Item 1. Business
What is UNL?
The United States 12 Month Natural Gas
Fund, LP (“UNL”) is a Delaware limited partnership organized on June 27, 2007. UNL maintains its main business
office at 1850 Mt. Diablo Boulevard, Suite 640, Walnut Creek, California 94596. UNL is a commodity pool that issues limited
partnership interests (“shares”) traded on the NYSE Arca, Inc. (the “NYSE Arca”). It operates pursuant
to the terms of the Third Amended and Restated Agreement of Limited Partnership dated as of December 15, 2017 (as amended
from time to time, the “LP Agreement”), which grants full management control to its general partner, United States
Commodity Funds LLC (“USCF”).
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 price of natural gas delivered at the Henry Hub, Louisiana, as measured by the daily changes in the
average of the prices of specified short-term futures contracts on natural gas called the “Benchmark Futures Contracts”,
plus interest earned on UNL’s collateral holdings, less UNL’s expenses.
UNL seeks to achieve its investment objective
by investing primarily in futures contracts for natural gas that are traded on the NYMEX, ICE Futures Europe and ICE Futures
U.S. (together, “ICE Futures”), or other U.S. and foreign exchanges (collectively, “Futures Contracts”)
and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, other natural gas investments
such as cash-settled options on Futures Contracts, forward contracts for natural gas, cleared swap contracts, and non-exchange
traded (“over-the-counter” or “OTC”) transactions that are based on the price of natural gas, crude oil
and other petroleum-based fuels, as well as futures contracts for crude oil, heating oil, gasoline, and other petroleum-based fuels,
Futures Contracts 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,
Futures Contracts and Other Natural Gas-Related Investments collectively are referred to as “Natural Gas Interests”
in this annual report on Form 10-K.
In addition, 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 the daily changes in average
of the prices of the Benchmark Futures Contracts have historically closely tracked the daily changes in the spot price of natural gas.
USCF believes that the net effect of these two expected relationships will be that the daily changes in the price of UNL's shares on the
NYSE Arca on a percentage basis will continue to closely track the daily changes in the spot price of natural gas on a percentage basis,
less UNL's expenses.
Specifically, 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.
Investors should be aware that 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. USCF 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). This is because natural market forces
called contango and backwardation 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 and, 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 so impacted by contango and backwardation.
(It is important to note that the disclosure above ignores the potential costs associated with physically owning and storing natural
gas, which could be substantial.)
UNL’s shares began trading on November 18,
2009.
Who is USCF?
USCF is a single member limited liability
company that was formed in the state of Delaware on May 10, 2005. USCF maintains its main business office at 1850 Mt. Diablo
Boulevard, Suite 640, Walnut Creek, California 94596. USCF is a wholly-owned subsidiary of Wainwright Holdings, Inc.,
a Delaware corporation (“Wainwright”), which is an intermediate holding company that owns USCF and another advisor
of exchange traded funds. Wainwright is a wholly owned subsidiary of Concierge Technologies, Inc. (publicly traded under the
ticker CNCG) (“Concierge”), a publicly traded holding company that owns various financial and non-financial businesses.
Mr. Nicholas Gerber (discussed below), along with certain family members and certain other shareholders, owns the majority
of the shares in Concierge. Wainwright is a holding company that currently holds both USCF, as well as USCF Advisers LLC, an investment
adviser registered under the Investment Advisers Act of 1940, as amended (“USCF Advisers”). USCF Advisers serves as
the investment adviser for the USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (“SDCI”), a series of the
USCF ETF Trust. USCF Advisers was also the investment adviser for the USCF Commodity Strategy Fund (the “Mutual Fund”),
a series of the USCF Mutual Funds Trust, until March 2019, when the Mutual Fund liquidated all of its assets and distributed
cash pro rata to all remaining shareholders. It was also the investment adviser for two series of the USCF ETF Trust that liquidated
all of their assets and distributed cash pro rata to all remaining shareholders: the USCF SummerHaven SHPEI Index Fund (“BUY”),
until October 2020, and the USCF SummerHaven SHPEN Index Fund (“BUYN”), until May 2020. USCF ETF Trust and
USCF Mutual Funds Trust are registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Board
of Trustees for the USCF ETF Trust and USCF Mutual Funds Trust consist of different independent trustees than those independent
directors who serve on the Board of Directors of USCF. USCF is a member of the National Futures Association (the “NFA”)
and registered as a commodity pool operator (“CPO”) with the Commodity Futures Trading Commission (the “CFTC”)
on December 1, 2005 and as a swaps firm on August 8, 2013.
USCF serves as the general partner of UNL.
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 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”).
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. A registration statement that had been previously
filed for XBET was withdrawn on June 25, 2020.
USO, UNG, UGA, UNL, USL, BNO, USCI and CPER are referred to
collectively herein as the “Related Public Funds.”
The Related Public Funds are subject to
reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For more information
about each of the Related Public Funds, investors in UNL may call 1-800-920-0259 or visit www.uscfinvestments.com or the website
of the Securities and Exchange Commission (“SEC”) at www.sec.gov.
USCF is required to evaluate the
credit risk of UNL to the futures commission merchants (“FCMs”), oversee the purchase and sale of UNL's
shares by certain authorized purchasers (“Authorized Participants”), review daily positions and margin
requirements of UNL and manage UNL’s investments. USCF also pays the fees of ALPS Distributors, Inc.
(“ALPS Distributors”), which serves as the marketing agent for UNL (the “Marketing Agent”), and
The Bank of New York Mellon ("BNY Mellon"), which serves as the administrator (the “Administrator”) and
the custodian (the “Custodian”), and provides accounting and transfer agent services for, UNL since
April 1, 2020. Brown Brothers Harriman & Co. ("BBH&Co.") served as the administrator and custodian for UNL prior
to BNY Mellon. Certain fund accounting and fund administration services rendered by BBH&Co. to UNL and the Related Public
Funds terminated on May 31, 2020 to allow for the transition to BNY Mellon.
The limited partners take no part in the
management or control of, and have a minimal voice in UNL's operations or business. Limited partners have no right to elect USCF
as the general partner on an annual or any other continuing basis. If USCF voluntarily withdraws as general partner, however, the
holders of a majority of UNL’s outstanding shares (excluding for purposes of such determination shares owned, if any, by
the withdrawing USCF and its affiliates) may elect its successor. USCF may not be removed as general partner except upon approval
by the affirmative vote of the holders of at least 66 and 2/3 percent of UNL’s outstanding shares (excluding shares owned,
if any, by USCF and its affiliates), subject to the satisfaction of certain conditions set forth in the LP Agreement.
The business and affairs of USCF are managed
by a board of directors (the “Board”), which is comprised of four management directors (the “Management Directors”),
each of whom are also executive officers or employees of USCF, and three independent directors who meet the independent director
requirements established by the NYSE Arca Equities Rules and the Sarbanes-Oxley Act of 2002. The Management Directors have
the authority to manage USCF pursuant to the terms of the Sixth Amended and Restated Limited Liability Company Agreement of USCF,
dated as of May 15, 2015 (as amended from time to time, the “LLC Agreement”). Through its Management Directors,
USCF manages the day-to-day operations of UNL. The Board has an audit committee which is made up of the three independent directors
(Gordon L. Ellis, Malcolm R. Fobes III and Peter M. Robinson). For additional information relating to the audit committee, please
see “Item 10. Directors, Executive Officers and Corporate Governance – Audit Committee” in this annual
report on Form 10-K.
UNL has no executive officers or employees.
Pursuant to the terms of the LP Agreement, UNL's affairs are managed by USCF.
How Does UNL Operate?
An investment in the shares provides a
means for diversifying an investor’s portfolio or hedging exposure to changes in natural gas prices. An investment in the
shares allows both retail and institutional investors to easily gain this exposure to the natural gas market in a transparent,
cost-effective manner.
The net assets of UNL consist primarily
of investments in 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. 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, Futures Contracts and Other Natural Gas-Related Investments
collectively are referred to as “Natural Gas Interests” in this annual report on Form 10-K. UNL invests substantially
the entire amount of its assets in Futures Contracts while supporting such investments by holding the amounts of its margin, collateral
and other requirements relating to these obligations in short-term obligations of the United States of two years or less (“Treasuries”),
cash and cash equivalents. The daily holdings of UNL are available on UNL’s website at www.uscfinvestments.com.
UNL may invest in interests other than
the Benchmark Futures Contracts to comply with accountability levels and position limits. For a detailed discussion of accountability
levels and position limits, see “Item 1. Business – What are Futures Contracts?” below in this annual
report on Form 10-K.
UNL seeks to achieve its investment objective
by investing in a mix of Futures Contracts and Other-Natural-Gas Related Investments such that the changes in its NAV will closely
track the changes in the price of the NYMEX Futures Contracts for natural gas delivered to Henry Hub Louisiana. USCF believes changes
in the price of the Benchmark Futures Contracts have historically exhibited a close correlation with the changes in the spot price
of natural gas. On any valuation day (a valuation day is any NYSE Arca trading day as of which UNL calculates its NAV as described
herein), the Benchmark Futures Contracts are the near month contract to expire for natural gas traded on the NYMEX, 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 for
natural gas on the NYMEX and the contracts for the following 11 consecutive months. When calculating the daily movement of the
average price of the 12 contracts, each contract month is equally weighted.
USCF believes that holding futures contracts
whose expiration dates are spread out over a 12 month period of time will cause the total return of such a portfolio to vary compared
to a portfolio that holds only a single month’s contract (such as the near month contract). In particular, USCF believes
that the total return of a portfolio holding contracts with a range of expiration months will be impacted differently by the price
relationship between different contract months of the same commodity future compared to the total return of a portfolio consisting
of the near month contract. For example, in cases in which the near month contract’s price is higher than the price of contracts
that expire later in time (a situation known as “backwardation” in the futures markets), then absent the impact of
the overall movement in natural gas prices the value of the near month contract would tend to rise as it approaches expiration.
Conversely, in cases in which the near month contract’s price is lower than the price of contracts that expire later in time
(a situation known as “contango” in the futures markets), then absent the impact of the overall movement in natural
gas prices the value of the near month contract would tend to decline as it approaches expiration. The total return of a portfolio
that owned the near month contract and “rolled” forward each month by selling the near month contract as it approached
expiration and purchasing the next month contract to expire would be positively impacted by a backwardation market, and negatively
impacted by a contango market. Depending on the exact price relationship of the different month’s prices, portfolio expenses,
and the overall movement of natural gas prices, the impact of backwardation and contango could have a major impact on the total
return of such a portfolio over time. USCF believes that based on historical evidence a portfolio that held futures contracts with
a range of expiration dates spread out over a 12 month period of time would typically be impacted less by the positive effect of
backwardation and the negative effect of contango compared to a portfolio that held contracts of a single near month. As a result,
absent the impact of any other factors, a portfolio of 12 different monthly contracts would tend to have a lower total return than
a near month only portfolio in a backwardation market and a higher total return in a contango market. However, there can be no
assurance that such historical relationships would provide the same or similar results in the future.
USCF employs a “neutral” investment
strategy in order to track changes in the average of the prices of the Benchmark Futures Contracts regardless of whether the price
goes up or goes down. UNL’s “neutral” investment strategy is designed to permit investors generally to purchase
and sell UNL’s shares for the purpose of investing indirectly in natural gas in a cost-effective manner, and/or to permit
participants in the natural gas or other industries to hedge the risk of losses in their natural gas-related transactions. Accordingly,
depending on the investment objective of an individual investor, the risks generally associated with investing in natural gas and/or
the risks involved in hedging may exist. In addition, an investment in UNL involves the risk that the daily changes in the average
of the prices of UNL’s shares, in percentage terms, will not accurately track the daily changes in the Benchmark Futures
Contracts, in percentage terms, and that daily changes in the Benchmark Futures Contracts, in percentage terms, will not closely
correlate with daily changes in the spot prices of natural gas, in percentage terms.
The Benchmark Futures Contracts are changed
from the near month contract to expire and the 11 following months to the next month contract to expire and the 11 following months
during one day each month. On that day, USCF anticipates it will “roll” UNL’s positions by closing, or selling,
its natural gas interests and reinvests the proceeds from closing these positions in new natural gas interests.
The anticipated monthly dates on which
UNL will “roll” its positions are posted on UNL’s website at www.uscfinvestments.com, and are subject to change
without notice.
UNL’s total portfolio composition
is disclosed on its website each business day that the NYSE Arca is open for trading. The website disclosure of portfolio holdings
is made daily and includes, as applicable, the name and value of each Natural Gas Interest, the specific types of Natural Gas Interests
and characteristics of such Other Natural Gas Interests, the name and value of each Treasury and cash equivalent, and the amount
of cash held in UNL’s portfolio. UNL’s website is publicly accessible at no charge. UNL’s assets used for margin
and collateral are held in segregated accounts pursuant to the Commodity Exchange Act (the “CEA”) and CFTC regulations.
The shares issued by UNL may only be purchased
by Authorized Participants and only in blocks of 50,000 shares, called “Creation Baskets”. The amount of the purchase
payment for a Creation Basket is equal to the aggregate NAV of shares in the Creation Basket. Similarly, only Authorized Participants
may redeem shares and only in blocks of 50,000 shares, called “Redemption Baskets”. The amount of the redemption proceeds
for a Redemption Basket is equal to the aggregate NAV of the shares in the Redemption Basket. The purchase price for Creation Baskets,
and the redemption price for Redemption Baskets are the actual NAV calculated at the end of the business day when a request for
a purchase or redemption is received by UNL. The NYSE Arca publishes an approximate per share NAV intra-day based on the prior
day’s per share NAV and the current price of the Benchmark Futures Contracts, but the price of Creation Baskets and Redemption
Baskets is determined based on the actual per share NAV calculated at the end of the day.
While UNL issues shares only in Creation
Baskets, shares are listed on the NYSE Arca and investors may purchase and sell shares at market prices like any listed security.
What is UNL’s Investment Strategy?
In managing UNL’s assets, USCF does
not use a technical trading system that issues buy and sell orders. USCF instead employs a quantitative methodology whereby each
time a Creation Basket is sold, USCF purchases Futures Contracts and Other Natural Gas-Related Investments, such as the Benchmark
Futures Contracts, that have an aggregate market value that approximates the amount of Treasuries and/or cash received upon the
issuance of the Creation Basket.
UNL intends to continue to pursue its
investment objective as described above. By remaining invested as fully as possible in Futures Contracts or Other Natural
Gas-Related Investments, USCF believes that the daily changes in percentage terms of UNL’s NAV will continue to closely
track the daily changes in percentage terms in the average of the prices of the Benchmark Futures Contracts. USCF believes
that certain arbitrage opportunities result in the price of the shares traded on the NYSE Arca closely tracking the per share
NAV of UNL. Additionally, Futures Contracts as traded on the NYMEX have closely tracked the spot price of natural gas. Based
on these expected interrelationships, USCF believes that the daily changes in the price of UNL’s shares traded on the NYSE Arca, on a
percentage basis, have closely tracked and will continue to closely track on a daily basis, the daily changes in the spot
price of natural gas, on a percentage basis. For performance data relating to UNL’s ability to track its benchmark, see “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Tracking UNL’s
Benchmark” in this annual report on Form 10-K.
As a specific benchmark, USCF endeavors
to place UNL’s trades in Natural Gas Interests and otherwise manage UNL’s investments so that “A” will
be within plus/minus ten percent (10%) of “B,” where:
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A is the average daily percentage change in UNL’s per share NAV for any period of 30 successive
valuation days; i.e., any NYSE Arca trading day as of which UNL calculates its per share NAV; and
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B is the average daily percentage change in the prices of the Benchmark Futures Contracts over
the same period.
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USCF believes that market arbitrage opportunities
will cause the daily changes in UNL’s share price on the NYSE Arca, on a percentage basis, to closely track the daily changes
in UNL’s per share NAV, on a percentage basis. USCF further believes that the net effect of these two expected relationships
and the relationships described above between UNL’s per share NAV and the Benchmark Futures Contracts 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 changes in the spot price
of a barrel of natural gas on a percentage basis, plus interest earned on UNL’s collateral holdings, less UNL’s expenses.
For performance data relating to UNL’s ability to track its benchmark, see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Tracking UNL’s Benchmark” in this annual
report on Form 10-K.
The specific Futures Contracts purchased
depend on various factors, including a judgment by USCF as to the appropriate diversification of UNL’s investments in Futures
Contracts with respect to the month of expiration, and the prevailing price volatility of particular contracts. While USCF has
made significant investments in NYMEX Futures Contracts, for various reasons, including the ability to enter into the precise amount
of exposure to the natural gas market, position limits or other regulatory requirements limiting UNL’s holdings, and market
conditions, it may invest in Futures Contracts traded on other exchanges or invest in Other Natural Gas-Related Investments. To
the extent that UNL invests in Other Natural Gas-Related Investments, it would prioritize investments in contracts and instruments
that are economically equivalent to the Benchmark Futures Contracts, including cleared swaps that satisfy such criteria, and then,
to a lesser extent, it would invest in other types of cleared swaps and other contracts, instruments and non-cleared swaps, such
as swaps in the OTC market. If UNL is required by law or regulation, or by one of its regulators, including a futures exchange,
to reduce its position in the Benchmark Futures Contract to the applicable position limit or to a specified accountability level
or if market conditions dictate it would be more appropriate to invest in Other Natural Gas-Related Investments, a substantial
portion of UNL’s assets could be invested in accordance with such priority in Other Natural Gas-Related Investments that
are intended to replicate the return on the Benchmark Futures Contracts. As UNL’s assets reach higher levels, it is more
likely to exceed position limits, accountability levels or other regulatory limits and, as a result, it is more likely that it
will invest in accordance with such priority in Other Natural Gas-Related Investments at such higher levels. In addition, 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. See “Item 1. Business –
Commodities Regulation” in this annual report on Form 10-K for a discussion of the potential impact of regulation
on UNL’s ability to invest in OTC transactions and cleared swaps.
USCF may not be able to fully invest UNL’s
assets in the Benchmark Futures Contracts having an aggregate notional amount exactly equal to UNL’s NAV. For example, as
standardized contracts, the Benchmark Futures Contracts are for a specified amount of a particular commodity, and UNL’s NAV
and the proceeds from the sale of a Creation Basket are unlikely to be an exact multiple of the amounts of those contracts. As
a result, in such circumstances, UNL may be better able to achieve the exact amount of exposure to changes in price of the Benchmark
Futures Contracts through the use of Other Natural Gas-Related Investments, such as OTC contracts that have better correlation
with changes in price of the Benchmark Futures Contracts.
UNL anticipates that to the extent it invests
in Futures Contracts other than contracts on natural gas (such as futures contracts for light, sweet crude oil, diesel- heating
oil and other petroleum-based fuels) and Other Natural Gas-Related Investments, it will enter into various non-exchange-traded
derivative contracts to hedge the short-term price movements of such Futures Contracts and Other Natural Gas-Related Investments
against the current Benchmark Futures Contracts.
USCF does not anticipate letting UNL’s
Futures Contracts expire and taking delivery of the underlying commodity. Instead, USCF will close existing positions, e.g., when
it changes the Benchmark Futures Contracts or Other Natural Gas-Related Investments or it otherwise determines it would be appropriate
to do so and reinvests the proceeds in new Futures Contracts or Other Natural Gas-Related Investments. Positions may also be closed
out to meet orders for Redemption Baskets and in such case proceeds for such baskets will not be reinvested.
What is the Natural Gas Market and the Petroleum-Based Fuel
Market?
