28
|
%
|
Management fee
|
|
$
|
5,794
|
|
|
$
|
9,096
|
|
Total fees and other expenses excluding management fees
|
|
$
|
17,182
|
|
|
$
|
22,797
|
|
Total amount of the expense waiver
|
|
$
|
16,022
|
|
|
$
|
20,977
|
|
Expenses before allowance for the expense waiver
|
|
$
|
22,976
|
|
|
$
|
31,893
|
|
Expenses after allowance for the expense waiver
|
|
$
|
6,954
|
|
|
$
|
10,916
|
|
Total commissions accrued to brokers
|
|
$
|
131
|
|
|
$
|
372
|
|
Total commissions as annualized percentage of average total net assets
|
|
|
0.02
|
%
|
|
|
0.03
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
131
|
|
|
$
|
274
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
100.00
|
%
|
|
|
73.66
|
%
|
Commissions accrued as a result of creation and redemption activity
|
|
|
—
|
|
|
$
|
98
|
|
Percentage of commissions accrued as a result of creation and redemption activity
|
|
|
—
|
%
|
|
|
26.34
|
%
|
Portfolio
Expenses. UNL’s expenses consist of investment management fees, brokerage fees and commissions, certain offering
costs, licensing fees, registration fees, the fees and expenses of the independent directors of USCF and expenses relating to tax
accounting and reporting requirements. The management fee that UNL pays to USCF is calculated as a percentage of the total
net assets of UNL. The fee is accrued daily and paid monthly.
Average interest rates earned on short-term
investments held by UNL, including cash, cash equivalents and Treasuries, were lower during the three months ended March 31,
2020, compared to the three months ended March 31, 2019. As a result, the amount of income earned by UNL as a percentage
of average daily total net assets was lower during the three months ended March 31, 2020, compared to the three
months ended March 31, 2019.
The decrease in total fees and other
expenses excluding management fees for the three months ended March 31, 2020, compared to the three months ended March
31, 2019 was due primarily to UNL’s smaller size as measured by total net assets.
The decrease in total commissions accrued
to brokers for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily
to a lower number of Natural Gas Futures Contracts being held and traded.
Tracking UNL's Benchmark
USCF seeks to manage UNL's portfolio such
that changes in its average daily per share NAV, on a percentage basis, closely track the daily changes in the average price
of the Benchmark Futures Contracts, also on a percentage basis. Specifically, USCF seeks to manage the portfolio such that
over any rolling period of 30-valuation days, the average daily change in UNL's per share NAV is within a range of 90% to
110% (0.9 to 1.1) of the average daily change in the prices of the Benchmark Futures Contracts. As an example, if the average
daily movement of the average of the prices of the Benchmark Futures Contracts for a particular 30-valuation day time
period was 0.50% per day, USCF would attempt to manage the portfolio such that the average daily movement of the per share NAV
during that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of the benchmark’s results). UNL's portfolio
management goals do not include trying to make the nominal price of UNL's per share NAV equal to the average of the nominal
prices of the current Benchmark Futures Contracts or the spot price for natural gas. USCF believes that it is not practical
to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Natural Gas-Related
Investments.
For the 30-valuation days ended March 31,
2020, the simple average daily change in the average of the prices of the Benchmark Futures Contracts was (0.060)%, while
the simple average daily change in the per share NAV of UNL over the same time period was (0.054)%. The average daily difference
was 0.006% (or 0.6 basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the average
of the price the Benchmark Futures Contracts, the average error in daily tracking by the per share NAV was (4.449)%, meaning that
over this time period UNL’s tracking error was within the plus or minus 10% range established as its benchmark tracking
goal.
Since the commencement of the offering
of UNL’s shares to the public on November 18, 2009 to March 31, 2020, the simple average daily change in the average
price of the Benchmark Futures Contracts was (0.057)%, while the simple average daily change in the per share NAV of UNL
over the same time period was (0.058)%. The average daily difference was (0.001)% (or (0.1) basis points, where 1 basis point
equals 1/100 of 1%). As a percentage of the daily movement of the Benchmark Futures Contracts, the average error in daily tracking
by the per share NAV was 0.022%, meaning that over this time period UNL’s tracking error was within the plus or minus
10% range established as its benchmark tracking goal. The following two graphs demonstrate the correlation between the changes
in UNL’s NAV and the changes in the Benchmark Futures Contracts. The first graph exhibits the daily changes in the last 30
valuation days ended March 31, 2020. The second graph measures monthly changes since March 31, 2015 through March 31, 2020.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An alternative tracking measurement of
the return performance of UNL versus the return of its Benchmark Futures Contracts can be calculated by comparing the
actual return of UNL, measured by changes in its per share NAV, versus the expected changes in its per share NAV under the assumption
that UNL’s returns had been exactly the same as the daily changes in its Benchmark Futures Contracts.
