10-Q 1 file1.htm Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended June 30, 2006

Commission File Number 000-25921


SMITH BARNEY AAA ENERGY FUND L.P.
(Exact name of registrant as specified in its charter)

New York 13-3986032
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

c/o Citigroup Managed Futures LLC
731 Lexington Avenue – 25th Fl.
New York, New York 10022
(Address and Zip Code of principal executive offices)

(212) 559-2011
(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer             Accelerated filer             Non-accelerated filer    X    

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

Yes          No X



Table of Contents

SMITH BARNEY AAA ENERGY FUND L.P.

FORM 10-Q

INDEX


2



Table of Contents

PART I

Item 1. Financial Statements

Smith Barney AAA Energy Fund L.P.
Statements of Financial Condition
(Unaudited)


  June 30,
2006		 December 31,
2005
Assets:  
 
Investment in Master, at fair value $ 318,536,422
$ 308,988,960
Cash 67,488
65,973
  $ 318,603,910
$ 309,054,933
Liabilities and Partners' Capital:  
 
Liabilities:  
 
Accrued expenses:  
 
Brokerage commissions $ 1,158,013
$ —
Management fees 528,942
524,850
Other 80,929
70,932
Due to Special Limited Partner 15,245,862
—
Redemptions payable 7,623,667
32,231,152
  24,637,413
32,826,934
Partners' Capital:  
 
General Partner, 913.9790 Unit equivalents outstanding in 2006 and 2005, respectively 6,083,536
4,879,176
Special Limited Partner 594.5730 Redeemable Units of Limited Partnership Interest outstanding in 2006 and 2005 respectively 3,957,537
3,174,063
Limited Partners, 42,656.4008 and 50,235.0968 Redeemable Units of Limited Partnership Interest outstanding in 2006 and 2005, respectively 283,925,424
268,174,760
  293,966,497
276,227,999
  $ 318,603,910
$ 309,054,933

See Accompanying Notes to Financial Statements.

3



Table of Contents

Smith Barney AAA Energy Fund L.P.
Statements of Income and Expenses and Partners' Capital
(Unaudited)


  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2006 2005 2006 2005
Income:  
 
 
 
Realized gains on closed positions allocated from Master $ 48,099,858
$ 25,711,094
$ 160,734,082
$ 39,043,886
Change in unrealized gains (losses) on open positions allocated from Master (32,722,933
)
 19,701,782
(77,746,445
)
 58,613,811
Interest income allocated from Master 2,838,338
1,142,722
5,266,130
1,967,727
Expenses allocated from Master (371,067
)
 (1,359,613
)
 (678,495
)
 (2,667,271
)
  17,844,196
45,195,985
87,575,272
96,958,153
Expenses:  
 
 
 
Brokerage commissions 954,187
—
2,721,203
—
Management fee 1,670,450
1,138,618
3,278,564
2,058,096
Other 40,034
25,800
80,068
51,601
  2,664,671
1,164,418
6,079,835
2,109,697
Net income before allocation to Special Limited Partner 15,179,525
44,031,567
81,495,437
94,848,456
Allocation to Special Limited Partner (2,468,238
)
 (8,577,769
)
 (15,245,862
)
 (18,576,146
)
Net income after allocation to Special Limited Partner 12,711,287
35,453,798
66,249,575
76,272,310
Redemptions - Limited Partners (28,366,051
)
 (1,532,191
)
 (48,511,077
)
 (3,734,792
)
Net increase (decrease) in Partners' Capital (15,654,764
)
 33,921,607
17,738,498
72,537,518
Partners' Capital, beginning of period 309,621,261
194,235,462
276,227,999
155,619,551
Partners' Capital, end of period $ 293,966,497
$ 228,157,069
$ 293,966,497
$ 228,157,069
Net asset value per Redeemable Unit
(44,164.9528 and 54,672.3664 Redeemable Units outstanding at June 30, 2006 and 2005, respectively)		 $ 6,656.10
$ 4,173.17
$ 6,656.10
$ 4,173.17
Net income per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent $ 271.19
$ 645.82
$ 1,317.71
$ 1,380.40

See Accompanying Notes to Financial Statements.

