10-Q 1 file1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended September 30, 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



SMITH BARNEY AAA ENERGY FUND L.P.

FORM 10-Q

INDEX


2



PART I

Item 1. Financial Statements

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


  September 30,
2006		 December 31,
2005
Assets:  
 
Investment in Master, at fair value $ 274,484,099
$ 308,988,960
Cash 75,464
65,973
  $ 274,559,563
$ 309,054,933
Liabilities and Partners' Capital:  
 
Liabilities:  
 
Accrued expenses:  
 
Brokerage commissions $ 998,791
$ —
Management fees 455,786
524,850
Other 88,905
70,932
Redemptions payable 8,680,095
32,231,152
  10,223,577
32,826,934
Partners' Capital:  
 
General Partner, 913.9790 Unit equivalents outstanding in 2006 and 2005, respectively 5,629,288
4,879,176
Special Limited Partner 2,081.9988 and 594.5730 Redeemable Units of Limited Partnership Interest outstanding in 2006 and 2005 respectively 12,823,239
3,174,063
Limited Partners, 39,921.9676 and 50,235.0968 Redeemable Units of Limited Partnership Interest outstanding in 2006 and 2005, respectively 245,883,459
268,174,760
  264,335,986
276,227,999
  $ 274,559,563
$ 309,054,933

See accompanying Notes to Financial Statements.

3



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


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Income:  
 
 
 
Realized gains (losses) on closed positions allocated from Master $ (13,893,707
)
 $ (18,461,122
)
 $ 146,840,375
$ 20,582,764
Change in unrealized gains (losses) on open positions allocated from Master (14,025,816
)
 73,843,823
(91,772,261
)
 132,457,634
Interest income allocated from Master 2,423,419
1,427,142
7,689,549
3,394,869
Expenses allocated from Master (244,299
)
 (1,530,767
)
 (922,794
)
 (4,198,038
)
  (25,740,403
)
 55,279,076
61,834,869
152,237,229
Expenses:  
 
 
 
Brokerage commissions 806,315
—
3,527,518
—
Management fees 1,413,118
1,368,959
4,691,682
3,427,055
Other 40,034
119,951
120,102
171,552
  2,259,467
1,488,910
8,339,302
3,598,607
Net income (loss) before allocation to Special Limited Partner (27,999,870
)
 53,790,166
53,495,567
148,638,622
Allocation to Special Limited Partner 6,084,658
(10,472,605
)
 (9,161,204
)
 (29,048,751
)
Net income (loss) after allocation to Special Limited Partner (21,915,212
)
 43,317,561
44,334,363
119,589,871
Allocation of Units – Special Limited Partner 9,161,204
—
9,161,204
—
Redemptions – Limited Partners (16,876,503
)
 (5,769,884
)
 (65,387,580
)
 (9,504,676
)
Net increase (decrease) in Partners' Capital (29,630,511
)
 37,547,677
(11,892,013
)
 110,085,195
Partners' Capital, beginning of period 293,966,497
228,157,069
276,227,999
155,619,551
Partners' Capital, end of period $ 264,335,986
$ 265,704,746
$ 264,335,986
$ 265,704,746
Net Asset Value per Redeemable Unit (42,917.9454 and 53,384.7160 Redeemable Units outstanding at September 30, 2006 and 2005, respectively) $ 6,159.10
$ 4,977.17
$ 6,159.10
$ 4,977.17
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent $ (497.00
)
 $ 804.00
$ 820.71
$ 2,184.40

See accompanying Notes to Financial Statements.

4



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


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Cash flows from operating activities:  
 
 
 
Net income (loss) $ (21,915,212
)
 $ 43,317,561
$ 44,334,363
$ 119,589,871
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 15,904,290
4,980,145
121,205,572
11,657,498
Net unrealized (appreciation) depreciation on investment in Master 28,148,033
(53,865,058
)
 (53,526,649
)
 (148,887,896
)
Accrued expenses:  
 
 
 
Increase (decrease) in brokerage commissions (159,222
)
 —
998,791
—
Increase (decrease) in management fees (73,156
)
 80,307
(69,064
)
 221,526
Increase (decrease) in other 7,976
66,815
17,973
24,265
Increase (decrease) in due to Special Limited Partner (15,245,862
)
 10,472,605
—
29,048,751
Net cash provided by (used in) operating activities 6,666,847
5,052,375
79,786,924
9,320,411
Cash flows from financing activities:  
 
 
 
Allocation of Units – Special Limited Partner 9,161,204
—
9,161,204
—
Payments for redemptions – Limited Partners (15,820,075
)
 (5,016,945
)
 (88,938,637
)
 (9,307,106
)
Net cash provided by (used in) financing activities (6,658,871
)
 (5,016,945
)
 (79,777,433
)
 (9,307,106
)
Net change in cash 7,976
35,430
9,491
13,305
Cash, at beginning of period 67,488
26,532
65,973
48,657
Cash, at end of period $ 75,464
$ 61,962
$ 75,464
$ 61,962

See accompanying Notes to Financial Statements.