For the three months ended March 31,
2020, the actual total return of UNL as measured by changes in its per share NAV was (9.49)%. This is based on an initial
per share NAV of $8.43 as of December 31, 2019 and an ending per share NAV as of March 31, 2020 of $7.63. During this
time period, UNL made no distributions to its shareholders. However, if UNL’s daily changes in its per share NAV had
instead exactly tracked the changes in the daily total return of the Benchmark Futures Contracts, UNL would have had an estimated
per share NAV of $7.60 as of March 31, 2020, for a total return over the relevant time period of (9.85)%. The difference between
the actual per share NAV total return of UNL of (9.49)% and the expected total return based on the Benchmark Futures Contracts
of (9.85)% was an error over the time period of 0.36%, which is to say that UNL’s actual total return outperformed its benchmark by
that percentage. UNL incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling
of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive
or negative execution, tends to cause daily changes in the per share NAV of UNL to track slightly lower or higher than
daily changes in the price of the Benchmark Futures Contracts.
By comparison, for the three months
ended March 31, 2019, the actual total return of UNL as measured by changes in its per share NAV was 2.34%. This was based
on an initial per share NAV of $10.26 as of December 31, 2018 and an ending per share NAV as of March 31, 2019 of $10.50.
During this time period, UNL made no distributions to its shareholders. However, if UNL’s daily changes in its per share
NAV had instead exactly tracked the changes in the daily total return of the Benchmark Futures Contracts, UNL would have had
an estimated per share NAV of $10.47 as of March 31, 2019, for a total return over the relevant time period of 2.05%. The difference
between the actual per share NAV total return of UNL of 2.34% and the expected total return based on the Benchmark Futures Contracts
of 2.05% was an error over the time period of 0.29%, which is to say that UNL’s actual total return outperformed its benchmark
by that percentage. UNL incurred expenses primarily composed of the management fee, brokerage commissions for the buying and
selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net
of positive or negative execution, tended to cause daily changes in the per share NAV of UNL to track slightly lower or higher than
daily changes in the price of the Benchmark Futures Contracts.
There are currently three factors
that have impacted or are most likely to impact UNL's ability to accurately track Benchmark Futures Contracts.
First, UNL may buy or sell its
holdings in the then current Benchmark Futures Contracts at a price other than the closing settlement price of that contract
on the day during which UNL executes the trade. In that case, UNL may pay a price that is higher, or lower, than that
of the Benchmark Futures Contracts, which could cause the changes in the daily per share NAV of UNL to either be too high
or too low relative to the daily changes in the average price of the Benchmark Futures Contracts. During the three months
ended March 31, 2020, USCF attempted to minimize the effect of these transactions by seeking to execute its purchase or sale of
the Benchmark Futures Contracts at, or as close as possible to, the end of the day settlement price. However, it may not always
be possible for UNL to obtain the closing settlement price and there is no assurance that failure to obtain the closing settlement
price in the future will not adversely impact UNL's attempt to track the Benchmark Futures Contracts.
Second, UNL incurs expenses primarily
composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The
impact of these expenses tends to cause daily changes in the per share NAV of UNL to track slightly lower than daily changes
in the price of the Benchmark Futures Contracts. At the same time, UNL earns dividend and interest income on its cash, cash
equivalents and Treasuries. UNL is not required to distribute any portion of its income to its shareholders and did not make
any distributions to shareholders during the three months ended March 31, 2020. Interest payments, and any other income, were
retained within the portfolio and added to UNL's NAV. When this income exceeds the level of UNL's expenses for its management
fee, brokerage commissions and other expenses (including ongoing registration fees, licensing fees and the fees and expenses of
the independent directors of USCF), UNL will realize a net yield that will tend to cause daily changes in the per share NAV
of UNL to track slightly higher than daily changes in the average of the prices of the Benchmark Futures Contracts. If short-term
interest rates rise above the current levels, the level of deviation created by the yield would increase. Conversely, if short-term
interest rates were to decline, the amount of error created by the yield would decrease. When short-term yields drop to a level
lower than the combined expenses of the management fee and the brokerage commissions, then the tracking error becomes a negative
number and would tend to cause the daily returns of the per share NAV to underperform the daily returns of the Benchmark Futures
Contracts. USCF anticipates that interest rates may continue to stagnate over the near future from historical lows. It
is anticipated that fees and expenses paid by UNL may be higher than interest earned by UNL. As such, USCF anticipates
that UNL could possibly underperform its benchmark so long as interest earned is less than the fees and expenses
paid by UNL.