4



Table of Contents

Smith Barney AAA Energy Fund L.P.
Statements of Cash Flows
(Unaudited)


  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2006 2005 2006 2005
Cash flows from operating activities:  
 
 
 
Net income $ 12,711,287
$ 35,453,798
$ 66,249,575
$ 76,272,310
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
 
 
 
Changes in operating assets and liabilities:  
 
 
 
Purchase of investment in Master —
—
(33,174,062
)
 (2,333,604
)
Proceeds from sale of investment in Master 31,336,411
2,398,798
105,301,282
6,677,353
Net unrealized (appreciation) depreciation on investment in Master (15,020,194
)
 (44,066,799
)
 (81,674,682
)
 (95,022,838
)
Accrued expenses:  
 
 
 
Increase (decrease) in commissions (10,403
)
 —
1,158,013
—
Increase (decrease) in management fees (27,176
)
 57,203
4,092
141,219
Increase (decrease) in other (30,037
)
 (68,350
)
 9,997
(42,550
)
Increase (decrease) in due to Special Limited Partner 2,468,238
8,577,769
15,245,862
18,576,146
Net cash provided by (used in) operating activities 31,428,126
2,352,419
73,120,077
4,268,036
Cash flows from financing activities:  
 
 
 
Payments for redemptions - Limited Partners (31,458,162
)
 (2,420,768
)
 (73,118,562
)
 (4,290,161
)
Net cash provided by (used in) financing activities (31,458,162
)
 (2,420,768
)
 (73,118,562
)
 (4,290,161
)
Net change in cash (30,036
)
 (68,349
)
 1,515
(22,125
)
Cash, at beginning of period 97,524
94,881
65,973
48,657
Cash, at end of period $ 67,488
$ 26,532
$ 67,488
$ 26,532

See Accompanying Notes to Financial Statements.

5



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

1.    General:

Smith Barney AAA Energy Fund L.P. (the ‘‘Partnership’’) is a limited partnership organized on January 5, 1998 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity options and commodity futures contracts on United States exchanges and certain foreign exchanges. The Partnership may trade commodity futures and options contracts of any kind. In addition, the Partnership may enter into swap contracts on energy-related products. During the initial offering period (February 12, 1998 through March 15, 1998), the Partnership sold 49,538 redeemable units (‘‘Redeemable Units’’). The Partnership commenced trading on March 16, 1998. From March 16, 1998 to August 31, 2001, the Partnership engaged directly in the speculative trading of a diversified portfolio of commodity interests.

Effective September 1, 2001, the Partnership allocated substantially all of its capital to the SB AAA Master Fund LLC, a New York limited liability company (the ‘‘Master’’). With this cash, the Partnership purchased 128,539.1485 Units of the Master with a fair value of $128,539,149 (including unrealized depreciation of $7,323,329). The Master was formed in order to permit accounts managed by AAA Capital Management, Advisors, Ltd. (successor to AAA Capital Management, Inc.) (the ‘‘Advisor’’) using the Energy Program—Futures and Swaps, the Advisor's proprietary trading program, to invest together in one trading vehicle. Principals of the Master's Advisor were formerly employees of Smith Barney and associated persons of CGM. 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 may trade commodity futures and options contracts of any kind, but trades solely energy and energy-related products. In addition, the Master may enter into swap contracts or trade in energy-related products. The commodity interests that are traded by the Master are volatile and involve a high degree of market risk.

As of June 30, 2006, the Partnership owned approximately 28.5% 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 Statements of Financial Condition, Statements of Income and Expenses and Members' Capital, Condensed Schedules of Investments and Statements of Cash Flows are included herein.

Citigroup Managed Futures LLC acts as the General Partner (the ‘‘General Partner’’) of the Partnership and the managing member of the Master, as defined below. The Partnership's/Master's commodity broker is Citigroup Global Markets Inc. (‘‘CGM’’). CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. (‘‘CGMHI’’), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. (‘‘Citigroup’’).

The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership's financial condition at June 30, 2006 and December 31, 2005 and the results of its operations and cash flows for the three and six months ended June 30, 2006 and 2005. 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 for the year ended December 31, 2005.

Prior to January 1, 2006, round-turn commissions were borne at the Master level and allocated down to the feeder funds based on each funds' ownership. Effective January 1, 2006, round-turn commissions are borne by the Partnership consistent with contractual agreements.

