10-Q 1 d407565d10q.htm FORM 10-Q FOR PERIOD ENDING SEPTEMBER 30, 2012 Form 10-Q for Period ending September 30, 2012
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to        .

Commission File Number 0-50272

AAA CAPITAL ENERGY FUND L.P. II

 

(Exact name of registrant as specified in its charter)

 

New York

  

03-0407557

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue - 14th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X     No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer        Accelerated filer        Non-accelerated filer X     Smaller reporting company   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No X

As of October 31, 2012, 68,941.3403 Limited Partnership Redeemable Units were outstanding.


Table of Contents

AAA CAPITAL ENERGY FUND L.P. II

FORM 10-Q

INDEX

 

         

Page
Number

PART I - Financial Information:

     

Item 1.

   Financial Statements:   
   Statements of Financial Condition at September 30, 2012 (unaudited) and December 31, 2011    3
   Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2012 and 2011 (unaudited)    4
   Notes to Financial Statements, including the Financial Statements of AAA Master Fund LLC (unaudited)    5 – 21

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    22 – 24

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    25 – 26

Item 4.

   Controls and Procedures    27

PART II - Other Information

     

Item 1.

   Legal Proceedings    28

Item 1A.

   Risk Factors    29

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    30

Item 5.

   Other Information    31

Item 6.

   Exhibits    32 – 33

 

2


Table of Contents

PART I

Item 1. Financial Statements

AAA Capital Energy Fund L.P. II

Statements of Financial Condition

 

     (Unaudited)         
     September 30,
2012
     December 31,
2011
 

Assets:

     

Investment in the Master, at fair value

   $ 316,379,020       $ 352,633,984   

Cash

     182,312         229,298   
  

 

 

    

 

 

 

Total assets

   $ 316,561,332       $ 352,863,282   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Brokerage commissions

   $ 1,079,531       $ 1,253,476   

Management fees

     525,615         585,805   

Administrative fees

     131,404         146,451   

Other

     112,991         126,976   

Redemptions payable

     5,393,165         4,312,144   
  

 

 

    

 

 

 

Total liabilities

     7,242,706         6,424,852   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 866.9309 and 966.9309 unit equivalents outstanding at September 30, 2012 and December 31, 2011, respectively

     3,634,616         4,038,377   

Special Limited Partner, 464.0795 Redeemable Units outstanding at September 30, 2012 and December 31, 2011

     1,945,658         1,938,223   

Limited Partners, 72,447.8458 and 81,518.5546 Redeemable Units outstanding at September 30, 2012 and December 31, 2011, respectively

     303,738,352         340,461,830   
  

 

 

    

 

 

 

Total partners’ capital

     309,318,626         346,438,430   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 316,561,332       $ 352,863,282   
  

 

 

    

 

 

 

Net asset value per unit

   $ 4,192.51       $ 4,176.49   
  

 

 

    

 

 

 

See Accompanying Notes to Financial Statements.

 

3


Table of Contents

AAA Capital Energy Fund L.P. II

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012     2011     2012     2011  
                          

Investment income:

        

Interest income allocated from Master

   $ 31,262      $ 8,283      $ 81,760      $ 84,530   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Expenses allocated from Master

     307,289        224,052        963,667        834,335   

Brokerage commissions

     1,097,402        906,159        3,198,068        2,839,780   

Management fees

     1,563,023        1,677,225        4,945,539        5,410,193   

Administrative fees

     390,755        419,305        1,236,384        1,352,547   

Other

     46,886        12,705        166,772        218,716   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     3,405,355        3,239,446        10,510,430        10,655,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (3,374,093     (3,231,163     (10,428,670     (10,571,041
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

        

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

     19,817,290        8,762,726        68,464,295        (14,488,020

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

     674,557        (1,365,283     (58,097,833     21,242,552   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results allocated from Master

     20,491,847        7,397,443        10,366,462        6,754,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     17,117,754        4,166,280        (62,208     (3,816,509

Subscriptions — Limited Partners

     0        0        12,685,716        401,165   

Redemptions — Limited Partners

     (11,164,961     (13,234,918     (49,339,750     (62,643,167

Redemptions — General Partner

     (403,562     0        (403,562     (400,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in Partners’ Capital

     5,549,231        (9,068,638     (37,119,804     (66,458,511

Partners’ Capital, beginning of period

     303,769,395        335,052,462        346,438,430        392,442,335   
  

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, end of period

   $ 309,318,626      $ 325,983,824      $ 309,318,626      $ 325,983,824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit (73,778.8562 and 81,245.5047 units outstanding at September 30, 2012 and 2011, respectively)

   $ 4,192.51      $ 4,012.33      $ 4,192.51      $ 4,012.33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit *

   $ 225.93      $ 49.48      $ 16.02      $ (44.35
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

     75,769.8199        83,544.2007        80,373.4003        88,991.6096   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

4


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

1. General:

AAA Capital Energy Fund L.P. II (the “Partnership”) is a limited partnership organized on March 25, 2002 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including commodity options, commodity futures contracts on U.S. exchanges and certain foreign exchanges. The Partnership, through its investment in the Master (defined below), may trade commodity futures and options contracts of any kind. In addition, the Partnership, through its investment in the Master, may enter into swap contracts on energy-related products. The Partnership commenced trading on July 1, 2002. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”). There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC (“CMF”) a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). Morgan Stanley, indirectly through various subsidiaries, owns a majority equity interest in MSSB Holdings. Citigroup Inc. indirectly owns a minority equity interest in MSSB Holdings. Citigroup Inc. also indirectly owns Citigroup Global Markets Inc. (“CGM”), the commodity broker for the Partnership. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup Inc. As of September 30, 2012, all trading decisions for the Partnership are made by the Advisor (defined below).

On July 1, 2002, the Partnership allocated substantially all of its capital to AAA Master Fund LLC (the “Master”), a New York limited liability company. The Partnership purchased 64,945.0387 units of the Master with a fair value of $94,925,000. The Master was formed in order to permit commodity pools managed now or in the future by AAA Capital Management Advisors, Ltd. (the “Advisor”) using the Energy Program – Futures and Swaps, a proprietary, discretionary trading program, to invest together in one trading vehicle. In addition, the Advisor is a special limited partner of the Partnership (in its capacity as special limited partner, the “Special Limited Partner”). Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be non-managing members of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected. The Master’s commodity broker is CGM and its managing member is CMF. The Master may trade commodity futures and option contracts of any kind, but trades solely energy, energy-related products, grains, indices, lumber and softs. In addition, the Master may enter into swap contracts. The commodity interests that are traded by the Partnership, through its investment in the Master, are volatile and involve a high degree of market risk.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended September 30, 2012.