Third, UNL may hold Other Natural
Gas-Related Investments in its portfolio that may fail to closely track the Benchmark Futures Contracts' total return movements.
In that case, the error in tracking the Benchmark Futures Contracts could result in daily changes in the per share NAV of UNL
that are either too high, or too low, relative to the daily changes in the average price of the Benchmark Futures Contracts. During
the three months ended March 31, 2020, UNL did not hold any Other Natural Gas-Related Investments. If UNL increases
in size, and due to its obligations to comply with regulatory limits, UNL may invest in Other Natural Gas-Related Investments which
may have the effect of increasing transaction related expenses and may result in increased tracking error.
Term
Structure of Natural Gas Futures Prices and the Impact on Total Returns. Several factors determine the total return
from investing in futures contracts. One factor arises from “rolling” futures contracts that will expire at the end
of the current month (the “near” or “front” month contract) forward each month prior to expiration. For
a strategy that entails holding the near month contract, the price relationship between that futures contract and the next month
futures contract will impact returns. For example, if the price of the near month futures contract is higher than the next futures
month contract (a situation referred to as “backwardation”), then absent any other change, the price of a next month
futures contract tends to rise in value as it becomes the near month futures contract and approaches expiration. Conversely, if
the price of a near month futures contract is lower than the next month futures contract (a situation referred to as “contango”),
then absent any other change, the price of a next month futures contract tends to decline in value as it becomes the near month
futures contract and approaches expiration.
As
an example, assume that the price of natural gas for immediate delivery, is $3 per MMBtu, and the value of a position
in the near month futures contract is also $3. Over time, the price of natural gas will fluctuate based on a number of market
factors, including demand for natural gas relative to supply. The value of the near month futures contract will likewise fluctuate
in reaction to a number of market factors. If an investor seeks to maintain a position in a near month futures contract and not
take delivery of physical MMBtu of natural gas, the investor must sell the current near month futures contract as it approaches
expiration and invest in the next month futures contract. In order to continue holding a position in the current near month futures
contract, this “roll” forward of the futures contract must be executed every month.
Contango and backwardation are natural
market forces that have impacted the total return on an investment in UNL’s shares during the past year relative to a hypothetical
direct investment in natural gas. In the future, it is likely that the relationship between the market price of UNL’s shares
and changes in the spot prices of natural gas will continue to be impacted by contango and backwardation. It is important
to note that this comparison ignores the potential costs associated with physically owning and storing natural gas, which could
be substantial.
If
the futures market is in backwardation, e.g., when the price of the near month futures contract is higher than the price of
the next month futures contract, the investor would buy a next month futures contract for a lower price than the current near month
futures contract. Assuming the price of the next month futures contract was $2.94 per MMBtu, or 2% cheaper than the $3 near
month futures contract, then, hypothetically, and assuming no other changes (e.g., to either prevailing natural gas prices
or the price relationship between the spot price, the near month contract and the next month contract, and, ignoring the impact
of commission costs and the income earned on cash and/or cash equivalents), the value of the $2.94 next month futures contract
would rise to $3 as it approaches expiration. In this example, the value of an investment in the next month futures contract would
tend to outperform the spot price of natural gas. As a result, it would be possible for the new near month futures contract to
rise 12% while the spot price of natural gas may have risen a lower amount, e.g., only 10%. Similarly, the spot price of natural
gas could have fallen 10% while the value of an investment in the futures contract might have fallen another amount, e.g., only
8%. Over time, if backwardation remained constant, this difference between the spot price and the futures contract price would
continue to increase.