Natural Gas. Natural gas accounts
for almost a quarter of U.S. energy consumption. The price of natural gas is established by the supply and demand conditions in
the North American market, and more particularly, in the main refining center of the U.S. Gulf Coast. The natural gas market essentially
constitutes an auction, where the highest bidder wins the supply. When markets are “strong” (i.e., when demand is high
and/or supply is low), the bidder must be willing to pay a higher premium to capture the supply. When markets are “weak”
(i.e., when demand is low and/or supply is high), a bidder may choose not to outbid competitors, waiting instead for later, possibly
lower priced, supplies. Demand for natural gas by consumers, as well as agricultural, manufacturing and transportation industries,
determines overall demand for natural gas. Since the precursors of product demand are linked to economic activity, natural gas
demand will tend to reflect economic conditions. However, other factors such as weather significantly influence natural gas demand.
The NYMEX is the world’s largest
physical commodity futures exchange and the dominant market for the trading of energy and precious metals. The Benchmark Futures
Contracts trade in units of 10,000 million British thermal units (“MMBtu”) and is based on delivery at the Henry Hub
in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific
gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border.
Because of the volatility of natural gas prices, a vigorous basis market has developed in the pricing relationships between the
Henry Hub and other important natural gas market centers in the continental United States and Canada. The NYMEX makes available
for trading a series of basis swap futures contracts that are quoted as price differentials between approximately 30 natural gas
pricing points and the Henry Hub. The basis contracts trade in units of 2,500 MMBtu on the New York Mercantile Exchange ClearPort®
trading platform. The New York Mercantile Exchange ClearPort® is an electronic trading platform through which a slate of energy
futures contracts are available for competitive trading. Transactions can also be consummated off-NYMEX and submitted to the NYMEX
for clearing via the NYMEX ClearPort® clearing website as an exchange of futures for physicals or an exchange of futures for
swaps transactions.
Light, Sweet Crude Oil. Light, sweet
crudes are preferred by refiners because of their low sulfur content and relatively high yields of high-value products such as
gasoline, diesel fuel, diesel-heating oil, and jet fuel. The price of light, sweet crude oil has historically exhibited periods
of significant volatility.
Demand for petroleum products by consumers,
as well as agricultural, manufacturing and transportation industries, determines demand for crude oil by refiners. Since the precursors
of product demand are linked to economic activity, crude oil demand will tend to reflect economic conditions. However, other factors
such as weather also influence product and crude oil demand.
Crude oil supply is determined by both
economic and political factors. Oil prices (along with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development spending, which influence output capacity with a lag.
In the short run, production decisions by the Organization of Petroleum Exporting Countries (“OPEC”) also affect supply
and prices. Oil export embargoes and the current conflicts in the Middle East represent other routes through which political developments
move the market. It is not possible to predict the aggregate effect of all or any combination of these factors.
Diesel-Heating Oil. Diesel-heating
oil, also known as No. 2 fuel oil, accounts for 25% of the yield of a barrel of crude oil, the second largest “cut”
from oil after gasoline. The diesel- heating Oil Futures Contract listed and traded on the NYMEX trades in units of 42,000 gallons
(1,000 barrels) and is based on delivery in the New York harbor, the principal cash market center. The ICE Futures also offers
a diesel-heating Oil Futures Contract which trades in units of 42,000 U.S. gallons (1,000 barrels). The diesel-heating Oil Futures
Contract is cash-settled against the prevailing market price for heating oil delivered to the New York Harbor.
Gasoline. Gasoline is the largest
single volume refined product sold in the U.S. and accounts for almost half of national oil consumption. The gasoline futures contract
listed and traded on the NYMEX trades in units of 42,000 gallons (1,000 barrels) and is based on delivery at petroleum products
terminals in the New York harbor, the major East Coast trading center for imports and domestic shipments from refineries in the
New York harbor area or from the Gulf Coast refining centers. The price of gasoline has historically been volatile.
What are Futures Contracts?
Futures contracts are agreements between
two parties. One party agrees to buy a commodity such as natural gas from the other party at a later date at a price and quantity
agreed upon when the contract is made. Futures Contracts are traded on futures exchanges, including the NYMEX. For example, the
Benchmark Futures Contracts are traded on the NYMEX in units of 10,000 MMBtu. Futures Contracts traded on the NYMEX are priced
by floor brokers and other exchange members both through an “open outcry” of offers to purchase or sell the contracts
and through an electronic, screen-based system that determines the price by matching electronically offers to purchase and sell.
Additional risks of investing in Futures Contracts are included in “Item 1A. Risk Factors” in this annual report
on Form 10-K.
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 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 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 a Benchmark Futures Contract is 6,000 contracts. In addition,
the NYMEX imposes an accountability level for all months of 12,000 net futures contracts for natural gas. In addition, the ICE
Futures maintains the same accountability levels, position limits and monitoring authority for its natural gas contract as the
NYMEX. If UNL and the Related Public Funds exceed these accountability levels for investments in the futures contracts for natural
gas, the NYMEX and ICE Futures will monitor such 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 could be ordered to reduce its Natural Gas NG Futures Contracts
to below the 6,000 single month and/or 12,000 all month accountability level. As of December 31, 2020, UNL held 273 Natural
Gas NG Futures Contracts traded on the NYMEX and did not hold any Futures Contracts traded on ICE Futures. [For the year ended
December 31, 2020, UNL did not exceed accountability levels imposed by the NYMEX and ICE Futures, however, the aggregated
total of the Related Public Funds did exceed the accountability levels.
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 contracts to expire to the next month contracts
during a one-day period beginning two weeks from expiration of the contracts. For the year ended December 31, 2020, UNL did
not exceed any position limits imposed by the NYMEX and ICE Futures.
On October 15, 2020, the CFTC approved
a final rule that amends the existing federal position limits regime set forth in Part 150 of the CFTC’s regulations
as well as the framework for exchange-set position limits and exemptions (such final rule, the “Position Limits Rule”).
The Position Limits Rule establishes federal position limits for 25 core referenced futures contracts (comprised of agricultural,
energy and metals futures contracts), futures and options linked to the core referenced futures contracts, and swaps that are economically
equivalent to the core referenced futures contracts. The Position Limits Rule sets position limits for the spot month and
non-spot month; however, the non-spot month limits only apply in respect of the agricultural futures contracts that are currently
subject to position limits under Part 150 of the CFTC regulations (the “legacy agricultural contracts”). With
respect to regulatory oversight, the Position Limits Rule delegates authority to designated contract markets and swap execution
facilities to oversee certain aspects of the position limits framework. In addition to setting the federal position limits, the
Position Limits Rule also provides several exemptions from such position limits, including an expanded list of enumerated
bona fide hedge exemptions and certain spread exemptions. Further, the Position Limits Rule sets forth two alternative processes
for pursuing an exemption for non-enumerated hedge positions. Other than for the legacy agricultural contracts, compliance with
the limits imposed by the Position Limits Rule will not be required until 2022, except that economically equivalent swaps
need not comply with the Position Limits Rule until 2023.
The Benchmark Futures Contract will be
subject to position limits under the Position Limits Rule, and UNL’s trading does not qualify as an enumerated bona fide
hedge. Accordingly, the Position Limits Rule could negatively impact the ability of UNL to meet its investment objective by
inhibiting USCF’s ability to effectively invest the proceeds from sales of Creation Baskets of UNL in particular amounts
and types of its permitted investments.
Until such time as compliance with the
Position Limits Rule is required, 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 the nine legacy agricultural contracts, 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).
Under existing CFTC regulations and the
Position Limits Rule, 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% 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 market participant (the “Aggregation Rules”).
Price Volatility. The price volatility
of Futures Contracts generally has been historically greater than that for traditional securities such as stocks and bonds. Price
volatility often is greater day-to-day as opposed to intra-day. Futures Contracts tend to be more volatile than stocks and bonds
because price movements for natural gas are more currently and directly influenced by economic factors for which current data is
available and are traded by natural gas futures traders throughout the day. Because UNL invests a significant portion of its assets
in Futures Contracts, the assets of UNL, and therefore the prices of UNL shares, may be subject to greater volatility than traditional
securities.
Marking-to-Market Futures Positions.
Futures Contracts are marked to market at the end of each trading day and the margin required with respect to such contracts
is adjusted accordingly. This process of marking-to-market is designed to prevent losses from accumulating in any futures account.
Therefore, if UNL’s futures positions have declined in value, UNL may be required to post “variation margin”
to cover this decline. Alternatively, if UNL’s futures positions have increased in value, this increase will be credited
to UNL’s account.
Why Does UNL Purchase and Sell Futures Contracts?
UNL’s investment objective is for
the daily changes in percentage terms of its shares’ per share NAV to reflect the daily changes in percentage terms of the
price of natural gas delivered at the Henry Hub, Louisiana, as measured by the daily changes in the average of the prices of specified
short-term futures contracts on natural gas called the “Benchmark Futures Contracts”, plus interest earned on UNL’s
collateral holdings, less UNL’s expenses.
In connection with investing in Futures
Contracts and Other Natural Gas-Related Investments, UNL holds Treasuries, cash and/or cash equivalents that serve as segregated
assets supporting UNL’s positions in Futures Contracts and Other Natural Gas-Related Investments. For example, the purchase
of a Futures Contract with a stated value of $10 million would not require UNL to pay $10 million upon entering into the contract;
rather, only a margin deposit, generally of 5% to 30% of the stated value of the Futures Contract, would be required. To secure
its Futures Contract obligations, UNL would deposit the required margin with the FCMs and would separately hold, through its Custodian
or FCMs, Treasuries, cash and/or cash equivalents in an amount equal to the balance of the current market value of the contract,
which at the contract’s inception would be $10 million minus the amount of the margin deposit, or $9.5 million (assuming
a 5% margin).
As a result of the foregoing, typically
5% to 30% of UNL’s assets are held as margin in segregated accounts with an FCM. In addition to the Treasuries and cash it
posts with the FCM for the Futures Contracts it owns, UNL may hold, through the Custodian, Treasuries, cash and/or cash equivalents
that can be posted as additional margin or as other collateral to support its OTC contracts. UNL earns income from the Treasuries
and/or cash equivalents that it purchases, and on the cash it holds through the Custodian or FCM. UNL anticipates that the earned
income will increase the NAV and limited partners’ capital contribution accounts. UNL reinvests the earned income, holds
it in cash, or uses it to pay its expenses. If UNL reinvests the earned income, it makes investments that are consistent with its
investment objective.
What are the Trading Policies of UNL?
Liquidity
UNL invests only in Futures Contracts
and Other Natural Gas-Related Investments that, in the opinion of USCF, are traded in sufficient volume to permit the ready taking
and liquidation of positions in these financial interests and Other Natural Gas-Related Investments that, in the opinion of USCF,
may be readily liquidated with the original counterparty or through a third party assuming the position of UNL.
Spot Commodities
While the Futures Contracts can be
physically settled, UNL does not intend to take or make physical delivery. UNL may from time to time trade in Other Natural
Gas-Related Investments, including contracts based on the spot price of natural gas.
Leverage
USCF endeavors to have the value of
UNL's Treasuries, cash and cash equivalents, whether held by UNL or posted as margin or other collateral, at all times
approximate the aggregate market value of its obligations under its Futures Contracts and Other Natural Gas-Related
Investments. Commodity pools’ trading positions in futures contracts or other related investments are typically
required to be secured by the deposit of margin funds that represent only a small percentage of a futures contract’s
(or other commodity interest’s) entire market value. While USCF has not and does not intend to leverage UNL's
assets, it is not prohibited from doing so under the LP Agreement.
Although permitted to do so under the LP
Agreement, UNL has not and does not intend to leverage its assets and makes its investments accordingly. Consistent with this,
UNL’s investment decisions will take into account the need for UNL to make permitted investments that also allow it to maintain
adequate liquidity to meet its margin and collateral requirements and to avoid, to the extent reasonably possible, UNL becoming
leveraged, including by its holding of assets that have a high probability of causing the net asset value of the fund to be less
than zero.
Borrowings
Borrowings are not used by UNL, unless UNL
is required to borrow money in the event of physical delivery, if UNL trades in cash commodities, or for short-term needs
created by unexpected redemptions.
OTC Derivatives (Including Spreads
and Straddles)
In addition to Futures Contracts, there
are also a number of listed options on the Futures Contracts on the principal futures exchanges. These contracts offer investors
and hedgers another set of financial vehicles to use in managing exposure to the natural gas market. Consequently, UNL
may purchase options on natural gas Futures Contracts on these exchanges in pursuing its investment objective.
In addition to the Futures Contracts
and options on the Futures Contracts, there also exists an active non-exchange-traded market in derivatives tied to natural
gas. These derivatives transactions (also known as OTC contracts) are usually entered into between two parties in private contracts.
Unlike most of the exchange-traded Futures Contracts or exchange- traded options on the Futures Contracts, each party
to such contract bears the credit risk of the other party, i.e., the risk that the other party may not be able to perform its obligations
under its contract. To reduce the credit risk that arises in connection with such contracts, UNL will generally enter into
an agreement with each counterparty based on the Master Agreement published by the International Swaps and Derivatives Association, Inc.
(“ISDA”) that provides for the netting of its overall exposure to its counterparty.
USCF assesses or reviews, as appropriate,
the creditworthiness of each potential or existing counterparty to an OTC contract pursuant to guidelines approved by USCF's Board.
UNL may enter into certain transactions
where an OTC component is exchanged for a corresponding futures contract (“Exchange for Related Position” or “EFRP”
transactions). In the most common type of EFRP transaction entered into by UNL, the OTC component is the purchase or sale of one
or more baskets of UNL's shares. These EFRP transactions may expose UNL to counterparty risk during the interim period
between the execution of the OTC component and the exchange for a corresponding futures contract. Generally, the counterparty risk
from the EFRP transaction will exist only on the day of execution.
UNL may employ spreads or straddles
in its trading to mitigate the differences in its investment portfolio and its goal of tracking the price of the Benchmark Futures
Contracts. UNL would use a spread when it chooses to take simultaneous long and short positions in futures written on the
same underlying asset, but with different delivery months.
During the reporting period of this annual
report on Form 10-K, UNL has limited its derivatives activities to futures contracts in natural gas and EFRP transactions.
Pyramiding
UNL has not employed and will
not employ the technique, commonly known as pyramiding, in which the speculator uses unrealized profits on existing positions as
variation margin for the purchase or sale of additional positions in the same or another commodity interest.
Who are the Service Providers?
Custodian, Registrar, Transfer
Agent, and Administrator
USCF engaged The Bank of New York Mellon
("BNY 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. USCF pays the fees of BNY Mellon for its services under the BNY Mellon
Agreements and such fees are determined by the parties from time to time.
Brown Brothers Harriman and Co. ("BBH&Co.")
previously served as the Administrator, Custodian, Transfer Agent and Fund Accounting Agent for UNL and the Related Public
Funds prior to BNY Mellon commencing such services on April 1, 2020. Certain fund accounting and fund administration services
rendered by BBH&Co. to UNL and the Related Public Funds terminated on May 31, 2020 to allow for the transition to
BNY Mellon.
Marketing Agent
UNL also employs ALPS Distributors
as its marketing agent. USCF pays the Marketing Agent an annual fee. In no event may the aggregate compensation paid to the Marketing
Agent and any affiliate of USCF for distribution-related services in connection with the offering of shares exceed ten percent
(10%) of the gross proceeds of the offering.
ALPS Distributors’ principal business
address is 1290 Broadway, Suite 1100, Denver, CO 80203. ALPS Distributors is a broker-dealer registered with the SEC and is
a member of the Financial Industry Regulatory Authority (“FINRA”) and a member of the Securities Investor
Protection Corporation.
Payments to Certain Third Parties
USCF or the Marketing Agent, or an affiliate
of USCF or the Marketing Agent, may directly or indirectly make cash payments to certain broker-dealers for participating in activities
that are designed to make registered representatives and other professionals more knowledgeable about exchange-traded funds and
exchange-traded products, including UNL and the Related Public Funds, or for other activities, such as participation in marketing
activities and presentations, educational training programs, conferences, the development of technology platforms and reporting
systems.
Additionally, pursuant to written agreements,
USCF may make payments, out of its own resources, to financial intermediaries in exchange for providing services in connection
with the sale or servicing of UNL's shares, including waiving commissions on the purchase or sale of shares of participating
exchange-traded products.
Payments to a broker-dealer or intermediary
may create potential conflicts of interest between the broker-dealer or intermediary and its clients. The amounts described above,
which may be significant, are paid by USCF and/or the Marketing Agent from their own resources and not from the assets of UNL
or the Related Public Funds.
Futures Commission Merchants
RBC Capital Markets LLC
On October 8, 2013, USCF entered into
a Futures and Cleared Derivatives Transactions Customer Account Agreement with RBC Capital Markets, LLC ("RBC Capital"
or "RBC") to serve as UNL's FCM, effective October 10, 2013. This agreement requires RBC Capital to provide
services to UNL, as of October 10, 2013, in connection with the purchase and sale of Futures Contracts and Other
Natural Gas-Related Investments that may be purchased or sold by or through RBC Capital for UNL’s account. For the period
October 10, 2013 and after, UNL pays RBC Capital commissions for executing and clearing trades on behalf of UNL.
RBC Capital’s primary address is
3 World Financial Center, 200 Vesey St., New York, NY 10281. Effective October 10, 2013, RBC Capital became the futures clearing
broker for UNL. RBC Capital is registered in the United States with FINRA as a broker-dealer and with the CFTC as an FCM.
RBC Capital is a member of various U.S. futures and securities exchanges.
RBC Capital is a large broker dealer subject
to many different complex legal and regulatory requirements. As a result, certain of RBC Capital’s regulators may from time
to time conduct investigations, initiate enforcement proceedings and/or enter into settlements with RBC Capital with respect to
issues raised in various investigations. RBC Capital complies fully with its regulators in all investigations being conducted and
in all settlements it reaches. In addition, RBC Capital is and has been subject to a variety of civil legal claims in various jurisdictions,
a variety of settlement agreements and a variety of orders, awards and judgments made against it by courts and tribunals, both
in regard to such claims and investigations. RBC Capital complies fully with all settlements it reaches and all orders, awards
and judgments made against it.
RBC Capital has been named as a defendant
in various legal actions, including arbitrations, class actions and other litigation including those described below, arising in
connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or
punitive damages or claims for indeterminate amounts of damages. RBC Capital is also involved, in other reviews, investigations
and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding RBC Capital’s business,
including among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements,
fines, penalties, injunctions or other relief.
RBC Capital contests liability and/or the
amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in
the early stages, RBC Capital cannot predict the loss or range of loss, if any, related to such matters; how or if such matters
will be resolved; when they will ultimately be resolved; or what the eventual settlement, fine, penalty or other relief, if any,
might be. Subject to the foregoing, RBC Capital believes, based on current knowledge and after consultation with counsel, that
the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of RBC Capital.
On April 27, 2017, pursuant to an
offer of settlement, a Panel of the Chicago Board of Trade Business Conduct Committee (“Panel”) found that RBC Capital
engaged in EFRP transactions which failed to satisfy the Rules of the Chicago Board of Trade (the “Chicago Board of
Trade”) in one or more ways. Specifically, the Panel found that RBC Capital traders entered into EFRP trades in which RBC
Capital accounts were on both sides of the transactions. While the purpose of the transactions was to transfer positions between
the RBC Capital accounts, the Panel found that the manner in which the trades occurred violated the Chicago Board of Trade’s
prohibition on wash trades. The Panel found that RBC Capital thereby violated CBOT Rules 534 and (legacy) 538.B. and C. In
accordance with the settlement offer, the Panel ordered RBC Capital to pay a $175,000 fine. On October 1, 2019, the CFTC issued
an order filing and settling charges against RBCCM for the above activity, as well as related charges. The order required that
RBCCM cease and desist from violating the applicable regulations, pay a $5 million civil monetary penalty, and comply with various
conditions, including conditions regarding public statements and future cooperation with the CFTC.