As of September 30, 2012, the Partnership owned approximately 33.9% of the Master. As of December 31, 2011, the Partnership owned approximately 36.1% of the Master. It is the Partnership’s intention to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master’s trading of futures, swap and option contracts, as applicable, is done primarily on U.S. and foreign commodity exchanges. The Master engages in such trading through a commodity brokerage account maintained with CGM. The Master’s Statements of Financial Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Members’ Capital are included herein.

 

5


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

The General Partner and each limited partner share in the profits and losses of the Partnership, after the allocation to the Special Limited Partner, in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contribution and profits or losses, if any, net of distributions.

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at September 30, 2012 and December 31, 2011, and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2012 and 2011. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2011.

The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

 

6


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of September 30, 2012 and December 31, 2011 and Statements of Income and Expenses and Changes in Members’ Capital for the three and nine months ended September 30, 2012 and 2011 are presented below:

AAA Master Fund LLC

Statements of Financial Condition

 

    

(Unaudited)

September 30,

     December 31,  
     2012      2011  

Assets:

     

Equity in trading account:

     

Cash

   $ 741,173,411       $ 671,605,055   

Cash margin

     53,026,786         33,580,718   

Options purchased, at fair value (cost $354,919,507 and $394,712,745, respectively)

     232,445,238         374,133,088   
  

 

 

    

 

 

 

Total assets

   $
1,026,645,435
  
   $ 1,079,318,861   
  

 

 

    

 

 

 

Liabilities and Members’ Capital:

     

Liabilities:

     

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

   $ 22,285,448       $ 6,062,595   

Options premium received, at fair value (premium $155,850,388 and $223,316,821, respectively)

     72,143,401         96,374,598   

Accrued expenses:

     

Professional fees

     319,172         371,076   
  

 

 

    

 

 

 

Total liabilities

     94,748,021         102,808,269   
  

 

 

    

 

 

 

Members’ Capital:

     

Members’ Capital, 89,055.4837 and 96,401.5933 units outstanding at September 30, 2012 and December 31, 2011, respectively

     931,897,414         976,510,592   
  

 

 

    

 

 

 

Total liabilities and members’ capital

   $ 1,026,645,435       $ 1,079,318,861   
  

 

 

    

 

 

 

Net asset value per unit

   $ 10,464.23       $ 10,129.61   
  

 

 

    

 

 

 

 

7


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

AAA Master Fund LLC

Condensed Schedule of Investments

September 30, 2012

(Unaudited)

 

    

Number of

          

% of Members’

 
     Contracts      Fair Value     Capital  

Futures and Exchange-Cleared Swap Contracts Purchased

       

Energy

     23,646       $
(20,006,928

   
(2.15
)% 

Grains

     69        
832,312
  
    0.09   
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts purchased

       
(19,174,616

   
(2.06

     

 

 

   

 

 

 

Futures and Exchange-Cleared Swap Contracts Sold

       

Energy

     18,353        
(3,110,832

   
(0.33

     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts sold

       
(3,110,832

   
(0.33

     

 

 

   

 

 

 

Options Purchased

       

Call

       

Energy

       

NYMEX LT Crude Oil Nov 12 - Dec 14

     12,502        
94,363,060
  
    10.13   

Other

     7,860        
27,988,020
  
    3.00   
     

 

 

   

 

 

 

Call options purchased

       
122,351,080
  
    13.13   
     

 

 

   

 

 

 

Put

       

Energy

       

NYMEX LT Crude Oil Nov 12 - Dec 14

     12,791        
73,566,960
  
    7.89   

Other

    
8,198
  
    
36,526,767
  
    3.92   

Grains

     69        
431
  
    0.00
     

 

 

   

 

 

 

Put options purchased

       
110,094,158
  
    11.81   
     

 

 

   

 

 

 

Total options purchased

       
232,445,238
  
    24.94   
     

 

 

   

 

 

 

Options Premium Received

       

Call

       

Energy

     20,652        
(40,860,138

   
(4.38

Grains

    
69
  
    
(573,994

   
(0.06

     

 

 

   

 

 

 

Call options premium received

       
(41,434,132

   
(4.44

     

 

 

   

 

 

 

Put

       

Energy

    
15,155
  
    
(30,709,269

   
(3.30

     

 

 

   

 

 

 

Put options premium received

       
(30,709,269

   
(3.30

     

 

 

   

 

 

 

Total options premium received

       
(72,143,401

   
(7.74

     

 

 

   

 

 

 

Net fair value

      $
138,016,389
  
    14.81
     

 

 

   

 

 

 

 

* Due to rounding.

 

8


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

AAA Master Fund LLC

Condensed Schedule of Investments

December 31, 2011

 

     Number of
Contracts
     Fair Value     % of  Members’
Capital
 

Futures and Exchange-Cleared Swap Contracts Purchased

       

Energy

     31,887       $ (119,406,111 )     (12.23 )%

Indices

     60         (5,232 )     (0.00 )*

Lumber

     41         21,365        0.00 *

Softs

     430         (815,575 )     (0.08 )
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts purchased

        (120,205,553 )     (12.31 )
     

 

 

   

 

 

 

Futures and Exchange-Cleared Swap Contracts Sold

       

Energy

       

NYMEX HH Swap Mar 12 – Dec 14

     10,565         79,310,347        8.12   

Other

     17,763         35,201,407        3.60   

Grains

     153         (331,229 )     (0.03 )

Lumber

     41         (37,567 )     (0.00 )*
     

 

 

   

 

 

 

Total futures and exchange-cleared swap contracts sold

        114,142,958        11.69   
     

 

 

   

 

 

 

Options Purchased

       

Call

       

Energy

       

NYMEX LT Crude Oil Feb 12 – Dec 14

     9,179         97,782,830        10.01   

Other

     8,590         38,624,446        3.96   

Indices

     120         189,600        0.02   
     

 

 

   

 

 

 

Call options purchased

        136,596,876        13.99   
     

 

 

   

 

 

 

Put

       

Energy

       

NYMEX LT Crude Oil Feb 12 – Dec 14

     15,707         105,386,170        10.79   

NYMEX Natural Gas E Feb 12 – Jan 13

     3,022         84,054,102        8.61   

Other

     6,764         46,428,317        4.75   

Grains

     70         300,563        0.03   

Indices

     1,348         1,367,060        0.14   
     

 

 

   

 

 

 

Put options purchased

        237,536,212        24.32   
     

 

 

   

 

 

 

Total options purchased

        374,133,088        38.31   
     

 

 

   

 

 

 

Options Premium Received

       

Call

       

Energy

     25,531         (42,662,618 )     (4.37 )

Grains

     164         (169,713 )     (0.01 )

Indices

     270         (449,100 )     (0.05 )
     

 

 

   

 

 

 

Call options premium received

        (43,281,431 )     (4.43 )
     

 

 

   

 

 

 

Put

       

Energy

     25,561         (53,008,680 )     (5.43 )

Indices

     585         (84,487 )     (0.01 )
     

 

 

   

 

 

 

Put options premium received

        (53,093,167 )     (5.44 )
     

 

 

   

 

 

 

Total options premium received

        (96,374,598 )     (9.87 )
     

 

 

   

 

 

 

Net fair value

      $ 271,695,895        27.82 %
     

 

 

   

 

 

 

 

* Due to rounding.