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

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

The Master's Statements of Financial Condition and Condensed Schedules of Investments as of June 30, 2006 and December 31, 2005 and Statements of Income and Expenses and Members' Capital and Statements of Cash Flows for the three and six months ended June 30, 2006 and 2005 are presented below:

SB AAA Master Fund LLC
Statements of Financial Condition
(Unaudited)


  June 30,
2006		 December 31,
2005
Assets:  
 
Equity in commodity futures trading account:  
 
Cash (restricted $18,496,236 and $4,130,046 in 2006 and 2005, respectively) $ 934,279,723
$ 557,878,760
Net unrealized appreciation on open futures positions 60,252,028
260,548,395
Unrealized appreciation on open swaps contracts 198,780,567
193,692,178
Commodity options owned, at fair value (cost $212,807,941 and $129,024,667 in 2006 and 2005, respectively) 214,054,143
225,052,075
  1,407,366,461
1,237,171,408
Due from brokers 20,167,985
14,310,966
Interest receivable 3,106,310
1,813,732
   
 
  $ 1,430,640,756
$ 1,253,296,106
Liabilities and Members' Capital:  
 
Liabilities:  
 
Unrealized depreciation on open swap contracts $ 136,584,394
$ 165,265,325
Commodity options written, at market value (premium $188,925,002 and $147,363,753 in 2006 and 2005, respectively) 157,015,271
114,859,048
Accrued expenses:  
 
Commissions —
3,198,816
Professional fees 157,281
143,268
Due to brokers 18,930,030
13,948,544
Distribution Payable 3,090,805
1,798,953
  315,777,781
299,213,954
Members' Capital:  
 
Members' Capital, 220,757.0556 and 246,785.2714 Units
outstanding in 2006 and 2005, respectively		 1,114,862,975
954,082,152
  $ 1,430,640,756
$ 1,253,296,106

7



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

SB AAA Master Fund LLC
Condensed Schedule of Investments
June 30, 2006
(Unaudited)


  Number of
Contracts		 Fair
Value		 % of Members'
Capital
Futures Contracts Purchased  
 
 
Energy  
 
 
IPE Gas Oil – Nov 06 – March 07 10,379
$ 82,256,752
7.38
%
Other  
22,123,318
1.98
Total futures contracts purchased  
104,380,070
9.36
Futures Contracts Sold  
 
 
Energy  
(44,128,042
)
 (3.96
)
Total futures contracts  
60,252,028
5.40
Options Owned  
 
 
Energy  
 
 
NYMEX Natural Gas Sep. 06 – Apr. 07 4,415
59,144,770
5.31
Other  
154,909,373
13.89
Total options owned  
214,054,143
19.20
Options Written  
 
 
Energy  
 
 
NYMEX Natural Gas Aug. 06 – Jan. 07 5,334
(66,176,650
)
 (5.93
)
Other  
(90,838,621
)
 (8.15
)
Total options written  
(157,015,271
)
 (14.08
)
Unrealized Appreciation on Swap Contracts  
 
 
Energy  
198,780,567
17.83
Unrealized Depreciation on Swap Contracts  
 
 
Energy  
(136,584,394
)
 (12.25
)
Total Energy Fair Value  
$ 179,487,073
16.10
%
Percentages are based on Members' Capital unless otherwise indicated.

8



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2005
(Unaudited)


  Number of
Contracts		 Fair Value % of Members'
Capital
Futures Contracts Purchased  
 
 
Energy  
 
 
NYMEX Henry Hub Natural Gas Swap– April 07 – Dec. 09 6,496
$ 61,657,788
6.46
%
NYMEX Natural Gas Aug. 06 – Dec. 10 9,869
107,175,497
11.23
Other  
45,857,146
4.81
Total futures contracts purchased  
214,690,431
22.50
   
 
 
Futures Contracts Sold  
 
 
Energy  
45,857,964
4.81
Total futures contracts  
260,548,395
27.31
   
 
 
Options Owned  
 
 
Energy  
 
 
NYMEX Natural Gas Feb. 06 – July 06 4,778
78,598,570
8.24
Other  
146,453,505
15.35
Total options owned  
225,052,075
23.59
   
 
 
Options Written  
 
 
Energy  
(114,859,048
)
 (12.04
)
   
 
 