If
the futures market is in contango, an investor would be buying a next month futures contract for a higher price than
the current near month futures contract. Again, assuming the near month futures contract is $3 per MMBtu, the price
of the next month futures contract might be $3.06 per MMBtu, or 2% more expensive than the front month futures contract. Hypothetically,
and assuming no other changes, the value of the $3.06 next month futures contract would fall to $3 as it approaches expiration.
In this example, the value of an investment in the second month would tend to underperform the spot price of natural gas. As a
result, it would be possible for the new near month futures contract to rise only 10% while the spot price of natural gas may
have risen a higher amount, e.g., 12%. Similarly, the spot price of natural gas could have fallen 10% while the value of an
investment in the second month futures contract might have fallen another amount, e.g., 12%. Over time, if contango remained constant,
this difference between the spot price and the futures contract price would continue to increase.
The chart below compares the daily price
of the near month natural gas futures contract to the price of 13th month natural gas futures contract (i.e.,
a contract one year forward) over the last 10 years. When the price of the near month futures contract is higher than the price
of the 13th month futures contract, the market would be described as being in backwardation. When the price of the near
month futures contract is lower than the 13th month futures contract, the market would be described as being in contango.
Although the price of the near month futures contract and the price of the 13th month futures contract tend to
move together, it can be seen that at times the near month futures contract prices are higher than the 13th month futures contract
prices (backwardation) and, at other times, the near month futures contract prices are lower than the 13th month futures
contract prices (contango).
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An alternative way to view the same data
is to subtract the dollar price of the 13th month natural gas futures contract from the dollar price of the near
month natural gas futures contract, as shown in the chart below. When the difference is positive, the market is in backwardation.
When the difference is negative, the market is in contango. The natural gas market spent time in both backwardation and contango
during the last ten years. The chart below shows the results from subtracting the average dollar price of the near 12-month contracts
from the near month price for the 10-year period between March 31, 2010 and March 31, 2020. Investors will note that the natural
gas market spent time in both backwardation and contango.
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An investment in a portfolio that owned
only the near month natural gas futures contract would likely produce a different result than an investment in a portfolio that
owned an equal number of each of the near 12 months’ of natural gas futures contracts. Generally speaking, when the natural
gas futures market is in backwardation, a portfolio of only the near month natural gas futures contract may tend to have a higher
total return than a portfolio of 12 months’ of the natural gas futures contract. Conversely, if the natural gas futures market
was in contango, the portfolio containing only 12 months’ of natural gas futures contracts may tend to outperform the portfolio
holding only the near month natural gas futures contract.
Historically,
the natural gas futures markets have experienced periods of contango and backwardation. Because natural gas demand is
seasonal, it is possible for the price of natural gas futures contracts for delivery within one or two months to rapidly move
from backwardation into contango and back again within the relatively short period of time of less than one year. However, at
the end of November 2014, global natural gas inventories grew rapidly after two years of mild winters and the market was
primarily in contango, with occasional periods of backwardation, particularly in the severe winter months of 2018 and 2019,
through March 31, 2020.
Periods of contango or backwardation do
not materially impact UNL’s investment objective of having the daily percentage changes in its per share NAV track the daily
percentage changes in the average of the prices of the Benchmark Futures Contracts since the impact of backwardation and contango
tend to equally impact the daily percentage changes in price of both UNL’s shares and the Benchmark Futures Contracts. It
is impossible to predict with any degree of certainty whether backwardation or contango will occur in the future. It is likely
that both conditions will occur during different periods.
Natural
Gas Market. During the three months ended March 31, 2020, natural gas prices in the United States declined by
25.08%. Prices peaked in early January at $2.202 before falling to $1.602 by late March. Natural gas prices ended the
quarter at $1.640. Prices have averaged about $2.77 over the last three years. During the first quarter of 2020, storage
levels were persistently above and rising relative to prior year average and five-year average levels. By quarter-end, the
amount of natural gas in storage was 1,986 billion cubic feet, 77% above 2019 levels and 17% above the five year average.
While both domestic demand and U.S. exports of natural gas have increased, ample supplies have continued to constrain natural
gas prices.
Natural
Gas Price Movements in Comparison to Other Energy Commodities and Investment Categories. USCF believes that
investors frequently measure the degree to which prices or total returns of one investment or asset class move up or down in value
in concert with another investment or asset class. Statistically, such a measure is usually done by measuring the correlation
of the price movements of the two different investments or asset classes over some period of time. The correlation is scaled between
1 and -1, where 1 indicates that the two investment options move up or down in price or value together, known as “positive
correlation,” and -1 indicates that they move in completely opposite directions, known as “negative correlation.”