 

9


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

AAA Master Fund LLC

Statements of Income and Expenses and Changes in Members’ Capital

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Investment income:

        

Interest income

  

 

 

$

 

 

102,464

 

 

  

 

 

 

$

 

 

25,879

 

 

  

 

 

 

 

$

 

 

 

259,756

 

 

 

  

 

 

 

$

 

 

236,478

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Clearing fees

     880,584        504,922        2,532,654        1,751,867   

Professional fees

  

 

 

 

 

 

21,395

 

 

  

 

 

 

 

 

 

129,784

 

 

  

 

 

 

 

 

 

 

 

199,158

 

 

 

  

 

 

 

 

 

 

482,612

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  

 

 

 

 

 

 

 

 

 

901,979

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

634,706

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

2,731,812

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

2,234,479

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

  

 

 

 

 

 

 

 

 

 

 

 

(799,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(608,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,472,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,998,001

 

 

 

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Trading results:

        

Net gains (losses) on trading of commodity interests:

        

Net realized gains (losses) on closed contracts

     58,147,024        24,740,487        192,863,690        (39,673,549

Change in unrealized gains (losses) on open contracts

  

 

 

 

 

 

1,960,907

 

 

  

 

 

 

 

 

 

(3,814,676

 

 

 

 

 

 

 

 

 

 

(161,352,701

 

 

 

 

 

 

 

 

 

56,379,623

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

  

 

 

 

 

 

 

 

60,107,931

 

 

 

  

 

 

 

 

 

 

 

 

20,925,811

 

 

 

  

 

 

 

 

 

 

 

 

 

 

31,510,989

 

 

 

 

  

 

 

 

 

 

 

 

 

16,706,074

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  

 

 

 

59,308,416

 

  

 

 

 

 

20,316,984

 

  

 

 

 

 

29,038,933

 

  

 

 

 

 

14,708,073

 

  

Subscriptions

     7,866,906        34,613        49,182,387        106,053,886   

Redemptions

     (33,992,568     (42,796,897     (122,574,742     (156,300,791

Distribution of interest to feeder funds

  

 

 

 

 

 

(102,464

 

 

 

 

 

 

 

 

(25,879

 

 

 

 

 

 

 

 

 

 

(259,756

 

 

 

 

 

 

 

 

 

(236,478

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in Members’ Capital

  

 

 

 

33,080,290

 

  

 

 

 

 

(22,471,179

 

 

 

 

 

(44,613,178

 

 

 

 

 

(35,775,310

 

Members’ Capital, beginning of period

  

 

 

 

 

 

898,817,124

 

 

  

 

 

 

 

 

 

967,065,507

 

 

  

 

 

 

 

 

 

 

 

976,510,592

 

 

 

  

 

 

 

 

 

 

980,369,638

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Members’ Capital, end of period

  

 

 

 

$

 

 

 

931,897,414

 

 

 

  

 

 

 

 

$

 

 

 

944,594,328

 

 

 

  

 

 

 

 

 

$

 

 

 

 

931,897,414

 

 

 

 

  

 

 

 

 

$

 

 

 

944,594,328

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit (89,055.4837 and 97,881.6157 units outstanding in September 30, 2012 and 2011, respectively)

  

 

 

 

$

 

 

 

10,464.23

 

 

 

  

 

 

 

 

$

 

 

 

9,650.38

 

 

 

  

 

 

 

 

 

$

 

 

 

 

10,464.23

 

 

 

 

  

 

 

 

 

$

 

 

 

9,650.38

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit*

  

 

 

 

$

 

 

 

660.49

 

 

 

  

 

 

 

 

$

 

 

 

203.84

 

 

 

  

 

 

 

 

 

$

 

 

 

 

337.43

 

 

 

 

  

 

 

 

 

$

 

 

 

155.14

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

  

 

 

 

90,919.0513

 

  

 

 

 

 

100,759.3411

 

  

 

 

 

 

94,329.3985

 

  

 

 

 

 

103,060.4574

 

  

  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

* Based on change in net asset value per unit.

 

10


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

2. Financial Highlights:

Changes in the net asset value per unit for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012     2011     2012     2011  

Net realized and unrealized gains (losses)*

   $ 252.03      $ 75.17      $
94.81
  
  $ 35.10   

Interest income allocated from Master

     0.41        0.10        1.01        0.92   

Expenses and allocation to Special Limited Partner**

     (26.51     (25.79    
(79.80

    (80.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     225.93        49.48        16.02       
(44.35

Net asset value per unit, beginning of period

     3,966.58        3,962.85        4,176.49       
4,056.68
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 4,192.51      $ 4,012.33      $ 4,192.51      $ 4,012.33   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes brokerage commissions and clearing fees allocated from the Master.
** Excludes brokerage commissions and clearing fees allocated from the Master and includes allocation to Special Limited Partner in the three and nine months ended September 30, 2012 and 2011 if any.

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012             2011***     2012     2011***  

Ratios to Average Net Assets:****

        

Net investment income (loss)

     (4.4)     (3.9)     (4.3)     (4.0)

Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (4.4)     (3.9)     (4.3)     (4.0)
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     4.4     3.9     4.3     4.0

Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and allocation to Special Limited Partner

     4.4     3.9     4.3    
4.0

  

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

        

Total return before allocation to Special Limited Partner

     5.7     1.2     0.4    
(1.1)

Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return after allocation to Special Limited Partner

     5.7     1.2     0.4     (1.1)
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*** The ratios are shown net and gross of allocation to Special Limited Partner to conform to current period presentation.
**** Annualized (except for allocation to Special Limited Partner, if applicable).
***** Interest income allocated from Master less total expenses (exclusive of allocation to Special Limited Partner, if applicable).

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.