Unrealized Appreciation on Swap Contracts  
 
 
Energy  
 
 
Gulf Coast Unleaded Gas Calendar 2006 1,750
67,563,451
7.08
Other  
126,128,727
13.22
Total unrealized appreciation on swap contracts  
193,692,178
20.30
   
 
 
Unrealized Depreciation on Swap Contracts  
 
 
Energy  
 
 
Gulf Coast Unleaded Gas Calendar 2006 1,750
(65,229,496
)
 (6.84
)
Other  
(100,035,829
)
 (10.48
)
Total depreciation on swap contracts  
(165,265,325
)
 (17.32
)
Total Energy Fair Value  
$ 399,168,275
41.84
%
Percentages are based on Members' Capital unless otherwise indicated.

9



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006

(Unaudited)

SB AAA Master Fund LLC
Statements of Income and Expenses and Members' Capital
(Unaudited)


  Three Months Ended Six Months Ended
  June 30, June 30,
  2006 2005 2006 2005
Income:  
 
 
 
Net gains (losses) on trading of commodity interests:  
 
 
 
Realized gains on closed positions $ 163,585,293
$ 59,813,219
$ 542,416,640
$ 89,629,447
Change in unrealized gains (losses) on open positions (109,721,086
)
 45,857,753
(261,903,227
)
 135,553,460
  53,864,207
105,670,972
280,513,413
225,182,907
Interest income 9,980,631
2,724,168
18,320,770
4,664,278
  63,844,838
108,395,140
298,834,183
229,847,185
Expenses:  
 
 
 
Brokerage commissions including clearing fees of $690,114, $410,082, $1,224,774 and $727,286, respectively 1,169,618
3,098,850
2,095,567
6,040,508
Professional Fees 106,500
67,862
213,000
122,386
  1,276,118
3,166,712
2,308,567
6,162,894
Net income 62,568,720
105,228,428
296,525,616
223,684,291
Additions 22,922,343
32,264,517
161,101,037
75,289,996
Redemptions (83,091,699
)
 (36,649,976
)
 (278,620,004
)
 (54,873,321
)
Distribution of Interest to feeder funds (9,931,324
)
 (2,692,662
)
 (18,225,826
)
 (4,589,301
)
Net increase (decrease) in Members' Capital (7,531,960
)
 98,150,307
160,780,823
239,511,665
Members' Capital, beginning of period 1,122,394,935
477,856,893
954,082,152
336,495,535
Members' Capital, end of period $ 1,114,862,975
$ 576,007,200
$ 1,114,862,975
$ 576,007,200
Net asset value per Unit
(220,757.0556 and 196,355.4097 Units outstanding in June 30, 2006 and 2005, respectively)		 $ 5,050.18
$ 2,933.49
$ 5,050.18
$ 2,933.49
   
 
 
 
Net income per Unit of Member Interest $ 275.47
$ 535.54
$ 1,263.33
$ 1,141.57

10



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006

(Unaudited)

SB AAA Master Fund LLC
Statements of Cash Flows
(Unaudited)


  Three Months Ended Six Months Ended
  June 30, June 30,
  2006 2005 2006 2005
Cash flows from operating activities:  
 
 
 
Net Income $ 62,568,720
$ 105,228,428
$ 296,525,616
$ 223,684,291
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
 
 
 
Changes in operating assets and liabilities:  
 
 
 
(Increase) decrease in restricted cash 135,177,432
(1,546,704
)
 (14,366,190
)
 24,480,571
(Increase) decrease in net unrealized  
 
 
 
appreciation/depreciation on open futures positions 150,810,499
(39,138,657
)
 200,296,367
(83,762,054
)
(Increase) decrease in unrealized appreciation on open swaps contracts 33,822,037
15,515,826
(5,088,389
)
 (109,872,235
)
(Increase) decrease in commodity options owned at fair value (97,813,302
)
 (9,150,792
)
 10,997,932
(64,886,251
)
(Increase) decrease in due from brokers (6,827,435
)
 (2,746,802
)
 (5,857,019
)
 (7,629,130
)
(Increase) decrease in interest receivable 284,580
(84,412
)
 (1,292,578
)
 (460,313
)
Increase (decrease) in unrealized depreciation on open swap contracts (42,776,742
)
 (14,851,315
)
 (28,680,931
)
 94,299,056
Increase (decrease) in commodity options written, at fair value 17,647,672
9,148,623
42,156,223
16,447,907
Accrued expenses:  
 