A correlation of 0 would mean that the movements of the two are neither positively nor negatively correlated, known as “non-correlation.”
That is, the investment options sometimes move up and down together and other times move in opposite directions.
For
the ten-year time period between March 31, 2010 and March 31, 2020, the table below compares the monthly movements of natural gas
prices versus the monthly movements of the prices of several other energy commodities, such as crude oil, diesel-heating oil, and
unleaded gasoline, as well as several major non-commodity investment asset classes, such as large cap U.S. equities, U.S. government
bonds and global equities. It can be seen that over this particular time period, the movement of natural gas on a monthly basis
was neither strongly correlated nor inversely correlated with the movements of large cap U.S. equities, U.S. Government
bonds, global equities, crude oil, diesel-heating oil, or unleaded gasoline.
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gov’t.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
|
(EFFAS
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cap U.S.
|
|
|
U.S.
|
|
|
Equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
Gov’t.
|
|
|
(FTSE
|
|
|
|
|
|
Diesel-
|
|
|
|
|
|
|
|
Correlation Matrix
|
|
(S&P
|
|
|
Bond
|
|
|
World
|
|
|
Crude
|
|
|
Heating
|
|
|
Unleaded
|
|
|
Natural
|
|
March 31, 2010 – March 31, 2020*
|
|
500)
|
|
|
Index)
|
|
|
Index)
|
|
|
Oil
|
|
|
Oil
|
|
|
Gasoline
|
|
|
Gas
|
|
Large Cap U.S. Equities (S&P 500)
|
|
|
1.000
|
|
|
|
(0.444
|
)
|
|
|
0.961
|
|
|
|
0.501
|
|
|
|
0.413
|
|
|
|
0.450
|
|
|
|
0.144
|
|
U.S. Gov’t. Bonds (EFFAS U.S. Gov’t. Bond Index)
|
|
|
|
|
|
|
1.000
|
|
|
|
(0.412
|
)
|
|
|
(0.422
|
)
|
|
|
(0.366
|
)
|
|
|
(0.300
|
)
|
|
|
(0.064
|
)
|
Global Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.533
|
|
|
|
0.448
|
|
|
|
0.475
|
|
|
|
0.140
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.785
|
|
|
|
0.651
|
|
|
|
0.100
|
|
Diesel-Heating Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.669
|
|
|
|
0.136
|
|
Unleaded Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.137
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
Source: Bloomberg, NYMEX
The table below covers a more recent,
but much shorter, range of dates than the above table. Over the one year period ended March 31, 2020, the movement of natural
gas was neither strongly correlated nor inversely correlated with large cap U.S. equities, U.S. government bonds, global equities,
crude oil and unleaded gasoline. The movement of natural gas was somewhat correlated with diesel-heating oil.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gov’t.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
|
(EFFAS
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cap U.S.
|
|
|
U.S.
|
|
|
Equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
Gov’t.
|
|
|
(FTSE
|
|
|
|
|
|
Diesel-
|
|
|
|
|
|
|
|
Correlation Matrix
|
|
(S&P
|
|
|
Bond
|
|
|
World
|
|
|
Crude
|
|
|
Heating
|
|
|
Unleaded
|
|
|
Natural
|
|
12 Months ended March 31, 2020*
|
|
500)
|
|
|
Index)
|
|
|
Index)
|
|
|
Oil
|
|
|
Oil
|
|
|
Gasoline
|
|
|
Gas
|
|
Large Cap U.S. Equities (S&P 500)
|
|
|
1.000
|
|
|
|
(0.627
|
)
|
|
|
0.989
|
|
|
|
0.839
|
|
|
|
0.663
|
|
|
|
0.666
|
|
|
|
0.094
|
|
U.S. Gov’t. Bonds (EFFAS U.S. Gov’t. Bond Index)
|
|
|
|
|
|
|
1.000
|
|
|
|
(0.669
|
)
|
|
|
(0.652
|
)
|
|
|
(0.778
|
)
|
|
|
(0.516
|
)
|
|
|
(0.225
|
)
|
Global Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.847
|
|
|
|
0.701
|
|
|
|
0.667
|
|
|
|
0.182
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.899
|
|
|
|
0.843
|
|
|
|
0.226
|
|
Diesel-Heating Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.716
|
|
|
|
0.356
|
|
Unleaded Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.123
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
Source: Bloomberg, NYMEX
Investors are cautioned that the historical
price relationships between natural gas and various other energy commodities, as well as other investment asset classes, as measured
by correlation may not be reliable predictors of future price movements and correlation results. The results pictured above would
have been different if a different range of dates had been selected. USCF believes that natural gas has historically not demonstrated
a strong correlation with equities or bonds over long periods of time. However, USCF also believes that in the future it is possible
that natural gas could have long term correlation results that indicate prices of natural gas more closely track the movements
of equities or bonds. In addition, USCF believes that, when measured over time periods shorter than ten years, there will always
be some periods where the correlation of natural gas to equities and bonds will be either more strongly positively correlated or
more strongly negatively correlated than the long term historical results suggest.