5



Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
September 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 interests, including commodity options and commodity futures contracts on United States exchanges and certain foreign exchanges. The Partnership may trade commodity futures and options contracts. 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. Individual and pooled accounts currently managed by the Advisor, including the Partnership (collectively, the ‘‘Feeder Funds’’), 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 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 September 30, 2006, the Partnership owned approximately 27.7% 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 September 30, 2006 and December 31, 2005 and the results of its operations and cash flows for the three and nine months ended September 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 fund's ownership. Effective January 1, 2006, round-turn commissions are borne by the Partnership consistent with contractual agreements.

6



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

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.

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

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


  September 30,
2006		 December 31,
2005
Assets:  
 
Equity in commodity futures trading account:  
 
Cash (restricted $4,720,046 and $4,130,046 in 2006 and 2005, respectively) $ 793,721,613
$ 557,878,760
Net unrealized appreciation on open futures positions —
260,548,395
Unrealized appreciation on open swaps contracts 116,180,914
193,692,178
Commodity options owned, at fair value (cost $292,312,198 and $129,024,667 in 2006 and 2005, respectively) 325,775,158
225,052,075
  1,235,677,685
1,237,171,408
Due from brokers 12,086,805
14,310,966
Interest receivable 2,615,388
1,813,732
   
 
  $ 1,250,379,878
$ 1,253,296,106
Liabilities and Members' Capital:  
 
Liabilities:  
 
Net unrealized depreciation on open futures positions $ 2,295,549
$ —
Unrealized depreciation on open swap contracts 58,559,148
165,265,325
Commodity options written, at market value (premium $199,469,819 and $147,363,753 in 2006 and 2005, respectively) 182,318,173
114,859,048
Accrued expenses:  
 
Brokerage commissions —
3,198,816
Other 147,324
143,268
Due to brokers 15,038,110
13,948,544
Distribution payable 2,595,766
1,798,953
  260,954,070
299,213,954
Members' Capital:  
 
Members' Capital, 215,521.4035 and 246,785.2714 Units
outstanding in 2006 and 2005, respectively		 989,425,808
954,082,152
  $ 1,250,379,878
$ 1,253,296,106

7



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

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


  Number of
Contracts		 Fair
Value		 % of Members'
Capital
Futures Contracts Purchased  
 
 
Energy  
$ (154,992,929
)
 (15.66
)%
Futures Contracts Sold  
 
 
Energy  
152,697,380
15.43
Total futures contracts  
(2,295,549
)
 (0.23
)
Options Owned  
 
 
Energy  
 
 
NYMEX Natural Gas Nov. 06 – April 07 7,250
150,721,980
15.23
Other  
175,053,178
17.70
Total options owned  
325,775,158
32.93
Options Written  
 
 
Energy  
 
 
NYMEX Natural Gas Nov. 06 – March 07 5,200
(116,882,880
)
 (11.82
)
Other  
(65,435,293
)
 (6.61
)
Total options written  
(182,318,173
)
 (18.43
)
Unrealized Appreciation on Swap Contracts  
 
 
Energy  
116,180,914
11.74
Unrealized Depreciation on Swap Contracts  
 
 
Energy  
(58,559,148
)
 (5.92
)
Total Energy Fair Value  
$ 198,783,202
20.09
%
Percentages are based on Members' Capital unless otherwise indicated.

8



Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
September 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 unrealized 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



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

(Unaudited)

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


  Three Months Ended Nine Months Ended
  September 30, September 30,
  2006 2005 2006 2005
Income:  
 
 
 
Net gains (losses) on trading of commodity interests:  
 
 
 
Realized gains (losses) on closed positions $ (49,732,912
)
 $ (45,388,615
)
 $ 492,683,728
$ 44,240,832
Change in unrealized gains (losses) on open positions (49,663,311
)
 185,206,455
(311,566,538
)
 320,759,915
  (99,396,223
)
 139,817,840
181,117,190
365,000,747
Interest income 8,901,632
3,626,585
27,222,402
8,290,863
  (90,494,591
)
 143,444,425
208,339,592
373,291,610
Expenses:  
 
 
 
Brokerage commissions including clearing fees of $446,843, $430,958, $1,671,617 and $1,158,244, respectively 767,905
3,689,997
2,863,472
9,730,505
Other 106,504
104,356
319,504
226,742
  874,409
3,794,353
3,182,976
9,957,247
Net income (loss) (91,369,000
)
 139,650,072
205,156,616
363,334,363
Additions 43,487,021
68,978,312
204,588,058
144,268,308
Redemptions (68,710,096
)
 (18,541,906
)
 (347,330,100
)
 (73,415,227
)
Distribution of interest to feeder funds (8,845,092
)
 (3,594,110
)
 (27,070,918
)
 (8,183,411
)
Net increase (decrease) in Members'     Capital (125,437,167
)
 186,492,368
35,343,656
426,004,033
Members' Capital, beginning of period 1,114,862,975
576,007,200
954,082,152
336,495,535
Members' Capital, end of period $ 989,425,808
$ 762,499,568
$ 989,425,808
$ 762,499,568
Net Asset Value per Unit
(215,521.4035 and 212,830.6942 Units outstanding in September 30, 2006 and 2005, respectively)		 $ 4,590.85
$ 3,582.66
$ 4,590.85
$ 3,582.66
Net income (loss) per Unit of Member Interest $ (418.63
)
 $ 666.56
$ 844.70
$ 1,808.12