On June 18, 2015, in connection with
the Municipalities Continuing Disclosure Cooperation initiative of the SEC, the SEC commenced and settled an administrative proceeding
against RBC Capital for willful violations of Sections 17(a)(2) of the Securities Act of 1933, as amended (“1933 Act”)
after the firm self-reported instances in which it conducted inadequate due diligence in certain municipal securities offerings
and as a result, failed to form a reasonable basis for believing the truthfulness of certain material representations in official
statements issued in connection with those offerings. RBC Capital paid a fine of $500,000.
RBC Capital and certain affiliates were
named as defendants in a lawsuit relating to their role in transactions involving investments made by a number of Wisconsin school
districts in certain collateralized debt obligations. These transactions were also the subject of a regulatory investigation, which
was resolved in 2011. RBC Capital reached a final settlement with all parties in the civil litigation, and the civil action against
RBC Capital was dismissed with prejudice on December 6, 2016.
Beginning in 2015, putative class actions
were brought against RBC Capital and/or Royal Bank of Canada in the U.S., Canada and Israel. These actions were each brought against
multiple foreign exchange dealers and allege, among other things, collusive behavior in foreign exchange trading. Various regulators
are also conducting inquiries regarding potential violations of law by a number of banks and other entities, including RBC Capital,
regarding foreign exchange trading. In August 2018, the U.S. District Court entered a final order approving RBC Capital’s
pending settlement with class plaintiffs. Certain institutional plaintiffs opted out of participating in the settlement and have
brought their own claims. The Canadian class actions, one other U.S. action that is purportedly brought on behalf of different
classes of plaintiffs, and an action filed in Israel remain pending. Based on the facts currently known, it is not possible
at this time for us to predict the ultimate outcome of these investigations or proceedings or the timing of their resolution.
On July 31, 2015, RBC Capital was
added as a new defendant in a pending putative class action initially filed in November 2013 in the United States District
Court for the Southern District of New York. The action is brought against multiple foreign exchange dealers and alleges collusive
behavior, among other allegations, in foreign exchange trading. Based on the facts currently known, the ultimate resolution of
these collective matters is not expected to have a material adverse effect on RBC.
On April 13, 2015, RBC Capital’s
affiliate, Royal Bank of Canada Trust Company (Bahamas) Limited (“RBC Bahamas”), was charged in France with complicity
in tax fraud. RBC Bahamas believes that its actions did not violate French law and contested the charge in the French court. The
trial of this matter has concluded and a verdict was delivered on January 12, 2017, acquitting the company and the other defendants
and on June 29, 2018, the French appellate court affirmed the acquittals. The acquittals are being appealed.
Various regulators and competition and
enforcement authorities around the world, including in Canada, the United Kingdom, and the U.S., are conducting investigations
related to certain past submissions made by panel banks in connection with the setting of the U.S. dollar London interbank offered
rate (“LIBOR”). These investigations focus on allegations of collusion between the banks that were on the panel to
make submissions for certain LIBOR rates. Royal Bank of Canada, RBC Capital’s indirect parent, is a member of certain LIBOR
panels, including the U.S. dollar LIBOR panel, and has in the past been the subject of regulatory requests for information. In
addition, Royal Bank of Canada and other U.S. dollar panel banks have been named as defendants in private lawsuits filed in the
U.S. with respect to the setting of LIBOR including a number of class action lawsuits which have been consolidated before the U.S.
District Court for the Southern District of New York. The complaints in those private lawsuits assert claims against us and other
panel banks under various U.S. laws, including U.S. antitrust laws, the CEA, and state law. On February 28, 2018, the motion
by the plaintiffs in the class action lawsuits to have the class certified was denied in relation to Royal Bank of Canada. As such,
unless that ruling is reversed on appeal, Royal Bank of Canada is no longer a defendant in any pending class action. Royal Bank
of Canada is still a party to the various individual LIBOR actions. Based on the facts currently known, it is not possible at this
time for us to predict the ultimate outcome of these investigations or proceedings or the timing of their resolution.
Thornburg Mortgage Inc. (“TMST”)
and RBC Capital were parties to a master repurchase agreement executed in September 2003 whereby TMST financed its purchase
of residential mortgage-backed securities. Upon TMST’s default during the financial crisis, RBC Capital valued TMST’s
collateral at allegedly deflated prices. After TMST’s bankruptcy filing, TMST’s trustee brought suit against RBC Capital
in 2011 for breach of contract. In 2015, TMST was awarded more than $45 million in damages. RBC Capital has appealed. The appeals
court set a briefing schedule and simultaneously ordered the parties to participate in a mediation. The parties subsequently reached
an agreement to settle the matter; a motion to approve the settlement was filed with the bankruptcy court on January 10, 2016
and granted on February 27, 2017.
On October 14, 2014, the Delaware
Court of Chancery (the “Court of Chancery”) in a class action brought by former shareholders of Rural/Metro Corporation,
held RBC Capital liable for aiding and abetting a breach of fiduciary duty by three Rural/Metro directors, but did not make an
additional award for attorney’s fees. A final judgment was entered on February 19, 2015 in the amount of US$93 million
plus post judgment interest. RBC Capital appealed the Court of Chancery’s determination of liability and quantum of damages,
and the plaintiffs cross-appealed the ruling on additional attorneys’ fees. On November 30, 2015, the Delaware Supreme
Court affirmed the Court of Chancery with respect to both the appeal and cross-appeal. RBC Capital is cooperating with an investigation
by the SEC relating to this matter. In particular, the SEC contended that RBC Capital caused materially false and misleading information
to be included in the proxy statement that Rural filed to solicit shareholder approval for the sale in violation of section 14(A) of
the Exchange Act and Rule 14A-9 thereunder. On August 31, 2016, RBC Capital was ordered by the SEC to cease and desist
and paid $500,000 in disgorgement, plus interest of $77,759 and a civil penalty of $2 million.
Please see RBC Capital’s Form BD,
which is available on the FINRA BrokerCheck program, for more details.
RBC Capital will act only as clearing
broker for UNL and as such will be paid commissions for executing and clearing trades on behalf of UNL. RBC Capital has
not passed upon the adequacy or accuracy of this annual report on Form 10-K. RBC Capital will not act in any supervisory
capacity with respect to USCF or participate in the management of USCF or UNL.
RBC Capital is not affiliated with UNL
or USCF. Therefore, neither USCF nor UNL believes that there are any conflicts of interest with RBC Capital or its trading
principals arising from its acting as UNL’s FCM.
RCG Division of Marex Spectron
On May 28, 2020, UNL entered into a Commodity Futures
Customer Agreement with RCG Division of Marex Spectron (“RCG”) to serve as a FCM for UNL. This agreement requires RCG
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 or sold by or through RCG for UNL's account. Under this agreement, UNL pays RCG
commissions for executing and clearing trades on behalf of UNL.
RCG’s primary address is 360 Madison Avenue, 3rd Floor,
New York, NY 10017. RCG is registered in the United States with FINRA as a broker-dealer and with the CFTC as an FCM. RCG is a
member of various U.S. futures and securities exchanges.
RCG is a large broker dealer subject to many different complex
legal and regulatory requirements. As a result, certain of RCG’s regulators may from time to time conduct investigations,
initiate enforcement proceedings and/or enter into settlements with RCG with respect to issues raised in various investigations.
RCG complies fully with its regulators in all investigations which may be conducted and in all settlements it may reach. As of
the date hereof, RCG has no material litigation to disclose as that term is defined under the CEA and the regulations promulgated
thereunder.
RCG will act only as clearing broker
for UNL and as such will be paid commissions for executing and clearing trades on behalf of UNL. RCG has not passed upon
the adequacy or accuracy of this annual report on Form 10-K. RCG will not act in any supervisory capacity with respect
to USCF or participate in the management of USCF or UNL.
RCG is not affiliated with UNL or USCF. Therefore,
neither USCF nor UNL believes that there are any conflicts of interest with RCG or its trading principals arising from its
acting as UNL’s FCM.
E D & F Man Capital Markets Inc.
On June 5, 2020, UNL entered into a Customer Agreement
E D & F Man Capital Markets Inc. (“MCM”) to serve as an FCM for UNL. This agreement requires MCM 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 or sold by or through MCM for UNL's account. Under this agreement, UNL pays MCM commissions for executing
and clearing trades on behalf of UNL.
MCM’s primary address is 140 East 45th Street, 10th Floor,
New York, NY 10017. MCM is registered in the United States with FINRA as a broker-dealer and with the CFTC as an FCM. MCM is a
member of various U.S. futures and securities exchanges.
MCM is a large broker dealer subject to many different complex
legal and regulatory requirements. As a result, certain of MCM’s regulators may from time to time conduct investigations,
initiate enforcement proceedings and/or enter into settlements with MCM with respect to issues raised in various investigations.
MCM complies fully with its regulators in all investigations which may be conducted and in all settlements it may reach. As of
the date hereof, MCM has no material litigation to disclose as that term is defined under the CEA and the regulations promulgated
thereunder.
MCM will act only as clearing broker for UNL and as such
will be paid commissions for executing and clearing trades on behalf of UNL. MCM has not passed upon the adequacy or accuracy of
this annual report on Form 10-K. MCM will not act in any supervisory capacity with respect to USCF or participate in the management
of USCF or UNL.
MCM is not affiliated with UNL or USCF. Therefore, neither
USCF nor UNL believes that there are any conflicts of interest with MCM or its trading principals arising from its acting
as UNL’s FCM.
Macquarie Futures USA LLC
On December 3, 2020, UNL engaged Macquarie Futures
USA LLC (“MFUSA”) to serve as an additional futures commission merchant for UNL. The Customer Agreement between UNL
and MFUSA requires MFUSA to provide services to UNL in connection with the purchase and sale of futures contracts in Futures
Contracts and Other Natural Gas-Related Investments that may be purchased or sold by or through MFUSA for UNL’s account.
Under this agreement, UNL pays MFUSA commissions for executing and clearing trades on behalf of UNL.
MFUSA’s primary address is 125 West 55th Street, New York,
NY 10019. MFUSA is registered in the United States with the CFTC as an FCM providing futures execution and clearing services covering
futures exchanges globally. MFUSA is a member of various U.S. futures and securities exchanges.
MFUSA is a large broker dealer subject to many different complex
legal and regulatory requirements. As a result, certain of MFUSA’s regulators may from time to time conduct investigations,
initiate enforcement proceedings and/or enter into settlements with MFUSA with respect to issues raised in various investigations.
MFUSA complies fully with its regulators in all investigations which may be conducted and in all settlements it may reach. As of
the date hereof, MFUSA has no material litigation to disclose as that term is defined under the CEA and the regulations promulgated
thereunder.
MFUSA will act only as clearing broker for UNL and as such
will be paid commissions for executing and clearing trades on behalf of UNL. MFUSA has not passed upon the adequacy or accuracy
of this annual report on Form 10-K. MFUSA will not act in any supervisory capacity with respect to USCF or participate in
the management of USCF or UNL.
MFUSA is not affiliated with UNL or USCF. Therefore, neither
USCF nor UNL believes that there are any conflicts of interest with MFUSA or its trading principals arising from its acting
as UNL’s FCM.
Commodity Trading Advisor
Currently, USCF does not employ commodity
trading advisors for the trading of UNL contracts. USCF currently does, however, employ SummerHaven Investment Management,
LLC as a trading advisor for USCI and CPER. If, in the future, USCF does employ commodity trading advisors for UNL, it will choose
each advisor based on arm’s-length negotiations and will consider the advisor’s experience, fees and reputation.
Summary of Risk Factors
Investing in our securities involves a high degree of risk.
You should carefully consider the information in “Item 1A. Risk Factors”, including, but not limited to, the following
risks:
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The NAV of UNL’s shares relates directly to the value of the Benchmark Futures Contracts and other assets held by UNL and fluctuations in the prices of these assets could materially adversely affect an investment in UNL’s shares. Past performance is not necessarily indicative of futures results; all or substantially all of an investment in UNL could be lost.
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COVID-19 and other infectious disease outbreaks
could negatively affect the valuation and performance of UNL’s investments.
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An investment in UNL may provide little or no diversification benefits. Thus, in a declining market, UNL may have no gains to offset losses from other investments, and an investor may suffer losses on an investment in UNL while incurring losses with respect to other asset classes.
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Historical performance of UNL and the Benchmark Futures Contracts is not indicative of future performance.
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The market price at which investors buy or sell shares may be significantly less or more than NAV.
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Daily percentage changes in UNL’s NAV may not correlate with daily percentage changes in the average of the prices of the Benchmark Futures Contracts.
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Daily percentage changes in the price of the Benchmark Futures Contracts may not correlate with daily percentage changes in the spot price of natural gas.
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An investment in UNL is not a proxy for investing in the natural gas markets, and the daily percentage changes in the price of the Benchmark Futures Contracts, or the NAV of UNL, may not correlate with daily percentage changes in the spot price of natural gas.
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Natural forces in the natural gas futures market known as “backwardation” and “contango” may increase UNL’s tracking error and/or negatively impact total return.
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Accountability levels, position limits, and daily price fluctuation limits set by the exchanges have the potential to cause tracking error, by limiting UNL’s investments, including its ability to fully invest in the Benchmark Futures Contracts, which could cause the price of shares to substantially vary from the average of the prices of the Benchmark Futures Contract.
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Risk mitigation measures imposed by UNL’s FCMs have the potential to cause tracking error by limiting UNL’s investments, including its ability to fully invest in the Benchmark Futures Contracts and other Futures Contracts, which could cause the price of UNL’s shares to substantially vary from the price of the Benchmark Futures Contracts.
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An investor’s tax liability may exceed the amount of distributions, if any, on its shares.
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An investor’s allocable share of taxable income or loss may differ from its economic income or loss on its shares.
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Items of income, gain, deduction, loss and credit with respect to shares could be reallocated, and UNL could be liable for U.S. federal income tax, if the U.S. Internal Revenue Service ("IRS") does not accept the assumptions and conventions applied by UNL in allocating those items, with potential adverse consequences for an investor.
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UNL could be treated as a corporation for federal income tax purposes, which may substantially reduce the value of the shares.
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UNL is organized and operated as a limited partnership in accordance with the provisions of the LP Agreement and applicable state law, and therefore, UNL has a more complex tax treatment than traditional mutual funds.
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If UNL is required to withhold tax with respect to any Non-U.S. shareholders, the cost of such withholding may be borne by all shareholders.
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The impact of U.S. tax reform on UNL is uncertain.
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UNL will be subject to credit risk with respect to counterparties to OTC contracts entered into by UNL or held by special purpose or structured vehicles.
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Valuing OTC derivatives may be less certain than actively traded financial instruments.
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Fees of UNL
Fees and Compensation Arrangements with USCF and Non-Affiliated
Service Providers
Service Provider
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Compensation Paid by USCF(1)
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BBH&Co., Custodian and Administrator(3)
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Minimum amount of $75,000 annually
for its custody, fund accounting and fund administration services rendered to all funds, as well as a $20,000 annual fee for its
transfer agency services. In addition, an asset-based charge of (a) 0.06% for the first $500 million of UNL’s and the
Related Public Funds’ combined net assets, (b) 0.0465% for UNL’s and the Related Public Funds’ combined
net assets greater than $500 million but less than $1 billion, and (c) 0.035% once UNL’s and the Related Public Funds’
combined net assets exceed $1 billion.(2)
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BNY Mellon, Custodian and Administrator(4)
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Provides custody, fund accounting fund administration and transfer
agency services to UNL and the Related Public Funds' based on average AUM. The annual fees for UNL and the combined Related Public
Funds' may range from $0.4 million to $2.4 million depending on average AUM for any given year.
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ALPS Distributors - Marketing Agent(4)
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0.06% on UNL’s assets up to $3 billion and 0.04% on UNL’s assets in excess of $3 billion.
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(1)
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USCF pays this compensation.
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(2)
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The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. USCF also will pay transaction charge fees to BBH&Co., ranging from $7 to $15 per transaction for the funds.
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(3)
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BBH&Co. provided certain fund accounting and fund administration services to UNL through May 31, 2020.
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(4)
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BNY Mellon has served as the Custodian and Administrator of UNL since April 1, 2020.*
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Compensation to USCF
UNL is contractually obligated to pay USCF
a management fee based on 0.75% per annum on its average daily total net assets. Fees are calculated on a daily basis (accrued
at 1/366 of the applicable percentage of total net assets on that day) and paid on a monthly basis. Total net assets are calculated
by taking the current market value of UNL’s total assets and subtracting any liabilities.
Fees and Compensation Arrangements between UNL and Non-Affiliated
Service Providers (5)
Service Provider
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Compensation
Paid by UNL
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RBC Capital Futures Commission Merchant
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Approximately $3.50 per buy or sell; charges may vary
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RCG Division of Marex Spectron, Futures Commission Merchant
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E D & F Man Capital Markets Inc., Futures Commission
Merchant
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MFUSA, Futures Commission Merchant
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(5)
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UNL pays this compensation.
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New York Mercantile Exchange Licensing Fee(6) –
0.015% on all net assets.
(6)
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Fees are calculated on a daily basis (accrued at 1/366 of the applicable percentage of NAV on that day) and paid on a monthly basis. UNL is responsible for its pro rata share of the assets held by UNL and the Related Public Funds, other than BNO, USCI and CPER.
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Expenses Paid or Accrued by UNL from Inception through
December 31, 2020 in dollar terms:
Expenses:
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Amount in Dollar Terms
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Amount Paid or Accrued to USCF:
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$
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1,599,207
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Amount Paid or Accrued in Portfolio Brokerage Commissions:
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$
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71,768
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Other Amounts Paid or Accrued(7):
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$
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1,499,716
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Total Expenses Paid or Accrued:
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$
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3,170,691
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Expenses Waived(8):
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$
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(1,147,245
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)
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Total Expenses Paid or Accrued Excluding Expenses Waived(8) :
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$
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2,023,446
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(7)
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Includes expenses relating to legal fees, auditing fees, printing expenses, licensing fees, tax reporting fees, prepaid insurance expenses and miscellaneous expenses and fees and expenses paid to the independent directors of USCF.
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(8)
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USCF has voluntarily agreed to pay certain expenses typically borne by UNL, to the extent that such 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.
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Expenses Paid or Accrued by UNL from Inception through
December 31, 2020 as a Percentage of Average Daily Net Assets:
Expenses:
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Amount as a Percentage of
Average Daily Net Assets
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Amount Paid or Accrued to USCF:
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0.74% annualized
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Amount Paid or Accrued in Portfolio Brokerage Commissions:
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0.03% annualized
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Other Amounts Paid or Accrued(9):
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0.68% annualized
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Total Expenses Paid or Accrued:
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1.45% annualized
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Expenses Waived(10):
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0.51% annualized
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Total Expenses Paid or Accrued Excluding Expenses Waived(10) :
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0.94% annualized
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(9)
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Includes expenses relating to legal fees, auditing fees, printing expenses, licensing fees, tax reporting fees, prepaid insurance expenses and miscellaneous expenses and fees and expenses paid to the independent directors of USCF.
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(10)
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USCF has voluntarily agreed to
pay certain expenses typically borne by UNL, to the extent that such 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.
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Other Fees. UNL also pays
the fees and expenses associated with its audit, tax accounting and reporting requirements. These fees were approximately $51,400
for the fiscal year ended December 31, 2020. In addition, 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 organized as limited partnerships and, as of July 8,
2011, those Related Public Funds organized as a series of a Delaware statutory trust. 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 ended December 31, 2020 were $585,896 for UNL and the Related Public
Funds. UNL’s portion of such fees and expenses for the year ended December 31, 2020 was $2,711.