The correlations between natural gas, crude
oil, diesel-heating oil and gasoline are relevant because USCF endeavors to invest UNL’s assets in Natural Gas Futures Contracts
and Other Natural Gas-Related Investments so that daily changes in percentage terms in UNL’s per share NAV correlate as closely
as possible with daily changes in percentage terms in the average of the prices of the Benchmark Futures Contracts. If certain
other fuel-based commodity futures contracts do not closely correlate with the Natural Gas Futures Contracts, then their use could
lead to greater tracking error. As noted above, USCF also believes that the changes in percentage terms in the average of the prices
of the Benchmark Futures Contracts will closely correlate with changes in percentage terms in the spot price of natural gas.
Critical Accounting Policies
Preparation of the condensed financial
statements and related disclosures in compliance with accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well as the use of estimates. UNL's application
of these policies involves judgments and actual results may differ from the estimates used.
USCF has evaluated the nature and types
of estimates that it makes in preparing UNL's condensed financial statements and related disclosures and has determined that
the valuation of its investments, which are not traded on a United States or internationally recognized futures exchange (such
as forward contracts and OTC swaps) involves a critical accounting policy. The values which are used by UNL for its Futures
Contracts are provided by its commodity broker who uses market prices when available, while OTC swaps are valued based on the present
value of estimated future cash flows that would be received from or paid to a third party in settlement of these derivative contracts
prior to their delivery date and valued on a daily basis. In addition, UNL estimates interest and dividend income on a daily
basis using prevailing rates earned on its cash and cash equivalents. These estimates are adjusted to the actual amount received
on a monthly basis and the difference, if any, is not considered material.
Liquidity and Capital Resources
UNL has not made, and does not anticipate
making, use of borrowings or other lines of credit to meet its obligations. UNL has met, and it is anticipated that UNL
will continue to meet, its liquidity needs in the normal course of business from the proceeds of the sale of its investments, or
from the Treasuries, cash and/or cash equivalents that it intends to hold at all times. UNL's liquidity needs include: redeeming
shares, providing margin deposits for its existing Futures Contracts or the purchase of additional Futures Contracts
and posting collateral for its OTC swaps, if applicable, and payment of its expenses, summarized below under “Contractual
Obligations.”
UNL currently generates cash
primarily from: (i) the sale of baskets consisting of 50,000 shares (“Creation Baskets”) and (ii) income earned
on Treasuries, cash and/or cash equivalents. UNL has allocated substantially all of its net assets to trading in Natural
Gas Interests. UNL invests in Natural Gas Interests to the fullest extent possible without being leveraged or unable
to satisfy its current or potential margin or collateral obligations with respect to its investments in Futures Contracts
and Other Natural Gas-Related Investments. A significant portion of UNL's NAV is held in cash and cash equivalents that are
used as margin and as collateral for its trading in Natural Gas Interests. The balance of the assets is held in UNL's
account at its custodian bank and in Treasuries at the FCM. Income received from UNL's investments in money market funds
and Treasuries is paid to UNL. During the three months ended March 31, 2020, UNL's expenses, pre expense waiver, exceeded
the income UNL earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets. During
the three months ended March 31, 2020, UNL used other assets to pay expenses, post expense waiver. To the extent expenses exceed
income, UNL's NAV will be negatively impacted.
UNL's investments in Natural
Gas Interests may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons.