 
 
Increase (decrease) in commissions —
(52,074
)
 (3,198,816
)
 923,781
Increase (decrease) in professional fees (92,487
)
 (48,270
)
 14,013
6,254
Increase (decrease) in due to brokers 4,547,830
688,143
4,981,486
4,921,682
Increase (decrease) in due to CGM —
—
—
(22,978
)
Net cash provided by (used in) operating activities 257,348,804
62,961,994
496,487,714
98,130,581
   
 
 
 
Cash flows from financing activities:  
 
 
 
Proceeds from additions 22,922,343
32,264,517
161,101,037
75,289,996
Payments for redemptions (83,091,699
)
 (36,649,976
)
 (278,620,004
)
 (54,873,321
)
Distribution of interest to feeder funds (10,215,266
)
 (2,609,144
)
 (16,933,974
)
 (4,131,132
)
Net cash provided by (used in) financing activities (70,384,622
)
 (6,994,603
)
 (134,452,941
)
 16,285,543
Net change in cash 186,964,182
55,967,391
362,034,773
114,416,124
Unrestricted cash, at beginning of period 728,819,305
331,987,915
553,748,714
273,539,182
Unrestricted cash, at end of period $ 915,783,487
$ 387,955,306
$ 915,783,487
$ 387,955,306

11



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006

(Unaudited)

2.    Financial Highlights:

Changes in Net Asset Value per Redeemable Unit for the three and six months ended June 30, 2006 and 2005 were as follows:


  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2006 2005 2006 2005
Net realized and unrealized gains* $ 300.83
$ 803.00
$ 1,582.33
$ 1,720.11
Interest income 59.99
20.81
107.64
35.66
Expenses and allocation to Special Limited Partner** (89.63
)
 (177.99
)
 (372.26
)
 (375.37
)
Increase for the period 271.19
645.82
1,317.71
1,380.40
Net Asset Value per Redeemable Unit, beginning of period 6,384.91
3,527.35
5,338.39
2,792.77
Net Asset Value per Redeemable Unit, end of period $ 6,656.10
$ 4,173.17
$ 6,656.10
$ 4,173.17
*      Includes Partnership commissions and expenses allocated from the Master.  
**    Excludes Partnership commissions and expenses allocated from the Master.  

Ratios to average net assets:***  
 
 
 
Net investment loss before allocation to Special Limited Partner**** (0.3
)%
 (2.7
)%
 (0.6
)%
 (3.0
)%
Operating expense 3.9
%
 4.9
%
 4.1
%
 5.1
%
Allocation to Special Limited Partner 0.8
%
 4.1
%
 5.0
%
 9.8
%
Total expenses 4.7
%
 9.0
%
 9.1
%
 14.9
%
Total return:  
 
 
 
Total return before allocation to Special Limited Partner 5.1
%
 22.8
%
 31.2
%
 61.6
%
Allocation to Special Limited Partner (0.9
)%
 (4.5
)%
 (6.5
)%
 (12.2
)%
Total return after allocation to Special Limited Partner 4.2
%
 18.3
%
 24.7
%
 49.4
%
*** Annualized (except for allocation to Special Limited Partner)
**** Interest income less total expenses (exclusive of allocation to Special Limited Partner)
The above ratios may vary for individual investors based on the timing of capital transactions during the year. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners' share of income, expenses and average net assets.

12



Table of Contents

Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006

(Unaudited)

Financial Highlights of the Master:


  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2006 2005 2006 2005
Net realized and unrealized gains* $ 231.63
$ 522.04
$ 1,184.65
$ 1,118.42
Interest income 44.32
13.85
79.60
23.78
Expenses ** (0.48
)
 (0.35
)
 (0.92
)
 (0.63
)
Increase for the period 275.47
535.54
1,263.33
1,141.57
Distributions (44.10
)
 (13.69
)
 (79.19
)
 (23.40
)
Net Asset Value per Unit, beginning of period 4,818.81
2,411.64
3,866.04
1,815.32
Net Asset Value per Unit, end of period $ 5,050.18
$ 2,933.49
$ 5,050.18
$ 2,933.49
* Includes brokerage commissions
** Excludes brokerage commissions

Ratios to average net assets:***  
 
 
 
Net investment gain (loss)**** 3.1
%
 (0.3
)%
 3.0
%
 (0.7
)%
Operating expense 0.4
%
 2.5
%
 0.4
%
 2.7
%
Total return 5.7
%
 22.2
%
 32.7
%
 62.9
%
*** Annualized
**** Interest income less total expenses
The above ratios may vary for individual investors based on the timing of capital transactions during the year.