Form of Shares
Registered Form. Shares are
issued in registered form in accordance with the LP Agreement. The Administrator has been appointed registrar and transfer agent
for the purpose of transferring shares in certificated form. The Administrator keeps a record of all limited partners and holders
of the shares in certificated form in the registry. USCF recognizes transfers of shares in certificated form only if done in accordance
with the LP Agreement. The beneficial interests in such shares are held in book-entry form through participants and/or accountholders
in the Depository Trust Company (“DTC”).
Book Entry. Individual certificates
are not issued for the shares. Instead, shares are represented by one or more global certificates, which are deposited by the Administrator
with DTC and registered in the name of Cede & Co., as nominee for DTC. The global certificates evidence all of the shares
outstanding at any time. Shareholders are limited to: (1) participants in DTC such as banks, brokers, dealers and trust companies
(“DTC Participants”), (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those banks, brokers, dealers, trust companies and others who hold
interests in the shares through DTC Participants or Indirect Participants, in each case who satisfy the requirements for transfers
of shares. DTC Participants acting on behalf of investors holding shares through such participants’ accounts in DTC will
follow the delivery practice applicable to securities eligible for DTC’s Same-Day Funds Settlement System. Shares are credited
to DTC Participants’ securities accounts following confirmation of receipt of payment.
DTC. DTC has advised UNL
as follows: It is a limited purpose trust company organized under the laws of the State of New York and is a member of the Federal
Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities for DTC Participants
and facilitates the clearance and settlement of transactions between DTC Participants through electronic book-entry changes in
accounts of DTC Participants.
Calculating Per Share NAV
UNL’s per share NAV is calculated by:
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Taking the current market value of its total assets;
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Subtracting any liabilities; and
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Dividing that total by the total number of outstanding shares.
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The Administrator calculates the per share
NAV of UNL once each NYSE Arca trading day. The per share NAV for a normal 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. The 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 Futures
Contracts traded on the NYMEX, but calculates or determines the value of all other UNL investments (including Natural Gas Futures
Contracts not traded on the NYMEX, Other Natural Gas-Related Investments and Treasuries) using market quotations, if available,
or other information customarily used to determine the fair value of such investments as of the earlier of the close of the NYSE
Arca or 4:00 p.m. New York time in accordance with the current Administrative Agency Agreement among the Administrator, UNL
and USCF. “Other information” customarily used in determining fair value includes information consisting of market
data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields,
yield curves, volatilities, spreads, correlations or other market data in the relevant market; or information of the types described
above from internal sources if that information is of the same type used by UNL in the regular course of its business for the valuation
of similar transactions. The information may include costs of funding, to the extent costs of funding are not and would not be
a component of the other information being utilized. Third parties supplying quotations or market data may include, without limitation,
dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information.
In addition, in order to provide updated
information relating to UNL for use by investors and market professionals, the NYSE Arca calculates and disseminates throughout
the core trading session on each trading day an updated indicative fund value. The indicative fund value is calculated by using
the prior day’s closing per share NAV of UNL as a base and updating that value throughout the trading day to reflect changes
in the most recently reported trade price for the active natural gas Futures Contracts on the NYMEX. The prices reported for the
active Futures Contract month are adjusted based on the prior day’s spread differential between settlement values for the
relevant contract and the spot month contract. In the event that the spot month contract is also the Benchmark Futures Contracts,
the last sale price for that contract is not adjusted. The indicative fund value share basis disseminated during NYSE Arca core
trading session hours should not be viewed as an actual real time update of the per share NAV, because the per share NAV is calculated
only once at the end of each trading day based upon the relevant end of day values of UNL’s investments.
The indicative fund value is disseminated
on a per share basis every 15 seconds during regular NYSE Arca core trading session hours of 9:30 a.m. New York time to 4:00
p.m. New York time. The normal trading hours of the NYMEX are 9:00 a.m. New York time to 2:30 p.m. New York time.
This means that there is a gap in time at the beginning and the end of each day during which UNL’s shares are traded on the
NYSE Arca, but real-time NYMEX trading prices for Futures Contracts traded on the NYMEX are not available. During such gaps in
time, the indicative fund value will be calculated based on the end of day price of such Futures Contracts from the NYMEX’s
immediately preceding trading session. In addition, other Natural Gas Interests and Treasuries held by UNL will be valued by the
Administrator, using rates and points received from client-approved third party vendors (such as Reuters and WM Company) and advisor
quotes. These investments will not be included in the indicative fund value.
The NYSE Arca disseminates the indicative fund value through
the facilities of CTA/CQ High Speed Lines. In addition, the indicative fund value is published on NYSE Arca's website and is available
through on-line information services such as Bloomberg and Reuters.
Dissemination of the indicative fund value
provides additional information that is not otherwise available to the public and is useful to investors and market professionals
in connection with the trading of UNL shares on the NYSE Arca. Investors and market professionals are able throughout the trading
day to compare the market price of UNL and the indicative fund value. If the market price of UNL shares diverges significantly
from the indicative fund value, market professionals will have an incentive to execute arbitrage trades. For example, if UNL appears
to be trading at a discount compared to the indicative fund value, a market professional could buy UNL shares on the NYSE Arca
and sell short Natural Gas Futures Contracts. Such arbitrage trades can tighten the tracking between the market price of UNL and
the indicative fund value and thus can be beneficial to all market participants.
UNL reserves the right to adjust the Share
price of UNL in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through
stock splits or reverse stock splits. Such splits would decrease (in the case of a split) or increase (in the case of a reverse
split) the proportionate net asset value per Share, but would have no effect on the net assets of UNL or the proportionate voting
rights of shareholders or limited partners.
Creation and Redemption of Shares
UNL creates and redeems shares from
time to time, but only in one or more Creation Baskets or Redemption Baskets. The creation and redemption of baskets are only made
in exchange for delivery to UNL or the distribution by UNL of the amount of Treasuries and any cash represented by the
baskets being created or redeemed, the amount of which is based on the combined NAV of the number of shares included in the baskets
being created or redeemed determined as of 4:00 p.m. New York time on the day the order to create or redeem baskets is properly
received.
Authorized Participants are the only persons
that may place orders to create and redeem baskets. Authorized Participants must be: (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions, that are not required to register as broker-dealers
to engage in securities transactions as described below, and (2) DTC Participants. To become an Authorized Participant, a
person must enter into an Authorized Participant Agreement with USCF on behalf of UNL (each such agreement, an “Authorized
Participant Agreement”). The Authorized Participant Agreement provides the procedures for the creation and redemption of
baskets and for the delivery of the Treasuries and any cash required for such creations and redemptions. The Authorized Participant
Agreement and the related procedures attached thereto may be amended by UNL, without the consent of any limited partner or shareholder
or Authorized Participant. Authorized Participants pay a transaction fee of $350 to UNL for each order placed
to create one or more Creation Baskets or to redeem one or more Redemption Baskets. The transaction fee may be reduced, increased,
or otherwise changed by USCF. Authorized Participants who make deposits with UNL in exchange for baskets receive no fees,
commissions or other form of compensation or inducement of any kind from either UNL or USCF, and no such person will have
any obligation or responsibility to UNL or USCF to effect any sale or resale of shares. As of December 31, 2020, 10
Authorized Participants had entered into agreements with USCF on behalf of UNL. During the year ended December 31, 2020, UNL
issued 11 Creation Baskets and did not issue any Redemption Baskets.
Certain Authorized Participants are expected
to be capable of participating directly in the physical natural gas market and the natural gas futures market. In some cases,
Authorized Participants or their affiliates may from time to time buy or sell natural gas or Natural Gas Interests
and may profit in these instances. USCF believes that the size and operation of the natural gas market make it unlikely that
an Authorized Participant’s direct activities in the natural gas or securities markets will significantly affect the
price of natural gas, Natural Gas Interests or the price of the shares.
Each Authorized Participant is required
to be registered as a broker-dealer under the Exchange Act and is a member in good standing with FINRA, or exempt from being or
otherwise not required to be registered as a broker-dealer or a member of FINRA, and qualified to act as a broker or dealer in
the states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may also be regulated
under federal and state banking laws and regulations. Each Authorized Participant has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.
Under the Authorized Participant Agreement,
USCF, and UNL under limited circumstances, have agreed to indemnify the Authorized Participants against certain liabilities,
including liabilities under the 1933 Act, and to contribute to the payments the Authorized Participants may be required to
make in respect of those liabilities.
The following description of the procedures
for the creation and redemption of baskets is only a summary and an investor should refer to the relevant provisions of the LP
Agreement and the form of Authorized Participant Agreement for more detail, each of which is incorporated by reference into this
annual report on Form 10-K.
Creation Procedures
On any business day, an Authorized Participant
may place an order with the Marketing Agent to create one or more baskets. For purposes of processing purchase and redemption orders,
a “business day” means any day other than a day when any of the NYSE Arca, the NYMEX or the NYSE is closed for
regular trading. Purchase orders must be placed by 12:00 p.m. New York time or the close of regular trading on the NYSE Arca,
whichever is earlier. The day on which the Marketing Agent receives a valid purchase order is referred to as the purchase order
date.
By placing a purchase order, an
Authorized Participant agrees to deposit Treasuries, cash, or a combination of Treasuries and cash, as described below. Prior
to the delivery of baskets for a purchase order, the Authorized Participant must also have wired to the Custodian the
non-refundable transaction fee due for the purchase order. Authorized Participants may not withdraw a Creation Basket
request, except as otherwise set forth in the procedures in the Authorized Participant Agreement.
The manner by which creations are made
is dictated by the terms of the Authorized Participant Agreement. By placing a purchase order, an Authorized Participant agrees
to (1) deposit Treasuries, cash, or a combination of Treasuries and cash with the Custodian, and (2) if required by USCF
in its sole discretion, enter into or arrange for a block trade, an exchange for physical or exchange for swap, or any other OTC
energy transaction (through itself or a designated acceptable broker) with UNL for the purchase of a number and type of futures
contracts at the closing settlement price for such contracts on the purchase order date. If an Authorized Participant fails to
consummate (1) and (2), the order shall be cancelled. The number and types of contracts specified shall be determined by USCF,
in its sole discretion, to meet UNL’s investment objective and shall be purchased as a result of the Authorized Participant’s
purchase of shares.
Determination of Required Deposits
The total deposit required to create each
Creation Basket (“Creation Basket Deposit”) is the amount of Treasuries and/or cash that is in the same proportion
to the total assets of UNL (net of estimated accrued but unpaid fees, expenses and other liabilities) on the purchase order
date as the number of shares to be created under the purchase order is in proportion to the total number of shares outstanding
on the purchase order date. USCF determines, directly in its sole discretion or in consultation with the Administrator, the requirements
for Treasuries and the amount of cash, including the maximum permitted remaining maturity of a Treasury and proportions of Treasury
and cash that may be included in deposits to create baskets. The Marketing Agent will publish such requirements at the beginning
of each business day. The amount of cash deposit required is the difference between the aggregate market value of the Treasuries
required to be included in a Creation Basket Deposit as of 4:00 p.m. New York time on the date the order to purchase is properly
received and the total required deposit.
Delivery of Required Deposits
An Authorized Participant who places a
purchase order is responsible for transferring to UNL’s account with the Custodian the required amount of Treasuries and
cash by the end of the second business day following the purchase order date. Upon receipt of the deposit amount, the Administrator
directs DTC to credit the number of baskets ordered to the Authorized Participant’s DTC account on the second business day
following the purchase order dates. The expense and risk of delivery and ownership of Treasuries until such Treasuries have been
received by the Custodian on behalf of UNL shall be borne solely by the Authorized Participant.
Because orders to purchase baskets must
be placed by 12:00 p.m., New York time, but the total payment required to create a basket during the continuous offering period
will not be determined until after 4:00 p.m., New York time, on the date the purchase order is received, Authorized Participants
will not know the total amount of the payment required to create a basket at the time they submit an irrevocable purchase order
for the basket. UNL’s NAV and the total amount of the payment required to create a basket could rise or fall substantially
between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect thereof is
determined.
Rejection of Purchase Orders
USCF acting by itself or through the Marketing
Agent shall have the absolute right but no obligation to reject a purchase order or a Creation Basket Deposit if:
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it determines that the investment alternative available to UNL at that time will not enable it to meet its investment objective;
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it determines that the purchase order or the Creation Basket Deposit is not in proper form;
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it believes that the purchase order or the Creation Basket Deposit would have adverse tax consequences to UNL, the limited partners or its shareholders;
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the acceptance or receipt of the Creation Basket Deposit would, in the opinion of counsel to USCF, be unlawful; or
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circumstances outside the control of USCF, Marketing Agent or Custodian make it, for all practical purposes, not feasible to process creations of baskets.
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None of USCF, the Marketing Agent or the
Custodian will be liable for the rejection of any purchase order or Creation Basket Deposit.
Redemption Procedures
The procedures by which an Authorized Participant
can redeem one or more baskets mirror the procedures for the creation of baskets. On any business day, an Authorized Participant
may place an order with the Marketing Agent to redeem one or more baskets. Redemption orders must be placed by 12:00 p.m. New
York time or the close of regular trading on the NYSE Arca, whichever is earlier. A redemption order so received will be effective
on the date it is received in satisfactory form by the Marketing Agent (“Redemption Order Date”). The redemption procedures
allow Authorized Participants to redeem baskets and do not entitle an individual shareholder to redeem any shares in an amount
less than a Redemption Basket, or to redeem baskets other than through an Authorized Participant.
By placing a redemption order, an Authorized
Participant agrees to deliver the baskets to be redeemed through DTC’s book-entry system to UNL, as described below. Prior
to the delivery of the redemption distribution for a redemption order, the Authorized Participant must also have wired to UNL’s
account at the Custodian the non-refundable transaction fee due for the redemption order. An Authorized Participant may not withdraw
a redemption order, except as otherwise set forth in the procedures in the Authorized Participant Agreement.
The manner by which redemptions are made
is dictated by the terms of the Authorized Participant Agreement. By placing a redemption order, an Authorized Participant agrees
to (1) deliver the Redemption Basket to be redeemed through DTC’s book-entry system to UNL’s account with the
Custodian not later than 3:00 p.m. New York time on the second business day following the effective date of the redemption
order (“Redemption Distribution Date”), and (2) if required by USCF in its sole discretion, enter into or arrange
for a block trade, an exchange for physical or exchange for swap, or any other OTC energy transaction (through itself or a designated
acceptable broker) with UNL for the sale of a number and type of futures contracts at the closing settlement price for such
contracts on the Redemption Order Date. If an Authorized Participant fails to consummate (1) and (2) above, the order
shall be cancelled. The number and type of contracts specified shall be determined by USCF, in its sole discretion, to meet UNL’s
investment objective and shall be sold as a result of the Authorized Participant’s sale of shares.
Determination of Redemption Distribution
The redemption distribution from UNL
consists of a transfer to the redeeming Authorized Participant of an amount of Treasuries and/or cash that is in the same proportion
to the total assets of UNL (net of estimated accrued but unpaid fees, expenses and other liabilities) on the date the order
to redeem is properly received as the number of shares to be redeemed under the redemption order is in proportion to the total
number of shares outstanding on the date the order is received. USCF, directly or in consultation with the Administrator, determines
the requirements for Treasuries and the amounts of cash, including the maximum permitted remaining maturity of a Treasury, and
the proportions of Treasuries and cash that may be included in distributions to redeem baskets. The Marketing Agent will publish
an estimate of the redemption distribution per basket as of the beginning of each business day.
Delivery of Redemption Distribution
The redemption distribution due from UNL
will be delivered to the Authorized Participant by 3:00 p.m. New York time on the second business day following the redemption
order date if, by 3:00 p.m. New York time on such second business day, UNL’s DTC account has been credited with the
baskets to be redeemed. If UNL’s DTC account has not been credited with all of the baskets to be redeemed by such time, the
redemption distribution will be delivered to the extent of whole baskets received. Any remainder of the redemption distribution
will be delivered on the next business day to the extent of remaining whole baskets received if UNL receives the fee applicable
to the extension of the redemption distribution date which USCF may, from time to time, determine and the remaining baskets to
be redeemed are credited to UNL’s DTC account by 3:00 p.m. New York time on such next business day. Any further outstanding
amount of the redemption order shall be cancelled. Pursuant to information from USCF, the Custodian will also be authorized to
deliver the redemption distribution notwithstanding that the baskets to be redeemed are not credited to UNL’s DTC account
by 3:00 p.m. New York time on the second business day following the redemption order date if the Authorized Participant has
collateralized its obligation to deliver the baskets through DTC’s book entry-system on such terms as USCF may from time
to time determine.
Suspension or Rejection of Redemption
Orders
USCF may, in its discretion, suspend the
right of redemption, or postpone the redemption settlement date, (1) for any period during which the NYSE Arca or the NYMEX
is closed other than customary weekend or holiday closings, or trading on the NYSE Arca or the NYMEX is suspended or restricted,
(2) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of Treasuries is
not reasonably practicable, or (3) for such other period as USCF determines to be necessary for the protection of the limited
partners or shareholders. For example, USCF may determine that it is necessary to suspend redemptions to allow for the orderly
liquidation of UNL’s assets at an appropriate value to fund a redemption. If USCF has difficulty liquidating its positions,
e.g., because of a market disruption event in the futures markets, a suspension of trading by the exchange where the futures contracts
are listed or an unanticipated delay in the liquidation of a position in an OTC contract, it may be appropriate to suspend redemptions
until such time as such circumstances are rectified. None of USCF, the Marketing Agent, the Administrator, or the Custodian will
be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
Redemption orders must be made in whole
baskets. USCF will reject a redemption order if the order is not in proper form as described in the Authorized Participant Agreement
or if the fulfillment of the order, in the opinion of its counsel, might be unlawful. USCF may also reject a redemption order if
the number of shares being redeemed would reduce the remaining outstanding shares to 100,000 shares (i.e., two baskets) or
less, unless USCF has reason to believe that the placer of the redemption order does in fact possess all the outstanding shares
and can deliver them.
Creation and Redemption Transaction
Fee
To compensate UNL for its expenses
in connection with the creation and redemption of baskets, an Authorized Participant is required to pay a transaction
fee to UNL of $350 per order to create or redeem baskets, regardless of the number of baskets in such order. An order
may include multiple baskets. The transaction fee may be reduced, increased or otherwise changed by USCF. USCF shall notify DTC
of any change in the transaction fee and will not implement any increase in the fee for the redemption of baskets until thirty
(30) days after the date of the notice.
Tax Responsibility
Authorized Participants are responsible
for any transfer tax, sales or use tax, stamp tax, recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax or charge is imposed directly on the Authorized
Participant, and agree to indemnify USCF and UNL if they are required by law to pay any such tax, together with any applicable
penalties, additions to tax and interest thereon.
Secondary Market Transactions
As noted, UNL creates and redeems
shares from time to time, but only in one or more Creation Baskets or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to UNL or the distribution by UNL of the amount of Treasuries and cash represented
by the baskets being created or redeemed, the amount of which will be based on the aggregate NAV of the number of shares included
in the baskets being created or redeemed determined on the day the order to create or redeem baskets is properly received.
As discussed above, Authorized Participants
are the only persons that may place orders to create and redeem baskets. Authorized Participants must be registered broker-dealers
or other securities market participants, such as banks and other financial institutions that are not required to register as broker-dealers
to engage in securities transactions. An Authorized Participant is under no obligation to create or redeem baskets, and an Authorized
Participant is under no obligation to offer to the public shares of any baskets it does create. Authorized Participants that do
offer to the public shares from the baskets they create will do so at per-share offering prices that are expected to reflect, among
other factors, the trading price of the shares on the NYSE Arca, the NAV of UNL at the time the Authorized Participant purchased
the Creation Baskets and the NAV of the shares at the time of the offer of the shares to the public, the supply of and demand for
shares at the time of sale, and the liquidity of the Futures Contract market and the market for Other Natural Gas-Related
Investments.