 

11


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

Financial Highlights of the Master:

 

    Three Months Ended
September 30,
    Nine Months  Ended
September 30,
 
    2012     2011     2012     2011  

Net realized and unrealized gains (losses)*

  $
659.59
  
  $ 204.88      $
336.73
  
  $
157.56
  

Interest income

    1.14       
0.26
  
    2.81       
2.33
  

Expenses **

    (0.24    
(1.30

    (2.11    
(4.75

 

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

    660.49       
203.84
  
    337.43       
155.14
  

Distribution of interest income to feeder funds

    (1.14    
(0.26

    (2.81    
(2.33

Net asset value per unit, beginning of period

    9,804.88       
9,446.80
  
    10,129.61       
9,497.57
  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

  $
10,464.23
  
  $
9,650.38
  
  $
10,464.23
  
  $
9,650.38
  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes clearing fees.
** Excludes clearing fees.

 

    Three Months Ended
September 30,
    Nine Months  Ended
September 30,
 
    2012     2011     2012     2011  

Ratios to average net assets:***

       

Net investment income (loss)****

    (0.3 )%     
(0.3
)% 
    (0.4 )%     
(0.3
)% 
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    0.4    
0.3

    0.4    
0.3

 

 

 

   

 

 

   

 

 

   

 

 

 

Total return

    6.7    
2.2

    3.3     1.6
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*** Annualized.

 

**** Interest income less total expenses.

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

 

3. Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure. The Partnership’s pro rata share of the results of the Master’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The customer agreements between the Partnership and CGM and the Master and CGM give the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures and exchange-cleared swap contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and exchange-cleared swap contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210-20, “Balance Sheet,” have been met.

 

12


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

Brokerage commissions are based on the number of trades executed by the Advisor and the Partnership’s ownership percentage of the Master.

All of the commodity interests owned by the Master are held for trading purposes. The monthly average number of futures and exchange-cleared swap contracts traded during the three months ended September 30, 2012 and 2011 were 43,121 and 84,370, respectively. The monthly average number of futures and exchange-cleared swap contracts traded during the nine months ended September 30, 2012 and 2011 were 41,743 and 88,598, respectively. The monthly average number of options contracts traded during the three months ended September 30, 2012 and 2011 were 80,827 and 104,178, respectively. The monthly average number of option contracts traded during the nine months ended September 30, 2012 and 2011 were 78,836 and 111,131, respectively.

The following tables indicate the gross fair values of derivative instruments of futures and exchange-cleared swap and option contracts as separate assets and liabilities as of September 30, 2012 and December 31, 2011.

 

     September 30, 2012  

Assets

  
Futures and Exchange-Cleared Swap Contracts   

Energy

   $
54,337,776
  

Grains

    
832,312
  
  

 

 

 

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

   $
55,170,088
  
  

 

 

 

Liabilities

  
Futures and Exchange-Cleared Swap Contracts   

Energy

   $
(77,455,536

  

 

 

 

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

   $
(77,455,536

  

 

 

 

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

   $
(22,285,448
)* 
  

 

 

 

Assets

  
Options Purchased   

Energy

   $
232,444,807
  

Grains

     431   
  

 

 

 

Total options purchased

   $
232,445,238
** 
  

 

 

 

Liabilities

  
Options Premium Received   

Energy

   $
(71,569,407

Grains

     (573,994
  

 

 

 

Total options premium received

   $
(72,143,401
)*** 
  

 

 

 

 

 

* This amount is in “Net unrealized depreciation on open futures and exchange-cleared swap contracts” on the Master’s Statements of Financial Condition.
** This amount is in “Options purchased, at fair value” on the Master’s Statements of Financial Condition.
*** This amount is in “Options premium received, at fair value” on the Master’s Statements of Financial Condition.

 

13


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

     December 31, 2011  

Assets

  

Futures and Exchange-Cleared Swap Contracts

  

Energy

   $ 149,194,744   

Indices

     5,735   

Lumber

     21,365   

Softs

     583,472   
  

 

 

 

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

   $ 149,805,316   
  

 

 

 

Liabilities

  

Futures and Exchange-Cleared Swap Contracts

  

Energy

   $ (154,089,101

Grains

     (331,229

Indices

     (10,967

Lumber

     (37,567

Softs

     (1,399,047
  

 

 

 

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

   $ (155,867,911
  

 

 

 

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

   $ (6,062,595 )* 
  

 

 

 

Assets

  

Options Purchased

  

Energy

   $ 372,275,865   

Grains

     300,563   

Indices

     1,556,660   
  

 

 

 

Total options purchased

   $ 374,133,088 ** 
  

 

 

 

Liabilities

  

Options Premium Received

  

Energy

   $ (95,671,298

Grains

     (169,713

Indices

     (533,587
  

 

 

 

Total options premium received

   $ (96,374,598 )*** 
  

 

 

 

 

* This amount is in “Net unrealized depreciation on open futures and exchange-cleared swap contracts” on the Master’s Statements of Financial Condition.
** This amount is in “Options purchased, at fair value” on the Master’s Statements of Financial Condition.
*** This amount is in “Options premium received, at fair value” on the Master’s Statements of Financial Condition.

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2012 and 2011.

 

Sector

  Three Months  Ended
September 30, 2012
Gain (loss) from trading
    Three Months  Ended
September 30, 2011
Gain (loss) from trading
    Nine Months Ended
September 30, 2012
Gain (loss) from trading
    Nine Months  Ended
September 30, 2011
Gain (loss) from trading
 

Energy

  $
60,070,413
  
   
20,967,573
  
  $
33,144,396
  
   
17,629,437
  

Grains

    37,518       
207,501
  
    670,620       
172,626
  

Indices

    —          —          (836,720 )       —     

Lumber

    —         
395,146
  
    163,753       
397,250
  

Softs

    —         
(644,409

    (1,631,060    
(1,493,239

 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $
60,107,931
**** 
  $
20,925,811
**** 
  $
31,510,989
**** 
  $
16,706,074
**** 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

14


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

4. Fair Value Measurements:

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2 of the Master’s notes to the annual financial statements as of December 31, 2011.

Partnership’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s Level 2 assets.

The Partnership will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards [(“IFRS”)].” The amendments within this ASU change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between GAAP and IFRS. However, some of the amendments clarify the Financial Accounting Standards Board’s (“FASB”) intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This new guidance did not have a significant impact on the Partnership’s/Master’s financial statements.

The Partnership values its investments in the Master with no rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended September 30, 2012 and December 31, 2011, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the nine months ended September 30, 2012, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

15


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

           

Quoted Prices in

Active Markets for
Identical Assets

     Significant Other
Observable Inputs
    

Significant

Unobservable Inputs

 
     September 30, 2012      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Investment in Master

   $ 316,379,020       $ —         $ 316,379,020       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $
316,379,020
  
   $ —         $
316,379,020
  
   $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable
Inputs
     Significant
Unobservable Inputs
 
     December 31, 2011      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Investment in Master

   $ 352,633,984       $ —         $ 352,633,984       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 352,633,984       $ —         $ 352,633,984       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Master’s Investments. All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Members’ Capital.