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Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

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 the majority of its assets through a ‘‘master fund/feeder fund’’ structure. The results of the Partnership's investment in the Master are shown in the Statements of Income and Expenses and Partners' Capital and are discussed in Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.

All of the commodity interests owned by the Master are held for trading purposes. The average fair values of these interests during the six and twelve months ended June 30, 2006 and December 31, 2005, based on a monthly calculation, were $233,951,355 and $199,595,694, respectively. The fair values of these commodity interests, including options and swaps thereon, if applicable, at June 30, 2006 and December 31, 2005 were $179,487,073 and $399,168,275, respectively. Fair values for exchange-traded commodity futures and options are based on quoted market prices for those futures and options. Fair values for all other financial instruments for which market quotations are not readily available are based on calculations approved by the General Partner.

4.    Financial Instrument Risks:

In the normal course of its 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 flows, 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 option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The Master's swap contracts are OTC contracts.

Market risk is the potential for changes in the value of the financial instruments traded by the 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.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange-traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's/Master's risk of loss in the event of counterparty default is typically limited to the amounts recognized in the statements of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership, through its investment in the Master, has concentration risk because a significant counterparty or broker with respect to the Master's assets is CGM.

The General Partner monitors and controls 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

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Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
June 30, 2006
(Unaudited)

effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Master is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these instruments mature within one year of June 30, 2006. However, due to the nature of the Partnership's/Master's business, these instruments may not be held to maturity.

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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 the sale 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. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a decrease in liquidity, no such losses occurred during the second quarter of 2006.

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

For the six months ended June 30, 2006, Partnership capital increased 6.4% from $276,227,999 to $293,966,497. This increase was attributable to net income from operations of $66,249,575, which was partially offset by the redemptions of 7,578.6960 Redeemable Units resulting in an outflow of $48,511,077. Future redemptions can 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 commodity futures trading, expenses, interest income, redemptions of Units and distributions of profits, if any.

For the six months ended June 30, 2006, the Master's capital increased 16.9% from $954,082,152 to $1,114,862,975. This increase was attributable to net income from operations of $296,525,616, coupled with the addition of 39,778.1299 Units totaling $161,101,037 which was partially offset by the redemptions of 65,806.3457 Units totaling $278,620,004 and distributions of interest totaling $18,225,826 to the non-managing members of the Master. 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 U.S. generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from these estimates.

All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statement of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available, including dealer quotes for swaps and certain option contracts. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on commodity interests and foreign currencies are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests.

The value of the Partnership's investment in the Master reflects the Partnership's proportional interest in the members' capital of the Master. All of the income and expenses and unrealized and realized gains and losses from the commodity transactions of the Master are allocated pro rata among the investors at the time of such determination.

Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss

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on the contracts, as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting dates, is included in the statements of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statements of income and expenses and partners' capital.

Results of Operations

During the Partnership's second quarter of 2006, the Net Asset Value per Redeemable Unit increased 4.2% from $6,384.91 to $6,656.10 as compared to an increase of 18.3% in the second quarter of 2005. The Partnership experienced a net trading gain before brokerage commissions and related fees in the second quarter of 2006 of $15,376,925. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Natural Gas, NYMEX Unleaded Gas, NYMEX Freight Futures, NYMEX Energy Swaps and Gasoline and were partially offset by losses in IPE Gas Oil, NYMEX Heating Oil, IPE Crude Oil and OTC Energy Swaps. The Partnership experienced a net trading gain before brokerage commissions and related fees in the second quarter of 2005 of $45,412,876. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Gasoline, NYMEX Heating Oil, IPE Natural Gas, NYMEX Natural Gas, NYMEX Unleaded Gas and OTC Energy Swaps and were partially offset by losses in IPE Crude Oil, NYMEX Energy Swaps and IPE Gas Oil.