The prices of shares offered by Authorized
Participants are expected to fall between UNL’s NAV and the trading price of the shares on the NYSE Arca at the time of sale.
Shares initially comprising the same basket but offered by Authorized Participants to the public at different times may have different
offering prices. An order for one or more baskets may be placed by an Authorized Participant on behalf of multiple clients. Authorized
Participants who make deposits with UNL in exchange for baskets receive no fees, commissions or other forms of compensation
or inducement of any kind from either UNL or USCF, and no such person has any obligation or responsibility to USCF or UNL
to effect any sale or resale of shares. Shares trade in the secondary market on the NYSE Arca. Shares may trade in the secondary
market at prices that are lower or higher relative to their NAV per share. The amount of the discount or premium in the trading
price relative to the NAV per share may be influenced by various factors, including, among other things, the number of
investors who seek to purchase or sell shares in the secondary market and the liquidity of the Futures Contracts market and
the market for Other Natural Gas-Related Investments. While the shares trade during the core trading session on the NYSE Arca
until 4:00 p.m. New York time, liquidity in the market for Futures Contracts and Other Natural Gas-Related Investments traded
on the NYMEX may be reduced after the close of the NYMEX at 2:30 p.m. New York time. As a result, during this time, particularly
if UNL has invested in Futures Contracts and Other Natural Gas-Related Investments traded on the NYMEX, trading spreads, and the
resulting premium or discount, on the shares may widen.
Use of Proceeds
USCF causes UNL to transfer the proceeds
from the sale of Creation Baskets to the Custodian or other custodian for trading activities. USCF will invest UNL’s assets
in Natural Gas-Interests and investments in Treasuries, cash and/or cash equivalents. When UNL purchases a Futures
Contract and certain exchange-traded Other Natural Gas-Related Investments, UNL is required to deposit typically 5% to
30% with the selling FCMs on behalf of the exchange a portion of the value of the contract or other interest as security to ensure
payment for the obligation under Natural Gas Interests at maturity. This deposit is known as initial margin. Counterparties
in transactions in OTC Natural Gas Interests will generally impose similar collateral requirements on UNL. USCF will
invest the assets that remain after margin and collateral are posted in Treasuries, cash and/or cash equivalents subject to these
margin and collateral requirements. USCF has sole authority to determine the percentage of assets that are:
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held on deposit with the FCMs or other custodian;
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used for other investments, and
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held in bank accounts to pay current obligations and
as reserves.
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Approximately 5% to 30% of UNL's
assets have normally been committed to margin for commodity futures contracts. However, from time to time, the percentage of
assets committed as margin may be substantially more, or less than, such range. An FCM, counterparty, government agency or
commodity exchange could increase margin or collateral requirements applicable to USO to hold trading positions at any time.
Ongoing margin and collateral payments will generally be required for both exchange-traded and OTC contracts based on changes
in the value of the Natural Gas Interests. Furthermore, ongoing collateral requirements with respect to OTC contracts are
negotiated by the parties, and may be affected by overall market volatility, volatility of the underlying commodity or index,
the ability of the counterparty to hedge its exposure under a Natural Gas Interests, and each party's creditworthiness.
Margin is merely a security deposit and has no bearing on the profit or loss potential for any positions held. In light of
the differing requirements for initial payments under exchange-traded and OTC contracts and the fluctuating nature of ongoing
margin and collateral payments, it is not possible to estimate what portion of UNL's assets will be posted as margin or
collateral at any given time. The Treasuries, cash and cash equivalents held by UNL will constitute reserves that will be
available to meet ongoing margin and collateral requirements. All interest income will be used for UNL's benefit. USCF
invests the balance of UNL's assets not invested in Natural Gas Interests or held in margin as reserves to be available for
changes in margin. All interest income is used for UNL's benefit.
The assets of UNL posted as margin
for Futures Contracts are held in segregated accounts pursuant to the CEA and CFTC regulations.
If UNL enters into a swap agreement, UNL
must post both collateral and independent amounts to its swap counterparties. The amount of collateral UNL posts changes according
to the amounts owed by UNL to its counterparty on a given swap transaction, while independent amounts are fixed amounts posted
by UNL at the start of a swap transaction. Collateral and independent amounts posted to swap counterparties will be held by
a third-party custodian.
The Commodity Interest Markets
General
The CEA governs the regulation of commodity
interest transactions, markets and intermediaries. The CEA provides for varying degrees of regulation of commodity interest transactions
depending upon: (1) the type of instrument being traded (e.g., contracts for future delivery, forwards, options, swaps or
spot contracts), (2) the type of commodity underlying the instrument (distinctions are made between instruments based on agricultural
commodities, energy and metals commodities and financial commodities), (3) the nature of the parties to the transaction (e.g.,
retail or eligible contract participant), (4) whether the transaction is entered into on a principal-to-principal or intermediated
basis, (5) the type of market on which the transaction occurs, and (6) whether the transaction is subject to clearing
through a clearing organization.
The offer and sale of shares of UNL, as
well as shares of each Related Public Fund, is registered under the 1933 Act. UNL and the Related Public Funds are subject
to the requirements of the 1933 Act, the Exchange Act and the rules and regulations adopted thereunder as administered
by the SEC. Firms' participation in the distribution of shares is regulated as described above, as well as by the self-regulatory
association, FINRA.
Futures Contracts
A futures contract is a standardized contract
traded on, or subject to the rules of, an exchange that calls for the future delivery of a specified quantity and type of
a commodity at a specified time and place. Futures contracts are traded on a wide variety of commodities, including agricultural
products, bonds, stock indices, interest rates, currencies, energy and metals. The size and terms of futures contracts on a particular
commodity are identical and are not subject to any negotiation, other than with respect to price and the number of contracts traded
between the buyer and seller.
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. The difference
between the price at which the futures contract is purchased or sold and the price paid for the offsetting sale or purchase, after
allowance for brokerage commissions, constitutes the profit or loss to the trader. Some futures contracts, such as stock index
contracts, settle in cash (reflecting the difference between the contract purchase/sale price and the contract settlement price)
rather than by delivery of the underlying commodity.
In market terminology, a trader who purchases
a futures contract is long in the market and a trader who sells a futures contract is short in the market. Before a trader closes
out his long or short position by an offsetting sale or purchase, his outstanding contracts are known as open trades or open positions.
The aggregate amount of open positions held by traders in a particular contract is referred to as the open interest in such contract.
Forward Contracts
A forward contract is a contractual obligation
to purchase or sell a specified quantity of a commodity at or before a specified date in the future at a specified price and, therefore,
is economically similar to a futures contract. Unlike futures contracts, however, forward contracts are typically traded in the
OTC markets and are not standardized contracts. Forward contracts for a given commodity are generally available for various amounts
and maturities and are subject to individual negotiation between the parties involved. Moreover, generally there is no direct means
of offsetting or closing out a forward contract by taking an offsetting position as one would a futures contract on a U.S. exchange.
If a trader desires to close out a forward contract position, he generally will establish an opposite position in the contract
but will settle and recognize the profit or loss on both positions simultaneously on the delivery date. Thus, unlike in the futures
contract market where a trader who has offset positions will recognize profit or loss immediately, in the forward market a trader
with a position that has been offset at a profit will generally not receive such profit until the delivery date, and likewise a
trader with a position that has been offset at a loss will generally not have to pay money until the delivery date. Nevertheless,
in some instances forward contracts now provide a right of offset or cash settlement as an alternative to making or taking delivery
of the underlying commodity.
In general, the CFTC does not regulate
the interbank and forward foreign currency markets with respect to transactions in contracts between certain sophisticated counterparties
such as UNL or between certain regulated institutions and retail investors. Although U.S. banks are regulated in various ways
by the Federal Reserve Board, the Comptroller of the Currency and other U.S. federal and state banking officials, banking authorities
do not regulate the forward markets to the same extent that the swap markets are regulated by the CFTC and SEC.
Regulation exempts both foreign exchange
swaps and foreign exchange forwards from the definition of “swap” and, by extension, certain regulatory requirements
applicable to swaps (such as clearing and margin). The final exemption does not extend to other foreign exchange derivatives, such
as foreign exchange options, currency swaps, and non-deliverable forwards.
While the U.S. government does not currently
impose any restrictions on the movements of currencies, it could choose to do so. The imposition or relaxation of exchange controls
in various jurisdictions could significantly affect the market for that and other jurisdictions’ currencies. Trading in the
interbank market also exposes UNL to a risk of default since failure of a bank with which UNL had entered into a forward
contract would likely result in a default and thus possibly substantial losses to UNL.
Options on Futures Contracts
Options on futures contracts are standardized
contracts traded on an exchange. An option on a futures contract gives the buyer of the option the right, but not the obligation,
to take a position at a specified price (the striking, strike, or exercise price) in the underlying futures contract or underlying
interest. The buyer of a call option acquires the right, but not the obligation, to purchase or take a long position in the underlying
interest, and the buyer of a put option acquires the right, but not the obligation, to sell or take a short position in the underlying
interest.
The seller, or writer, of an option is
obligated to take a position in the underlying interest at a specified price opposite to the option buyer if the option is exercised.
The seller of a call option must stand ready to take a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand, must stand ready to take a long position in the underlying
interest at the strike price.
A call option is said to be in-the-money
if the strike price is below current market levels and out-of-the-money if the strike price is above current market levels. Conversely,
a put option is said to be in-the-money if the strike price is above the current market levels and out-of- the-money if the strike
price is below current market levels.
Options have limited life spans, usually
tied to the delivery or settlement date of the underlying interest. Some options, however, expire significantly in advance of such
date. The purchase price of an option is referred to as its premium, which consists of its intrinsic value (which is related to
the underlying market value) plus its time value. As an option nears its expiration date, the time value shrinks and the market
and intrinsic values move into parity. An option that is out-of-the-money and not offset by the time it expires becomes worthless.
On certain exchanges, in-the-money options are automatically exercised on their expiration date, but on others unexercised options
simply become worthless after their expiration date.
Regardless of how much the market swings,
the most an option buyer can lose is the option premium. The option buyer deposits his premium with his broker, and the money goes
to the option seller. Option sellers, on the other hand, face risks similar to participants in the futures markets. For example,
since the seller of a call option is assigned a short futures position if the option is exercised, his risk is the same as someone
who initially sold a futures contract. Because no one can predict exactly how the market will move, the option seller typically
posts margin to demonstrate his ability to meet any potential contractual obligations.
Options on Forward Contracts or Commodities
Options on forward contracts or commodities
operate in a manner similar to options on futures contracts. An option on a forward contract or commodity gives the buyer of the
option the right, but not the obligation, to take a position at a specified price in the underlying forward contract or commodity.
However, unlike options on futures contracts, options on forward contracts or on commodities are individually negotiated contracts
between counterparties and are typically traded in the OTC market. Therefore, options on forward contracts and physical commodities
possess many of the same characteristics of forward contracts with respect to offsetting positions and credit risk that are described
above.
Swap Contracts
Swap transactions generally involve contracts
between two parties to exchange a stream of payments computed by reference to a notional amount and the price of the asset that
is the subject of the swap. Swap contracts are principally traded off-exchange, although certain swap contracts are also being
traded in electronic trading facilities and cleared through clearing organizations.
Swaps are usually entered into on a net
basis, that is, the two payment streams are netted out in a cash settlement on the payment date or dates specified in the agreement,
with the parties receiving or paying, as the case may be, only the net amount of the two payments. Swaps do not generally involve
the delivery of underlying assets or principal. Accordingly, the risk of loss with respect to swaps is generally limited to the
net amount of payments that the party is contractually obligated to make. In some swap transactions one or both parties may require
collateral deposits from the counterparty to support that counterparty’s obligation under the swap agreement. If the counterparty
to such a swap defaults, the risk of loss consists of the net amount of payments that the party is contractually entitled to receive
less any collateral deposits it is holding.
Some swap transactions are cleared through
central counterparties. “Clearing” refers to the process by which a trade that is bilaterally executed by two parties
is submitted to a central clearing counterparty, via a clearing member (i.e., an FCM), and replaced by two mirror swaps, with the
central clearing counterparty becoming the counterparty to both of the initial parties to the swap. These transactions, known as
cleared swaps, involve two counterparties first agreeing to the terms of a swap transaction, then submitting the transaction to
a clearing house that acts as the central counterparty. Once accepted by the clearing house, the original swap transaction is terminated
and replaced by two mirror trades for which the central counterparty becomes the counterparty to each of the original parties based
upon the trade terms determined in the original transaction. In this manner each individual swap counterparty reduces its risk
of loss due to counterparty nonperformance because the clearing house acts as the counterparty to each transaction.
Commodities Regulation
Futures exchanges in the United States
are subject to varying degrees of regulation under the CEA depending on whether such exchange is a designated contract market,
exempt board of trade or electronic trading facility. Clearing organizations are also subject to the CEA and the rules and
regulations adopted thereunder and administered by the CFTC. The CFTC is the governmental agency charged with responsibility for
regulation of futures exchanges and commodity interest trading. The CFTC’s function is to implement the CEA’s objectives
of preventing price manipulation and excessive speculation and promoting orderly and efficient commodity interest markets. In addition,
the various exchanges and clearing organizations themselves exercise regulatory and supervisory authority over their member firms.
The CFTC also regulates the activities
of “commodity trading advisors” and “commodity pool operators” and the CFTC has adopted regulations with
respect to certain of such persons’ activities. Pursuant to its authority, the CFTC requires a CPO, such as USCF, to keep
accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend, modify or terminate the registration
of any registrant for failure to comply with CFTC rules or regulations. Suspension, restriction or termination of USCF’s
registration as a CPO would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and
might result in the termination of, UNL or the Related Public Funds.
Under certain circumstances, the CEA grants
shareholders the right to institute a reparations proceeding before the CFTC against USCF (as a registered commodity pool operator),
as well as those of their respective employees who are required to be registered under the CEA. Shareholders may also be able to
maintain a private right of action for certain violations of the CEA.
Pursuant to authority in the CEA, the NFA
has been formed and registered with the CFTC as a registered futures association. The NFA is the only self-regulatory association
for commodities professionals other than the exchanges. As such, the NFA promulgates rules governing the conduct of commodity
professionals and disciplines those professionals that do not comply with such standards. The CFTC has delegated to the NFA responsibility
for the registration of commodity pool operators. USCF is a member of the NFA. As a member of the NFA, USCF is subject to NFA standards
relating to fair trade practices, financial condition, and consumer protection.
The CEA requires all FCMs, i.e., UNL’s
clearing brokers, to meet and maintain specified fitness and financial requirements, to segregate customer funds from proprietary
funds and account separately for all customers’ funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority over introducing brokers, or persons who solicit or accept
orders for commodity interest trades but who do not accept margin deposits for the execution of trades. The CEA authorizes the
CFTC to regulate trading by FCMs and by their officers and directors, permits the CFTC to require action by exchanges in the event
of market emergencies, and establishes an administrative procedure under which customers may institute complaints for damages arising
from alleged violations of the CEA.
The regulations of the CFTC and the NFA
prohibit any representation by a person registered with the CFTC or by any member of the NFA, that registration with the CFTC,
or membership in the NFA, in any respect indicates that the CFTC or the NFA, as the case may be, has approved or endorsed that
person or that person’s trading program or objectives. The registrations and memberships of the parties described in this
summary must not be considered as constituting any such approval or endorsement. Likewise, no futures exchange has given or will
give any similar approval or endorsement.
CFTC regulations require enhanced customer
protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures
and auditing and examination programs for FCMs. These regulations are intended to afford greater assurances to market participants
that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of the risks of
futures trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust manner,
the capital and liquidity of FCMs are strengthened to safeguard the continued operations, and the auditing and examination programs
of the CFTC and the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner.
UNL’s investors are afforded prescribed
rights for reparations under the CEA against USCF (as a registered commodity pool operator), as well as its respective employees
who are required to be registered under the CEA. Investors may also be able to maintain a private right of action for violations
of the CEA. The CFTC has adopted rules implementing the reparation provisions of the CEA, which provide that any person may
file a complaint for a reparations award with the CFTC for violation of the CEA against a floor broker or an FCM, introducing broker,
commodity trading advisor, CPO, and their respective associated persons.
The regulation of commodity interest trading
in the United States and other countries is an evolving area of the law. Below are discussed several key regulatory items that
are relevant to UNL. The various statements made in this summary are subject to modification by legislative action and changes
in the rules and regulations of the CFTC, the NFA, the futures exchanges, clearing organizations and other regulatory bodies.
In addition, with regard to any other rules that the CFTC or SEC may adopt in the future, the effect of any such regulatory
changes on UNL is impossible to predict, but it could be substantial and adverse.
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.
On October 15, 2020, the CFTC approved the Position Limits
Rule. The Position Limits Rule establishes federal position limits for 25 core referenced futures contracts (comprised of
agricultural, energy and metals futures contracts), futures and options linked to the core referenced futures contracts, and swaps
that are economically equivalent to the core referenced futures contracts. The Position Limits Rule sets position limits for
the spot month and non-spot month; however, the non-spot month limits only apply in respect of the agricultural futures contracts
that are currently subject to position limits under Part 150 of the CFTC regulations (the “legacy agricultural contracts”).
With respect to regulatory oversight, the Position Limits Rule delegates authority to designated contract markets and swap
execution facilities to oversee certain aspects of the position limits framework. In addition to setting the federal position limits,
the Position Limits Rule also provides several exemptions from such position limits, including an expanded list of enumerated
bona fide hedge exemptions and certain spread exemptions. Further, the Position Limits Rule sets forth two alternative processes
for pursuing an exemption for non-enumerated hedge positions. Other than for the legacy agricultural contracts, compliance with
the limits imposed by the Position Limits Rule will not be required until 2022, except that economically equivalent swaps
need not comply with the Position Limits Rule until 2023. The Benchmark Futures Contract will be subject to position
limits under the Position Limits Rule, and UNL’s trading does not qualify as an enumerated bona fide hedge. Accordingly,
the Position Limits Rule could negatively impact the ability of UNL to meet its investment objective by inhibiting USCF’s
ability to effectively invest the proceeds from sales of Creation Baskets of UNL in particular amounts and types of its permitted
investments.
Until such time as compliance with the Position Limits Rule is
required, 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 the nine legacy agricultural
contracts, 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).
Under existing CFTC regulations and the Position Limits Rule,
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% 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 market participant (the “Aggregation Rules”).
Margin Requirements
Futures and Cleared Swaps
Original or initial margin is the minimum
amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally less than the original margin) to which a trader’s
account may decline before he must deliver additional margin. A margin deposit is like a cash performance bond. It helps assure
the trader’s performance of the futures contracts that he or she purchases or sells.
Futures contracts are customarily bought
and sold on initial margin that represents a very small percentage (ranging upward from 5%) of the aggregate purchase or sales
price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create
profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation.
As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial
margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by
the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract.
Brokerage firms, such as UNL’s clearing
brokers, carrying accounts for traders in commodity interest contracts may not accept lower, and generally require higher, amounts
of margin as a matter of policy to further protect themselves. The clearing brokers require UNL to make margin deposits equal
to exchange minimum levels for all commodity interest contracts. This requirement may be altered from time to time in the clearing
brokers’ discretion.