Master’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

16


Table of Contents

AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, the Master’s Level 1 assets and liabilities are actively traded.

The Master will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Master considers prices for exchange-traded commodity futures and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of non-exchange-traded swaps and certain option contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended September 30, 2012 and December 31, 2011, the Master did not hold any derivative instruments for which market quotations were not readily available and which were priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the nine months ended September 30, 2012, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

     September 30, 2012      Quoted Prices in
Active  Markets for
Identical Assets
and Liabilities

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

Assets

           

Futures and Exchange-Cleared Swaps

   $ 55,170,088       $ 55,170,088       $ —         $ —     

Options purchased

     232,445,238         232,445,238         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     287,615,326         287,615,326         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures and Exchange-Cleared Swaps

   $ 77,455,536       $ 77,455,536       $ —         $ —     

Options premium received

     72,143,401         72,143,401         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilites

     149,598,937         149,598,937         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 138,016,389       $ 138,016,389       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011      Quoted Prices in
Active  Markets for
Identical Assets
and Liabilities

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

Assets

           

Futures and Exchange-Cleared Swaps

   $ 149,805,316       $ 149,805,316       $ —         $ —     

Options purchased

     374,133,088         374,133,088         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     523,938,404         523,938,404         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures and Exchange-Cleared Swaps

   $ 155,867,911       $ 155,867,911       $ —         $ —     

Options premium received

     96,374,598         96,374,598         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     252,242,509         252,242,509         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 271,695,895       $ 271,695,895       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

17


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AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

5. Financial Instrument Risks:

In the normal course of business, the Partnership, through its investment in the Master, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forward and option contracts. OTC contracts are negotiated between contracting parties and include swaps and certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer, or seller, of an option has unlimited risk. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded by the Partnership/Master. The Partnership/Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Master has credit risk and concentration risk as CGM or a CGM affiliate is the sole counterparty or broker with respect to the Partnership’s/Master’s assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Partnership’s/Master’s counterparty is an exchange or clearing organization.

The Advisor will concentrate the Partnership’s/Master’s trading in energy-related markets. Concentration in a limited number of commodity interests may subject the Partnership’s/Master’s account to greater volatility than if a more diversified portfolio of contracts were traded on behalf of the Partnership/Master.

As both a buyer and seller of options, the Partnership/Master pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Master to potentially unlimited liability; for purchased options, the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Master does not consider these contracts to be guarantees.

The General Partner/managing member monitors and attempts to control the Partnership’s/Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Master may be subject. These monitoring systems generally allow the General Partner/managing member to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures and exchange-cleared swaps, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.

 

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AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

6. Critical Accounting Policies:

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2 of the Master’s notes to the annual financial statements as of December 31, 2011.

Partnership’s and the Master’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Master’s Level 1 assets and liabilities are actively traded.

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities.

The Partnership and the Master will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Partnership values its investment in the Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended September 30, 2012 and December 31, 2011, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the nine months ended September 30, 2012, there were no transfers of assets or liabilities between Level 1 and Level 2.

The Master considers prices for exchange-traded commodity futures and options contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of non-exchange-traded swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended September 30, 2012 and December 31, 2011, the Master did not hold any derivative instruments for which market quotations are not readily available and are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the nine months ended September 30, 2012, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

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AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

Futures Contracts. The Master trades futures contracts and exchange-cleared swaps. Exchange-cleared swaps are swaps that are traded as futures. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Members’ Capital.

Options. The Master may purchase and write (sell) both exchange-listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Master purchases an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Members’ Capital.

Brokerage Commissions. Commission charges to open and close futures and exchange-traded swap contracts are expensed at the time the positions are opened. Commission charges on option contracts are expensed at the time the position is established and when the option contract is closed.

Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.

GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.

The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2009 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.

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

 

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AAA Capital Energy Fund L.P. II

Notes to Financial Statements

September 30, 2012

(Unaudited)

 

Recent Accounting Pronouncements. In October 2011, FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company. Under longstanding GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes being proposed by FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. In addition to the changes to the criteria for determining whether an entity is an investment company, FASB also proposes that an investment company consolidate another investment company if it holds a controlling financial interest in the entity. In August 2012, FASB updated the proposed ASU to state that entities regulated under the Investment Company Act of 1940 should qualify to be investment companies within the proposed investment company guidance. The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.

In December 2011, FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership should also provide the disclosures retrospectively for all comparative periods presented. The Partnership is currently evaluating the impact that the pronouncement would have on the financial statements.

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

 

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in the sale of goods or services. The Master’s only assets are its equity in its trading accounts, consisting of cash, cash margin and options purchased at fair value. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the third quarter of 2012.

The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by income (loss) from its investment in the Master and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2012, Partnership capital decreased 10.7% from $346,438,430 to $309,318,626. This decrease was attributable to redemptions of 12,113.4640 Redeemable Units resulting in an outflow of $49,339,750, and the redemption of 100.0000 General Partner unit equivalents totaling $403,562, coupled with the net loss of $62,208, which was partially offset by the subscriptions of 3,042.7552 Redeemable Units totaling $12,685,716. Future redemptions could impact the amount of funds available for investment in the Master in subsequent periods.

The Master’s capital consists of the capital contributions of the members as increased or decreased by realized and/or unrealized gains or losses on trading and by expenses, interest income, redemptions of units and distributions of profits, if any.

For the nine months ended September 30, 2012, the Master’s capital decreased 4.6% from $976,510,592 to $931,897,414. This decrease was attributable to the redemptions of 12,226.7785 units totaling $122,574,742 and distribution of interest income to feeder funds totaling $259,756, which was partially offset by the subscriptions of 4,880.6689 units totaling $49,182,387, coupled with the net income of $29,038,933. Future redemptions can impact the amount of funds available for investments in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Management believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 6 of the Financial Statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Table of Contents

Results of Operations

During the Partnership’s third quarter of 2012, the net asset value per unit increased 5.7% from $3,966.58 to $4,192.51 as compared to an increase of 1.2% in the same period of 2011. The Partnership, for its own account, through its investment in the Master experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2012 of $20,491,847. Gains were primarily attributable to the Master’s trading of commodity futures in NYMEX Crude Oil, NYMEX Energy Swaps, NYMEX Gasoline, NYMEX Natural Gas and Corn and were partially offset by losses in Brent Crude Oil, IPE Gas Oil and NYMEX Heating Oil. The Partnership, for its own account, through its investment in the Master experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2011 of $7,397,443. Gains were primarily attributable to the Master’s trading of commodity futures in NYMEX Heating Oil, NYMEX Crude Oil, IPE Gas Oil, Brent Crude Oil, Lumber and Corn and were partially offset by losses in NYMEX Energy Swaps, NYMEX Gasoline, NYMEX Natural Gas and Softs.