The second quarter of 2006 was challenging for the Advisor as the energy markets went through several phases in a short period. The two key themes were wide fluctuations in crude oil prices with an upward bias and declining natural gas prices. In both cases, the risk and reward opportunities were on the relative price differences between the near-term and long-term price curves.

The Advisor had a successful April with positive returns from both oil and gas positions. Long positions in petroleum were profitable as was a sizable bull spread position in the Dec/Red Dec NYMEX crude spread. The run-up in gasoline values in the first half of the month also contributed to gas crack and gas/heat positions. Natural gas positions continued to benefit from long positions in the long dated part of the price curve. Stepped up short positions on the front end of the curve on the brief run of gas prices above $8.00/MM BTU also bolstered the bottom line.

May proved more difficult with a great deal of speculative/fund short interest in natural gas and bearish storage fundamentals which were well discounted into the market. Natural gas prices stabilized at $6.00/MM BTU with a late May rebound to $6.725/MM BTU which led to losses. On the oil side of the complex the sharp decline in the Dec 2006 versus Dec 2007 crude curve spreads also resulted in losses to a smaller degree.

The month of June closed out on a positive note following a weak start for the Advisor's natural gas positions and amid a great deal of market volatility on both sides of the energy complex. Overall market exposure and risk were reduced during June.

During the six months ended June 30, 2006, the Net Asset Value per Redeemable Unit increased 24.7% from $5,338.39 to $6,656.10 as compared to an increase of 49.4% in the same period of 2005. The Partnership experienced a net trading gain before brokerage commissions and related fees in the six months ended June 30, 2006 of $82,987,637. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Natural Gas, NYMEX Unleaded Gas, NYMEX Freight Futures, IPE Gas Oil, NYMEX Energy Swaps and Gasoline and were partially offset by losses in NYMEX Heating Oil, IPE Crude Oil and OTC Energy Swaps. The Partnership experienced a net trading gain before brokerage commissions and related fees in the six months ended June 30, 2005 of $97,657,697. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Gasoline, NYMEX Heating Oil, IPE Natural Gas, NYMEX Natural Gas, NYMEX Unleaded Gas, and OTC Energy Swaps and were partially offset by losses in IPE Crude Oil, NYMEX Energy Swaps and IPE Gas Oil.

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The

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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.

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. CGM may continue to maintain the Master's assets in cash and/or place all of the Master's assets in 90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills purchased. Interest income allocated from the Master for the three and six months ended June 30, 2006 increased by $1,695,616 and $3,298,403, as compared to the corresponding periods in 2005. The increase in interest income is primarily due to higher average net assets and higher interest rates during the three and six months ended June 30, 2006 as compared to 2005.

Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance and redemptions. Management fees for the three and six months ended June 30, 2006 increased by $531,832 and $1,220,468, as compared to the corresponding periods in 2005. The increase in management fees is due to higher average net assets during the three and six months ended June 30, 2006 as compared to 2005.

Special limited partner profit share allocations (incentive fees) are based on the new trading profits generated by the Advisor at the end of the year, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. The profit share allocation accrued for the three and six months ended June 30, 2006 was $2,468,238 and $15,245,862. The profit share allocation accrued for the three and six months ended June 30, 2005 was $8,577,769 and $18,576,146.

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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 it are acquired for speculative trading purposes, and all or substantially all of the Master's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master's main line of business.

Market movements result in frequent changes in the fair value of the Master's open positions and, consequently, in its earnings and cash flow. The Master'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 value of financial instruments and contracts, the diversification effects of the Master's open positions and the liquidity of the markets in which it 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.

The following table indicates the trading Value at Risk associated with the Master's open positions by market category as of June 30, 2006 and the highest, lowest and average value during the three months ended June 30, 2006. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of June 30, 2006, the Master's total capitalization was $1,114,862,975. 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, 2005.

June 30, 2006


      Three Months Ended June 30, 2006
Market Sector Value
at Risk		 % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Energy $14,366,191
1.29%
$149,543,621
$14,366,191
$53,342,470
Energy Swaps 4,130,046
0.37%
$ 4,130,046
$ 4,130,046
$ 4,130,046
Total $18,496,237
1.66%
 
 
 
* Average monthly Values at Risk

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Table of Contents

Item 4.    Controls and Procedures

The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) with respect to the Partnership as of the end of the period covered by the report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. There was no change in the Partnership's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The following information supplements and amends our discussion set forth under Part I, Item 3 ‘‘Legal Proceedings’’ in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and under Part II, Item 1, ‘‘Legal Proceedings’’ in the Partnership's Quarterly Report on form 10-Q for the quarter ended March 31, 2006.