Margin requirements are computed each day
by the relevant clearing organization and a trader’s clearing broker. When the market value of a particular open commodity
interest position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call
is made by the broker. With respect to trading by UNL, UNL (and not its investors personally) is subject to margin calls.
Finally, many major U.S. exchanges have
passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an
account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring
the total risk of the combined positions.
Options
When a trader purchases an option, there
is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he
or she may be required to deposit margin in an amount determined by the margin requirements established for the underlying interest
and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling
of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher
than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions,
which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying
interest.
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. UNL is not a Covered Swap Entity under the Final Margin Rules but it is a financial end-user. Accordingly, UNL
is currently subject to the variation margin requirements of the Final Margin Rules. However, UNL does not have material swaps
exposure and, accordingly, UNL 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 FCMs.
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.
SEC Reports
UNL makes available, free of charge,
on its website, its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K
and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon
as reasonably practicable after these forms are filed with, or furnished to, the SEC. These reports are also available from the
SEC through its website at: www.sec.gov.
CFTC Reports
UNL also makes available its monthly
reports and its annual reports required to be prepared and filed with the NFA under the CFTC regulations.
Intellectual Property
USCF owns trademark registrations for the
UNITED STATES 12 MONTH NATURAL GAS FUND (U.S. Reg. No. 3783071) for “Financial investment services in the field of natural
gas futures contracts, cash-settled options on natural gas futures contracts, forward contracts for natural gas, over-the-counter
transactions based on the price of natural gas, and indices based on the foregoing,” in use since November 18, 2009,
and UNL UNITED STATES 12 MONTH NATURAL GAS FUND, LP (and 12 and Flame Design) (U.S. Reg. No. 4440925) for “Financial
investment services in the field of natural gas futures contracts, cash-settled options on natural gas futures contracts, forward
contracts for natural gas, over-the-counter transactions based on the price of natural gas, and indices based on the foregoing,”
in use since September 30, 2012. USCF relies upon these trademarks through which it markets its services and strives to build
and maintain brand recognition in the market and among current and potential investors. So long as USCF continues to use these
trademarks to identify its services, without challenge from any third party, and properly maintains and renews the trademark registrations
under applicable laws, rules and regulations, it will continue to have indefinite protection for these trademarks under current
laws, rules and regulations.
USCF owns trademark registrations for USCF
(and Design) (U.S. Reg. No. 5127374) for “Fund investment services,” in use since April 10, 2016, USCF (U.S.
Reg No. 5040755) for “Fund investment services,” in use since June 24, 2008, and INVEST IN WHAT’S REAL
(U.S. Reg. No. 5450808) for “Fund investment services,” in use since April 2016. USCF relies upon these trademarks
and service mark through which it markets its services and strives to build and maintain brand recognition in the market and among
current and potential investors. So long as USCF continues to use these trademarks to identify its services, without challenge
from any third party, and properly maintains and renews the trademark registrations under applicable laws, rules and regulations;
it will continue to have indefinite protection for these trademarks under current laws, rules and regulations. USCF has been
granted two patents Nos. 7,739,186 and 8,019,675, for systems and methods for an exchange traded fund (ETF) that tracks the price
of one or more commodities.
Item 1A. Risk Factors.
The following risk factors should be
read in connection with the other information included in this annual report on Form 10-K, including Management’s Discussion
and Analysis of Financial Condition and Results of Operations and UNL’s financial statements and the related notes.
UNL's investment objective is for the daily percentage changes
in the NAV per share to reflect the daily percentage changes of the spot price of natural gas delivered at the Henry Hub, Louisiana
as measured by the daily percentage changes in the price of the average of the prices of 12 futures contracts on 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. 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.
UNL’s investment strategy is designed
to provide investors with a means of investing indirectly in natural gas and to hedge against movements in the spot price of natural
gas. An investment in UNL involves investment risk similar to a direct investment in Natural Gas Interests. An investment in UNL
also involves investment risk similar to a direct investment in Futures Contracts and Other Natural Gas-Related Investments, and
correlation risk, or the risk that investors purchasing shares to hedge against movements in the price of natural gas will have
an efficient hedge only if the price they pay for their shares closely correlates with the price of natural gas. In addition to
investment risk and correlation risk, an investment UNL involves tax risks, OTC and other risks.
Investment Risk
The daily changes in percentage terms
of UNL’s shares per share NAV relates directly to daily changes in the average of the prices of the price Benchmark Futures
Contracts and other assets held by UNL and fluctuations in the prices of these assets could materially adversely affect an investment
in UNL’s shares. Past performance is not necessarily indicative of futures results; all or substantially all of an investment
in UNL could be lost.
The net assets of UNL consist primarily
of investments in Futures Contracts and, to a lesser extent, in Other Natural Gas-Related Investments. The NAV of UNL’s shares
relates directly to the value of these assets (less liabilities, including accrued but unpaid expenses), which in turn relates
to the price of natural gas in the marketplace. Natural gas prices depend on local, regional and global events or conditions that
affect supply and demand for natural gas.
Economic conditions impacting natural
gas. The demand for natural gas correlates closely with general economic growth rates. The occurrence of recessions or
other periods of low or negative economic growth will typically have a direct adverse impact on natural gas demand and therefore
may have an adverse impact on natural gas prices. Other factors that affect general economic conditions in the world or in a major
region, such as changes in population growth rates, periods of civil unrest, pandemics, (e.g. COVID-19) government austerity programs,
or currency exchange rate fluctuations, can also impact the demand for natural gas. Sovereign debt downgrades, defaults, inability
to access debt markets due to credit or legal constraints, liquidity crises, the breakup or restructuring of fiscal, monetary,
or political systems such as the European Union, and other events or conditions (e.g., pandemics such as COVID-19) that impair
the functioning of financial markets and institutions also may adversely impact the demand for natural gas.
Other natural gas demand-related
factors. Other factors that may affect the demand for natural gas and therefore its price, include technological improvements
in energy efficiency; seasonal weather patterns, which affect the demand for natural gas associated with heating; increased competitiveness
of alternative energy sources that have so far generally not been competitive with natural gas without the benefit of government
subsidies or mandates; and changes in technology or consumer preferences that alter fuel choices, such as toward alternative fueled
vehicles.
Other natural gas supply-related
factors. Natural gas prices also vary depending on a number of factors affecting supply. For example, increased supply
from the development of new natural gas sources and technologies to enhance recovery from existing sources tends to reduce natural
gas prices to the extent such supply increases are not offset by commensurate growth in demand. Similarly, increases in industry
refining or manufacturing capacity may impact the supply of natural gas. Natural gas supply levels can also be affected by factors
that reduce available supplies, such natural disasters, disruptions in competitors’ operations, or unexpected unavailability
of distribution channels that may disrupt supplies. Technological change can also alter the relative costs for companies in the
natural gas industry to find, produce, and transport natural gas, which in turn, may affect the supply of and demand for natural
gas.
Other factors impacting the natural
gas market. The supply of and demand for natural gas may also be impacted by changes in interest rates, inflation, and
other local or regional market conditions, as well as by the development of alternative energy sources.
Price Volatility May Possibly
Cause the Total Loss of Your Investment. Futures contracts have a high degree of price variability and are subject to occasional
rapid and substantial changes. Consequently, you could lose all or substantially all of your investment in UNL.
COVID-19 and other infectious disease outbreak could
negatively affect the valuation and performance of UNL’s investments.
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. 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, loss of employment, supply
chain disruptions, and lower consumer and institutional demand for goods and services, 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 disease 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
quasigovernmental 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 the 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 the 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 the UNL’s
investments could be impacted adversely.
An investment in UNL may provide
little or no diversification benefits. Thus, in a declining market, UNL may have no gains to offset losses from other investments,
and an investor may suffer losses on an investment in UNL while incurring losses with respect to other asset classes.
Historically, Futures Contracts and Other
Natural Gas-Related Investments have generally been non-correlated to the performance of other asset classes such as stocks and
bonds. Non-correlation means that there is a low statistically valid relationship between the performance of futures and other
commodity interest transactions, on the one hand, and stocks or bonds, on the other hand.
However, there can be no assurance that
such non-correlation will continue during future periods. If, contrary to historic patterns, UNL’s performance were to move
in the same general direction as the financial markets, investors will obtain little or no diversification benefits from an investment
in UNL’s shares. In such a case, UNL may have no gains to offset losses from other investments, and investors may suffer
losses on their investment in UNL at the same time they incur losses with respect to other investments.
Variables such as drought, floods,
weather, pandemics (such as COVID-19) embargoes, tariffs and other political events may have a larger impact on natural gas
prices and natural gas-linked instruments, including Futures Contracts and Other Natural Gas-Related Investments, than on
traditional securities. These additional variables may create additional investment risks that subject UNL's investments to
greater volatility than investments in traditional securities.
Non-correlation should not be confused
with negative correlation, where the performance of two asset classes would be opposite of each other. There is no historical evidence
that the spot price of natural gas and prices of other financial assets, such as stocks and bonds, are negatively correlated. In
the absence of negative correlation, UNL cannot be expected to be automatically profitable during unfavorable periods for the stock
market, or vice versa.
Historical performance of UNL and
the Benchmark Futures Contracts is not indicative of future performance.
Past performance of UNL or the Benchmark
Futures Contract is not necessarily indicative of future results. Therefore, past performance of UNL or the Benchmark Futures Contract
should not be relied upon in deciding whether to buy shares of UNL.
Correlation Risk
Investors purchasing shares to hedge against
movements in the price of natural gas will have an efficient hedge only if the price investors pay for their shares closely
correlates with the price of natural gas. Investing in UNL’s shares for hedging purposes involves the following risks:
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The market price at which the investor buys or sells shares may be significantly less or more than NAV.
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Daily percentage changes in NAV may not closely correlate with daily percentage changes in the average of the prices of the Benchmark Futures Contracts.
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Daily percentage changes in the average of the prices of the Benchmark Futures Contracts may not closely correlate with daily percentage changes in the price natural gas.
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As of the date of this annual report on
Form 10-K, significant market volatility has occurred in the oil markets and the oil futures markets. Such volatility is attributable
to the COVID-19 pandemic, disputes among oil-producing companies, a corresponding collapse in demand for oil and a lack of on-land
storage for oil. Although the volatility has abated in recent months, future volatility cannot be predicted. Volatility in the
natural gas market was also elevated, but it did not reach the same extreme levels as the volatility in the oil futures market
did. However, the COVID-19 pandemic could cause increased volatility in the future, the impact of which could limit UNL's ability
to have a substantial portion of its assets invested in the Benchmark Futures Contracts. In such a circumstance, UNL could, if
it determined it appropriate to do so in light of market conditions and regulatory requirements, invest in other Futures Contract
and/or Other Natural Gas-Related Investments.
The market price at which investors buy or sell shares
may be significantly less or more than NAV.
UNL’s NAV per share will change throughout the day
as fluctuations occur in the market value of UNL’s portfolio investments. The public trading price at which an investor
buys or sells shares during the day from their broker may be different from the NAV of the shares, which is also the price
shares can be redeemed with UNL by Authorized Participants in Redemption Baskets. USCF expects that exploitation of certain
arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading
price to track NAV per share closely over time, but there can be no assurance of that. For example, a shortage of UNL shares
in the market and other factors could cause UNL's shares to trade at a premium. Investors should be aware that such premiums
can be transitory. To the extent an investor purchases shares that include a premium (e.g., because of a shortage of shares
in the market due to the inability of Authorized Participants to purchase additional shares from UNL that could be resold
into the market) and the cause of the premium no longer exists causing the premium to disappear (e.g., because more shares
are available for purchase from UNL by Authorized Participants that could be resold into the market) such investor's return
on its investment would be adversely impacted due to the loss of the premium.
Price differences may relate primarily
to supply and demand forces at work in the secondary trading market for shares that are closely related to, but not identical to,
the same forces influencing the prices of natural gas and the Benchmark Futures Contracts at any point in time. For example,
a shortage of UNL shares in the market and other factors could cause UNL's shares to trade at a premium. Investors should
be aware that such premiums can be transitory. To the extent an investor purchases shares that include a premium (e.g., because
of a shortage of shares in the market due to the inability of Authorized Participants to purchase additional shares from UNL
that could be resold into the market) and the cause of the premium no longer exists causing the premium to disappear (e.g., because
more shares are available for purchase from UNL by Authorized Participants that could be resold into the market)
such investor’s return on its investment would be adversely impacted due to the loss of the premium. See the risk factor,
An unanticipated number of Creation Basket requests during a short period of time could result in a shortage of shares,
below.
The NAV of UNL’s shares may also
be influenced by non-concurrent trading hours between the NYSE Arca and the various futures exchanges on which natural gas
is traded. While the shares trade on the NYSE Arca from 9:30 a.m. to 4:00 p.m. Eastern Time, the trading hours for the
futures exchanges on which natural gas trades may not necessarily coincide during all of this time. For example, while the shares
trade on the NYSE Arca until 4:00 p.m. Eastern Time, liquidity in the global natural gas market will be reduced after
the close of the NYMEX at 2:30 p.m. Eastern Time. As a result, during periods when the NYSE Arca is open and the futures exchanges
on which natural gas is traded are closed, trading spreads and the resulting premium or discount on the shares may widen and,
therefore, increase the difference between the price of the shares and the NAV of the shares.
Daily percentage changes in UNL’s
NAV may not correlate with daily percentage changes in the average of the prices of the Benchmark Futures
Contracts.
It is possible that the daily percentage
changes in UNL's NAV per share may not closely correlate to daily percentage changes in the average of the prices of the Benchmark Futures
Contracts. Non- correlation may be attributable to disruptions in the market for natural gas, the imposition of position or
accountability limits by regulators or exchanges, or other extraordinary circumstances. As UNL approaches or reaches position
limits with respect to the Benchmark Futures Contracts and other Futures Contracts or in view of market conditions, UNL may
begin investing in Other Natural Gas-Related Investments. In addition, UNL is not able to replicate exactly the changes
in the price of the Benchmark Futures Contracts because the total return generated by UNL is reduced by expenses and
transaction costs, including those incurred in connection with UNL’s trading activities, and increased by interest income
from UNL's holdings of Treasuries (defined below). Tracking the Benchmark Futures Contracts requires trading of UNL’s
portfolio with a view to tracking the Benchmark Futures Contracts over time and is dependent upon the skills of USCF and its
trading principals, among other factors.
An
investment in UNL is not a proxy for investing in the natural gas markets, and the daily percentage changes in the
price of the Benchmark Futures Contracts, or the NAV of UNL, may
not correlate with daily percentage changes in the spot price of natural gas.
An investment in UNL is not a proxy for
investing in the natural gas markets. To the extent that investors use UNL as a means of indirectly investing in natural gas, there
is the risk that the daily changes in the price of UNL’s shares on the NYSE Arca, on a percentage basis, will not closely
track the daily changes in the spot price of natural gas on a percentage basis. This could happen if the price of shares traded
on the NYSE Arca does not correlate closely with the value of UNL’s NAV; the changes in UNL’s NAV do not correlate
closely with the changes in the price of the Benchmark Futures Contracts; or the changes in the price of the Benchmark Futures
Contracts do not closely correlate with the changes in the cash or spot price of natural gas. This is a risk because if these correlations
do not exist, then investors may not be able to use UNL as a cost-effective way to indirectly invest in natural gas or as a hedge
against the risk of loss in natural gas-related transactions. The degree of correlation among UNL’s share price, the price
of the Benchmark Futures Contracts and the spot price of natural gas depends upon circumstances such as variations in the speculative
natural gas market, supply of and demand for Futures Contracts (including the Benchmark Futures Contracts) and Other Natural Gas-Related
Investments, and technical influences on trading natural gas futures contracts. Investors who are not experienced in investing
in natural gas futures contracts or the factors that influence that market or speculative trading in the natural gas markets and
may not have the background or ready access to the types of information that investors familiar with these markets may have and,
as a result, may be at greater risk of incurring losses from trading in UNL shares than such other investors with such experience
and resources.
Natural forces in the natural gas futures market known
as “backwardation” and “contango” may increase UNL’s tracking error and/or negatively impact total
return.
The design of UNL's Benchmark Futures Contract consists of the
near month contract to expire and the 11 following months, which are changed to the next month contract to expire and the 11 following
months during one day each month.
In the event of a natural gas futures market where near month contracts trade at a higher price than next month to expire contracts,
a situation described as “backwardation” in the futures market, then absent the impact of the overall movement in natural
gas prices the value of the Benchmark Futures Contracts would tend to rise as it approaches expiration. Conversely, in the
event of a natural gas futures market where near month contracts trade at a lower price than next month contracts, a situation
described as “contango” in the futures market, then absent the impact of the overall movement in natural gas prices
the value of the benchmark contracts would tend to decline as it approaches expiration. When compared to total return of other
price indices, such as the spot price of natural gas, the impact of backwardation and contango may cause the total return of UNL’s
per share NAV to vary significantly. Moreover, absent the impact of rising or falling natural gas prices, a prolonged period of
contango could have a significant negative impact on UNL’s per share NAV and total return and investors could lose part or
all of their investment.
While contango and backwardation are consistently present in
trading in the futures markets, such conditions can be exacerbated by market forces. For example, extraordinary market conditions
in the crude oil markets, including “super contango” (a higher level of contango arising from the overabundance of
oil being produced and the limited availability of storage for such excess supply), occurred, and may continue to occur for an
unknown duration, in the crude oil futures markets due to over-supply of crude oil in the face of weak demand during the COVID-19
pandemic when disputes among oil-producing countries regarding limitations on the production of oil also were occurring. Volatility
in the natural gas market was also elevated, but it did not reach the same extreme levels as the volatility in the oil futures
market did. However, the COVID-19 pandemic could cause increased volatility in the future, the impact of which could limit UNL’s
ability to have a substantial portion of its assets invested in the Benchmark Futures Contract. In such a circumstance, UNL could,
if it determined it appropriate to do so in light of market conditions and regulatory requirements, invest in other Futures Contract
and/or Other Natural-Gas Related Investments.
Accountability levels, position limits,
and daily price fluctuation limits set by the exchanges have the potential to cause tracking error, by limiting UNL's investments,
including its ability to fully invest in the Benchmark Futures Contracts, which could cause the price of shares to substantially
vary from the price of the Benchmark Futures Contracts.
Designated contract markets, such as the
NYMEX, 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 also set daily price fluctuation
limits on futures contracts. The daily price 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 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 a Benchmark Futures Contract is 6,000 contracts. In addition, the NYMEX imposes
an accountability level for all months of 12,000 net futures contracts for natural gas. In addition, the ICE Futures maintains
the same accountability levels, position limits and monitoring authority for its natural gas contract as the NYMEX. If UNL and
the Related Public Funds exceed these accountability levels for investments in the futures contracts for natural gas, the NYMEX
and ICE Futures will monitor such 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 could be ordered to reduce its Natural Gas NG Futures Contracts to below the 6,000
single month and/or 12,000 all month accountability level. As of December 31, 2020, UNL held 273 Natural Gas NG Futures
Contracts traded on the NYMEX and did not hold any Futures Contracts traded on ICE Futures. For the year ended December 31,
2020, UNL did not exceed accountability levels imposed by the NYMEX and ICE Futures, however, the aggregated total of the Related
Public Funds did exceed the accountability levels.
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 the 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 contracts to expire to the next month contracts during a one day period
beginning two weeks from expiration of the contracts. For the year ended December 31, 2020, UNL did not exceed any position
limits imposed by the NYMEX and ICE Futures.