The most significant gains were recorded within the energies complex during August from long futures and options positions in RBOB gasoline as prices rallied during the end of the summer months when demand is at its highest. Further gains were recorded in August from short futures positions in natural gas as prices declined as mild temperatures throughout the U.S. help to weaken demand for the commodity. Gains were also recorded in July as long futures and options positions in RBOB gasoline benefited from rallying crude oil prices due to unrest in the Middle East. Gains were also recorded during September from short futures and options positions in Brent crude oil as prices declined due to concerns about the “health” of the U.S. economy and increased supplies.

During the nine months ended September 30, 2012, the net asset value per unit increased 0.4% from $4,176.49 to $4,192.51 as compared to a decrease of 1.1% in the same period of 2011. The Partnership, for its own account, through its investment in the Master experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2012 of $10,366,462. Gains were primarily attributable to the Master’s trading of commodity futures in NYMEX Energy Swaps, NYMEX Gasoline, NYMEX Heating Oil, NYMEX Natural Gas, Lumber and Corn and were partially offset by losses in Brent Crude Oil, NYMEX Crude Oil, IPE Gas Oil, Indices and Softs. The Partnership, for its own account, through its investment in the Master experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2011 of $6,754,532. Gains were primarily attributable to the Master’s trading of commodity futures in NYMEX Crude Oil, NYMEX Heating Oil, Brent Crude Oil, Lumber and Corn and were partially offset by losses in NYMEX Energy Swaps, NYMEX Gasoline, NYMEX Natural Gas, IPE Gas Oil and Softs.

The most significant gains were recorded within the energies complex during August from long futures and options positions in RBOB gasoline as prices rallied during the end of the summer months when demand is at its highest. Gains were also recorded in July as long futures and options positions in RBOB gasoline benefited from rallying crude oil prices due to unrest in the Middle East. Further gains were recorded in August from short futures positions in natural gas as prices declined as mild temperatures throughout the U.S. help to weaken demand for the commodity. Smaller gains were recorded during May from long call options positions in natural gas as prices rallied given concerns over warmer-than-expected weather forecasts in May and for June. Smaller gains were also recorded from futures and options positions in the S&P 500 Index as prices declined during May given concerns over slowing growth in the United States. A portion of the Partnership’s gains for the first nine months of the year was offset by losses incurred within the energies complex during April and May from a net long exposure to crude oil as prices moved lower given concerns about the euro zone and the overall health of the global economy. Further losses were incurred during May from long futures positions in RBOB gasoline as prices fell due to a weakening global economy and a general sell-off of “risk assets” throughout global markets. Losses were also incurred in May from long call options positions in West Texas Intermediate (“WTI”) crude oil as volatility declined despite the drop in crude oil prices. The Partnership also incurred losses during February as short futures positions in Brent crude oil were negatively impacted as potential supply disruptions from Iran helped push prices higher. Further losses were incurred from short call options in Brent crude oil as prices rallied during January and February which also detracted from performance. Short futures positions in Light Sweet crude oil incurred smaller losses during February as prices strengthened on potential supply disruptions and an expected increase in demand.

 

23


Table of Contents

Commodity futures markets are highly volatile. Broad and rapid price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility for profit or loss. The profitability of the Partnership (and the Master) depends on the Advisor’s ability to forecast price changes in energy and energy-related commodities. Such price changes are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that the Advisor correctly makes such forecasts, the Partnership (and the Master) expects to increase capital through operations.

Brokerage commissions are based on the number of trades executed by the Advisor and the Partnership’s ownership percentage of the Master. Brokerage commissions for the three months and nine ended September 30, 2012 increased by $191,243 and $358,288, respectively, as compared to the corresponding periods in 2011. The increase in brokerage commissions is primarily due to an increase in the number of trades during the three and nine months ended September 30, 2012 as compared to the corresponding periods in 2011.

Interest income on 80% of the Partnership’s average daily equity allocated to it by the Master was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. Interest income allocated from the Master for the three months ended September 30, 2012 increased by $22,979 as compared to the corresponding period in 2011. The increase in interest income is primarily due to higher U.S. Treasury bill rates for the Partnership during the three months ended September 30, 2012, as compared to the corresponding period in 2011. Interest income allocated from the Master for the nine months ended September 30, 2012 decreased by $2,770 as compared to the corresponding period in 2011. The decrease in interest income is primarily due to lower average daily equity for the Partnership during the nine months ended September 30, 2012. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Master’s account and upon interest rates over which the Partnership, the Master and CGM have no control.

Management fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Management fees for the three and nine months ended September 30, 2012 decreased by $114,202 and $464,654, respectively, as compared to the corresponding periods in 2011. The decrease in management fees is due to a decrease in average net assets during the three and nine months ended September 30, 2012 as compared to the corresponding periods in 2011.

Administrative fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Administrative fees for the three and nine months ended September 30, 2012 decreased by $28,550 and $116,163, respectively, as compared to the corresponding periods in 2011. The decrease in administrative fees is due to a decrease in average net assets during the three and nine months ended September 30, 2012 as compared to the corresponding periods in 2011.

Special Limited Partner profit share allocations are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreements among the Partnership, the General Partner and the Advisor. There were no profit share allocations made for the three and nine months ended September 30, 2012 and 2011. The Advisor will not be allocated a profit share until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considers the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.

 

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Table of Contents

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. The Master is a speculative commodity pool. The market sensitive instruments held by the Master are acquired for speculative trading purposes, and all or substantially all of the Partnership’s capital is subject to the risk of trading loss through its investment in the Master. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master’s and the Partnership’s main line of business.

The limited partners will not be liable for losses exceeding the current net asset value of their investment.

Market movements result in frequent changes in the fair value of the Master’s open positions and, consequently, in its earnings and cash balances. The Master’s and the Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Master’s open contracts and the liquidity of the markets in which the Master trades.

The Master rapidly acquires and liquidates both long and short positions in a range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Master’s past performance is not necessarily indicative of its future results.