For example, most commodity exchanges limit the fluctuations in futures contracts prices during a single day by regulations referred
to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price
of a futures contract has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither
be taken nor liquidated unless the traders are willing to effect trades at or within the specified daily limit. Such market conditions
could prevent UNL from promptly liquidating its positions in Futures Contracts. During the three months ended March 31, 2020, UNL
did not purchase or liquidate any of its positions while daily limits were in effect; however, UNL cannot predict whether
such an event may occur in the future.
Since the initial offering of shares, UNL has
been responsible for expenses relating to: (i) management fees, (ii) brokerage fees and commissions, (iii) licensing fees for the
use of intellectual property, (iv) ongoing registration expenses in connection with offers and sales of its shares subsequent to
the initial offering, (v) other expenses, including tax reporting costs, (vi) fees and expenses of the independent directors of
USCF and (vii) other extraordinary expenses not in the ordinary course of business, while USCF has been responsible for expenses
relating to the fees of UNL's Marketing Agent, Administrator and Custodian and registration expenses relating to the initial offering
of shares. If USCF and UNL are unsuccessful in raising sufficient funds to cover these respective expenses or in locating any other
source of funding, UNL will terminate and investors may lose all or part of their investment.
Market Risk
Trading in Futures Contracts and Other
Natural Gas-Related Investments, such as forwards, involves UNL entering into contractual commitments to purchase or sell natural
gas at a specified date in the future. The aggregate market value of the contracts will significantly exceed UNL's future
cash requirements since UNL intends to close out its open positions prior to settlement. As a result, UNL is generally
only subject to the risk of loss arising from the change in value of the contracts. UNL considers the “fair value”
of its derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with UNL's commitments
to purchase natural gas is limited to the aggregate market value of the contracts held. However, should UNL enter into a contractual
commitment to sell natural gas, it would be required to make delivery of the natural gas at the contract price, repurchase the
contract at prevailing prices or settle in cash. Since there are no limits on the future price of natural gas, the market risk
to UNL could be unlimited.
UNL's exposure to market risk depends
on a number of factors, including the markets for natural gas, the volatility of interest rates and foreign exchange rates, the
liquidity of the Futures Contracts and Other Natural Gas-Related Investments markets and the relationships among the contracts
held by UNL. Drastic market occurrences could ultimately lead to the loss of all or substantially all of an investor’s capital.
Credit Risk
When UNL enters into Futures
Contracts and Other Natural Gas-Related Investments, it is exposed to the credit risk that the counterparty will not be able to
meet its obligations. The counterparty for the Futures Contracts traded on the NYMEX and on most other futures exchanges is
the clearinghouse associated with the particular exchange. In general, in addition to margin required to be posted by the clearinghouse
in connection with cleared trades, clearinghouses are backed by their members who may be required to share in the financial burden
resulting from the nonperformance of one of their members and, therefore, this additional member support should significantly reduce
credit risk. UNL is not currently a member of any clearinghouse. Some foreign exchanges are not backed by their clearinghouse
members but may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty,
clearinghouse, or their members or their financial backers will satisfy their obligations to UNL in such circumstances.
USCF attempts to manage the credit risk
of UNL by following various trading limitations and policies. In particular, UNL generally posts margin and/or holds
liquid assets that are approximately equal to the market value of its obligations to counterparties under the Futures Contracts
and Other Natural Gas-Related Investments it holds. USCF has implemented procedures that include, but are not limited to,
executing and clearing trades only with creditworthy parties and/or requiring the posting of collateral or margin by such parties
for the benefit of UNL to limit its credit exposure. An FCM, when acting on behalf of UNL in accepting orders to purchase
or sell Futures Contracts on United States exchanges, is required by CFTC regulations to separately account for and segregate
as belonging to UNL, all assets of UNL relating to domestic Futures Contracts trading. These FCMs are not allowed to
commingle UNL's assets with their other assets. In addition, the CFTC requires FCMs to hold in a secure account UNL's
assets related to foreign Futures Contracts trading.
In the future, UNL may purchase OTC
swaps, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this quarterly
report on Form 10-Q for a discussion of OTC swaps.
As of March 31, 2020, UNL held cash
deposits and investments in Treasuries and money market funds in the amount of $3,398,533 with the custodian and FCM. Some or all
of these amounts held by a custodian or an FCM, as applicable, may be subject to loss should UNL's custodian or FCM, as applicable,
cease operations.