On October 15, 2020, the CFTC approved the Position Limits
Rule. The Position Limits Rule establishes federal position limits for 25 core referenced futures contracts (comprised of
agricultural, energy and metals futures contracts), futures and options linked to the core referenced futures contracts, and swaps
that are economically equivalent to the core referenced futures contracts. The Position Limits Rule sets position limits for
the spot month and non-spot month; however, the non-spot month limits only apply in respect of the agricultural futures contracts
that are currently subject to position limits under Part 150 of the CFTC regulations (the “legacy agricultural contracts”).
With respect to regulatory oversight, the Position Limits Rule delegates authority to designated contract markets and swap
execution facilities to oversee certain aspects of the position limits framework. In addition to setting the federal position limits,
the Position Limits Rule also provides several exemptions from such position limits, including an expanded list of enumerated
bona fide hedge exemptions and certain spread exemptions. Further, the Position Limits Rule sets forth two alternative processes
for pursuing an exemption for non-enumerated hedge positions. Other than for the legacy agricultural contracts, compliance with
the limits imposed by the Position Limits Rule will not be required until 2022, except that economically equivalent swaps
need not comply with the Position Limits Rule until 2023.
The Benchmark Futures Contract will be subject to position limits
under the Position Limits Rule, and UNL’s trading does not qualify as an enumerated bona fide hedge. Accordingly, the Position
Limits Rule could negatively impact the ability of UNL to meet its investment objective by inhibiting USCF’s ability
to effectively invest the proceeds from sales of Creation Baskets of UNL in particular amounts and types of its permitted investments.
Until such time as compliance with the Position Limits Rule is
required, 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 the nine legacy agricultural
contracts, 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).
Under existing CFTC regulations and
the Position Limits Rule, 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% 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 market participant (the
“Aggregation Rules”).
Risk mitigation measures imposed
by UNL’s FCMs have the potential to cause tracking error by limiting UNL’s investments, including its ability to fully
invest in the Benchmark Futures Contracts and other Futures Contracts, which could cause the price of UNL’s shares to substantially
vary from the price of the Benchmark Futures Contracts.
UNL’s FCMs have discretion to impose
limits on the positions that UNL may hold in the Benchmark Futures Contracts as well as certain other months. To date, UNL’s
FCMs have not imposed any such limits. However, were UNL’s FCMs to impose limits, UNL’s ability to have a substantial
portion of its assets invested in the Benchmark Futures Contracts and other Futures Contracts could be severely limited, which
could lead UNL to invest in other Futures Contracts or, potentially, Other Natural Gas-Related Investments. UNL could also have
to more frequently rebalance and adjust the types of holdings in its portfolio than is currently the case. This could inhibit UNL
from pursuing its investment objective in the same manner that it has historically and currently.
In addition, when offering Creation Baskets
for purchase, limitations imposed by exchanges and/or any of UNL’s FCMs could limit UNL’s ability to invest the proceeds
of the purchases of Creation Baskets in Benchmark Futures Contracts and other Futures Contracts. If this were the case, UNL may
invest in other permitted investments, including Other Natural Gas-Related Investments, and may hold larger amounts of Treasuries,
cash and cash equivalents, which could impair UNL’s ability to meet its investment objective.
Tax Risk
An investor’s tax liability
may exceed the amount of distributions, if any, on its shares.
Cash or property will be distributed at
the sole discretion of USCF. USCF has not and does not currently intend to make cash or other distributions with respect to shares.
Investors will be required to pay U.S. federal income tax and, in some cases, state, local, or foreign income tax, on their allocable
share of UNL’s taxable income, without regard to whether they receive distributions or the amount of any distributions. Therefore,
the tax liability of an investor with respect to its shares may exceed the amount of cash or value of property (if any) distributed.
An investor’s allocable share
of taxable income or loss may differ from its economic income or loss on its shares.
Due to the application of the assumptions and conventions applied
by UNL in making allocations for tax purposes and other factors, an investor’s allocable share of UNL’s income,
gain, deduction or loss may be different than its economic profit or loss from its shares for a taxable year. This difference could
be temporary or permanent and, if permanent, could result in it being taxed on amounts in excess of its economic income.
Items of income, gain, deduction,
loss and credit with respect to shares could be reallocated, and UNL could be liable for U.S. federal income tax, if the IRS
does not accept the assumptions and conventions applied by UNL in allocating those items, with potential adverse consequences
for an investor.
The U.S. tax rules pertaining to partnerships
are complex and their application to large, publicly traded partnerships such as UNL is in many respects uncertain. UNL applies
certain assumptions and conventions in an attempt to comply with the intent of the applicable rules and to report taxable
income, gains, deductions, losses and credits in a manner that properly reflects shareholders’ economic gains and losses.
These assumptions and conventions may not fully comply with all aspects of the Internal Revenue Code (the “Code”) and
applicable Treasury Regulations, however, and it is possible that the IRS will successfully challenge UNL’s allocation methods
and require UNL to reallocate items of income, gain, deduction, loss or credit in a manner that adversely affects investors.
UNL may be liable for U.S. federal income
tax on any “imputed understatement” of tax resulting from an adjustment as a result of an IRS audit. The amount of
the imputed understatement generally includes increases in allocations of items of income or gains to any investor and decreases
in allocations of items of deduction, loss, or credit to any investor without any offset for any corresponding reductions in allocations
of items of income or gain to any investor or increases in allocations of items of deduction, loss, or credit to any investor.
If UNL is required to pay any U.S. federal income taxes on any imputed understatement, the resulting tax liability would reduce
the net assets of UNL and would likely have an adverse impact on the value of the shares. Under certain circumstances, UNL
may be eligible to make an election to cause the investors to take into account the amount of any imputed understatement, including
any interest and penalties. The ability of a publicly traded partnership such as UNL to make this election is uncertain. If
the election is made, UNL would be required to provide investors who owned beneficial interests in the shares in the year
to which the adjusted allocations relate with a statement setting forth their proportionate shares of the adjustment (“Adjusted
K-1s”). The investors would be required to take the adjustment into account in the taxable year in which the Adjusted K-1s
are issued.
UNL could be treated
as a corporation for federal income tax purposes, which may substantially reduce the value of the shares.
UNL has received an opinion of counsel
that, under current U.S. federal income tax laws, UNL will be treated as a partnership that is not taxable as a corporation
for U.S. federal income tax purposes, provided that (i) at least 90 percent of UNL’s annual gross income will be derived
from (a) income and gains from commodities (not held as inventory) or futures, forwards, options, swaps and other notional
principal contracts with respect to commodities, and (b) interest income, (ii) UNL is organized and operated in accordance
with its governing agreements and applicable law and (iii) UNL does not elect to be taxed as a corporation for federal income
tax purposes. Although USCF anticipates that UNL has satisfied and will continue to satisfy the “qualifying income”
requirement for all of its taxable years, that result cannot be assured. UNL has not requested and will not request any ruling
from the IRS with respect to its classification as a partnership not taxable as a corporation for federal income tax purposes.
If the IRS were to successfully assert that UNL is taxable as a corporation for federal income tax purposes in any taxable
year, rather than passing through its income, gains, losses and deductions proportionately to shareholders, UNL would be subject
to tax on its net income for the year at corporate tax rates. In addition, although USCF does not currently intend to make distributions
with respect to shares, any distributions would be taxable to shareholders as dividend income. Taxation of UNL as a corporation
could materially reduce the after-tax return on an investment in shares and could substantially reduce the value of the shares.
UNL is organized and operated
as a limited partnership in accordance with the provisions of the LP Agreement and applicable state law, and therefore, UNL
has a more complex tax treatment than traditional mutual funds.
UNL is organized and operated as a
limited partnership in accordance with the provisions of the LP Agreement and applicable state law. No U.S. federal income tax
is paid by UNL on its income. Instead, UNL will furnish shareholders each year with tax information on IRS Schedule K-1
(Form 1065) and each U.S. shareholder is required to report on its U.S. federal income tax return its allocable share of the
income, gain, loss and deduction of UNL.
This must be reported without regard to
the amount (if any) of cash or property the shareholder receives as a distribution from UNL during the taxable year.
A shareholder, therefore, may be allocated income or gain by UNL but receive no cash distribution with which to pay the tax
liability resulting from the allocation, or may receive a distribution that is insufficient to pay such liability.
In addition to federal income taxes, shareholders
may be subject to other taxes, such as state and local income taxes, unincorporated business taxes, business franchise taxes and
estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which UNL does business or owns
property or where the shareholders reside. Although an analysis of those various taxes is not presented here, each prospective
shareholder should consider their potential impact on its investment in UNL. It is each shareholder’s responsibility to file
the appropriate U.S. federal, state, local and foreign tax returns.
If UNL is required to withhold
tax with respect to any Non-U.S. shareholders, the cost of such withholding may be borne by all shareholders.
Under certain circumstances, UNL may
be required to pay withholding tax with respect to allocations to Non-U.S. shareholders. Although the LP Agreement provides that
any such withholding will be treated as being distributed to the Non-U.S. shareholder, UNL may not be able to cause the economic
cost of such withholding to be borne by the Non-U.S. shareholder on whose behalf such amounts were withheld since it does not generally
expect to make any distributions. Under such circumstances, the economic cost of the withholding may be borne by all shareholders,
not just the shareholders on whose behalf such amounts were withheld. This could have a material impact on the value of the shares.
The impact of U.S. tax reform on UNL is
uncertain.
On December 22, 2017, H.R. 1, the
bill formerly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), was signed into law. The Tax Act substantially
alters the U.S. federal tax system in a variety of ways, including significant changes to the taxation of business entities, the
deductibility of interest expense, and the tax treatment of capital investment. We cannot predict with certainty how any changes
in the tax laws might affect the U.S. economy or the demand for and the price of commodities. As a result, it is possible that
the Tax Act, as well as any U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act
and any future legislation related to tax reform, could have unexpected or negative impacts on UNL and some or all of its
shareholders. Shareholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative
developments and proposals and their potential effect on an investment in UNL.
OTC Contract Risk
UNL will be subject to credit
risk with respect to counterparties to OTC contracts entered into by UNL or held by special purpose or structured vehicles.
UNL faces the risk of non-performance
by the counterparties to the OTC contracts. Unlike in futures contracts, the counterparty to these contracts is generally a single
bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result,
there will be greater counterparty credit risk in these transactions. A counterparty may not be able to meet its obligations to
UNL, in which case UNL could suffer significant losses on these contracts. The two-way margining requirements imposed by U.S.
regulators, discussed in “Item 1. Business – Commodities Regulation,” are intended to mitigate this risk.
If a counterparty becomes bankrupt or otherwise
fails to perform its obligations due to financial difficulties, UNL may experience significant delays in obtaining any recovery
in a bankruptcy or other reorganization proceeding. UNL may obtain only limited recovery or may obtain no recovery in such
circumstances.
Valuing OTC derivatives may be less
certain than actively traded financial instruments.
In general, valuing OTC derivatives is
less certain than valuing actively traded financial instruments such as exchange traded futures contracts and securities or cleared
swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated,
and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers
and dealers generally quote indicative prices or terms for entering into or terminating OTC contracts, they typically are not contractually
obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent
value for an outstanding OTC derivatives transaction.
Other Risks
UNL is not leveraged.
UNL has not leveraged, and does not
intend to leverage, its assets through borrowings or otherwise, and makes its investments accordingly. Consistent with the foregoing,
UNL's announced investment intentions, and any changes thereto, will take into account the need for UNL to make permitted
investments that also allow it to maintain adequate liquidity to meet its margin and collateral requirements and to avoid, to the
extent reasonably possible, UNL becoming leveraged. If market conditions require it, these risk reduction procedures may occur
on short notice if they occur other than during a roll or rebalance period.
UNL may temporarily limit the offering of Creation
Baskets.
UNL may determine to limit the issuance
of its shares through the offering of Creation Baskets to its Authorized Participants in order to allow it to reinvest the proceeds
from sales of its Creation Baskets in currently permitted assets in a manner that meets its investment objective. UNL will
announce to the market through the filing of a Current Report on Form 8-K if it intends to limit the offering of Creation
Baskets at any time. In such case, orders for Creation Baskets will be considered for acceptance in the order they are received
by UNL and UNL would continue to accept requests for redemption of its shares from Authorized Participants through
Redemption Baskets during the period of the limited offering of Creation Baskets.
Certain of UNL’s investments
could be illiquid, which could cause large losses to investors at any time or from time to time.
Futures positions cannot always be liquidated
at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and
sell orders in a market. A market disruption, such as a foreign government taking political actions that disrupt the market for
its currency, its natural gas production or exports, or another major export, can also make it difficult to liquidate a position.
Because both Futures Contracts and Other Natural Gas-Related Investments may be illiquid, UNL's Natural Gas Interests
may be more difficult to liquidate at favorable prices in periods of illiquid markets and losses may be incurred during the period
in which positions are being liquidated. The large size of the positions that UNL may acquire increases the risk of illiquidity
both by making its positions more difficult to liquidate and by potentially increasing losses while trying to do so.
OTC contracts that are not subject to clearing
may be even less marketable than futures contracts because they are not traded on an exchange, do not have uniform terms and conditions,
and are entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral,
and in general, they are not transferable without the consent of the counterparty. These conditions make such contracts less liquid
than standardized futures contracts traded on a commodities exchange and could adversely impact UNL’s ability to realize
the full value of such contracts. In addition, even if collateral is used to reduce counterparty credit risk, sudden changes in
the value of OTC transactions may leave a party open to financial risk due to a counterparty default since the collateral held
may not cover a party’s exposure on the transaction in such situations.
UNL is not actively managed
and its investment objective is to track the Benchmark Futures Contracts 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.
UNL is not actively managed by conventional
methods. Accordingly, if UNL’s investments in Natural Gas Interests are declining in value, in the ordinary course, UNL
will not close out such positions except in connection with paying the proceeds to an Authorized Participant upon the redemption
of a basket or closing out its positions in Futures Contracts and other permitted investments (i) in connection with
the monthly change in the Benchmark Futures Contracts or when UNL otherwise determines it would be appropriate to
do so, e.g., due to regulatory requirements or risk mitigation measures, or to avoid UNL becoming leveraged, and it reinvests
the proceeds in new Futures Contracts or Other Natural Gas-Related Investments to the extent possible. USCF will seek to cause
the NAV of UNL’s shares to track the Benchmark Futures Contracts during periods in which its price is flat or declining
as well as when the price is rising.
UNL's ability to invest in the Benchmark Futures
Contracts could be limited as a result of any or all of the following: evolving market conditions, a change in regulatory accountability
levels and position limits imposed on UNL with respect to its investment in Futures Contracts, additional or different
risk mitigation measures taken by market participants, generally, including UNL, with respect to UNL acquiring additional Futures
Contracts, or UNL selling additional shares.
UNL may not meet the listing standards of NYSE Arca,
which would adversely impact an investor’s ability to sell shares.
UNL's shares are listed for trading on
the NYSE Arca under the market symbol “UNL.” NYSE Arca may suspend UNL’s shares from trading on the exchange
with or without prior notice to UNL, upon failure of UNL to comply with the NYSE’s listing requirements, or when in
its sole discretion, the NYSE Arca determines that such suspension of dealings is in the public interest or otherwise warranted.
There can be no assurance that the requirements necessary to maintain the listing of UNL’s shares will continue to be met
or will remain unchanged. If UNL were unable to meet the NYSE’s listing standards and were to become delisted, an investor’s
ability to sell its shares would be adversely impacted.
The NYSE Arca may halt trading in
UNL’s shares, which would adversely impact an investor’s ability to sell shares.
Trading in shares may be halted due to
market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in the view of the NYSE Arca, make trading
in shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit
breaker” rules that require trading to be halted for a specified period based on a specified market decline.
The liquidity of UNL's shares
may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the market price
of the shares.
In the event that one or more Authorized
Participants which have substantial interests in the shares withdraw from participation, the liquidity of the shares will likely
decrease, which could adversely affect the market price of the shares and result in investors incurring a loss on their investment.
Shareholders that are not Authorized
Participants may only purchase or sell their shares in secondary trading markets, and the conditions associated with trading in
secondary markets may adversely affect investors’ investment in the shares.
Only Authorized Participants may directly
purchase from or redeem shares with, UNL through Creation Baskets or Redemption Baskets. All other investors that desire
to purchase or sell shares must do so through the NYSE Arca or in other markets, if any, in which the shares may be traded. Shares
may trade at a premium or discount to NAV per share.
The lack of an active trading market
for UNL’s shares may result in losses on an investor’s investment in UNL at the time the investor sells the shares.
Although UNL’s shares are listed
and traded on the NYSE Arca, there can be no guarantee that an active trading market for the shares will be maintained. If an investor
needs to sell shares at a time when no active trading market for them exists, the price the investor receives upon sale of the
shares, assuming they were able to be sold, likely would be lower than if an active market existed.
Limited partners and shareholders
do not participate in the management of UNL and do not control USCF, so they do not have any influence over basic matters
that affect UNL.
The limited partners and shareholders take
no part in the management or control, and have a minimal voice in UNL’s operations or business. Limited partners and shareholders
must therefore rely upon the duties and judgment of USCF to manage UNL’s affairs. Limited partners and shareholders have
no right to elect USCF on an annual or any other continuing basis. If USCF voluntarily withdraws, however, the holders of a majority
of UNL’s outstanding shares (excluding for purposes of such determination shares owned, if any, by the withdrawing general
partner and its affiliates) may elect its successor. USCF may not be removed as general partner except upon approval by the affirmative
vote of the holders of at least 66 2/3 percent of UNL’s outstanding shares (excluding shares, if any, owned by USCF and its
affiliates), subject to the satisfaction of certain conditions set forth in the LP Agreement.
UNL could become leveraged if
it had insufficient assets to completely meet its margin or collateral requirements relating to its investments.
Although UNL does not and will not
borrow money or use debt to satisfy its margin or collateral obligations in respect of its investments, it could become leveraged
if UNL were to hold insufficient assets that would allow it to meet not only the current, but also future, margin or collateral
obligations required for such investments. Such a circumstance could occur if UNL were to hold assets that have a value of
less than zero.
USCF endeavors to have the value of UNL's
Treasuries, cash and cash equivalents, whether held by UNL or posted as margin or other collateral, at all times approximate
the aggregate market value of its obligations under its Futures Contracts and Other Natural Gas-Related Investments. Although
permitted to do so under its Limited Partnership Agreement, UNL has not and does not intend to leverage its assets by making
investments beyond its potential ability to meet the potential margin and collateral obligations relating to such investments.
Consistent with this, UNL's investment decisions will take into account the need for UNL to make permitted investments
that also allow it to maintain adequate liquidity to meet its margin and collateral requirements and to avoid, to the extent reasonably
possible, UNL becoming leveraged, including by its holding of assets that have a high probability of having a value of less
than zero.
Limited partners and shareholders
do not participate in the management of UNL and do not control USCF, so they do not have any influence over basic matters
that affect UNL.
The limited partners and shareholders take
no part in the management or control, and have a minimal voice in UNL's operations or business. Limited partners and shareholders
must therefore rely upon the duties and judgment of USCF to manage UNL's affairs. Limited partners and shareholders have no right
to elect USCF on an annual or any other continuing basis. If USCF voluntarily withdraws, however, the holders of a majority of
UNL's outstanding shares (excluding for purposes of such determination shares owned, if any, by the withdrawing general partner
and its affiliates) may elect its successor. USCF may not be removed as general partner except upon approval by the affirmative
vote of the holders of at least 66 2/3 percent of UNL's outstanding shares (excluding shares, if any, owned by USCF and its affiliates),
subject to the satisfaction of certain conditions set forth in the LP Agreement.
Limited partners may have limited
liability in certain circumstances, including potentially having liability for the return of wrongful distributions.