“Value at Risk” is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master’s speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Master’s losses in any market sector will be limited to Value at Risk or by the Master’s attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Master as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

 

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Table of Contents

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Master’s open positions by market category as of September 30, 2012 and December 31, 2011, and the highest, lowest and average value during the three months ended September 30, 2012 and for the twelve months ended December 31, 2011. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.

As of September 30, 2012, the Master’s total capitalization was $931,897,414 and the Partnership owned approximately 33.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of September 30, 2012 was as follows:

September 30, 2012

 

                  Three Months Ended September 30, 2012  

Market Sector

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

Energy

   $ 95,561,580         10.26   $ 95,561,580       $ 53,403,879       $ 74,013,255   

Grains

     4,692         0.00 %**      12,420         1,863         4,577   
  

 

 

    

 

 

         

Total

   $ 95,566,272          10.26         
  

 

 

    

 

 

         

 

 

* Average monthly Values at Risk.
** Due to rounding.

As of December 31, 2011, the Master’s total capitalization was $976,510,592 and the Partnership owned approximately 36.1% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2011 was as follows:

December 31, 2011

 

                   Twelve Months Ended December 31, 2011  

Market Sector

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

Energy

   $ 55,102,501         5.64   $ 94,389,860       $ 26,234,892       $ 59,052,953   

Grains

     296,485         0.03        301,619         53,188         150,902   

Indices

     1,456,343         0.15        2,900,159         17,268         1,177,895   

Lumber

     41,000         0.01        156,000         1,600         50,692   

Softs

     2,042,500         0.21        2,261,000         108,000         1,188,141   
  

 

 

    

 

 

         

Total

   $ 58,938,829         6.04        
  

 

 

    

 

 

         

 

 

* Annual average of month-end Values at Risk.

 

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Item 4.    Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the President and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2012 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s President and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:

 

   

pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

 

   

provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The following information supplements and amends the discussion set forth under Part I, Item 3. “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as updated by the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012.

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which CGM or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

CGM (together with Citigroup Inc. and its other subsidiaries, “Citigroup”) (formerly known as Salomon Smith Barney Inc.) is a New York corporation with its principal place of business at 388 Greenwich St., New York, New York 10013. CGM is registered as a broker-dealer and futures commission merchant (“FCM”), and provides futures brokerage and clearing services for institutional and retail participants in the futures markets. CGM and its affiliates also provide investment banking and other financial services for clients worldwide.

There have been no material administrative, civil or criminal actions within the past five years against CGM or any of its individual principals and no such actions are currently pending, except as follows.

RMBS Litigation and Other Matters

On May 4, 2012, the district court in FEDERAL HOUSING FINANCE AGENCY v. UBS AMERICAS, INC., ET AL., a parallel case to FEDERAL HOUSING FINANCE AGENCY v. ALLY FINANCIAL INC., ET AL., FEDERAL HOUSING FINANCE AGENCY v. CITIGROUP INC., ET AL., and FEDERAL HOUSING FINANCE AGENCY v. JPMORGAN CHASE & CO., ET AL., denied defendants’ motion to dismiss plaintiff’s securities law claims and granted defendants’ motion to dismiss plaintiff’s negligent misrepresentation claims. On June 19, 2012, the district court granted defendants’ motion to certify an interlocutory appeal to the United States Court of Appeals for the Second Circuit from the court’s statutes of repose and limitations rulings.

On May 15, 2012, Woori Bank filed a complaint in the United States District Court for the Southern District of New York against Citigroup alleging actionable misstatements and omissions in connection with Woori Bank’s $95 million investment in five collateralized debt obligations.

On May 18, 2012, the Federal Deposit Insurance Corporation filed (“FDIC”) complaints in the United States District Courts for the Southern District of New York and the Central District of California against various defendants, including Citigroup Global Markets Inc., Citicorp Mortgage Securities Inc., and CitiMortgage Inc., in connection with purchases of residential mortgage-backed securities (“RMBS”) by two failed banks for which the FDIC is acting as receiver.

On June 6, 2012, the court granted in part and denied in part defendants’ motions to dismiss in WESTERN & SOUTHERN LIFE INS. CO., ET AL. v. RESIDENTIAL FUNDING CO., LLC, ET AL.

On June 26, 2012, the court overruled defendants’ demurrer to plaintiff’s amended complaint in FEDERAL HOME LOAN BANK OF CHICAGO v. BANC OF AMERICA SECURITIES, LLC, ET AL.

On July 27, 2012, John Hancock Life Insurance Co. and several affiliated entities filed a complaint in the United States District Court for the District of Minnesota against various defendants, including CGM, asserting disclosure claims arising out of purchases of RMBS.

On August 29, 2012, the United States District Court for the Southern District of New York issued an order preliminarily approving the parties’ settlement in IN RE CITIGROUP INC. SECURITIES LITIGATION, pursuant to which Citigroup has agreed to pay $590 million. A fairness hearing is scheduled for January 15, 2013.

On August 30, 2012, Rentokil-Initial Pension Scheme filed a putative class action complaint against Citigroup on behalf of purchasers of 26 Citigroup offerings of medium term Euro Notes issued between October 12, 2005 and February 25, 2009. The complaint asserts claims under Section 90 of the Financial Services and Markets Act 2000 and includes allegations similar to those asserted in IN RE CITIGROUP INC. BOND LITIGATION.

On October 15, 2012, the United States District Court for the Southern District of New York granted lead plaintiffs’ amended motion for class certification in NEW JERSEY CARPENTERS HEALTH FUND v. RESIDENTIAL CAPITAL LLC, ET AL., having previously denied lead plaintiffs’ motion for class certification on January 18, 2011. Plaintiffs in this action allege violations of Sections 11, 12, and 15 of the Securities Act of 1933, as amended, and assert disclosure claims on behalf of a putative class of purchasers of mortgage-backed securities issued by Residential Accredited Loans, Inc. pursuant or traceable to prospectus materials filed on March 3, 2006 and April 3, 2007. CGM is one of the underwriter defendants.

Other Matters

Citigroup and Citibank, N.A., along with other U.S. Dollar (USD) LIBOR panel banks, are defendants in the multidistrict litigation (MDL) proceeding before Judge Buchwald in the United States District Court for the Southern District of New York captioned IN RE LIBOR-BASED FINANCIAL INSTRUMENTS ANTITRUST LITIGATION. Judge Buchwald has appointed interim lead class counsel for, and consolidated amended complaints have been filed on behalf of, three separate putative classes of plaintiffs: (1) OTC purchasers of derivative instruments tied to USD LIBOR; (2) purchasers of exchange-traded derivative instruments tied to USD LIBOR; and (3) indirect OTC purchasers of U.S. debt securities. Each of these putative classes alleges that the panel bank defendants conspired to suppress USD LIBOR in violation of the Sherman Act and/or the Commodity Exchange Act, thereby causing plaintiffs to suffer losses on the instruments they purchased. Also consolidated into the MDL proceeding are individual civil actions commenced by various Charles Schwab entities that allege that the panel bank defendants conspired to suppress the USD LIBOR rates in violation of the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, and California state law, causing the Schwab entities to suffer losses on USD LIBOR-linked financial instruments that they owned. Plaintiffs in these actions seek compensatory damages and restitution for losses caused by the alleged violations, as well as treble damages under the Sherman Act. The Schwab and OTC plaintiffs also seek injunctive relief.