Off Balance Sheet Financing
As of March 31, 2020, UNL had no loan
guarantee, credit support or other off-balance sheet arrangements of any kind other than agreements entered into in the normal
course of business, which may include indemnification provisions relating to certain risks that service providers undertake in
performing services which are in the best interests of UNL. While UNL's exposure under these indemnification provisions cannot
be estimated, they are not expected to have a material impact on UNL's financial position.
European Sovereign Debt
UNL had no direct exposure to European
sovereign debt as of March 31, 2020 and has no direct exposure to European sovereign debt as of the filing of this quarterly
report on Form 10-Q.
Redemption Basket Obligation
In order to meet its investment objective
and pay its contractual obligations described below, UNL requires liquidity to redeem shares, which redemptions must be in
blocks of 50,000 shares called “Redemption Baskets.” UNL has to date satisfied this obligation by paying
from the cash or cash equivalents it holds or through the sale of its Treasuries in an amount proportionate to the number of shares
being redeemed.
Contractual Obligations
UNL's primary contractual obligations
are with USCF. In return for its services, USCF is entitled to a management fee calculated daily and paid monthly as a fixed percentage
of UNL's NAV, currently 0.75% of NAV on its average daily total net assets.
USCF agreed to pay the start-up costs associated
with the formation of UNL, primarily its legal, accounting and other costs in connection with USCF’s registration with the
CFTC as a CPO and the registration and listing of UNL and its shares with the SEC, FINRA and NYSE Arca (formerly, AMEX), respectively.
However, since UNL’s initial offering of shares, offering costs incurred in connection with registering and listing additional
shares of UNL have been directly borne on an ongoing basis by UNL, and not by USCF.
USCF pays the fees of the Marketing Agent
and certain of the fees of BBH&Co. through March 31, 2020, as well as BBH&Co.’s fees for performing administrative
services, including those in connection with the preparation of UNL's condensed financial statements and its SEC, NFA and CFTC
reports through May 31, 2020. Commencing April 1, 2020, USCF also pays BNY Mellon for fees for custody and transfer agency services
as well as BNY Mellon’s fees for performing administrative services, including those in connection with the preparation of
UNL's condensed financial statements and its SEC, NFA and CFTC reports. USCF and UNL have also entered into a licensing agreement
with the NYMEX pursuant to which UNL and the Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee to the NYMEX.
UNL also pays the fees and expenses associated with its tax accounting and reporting requirements. USCF has voluntarily agreed
to pay certain expenses typically borne by UNL to the extent that such expenses exceeded 0.15% (15 basis points) of UNL’s
NAV, on an annualized basis. USCF has no obligation to continue such payments into subsequent periods. This voluntary expense waiver
is in addition to those amounts USCF is contractually obligated to pay as described in Note 4 to the Notes to Condensed
Financial Statements (Unaudited) in Item 1 of this quarterly report on Form 10-Q.
In addition to USCF’s management fee, UNL pays its brokerage fees (including fees to an FCM), OTC dealer spreads, any licensing
fees for the use of intellectual property, and, subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of shares, as well as legal, printing, accounting and
other expenses associated therewith, and extraordinary expenses. The latter are expenses not incurred in the ordinary course of
UNL’s business, including expenses relating to the indemnification of any person against liabilities and obligations to the
extent permitted by law and under the LP Agreement, the bringing or defending of actions in law or in equity or otherwise conducting
litigation and incurring legal expenses and the settlement of claims and litigation. Commission payments to an FCM are on a contract-by-contract,
or round turn, basis. UNL also pays a portion of the fees and expenses of the independent directors of USCF. See Note 3 to
the Notes to Condensed Financial Statements (Unaudited) in Item 1 of this quarterly report on Form 10-Q.
The parties cannot anticipate the amount
of payments that will be required under these arrangements for future periods, as UNL's per share NAVs and trading levels
to meet its investment objective will not be known until a future date. These agreements are effective for a specific term agreed
upon by the parties with an option to renew, or, in some cases, are in effect for the duration of UNL's existence. Either
party may terminate these agreements earlier for certain reasons described in the agreements.
As of March 31, 2020, UNL's portfolio
consisted of 137 Natural Gas Futures NG Contracts traded on the NYMEX. As of March 31, 2020, UNL did not hold any Futures Contracts
traded on the ICE Futures. For a list of UNL's current holdings, please see UNL's website at www.uscfinvestments.com.