Under Delaware law, a limited partner might
be held liable for UNL’s obligations as if it were a general partner if the limited partner participates in the control of
the partnership’s business and the persons who transact business with the partnership think the limited partner is the general
partner.
A limited partner will not be liable for
assessments in addition to its initial capital investment in any of UNL’s shares. However, a limited partner may be required
to repay to UNL any amounts wrongfully returned or distributed to it under some circumstances. Under Delaware law, UNL
may not make a distribution to limited partners if the distribution causes UNL’s liabilities (other than liabilities to partners
on account of their partnership interests and nonrecourse liabilities) to exceed the fair value of UNL’s assets. Delaware
law provides that a limited partner who receives such a distribution and knew at the time of the distribution that the distribution
violated the law will be liable to the limited partnership for the amount of the distribution for three years from the date of
the distribution.
The LLC Agreement provides limited
authority to the Non-Management Directors, and any Director of USCF may be removed by USCF’s parent company, which is wholly
owned by Concierge, a controlled public company where the majority of shares are owned by Nicholas D. Gerber along with certain
other family members and certain other shareholders.
USCF’s Board of Directors currently
consists of four Management Directors, each of whom are also executive officers or employees of USCF, and three Non-Management
Directors, each of whom are considered independent for purposes of applicable NYSE Arca and SEC rules. Under USCF’s LLC Agreement,
the Non-Management Directors have only such authority as the Management Directors expressly confer upon them, which means that
the Non-Management Directors may have less authority to control the actions of the Management Directors than is typically the case
with the independent members of a company’s Board of Directors. In addition, any Director may be removed by written consent
of Wainwright Holdings, Inc. (“Wainwright”), which is the sole member of USCF. The sole shareholder of Wainwright
is Concierge Technologies, Inc., a company publicly traded under the ticker symbol “CNCG” (“Concierge”).
Mr. Nicholas D. Gerber along with certain family members and certain other shareholders, owns the majority of the shares in
Concierge, which is the sole shareholder of Wainwright, the sole member of USCF. Accordingly, although USCF is governed by the
USCF Board of Directors, which consists of both Management Directors and Non-Management Directors, pursuant to the LLC Agreement,
it is possible for Mr. Gerber to exercise his indirect control of Wainwright to effect the removal of any Director (including
the Non-Management Directors which comprise the Audit Committee) and to replace that Director with another Director. Having control
in one person could have a negative impact on USCF and UNL, including their regulatory obligations.
There is a risk that UNL will
not earn trading gains sufficient to compensate for the fees and expenses that it must pay and as such UNL may not earn any
profit.
UNL pays brokerage charges of approximately
0.03% of average total net assets based on brokerage fees of $3.50 per buy or sell, management fees of 0.04% of NAV on its average
net assets, and OTC spreads and extraordinary expenses (e.g., subsequent offering expenses, other expenses not in the ordinary
course of business, including the indemnification of any person against liabilities and obligations to the extent permitted by
law and required under the LP Agreement and under agreements entered into by USCF on UNL’s behalf and the bringing and defending
of actions at law or in equity and otherwise engaging in the conduct of litigation and the incurring of legal expenses and the
settlement of claims and litigation) that cannot be quantified.
These fees and expenses must be paid in
all cases regardless of whether UNL's activities are profitable. Accordingly, UNL must earn trading gains sufficient
to compensate for these fees and expenses before it can earn any profit.
UNL is subject to extensive
regulatory reporting and compliance.
UNL is subject to a comprehensive
scheme of regulation under the federal commodities and securities laws. UNL could be subject to sanctions for a failure to
comply with those requirements, which could adversely affect its financial performance (in the case of financial penalties) or
ability to pursue its investment objective (in the case of a limitation on its ability to trade).
Because UNL’s shares are publicly
traded, UNL is subject to certain rules and regulations of federal, state and financial market exchange entities charged
with the protection of investors and the oversight of companies whose securities are publicly traded. These entities include the
Public Company Accounting Oversight Board (the “PCAOB”), the SEC, the CFTC and NYSE Arca and these authorities have
continued to develop additional regulations or interpretations of existing regulations. UNL’s ongoing efforts to comply with
these regulations and interpretations have resulted in, and are likely to continue resulting in, a diversion of management’s
time and attention from revenue-generating activities to compliance related activities.
UNL is responsible for establishing
and maintaining adequate internal control over financial reporting. UNL’s internal control system is designed to provide
reasonable assurance to its management regarding the preparation and fair presentation of published financial statements. All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective
may provide only reasonable assurance with respect to financial statement preparation and presentation.
Regulatory changes or actions, including
the implementation of new legislation is impossible to predict but may significantly and adversely affect UNL.
The futures markets are subject to comprehensive
statutes, regulations, and margin requirements. In addition, the CFTC and futures exchanges are authorized to take extraordinary
actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits
or higher margin requirements, the establishment of daily price limits and the suspension of trading. Regulation of commodity interest
transactions in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed
in the United States. In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in the event of
a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements,
the establishment of daily price limits and the suspension of trading. Further, various national governments outside of the United
States have expressed concern regarding the disruptive effects of speculative trading in the energy markets and the need to regulate
the derivatives markets in general. The effect of any future regulatory change on UNL is impossible to predict, but it could
be substantial and adverse. For a more detailed discussion of the regulations to be imposed by the CFTC and the SEC and the potential
impacts thereof on UNL, please see “Item 1. Business – Commodities Regulation” in this annual report on Form 10-K.
UNL is not a registered investment
company so shareholders do not have the protections of the 1940 Act.
UNL is not an investment company subject
to the 1940 Act. Accordingly, investors do not have the protections afforded by that statute, which, for example, requires investment
companies to have a majority of disinterested directors and regulates the relationship between the investment company and its investment
manager.
Trading in international markets
could expose UNL to credit and regulatory risk.
UNL invests primarily in Futures
Contracts, a significant portion of which are traded on United States exchanges, including the NYMEX. However, a portion of UNL’s
trades may take place on markets and exchanges outside the United States. Trading on such non-U.S. markets or exchanges presents
risks because they are not subject to the same degree of regulation as their U.S. counterparts, including potentially different
or diminished investor protections. In trading contracts denominated in currencies other than U.S. dollars, UNL is subject
to the risk of adverse exchange-rate movements between the dollar and the functional currencies of such contracts. Additionally,
trading on non-U.S. exchanges is subject to the risks presented by exchange controls, expropriation, increased tax burdens and
exposure to local economic declines and political instability. An adverse development with respect to any of these variables could
reduce the profit or increase the loss earned on trades in the affected international markets.
UNL and USCF may have conflicts
of interest, which may permit them to favor their own interests to the detriment of shareholders.
UNL is subject to actual and potential
inherent conflicts involving USCF, various commodity futures brokers and Authorized Participants. USCF’s officers, directors
and employees do not devote their time exclusively to UNL and also are directors, officers or employees of other entities
that may compete with UNL for their services. They could have a conflict between their responsibilities to UNL and
to those other entities. As a result of these and other relationships, parties involved with UNL have a financial incentive
to act in a manner other than in the best interests of UNL and the shareholders. USCF has not established any formal procedure
to resolve conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject to
such conflicts of interest to resolve them equitably. Although USCF attempts to monitor these conflicts, it is extremely difficult,
if not impossible, for USCF to ensure that these conflicts do not, in fact, result in adverse consequences to the shareholders.
USCF serves as the general partner or sponsor
to each of UNL and the Related Public Funds. USCF may have a conflict to the extent that its trading decisions for UNL
may be influenced by the effect they would have on the other funds it manages. By way of example, if, as a result of reaching position
limits imposed by the NYMEX, UNL purchased natural gas futures contracts, this decision could impact UNL's ability
to purchase additional natural gas futures contracts if the number of contracts held by funds managed by USCF reached the
maximum allowed by the NYMEX. Similar situations could adversely affect the ability of any fund to track its Benchmark Futures
Contracts.
UNL may also be subject to certain
conflicts with respect to its FCMs, including, but not limited to, conflicts that result from receiving greater amounts of compensation
from other clients, or purchasing opposite or competing positions on behalf of third party accounts traded through the FCMs. In
addition, USCF’s principals, officers, directors or employees may trade futures and related contracts for their own account.
A conflict of interest may exist if their trades are in the same markets and at the same time as UNL trades using the clearing
broker to be used by UNL. A potential conflict also may occur if USCF’s principals, officers, directors or employees trade
their accounts more aggressively or take positions in their accounts which are opposite, or ahead of, the positions taken by UNL.
UNL could terminate at any time
and cause the liquidation and potential loss of an investor’s investment and could upset the overall maturity and timing
of an investor’s investment portfolio.
UNL may terminate at any time, regardless
of whether UNL has incurred losses, subject to the terms of the LP Agreement. In particular, unforeseen circumstances, including,
but not limited to, (i) market conditions, regulatory requirements, risk mitigation measures taken by UNL or third parties
or otherwise that would lead UNL to determine that it could no longer foreseeably meet its business objective or that UNL's
aggregate net assets in relation to its operating expenses or its margin or collateral requirements make the continued operation
of UNL unreasonable or imprudent, or (ii) adjudication of incompetence, bankruptcy, dissolution, withdrawal, or removal
of USCF as the general partner of UNL could cause UNL to terminate unless a majority interest of the limited partners
within 90 days of the event elects to continue the partnership and appoints a successor general partner, or the affirmative vote
of a majority in interest of the limited partners subject to certain conditions. However, no level of losses will require USCF
to terminate UNL. UNL’s termination would cause the liquidation and potential loss of an investor’s investment.
Termination could also negatively affect the overall maturity and timing of an investor’s investment portfolio.
UNL does not expect to make
cash distributions.
UNL has not previously made any cash
distributions and intends to reinvest any realized gains in additional Natural Gas Interests rather than distributing cash
to limited partners, or other shareholders. Therefore, unlike mutual funds, commodity pools or other investment pools that actively
manage their investments in an attempt to realize income and gains from their investing activities and distribute such income and
gains to their investors, UNL generally does not expect to distribute cash to limited partners. An investor should not invest
in UNL if the investor will need cash distributions from UNL to pay taxes on its share of income and gains of UNL, if
any, or for any other reason. Nonetheless, although UNL does not intend to make cash distributions, the income earned from
its investments held directly or posted as margin may reach levels that merit distribution, e.g., at levels where such income is
not necessary to support its underlying investments in Natural Gas Interests and investors adversely react to being taxed
on such income without receiving distributions that could be used to pay such tax. If this income becomes significant then cash
distributions may be made.
An unanticipated number of Redemption Basket
requests during a short period of time could have an adverse effect on UNL’s NAV.
If a substantial number of requests for
redemption of Redemption Baskets are received by UNL during a relatively short period of time, UNL may not be able
to satisfy the requests from UNL’s assets not committed to trading. As a consequence, it could be necessary to liquidate
positions in UNL’s trading positions before the time that the trading strategies would otherwise dictate liquidation.
An unanticipated number of Creation Basket requests during a
short period of time could result in a shortage of shares.
While USCF makes every effort to predict
and maintain an adequate amount of shares outstanding, if a substantial number of requests for Creation Baskets are received by UNL
during a relatively short period of time that substantially differ from past creation volumes, due to market volatility or otherwise, could
result in circumstances where, because of high demand for its shares, UNL may not have sufficient shares available for sale
to satisfy demand and Authorized Participants may, therefore, be unable to purchase additional Creation Baskets.
In the event that there was a suspension
in the ability of Authorized Participants to purchase additional Creation Baskets, Authorized Participants and other groups that
make a market in shares of UNL would likely still continue to actively trade the shares. However, in such a situation, Authorized
Participants and other market makers may seek to adjust the market they make in the shares. Specifically, such market participants
may increase the spread between the prices that they quote for offers to buy and sell shares to allow them to adjust to the potential
uncertainty as to when they might be able to purchase additional Creation Baskets of shares. In addition, Authorized Participants
may be less willing to offer to quote offers to buy or sell shares in large numbers. The potential impact of either wider spreads
between bid and offer prices, or reduced number of shares on which quotes may be available, could increase the trading costs to
investors in UNL compared to the quotes and the number of shares on which bids and offers are made if the Authorized Participants
still were able to freely create new baskets of shares. In addition, there could be a significant variation between the market
price at which shares are traded and the shares’ NAV, which is also the price shares can be redeemed with UNL by Authorized
Participants in Redemption Baskets. The foregoing could also create significant deviations from UNL's investment objective. Any
potential impact to the market in shares of UNL that could occur from the Authorized Participant's inability to create new baskets
would likely not extend beyond the time when additional shares would be registered and available for distribution.
UNL may determine that to allow it to reinvest the
proceeds from sales of its Creation Baskets in currently permitted assets in a manner that meets its investment objective it may
limit its offers of Creation Baskets.
UNL may determine that UNL will limit
the issuance of its shares through the offering of Creation Baskets to its Authorized Participants. As a result of certain circumstances
described herein, including (1) the need to comply with regulatory requirements (including, but not limited to, exchange accountability
levels and position limits); (2) market conditions (including but not limited to those allowing UNL to obtain greater
liquidity or to execute transactions with more favorable pricing); and (3) risk mitigation measures taken by UNL's current
and other FCMs that limit UNL and other market participants from investing in particular natural gas futures contracts,
UNL's management can determine that it will limit the issuance of shares and the offerings of Creation Baskets because it is unable
to invest the proceeds from such offerings in investments that would permit it to reasonably meet its investment objective.
If such a determination is made, the same
consequences associated with a suspension of the offering of Creation Baskets, as described in the foregoing risk factor, An unanticipated
number of Creation Basket requests during a short period of time could result in a shortage of shares, could also occur as a result of UNL
determining to limit the offering of creation baskets.
The Fund may potentially lose money
on its holdings of money market mutual funds.
The SEC adopted amendments to Rule 2a-7
under the 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.
The failure or bankruptcy of a clearing broker or
UNL's Custodian could result in a substantial loss of UNL’s assets and could impair UNL in its ability to execute
trades.
The CEA and CFTC regulations impose several
requirements on FCMs and clearing houses that are designed to protect customers, including mandating the implementation of risk
management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and
examination programs. In particular, the CEA and CFTC regulations require FCMs and clearing houses to segregate all funds
received from customers from proprietary assets. There can be no assurance that the requirements imposed by the CEA and CFTC
regulations will prevent losses to, or not materially adversely affect, UNL or its investors.
In particular, in the event of an FCM’s
or clearing house’s bankruptcy, UNL could be limited to recovering either a pro rata share of all available funds segregated
on behalf of the FCM’s combined customer accounts or UNL may not recover any assets at all. UNL may also incur
a loss of any unrealized profits on its open and closed positions. This is because if such a bankruptcy were to occur, UNL
would be afforded the protections granted to customers of an FCM, and participants to transactions cleared through a clearing house,
under the United States Bankruptcy Code and applicable CFTC regulations. Such provisions generally provide for a pro rata distribution
to customers of customer property held by the bankrupt FCMs or an exchange’s clearing house if the customer property held
by the FCMs or the exchange’s clearing house is insufficient to satisfy all customer claims.
Bankruptcy of a clearing FCMs can be caused
by, among other things, the default of one of the FCM’s customers. In this event, the exchange’s clearing house is
permitted to use the entire amount of margin posted by UNL (as well as margin posted by other customers of the FCM) to cover
the amounts owed by the bankrupt FCM. Consequently, UNL could be unable to recover amounts due to it on its futures positions,
including assets posted as margin, and could sustain substantial losses.
Notwithstanding that UNL could sustain
losses upon the failure or bankruptcy of its FCM, the majority of UNL’s assets are held in Treasuries, cash and/or cash equivalents
with UNL's Custodian and would not be impacted by the bankruptcy of an FCM.
The failure or bankruptcy of UNL’s
Custodian could result in a substantial loss of UNL’s assets.
The majority of UNL’s assets are
held in Treasuries, cash and/or cash equivalents with the Custodian. The insolvency of the Custodian could result in a complete
loss of UNL’s assets held by that Custodian, which, at any given time, would likely comprise a substantial portion of UNL’s
total assets.
Third parties may infringe upon or
otherwise violate intellectual property rights or assert that USCF has infringed or otherwise violated their intellectual property
rights, which may result in significant costs and diverted attention.
It is possible that third parties might
utilize UNL’s intellectual property or technology, including the use of its business methods, trademarks and trading program
software, without permission. USCF has a patent for UNL’s business method and has registered its trademarks. UNL does
not currently have any proprietary software. However, if it obtains proprietary software in the future, any unauthorized use of
UNL’s proprietary software and other technology could also adversely affect its competitive advantage. UNL may not have
adequate resources to implement procedures for monitoring unauthorized uses of its patents, trademarks, proprietary software and
other technology. Also, third parties may independently develop business methods, trademarks or proprietary software and other
technology similar to that of USCF or claim that USCF has violated their intellectual property rights, including their copyrights,
trademark rights, trade names, trade secrets and patent rights. As a result, USCF may have to litigate in the future to protect
its trade secrets, determine the validity and scope of other parties’ proprietary rights, defend itself against claims that
it has infringed or otherwise violated other parties’ rights, or defend itself against claims that its rights are invalid.
Any litigation of this type, even if USCF is successful and regardless of the merits, may result in significant costs, divert its
resources from UNL, or require it to change its proprietary software and other technology or enter into royalty or licensing agreements.
Due to the increased use of technologies,
intentional and unintentional cyber-attacks pose operational and information security risks.
With the increased use of technologies
such as the internet and the dependence on computer systems to perform necessary business functions, UNL is susceptible to
operational and information security risks. In general, cyber incidents can result from deliberate attacks or unintentional events
such as a cyber-attack against UNL, a natural catastrophe, an industrial accident, failure of UNL’s disaster recovery systems,
or consequential employee error. Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems
for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks
may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks
on websites. Cyber security failures or breaches of UNL’s clearing broker or third party service provider (including, but
not limited to, index providers, the administrator and transfer agent, the custodian), have the ability to cause disruptions and
impact business operations, potentially resulting in financial losses, the inability of UNL shareholders to transact business,
violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation
costs, and/or additional compliance costs. Adverse effects can become particularly acute if those events affect UNL’s electronic
data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our
data.
In addition, substantial costs may be incurred
in order to prevent any cyber incidents in the future. UNL and its shareholders could be negatively impacted as a result.
While USCF and the Related Public Funds, including UNL, have established business continuity plans, there are inherent limitations in such plans.
General Risk Factors
Changes to U.S. tariff and import/export regulations
could have a negative effect on UNL.
There has been ongoing discussion and
commentary regarding significant changes that have been and could be made to U.S. trade policies, treaties and tariffs. The
new U.S. presidential administration and U.S. Congress is in the process of revisiting, and in some cases, reversing changes
made by the prior U.S. presidential administration and there is uncertainty about the future relationship between the United
States and other countries with respect to trade policies, treaties and tariffs. These developments, or the perception that
any of them could occur, could have a material adverse effect on global economic conditions and the stability of global
financial markets, and could significantly reduce global trade and, in particular, trade between the impacted nations and the
United States. Any of these factors could depress economic activity and negatively impact UNL.
There is uncertainty surrounding potential legal, regulatory
and policy changes by the new presidential administration in the United States that may directly affect financial institutions
and the global economy.
As a result of the United States presidential election, which
occurred on November 3, 2020 and subsequent senate runoff elections, there has been a change in control of the executive and legislative
branches of the U.S. government. Changes in federal policy, including tax policies, and at regulatory agencies occur over time
through policy and personnel changes following elections, which lead to changes involving the level of oversight and regulation
of the energy sector, climate change, and the financial services industry, as well as changes in tax rates. The nature, timing
and economic and political effects of potential changes to the current legal and regulatory framework affecting the energy sector
and financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect UNL and its investments.