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

 

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Item 1A.   Risk Factors

There have been no material changes to the risk factors set forth under Part 1, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012, other than as set forth below.

Speculative position and trading limits may reduce profitability.

The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person may hold or control in particular futures and options on futures. The trading instructions of an advisor may have to be modified, and positions held by the Partnership may have to be liquidated in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Partnership by increasing transaction costs to liquidate positions and foregoing potential profits.

In October 2011, the CFTC adopted new rules governing position limits. In September 2012, these rules were vacated by the United States District Court for the District of Columbia and remanded to the CFTC for further consideration. It is possible, nevertheless, that these rules may take effect in some form via re-promulgation or a successful appeal by the CFTC of the District Court’s ruling. The vacated rules established position limits on certain futures contracts and any economically equivalent futures, options and swaps.

 

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

For the three months ended September 30, 2012 there were no additional subscriptions to limited partners.

The following chart sets forth the purchases of Redeemable Units by the Partnership.

 

Period    (a) Total Number
of Redeemable
Units Purchased*
     (b) Average
Price Paid per
Redeemable Unit**
     (c) Total Number
of Redeemable Units
Purchased as Part
of Publicly Announced
Plans or Programs
    

(d) Maximum Number
(or Approximate
Dollar Value) of
Redeemable Units

that May Yet Be
Purchased Under the
Plans or Programs

 

July 1, 2012 -

July 31, 2012

     820.3020       $ 4,035.62         N/A         N/A   

August 1, 2012 -

August 31, 2012

     596.7230       $ 4,124.81         N/A         N/A   

September 1, 2012 -

September 30, 2012

     1,286.3810       $ 4,192.51         N/A         N/A   
       2,703.4060       $ 4,129.96         N/A         N/A   

* Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date, the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.

** Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day.

Item 3.    Defaults Upon Senior Securities – None

Item 4.    Mine Safety Disclosures – None

 

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Item 5.    Other Information 

The registrant does not have a board of directors. The General Partner is managed by a board of directors.

Effective November 14, 2012, Mr. Damian George was appointed a director of the General Partner.

Damian George, age 45, has been a Director of the General Partner since November 2012. Since June 2012, Mr. George has been the Chief Financial Officer and a principal of the General Partner and is an associate member of the National Futures Association. Since August 2009, Mr. George has been employed by Morgan Stanley Smith Barney LLC, a financial services firm, where his responsibilities include oversight of budgeting, finance and Sarbanes-Oxley testing for the Alternative Investments–Managed Futures group. Since August 2009, Mr. George has been registered as an associated person of Morgan Stanley Smith Barney LLC. From November 2005 through July 2009, Mr. George was employed by Citi Alternative Investments, a division of Citigroup Inc. (“Citigroup”), a financial services firm, which administered Citigroup’s hedge fund and fund of funds business, where he served as Director and was responsible for budgeting, finance and Sarbanes-Oxley testing for the Hedge Fund Management group. From November 2004 through July 2009, Mr. George was registered as an associated person of CGM. Mr. George earned his Bachelor of Science degree in Accounting in May 1989 from Fordham University and his Master of Business Administration degree in International Finance in February 1998 from Fordham University. Mr. George is a Certified Public Accountant.

 

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Item 6.    Exhibits

 

3.1    Certificate of Limited Partnership of the Partnership as filed in the Office of the Secretary of State of the State of New York, dated March 21, 2002 (filed as Exhibit 3.1 to the general form for registration of securities on Form 10 filed on May 1, 2003 and incorporated herein by reference).

 

   (a)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.1(a) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
   (b)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(b) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
   (c)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(c) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
   (d)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated August 27, 2008 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 2, 2008 and incorporated herein by reference).
   (e)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).
   (f)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated June 30, 2010 (filed as Exhibit 3.1(f) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).
   (g)   Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 7, 2011 and incorporated herein by reference).

 

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3.2    Third Amended and Restated Limited Partnership Agreement, dated May 19, 2010 (filed as Exhibit 3.2 to the Current Report on Form 8-K filed on May 24, 2010 and incorporated herein by reference).
10.1(a)    Customer Agreement between the Master and Salomon Smith Barney Inc., dated August 23, 2001 (filed as Exhibit 10 to the general form for registration of securities on Form 10 filed on May 1, 2003 and incorporated herein by reference).
10.1(b)    Customer Agreement among the Partnership and Salomon Smith Barney Inc., and for limited purposes Smith Barney AAA Master Fund LLC, dated May 31, 2002 (filed as Exhibit 10 to the general form for registration of securities on Form 10 filed on May 1, 2003 and incorporated herein by reference).
10.2    Form of Subscription Agreement (filed herein).
10.3    Advisory Agreement among the Partnership, the General Partner and AAA Capital Management Advisors, Ltd., dated April 3, 2006 (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

  (a)      Letter from the General Partner extending Advisor Agreement for 2011, dated June 1, 2011 (filed as Exhibit 10.3(a) to the Annual Report on Form 10-K filed on March 30, 2012 and incorporated herein by reference).

 

10.4    Amended and Restated Agency Agreement among the Partnership, the General Partner, Morgan Stanley Smith Barney LLC, and CGM, dated November 11, 2009 (filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
31.1    — Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).
31.2    — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director).
32.1    — Section 1350 Certification (Certification of President and Director).
32.2    — Section 1350 Certification (Certification of Chief Financial Officer and Director).

 

101. INS    XBRL Instance Document.
101. SCH    XBRL Taxonomy Extension Schema Document.
101. CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101. LAB    XBRL Taxonomy Extension Label Linkbase Document.
101. PRE    XBRL Taxonomy Extension Presentation Linkbase Document.
101. DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AAA CAPITAL ENERGY FUND L.P. II

 

By:   Ceres Managed Futures LLC
  (General Partner)
By:   /s/ Walter Davis
 

Walter Davis

President and Director

Date:   November 14, 2012
By:   /s/ Damian George
 

Damian George

Chief Financial Officer and Director

(Principal Accounting Officer)

Date:   November 14, 2012

 

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