Enron Corp.

On May 24, 2006, the District Court gave final approval to Citigroup's settlement of the securities class action (NEWBY, ET AL. V. ENRON CORP., ET AL.).

Research

On May 12, 2006, the District Court preliminarily approved the class action settlements in IN RE SALOMON ANALYST LEVEL 3 LITIGATION, IN RE SALOMON ANALYST XO LITIGATION, and IN RE SALOMON ANALYST WILLIAMS LITIGATION.

On May 18, 2006, the District Court gave final approval to the settlement in NORMAN v. SALOMON SMITH BARNEY.

On June 20, 2006, the District Court certified the plaintiff class in IN RE SALOMON ANALYST METROMEDIA LITIGATION.

On June 26, 2006, the United States Supreme Court granted plaintiffs' petition for a writ of certiorari, vacated the opinion of the United States Court of Appeals for the Seventh Circuit in DISHER v. CITIGROUP GLOBAL MARKETS INC., and then remanded the case to the Seventh Circuit for further proceedings in light of the Supreme Court's decision in Kircher v. Putnam Funds Trust.

Adelphia Communications Corporation

Without admitting any liability, CGM and numerous other financial institution defendants have agreed to settle IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION for a total of $250 million, subject to final court approval. On June 15, 2006, the court granted its preliminary approval of the settlement and set November 10, 2006 for a final hearing. CGM's share of the settlement is covered by existing reserves.

Item 1A.    Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. ‘‘Risk Factors’’ in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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Table of Contents

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

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


Period (a) Total Number
of Units
Purchased*		 (b) Average
Price Paid per
Unit**		 (c) Total Number
of Units
Purchased as Part
of Publicly Announced
Plans or Programs		 (d) Maximum Number
(or Approximate
Dollar Value) of
Units that
May Yet Be
Purchased Under the
Plans or Programs
April 1, 2006 –
April 30, 2006		 474.1307
$7,048.72 N/A
N/A
May 1, 2006 –
May 31, 2006		 2,708.2117
$6,425.04 N/A
N/A
June 1, 2006 –
June 30, 2006		 1,145.3655
$6,656.10 N/A
N/A
  4,327.7079
$6,709.95 N/A
N/A
* Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days' notice to the General Partner. Under certain circumstances, the General Partner may compel redemption but 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.    Submission of Matters to a Vote of Security Holders – None

Item 5.    Other Information

As of April 3, 2006, AAA Capital Management, Inc. ceased acting as a commodity trading advisor for the Fund. The portions of the Fund's assets formerly allocated to AAA Capital Management, Inc. were reallocated to AAA Capital Management Advisors, Ltd. effective April 3, 2006. A copy of the management agreement between AAA Capital Management Advisors, Ltd. and the Fund is attached to this Form 10-Q as an exhibit.

Item 6.    Exhibits

       The exhibits required to be filed by Item 601 of Regulation S-K are incorporated herein by reference to the exhibit index of the Partnership's Annual Report on Form 10-K for the period ended December 31, 2005.

Exhibit – 31.1 - Rule 13a-14(a)/15d-14(a) Certification
(Certification of President and Director)

Exhibit – 31.2 - Rule 13a-14(a)/15d-14(a) Certification
(Certification of Chief Financial Officer and Director)

Exhibit – 32.1 - Section 1350 Certification
(Certification of President and Director).

Exhibit – 32.2 - Section 1350 Certification
(Certification of Chief Financial Officer and Director).

Exhibit – 33 - Management Agreement among the Partnership, the General Partner and AAA Capital Management Advisors, Ltd. (filed herein).

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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.

Smith Barney AAA Energy Fund L.P.


By: Citigroup Managed Futures LLC  
  (General Partner)  
By: /s/ David J. Vogel  
  David J. Vogel
President and Director		  
Date: August 14, 2006  
By: /s/ Daniel R. McAuliffe, Jr.  
  Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director		  
Date: August 14, 2006