10



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

(Unaudited)

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


  Three Months Ended Nine Months Ended
  September 30, September 30,
  2006 2005 2006 2005
Cash flows from operating activities:  
 
 
 
Net income (loss) $ (91,369,000
)
 $ 139,650,072
$ 205,156,616
$ 363,334,363
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
 
 
 
Changes in operating assets and liabilities:  
 
 
 
(Increase) decrease in restricted cash 13,776,190
1,136,658
(590,000
)
 25,617,229
(Increase) decrease in unrealized appreciation on open futures positions 60,252,028
(93,833,154
)
 260,548,395
(177,595,208
)
(Increase) decrease in unrealized appreciation on open swaps contracts 82,599,653
(80,855,557
)
 77,511,264
(190,727,792
)
(Increase) decrease in commodity options owned at fair value (111,721,015
)
 (228,252,081
)
 (100,723,083
)
 (293,138,332
)
(Increase) decrease in due from brokers 8,081,180
(27,261,579
)
 2,224,161
(34,890,709
)
(Increase) decrease in interest receivable 490,922
(342,457
)
 (801,656
)
 (802,770
)
Increase (decrease) in unrealized depreciation on open futures positions 2,295,549
—
2,295,549
—
Increase (decrease) in unrealized depreciation on open swap contracts (78,025,246
)
 71,487,312
(106,706,177
)
 165,786,368
Increase (decrease) in commodity options written, at fair value 25,302,902
141,492,460
67,459,125
157,940,367
Accrued expenses:  
 
 
 
Increase (decrease) in brokerage commissions —
709,836
(3,198,816
)
 1,633,617
Increase (decrease) in other (9,957
)
 (6,916
)
 4,056
(662
)
Increase (decrease) in due to brokers (3,891,920
)
 22,273,296
1,089,566
27,194,978
Increase (decrease) in due to CGM —
—
—
(22,978
)
Net cash provided by (used in) operating activities (92,218,714
)
 (53,802,110
)
 404,269,000
44,328,471
   
 
 
 
Cash flows from financing activities:  
 
 
 
Proceeds from additions 43,487,021
68,978,312
204,588,058
144,268,308
Payments for redemptions (68,710,096
)
 (18,541,906
)
 (347,330,100
)
 (73,415,227
)
Distribution of interest to feeder funds (9,340,131
)
 (3,253,309
)
 (26,274,105
)
 (7,384,441
)
Net cash provided by (used in) financing activities (34,563,206
)
 47,183,097
(169,016,147
)
 63,468,640
Net change in unrestricted cash (126,781,920
)
 (6,619,013
)
 235,252,853
107,797,111
Unrestricted cash, at beginning of period 915,783,487
387,955,306
553,748,714
273,539,182
Unrestricted cash, at end of period $ 789,001,567
$ 381,336,293
$ 789,001,567
$ 381,336,293

11



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

(Unaudited)

2.    Financial Highlights:

Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2006 and 2005 were as follows:


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Net realized and unrealized gains (losses)* $ (656.62
)
 $ 1,000.32
$ 925.71
$ 2,720.43
Interest income 55.49
26.40
163.13
62.06
Expenses and allocation to Special Limited Partner** 104.13
(222.72
)
 (268.13
)
 (598.09
)
Increase (decrease) for the period (497.00
)
 804.00
820.71
2,184.40
Net Asset Value per Redeemable Unit, beginning of period 6,656.10
4,173.17
5,338.39
2,792.77
Net Asset Value per Redeemable Unit, end of period $ 6,159.10
$ 4,977.17
$ 6,159.10
$ 4,977.17
*      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**** (0.1
)%
 (2.6
)%
 (0.4
)%
 (2.8
)%
Operating expenses 3.6
%
 5.0
%
 3.9
%
 5.0
%
Allocation to Special Limited Partner (2.2
)%
 4.3
%
 3.1
%
 14.0
%
Total expenses 1.4
%
 9.3
%
 7.0
%
 19.0
%
Total return:  
 
 
 
Total return before allocation to Special Limited Partner (9.6
)%
 24.0
%
 19.4
%
 97.7
%
Allocation to Special Limited Partner 2.1
%
 (4.7
)%
 (4.0
)%
 (19.5
)%
Total return after allocation to Special Limited Partner (7.5
)%
 19.3
%
 15.4
%
 78.2
%
*** 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 period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners' share of income, expenses and average net assets.

12



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

(Unaudited)

2.    Financial Highlights (continued)

Financial Highlights of the Master:


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Net realized and unrealized gains (losses)* $ (459.10
)
 $ 649.51
$ 725.55
$ 1,767.93
Interest income 40.96
17.55
120.56
41.32
Expenses ** (0.49
)
 (0.50
)
 (1.41
)
 (1.13
)
Increase (decrease) for the period (418.63
)
 666.56
844.70
1,808.12
Distributions (40.70
)
 (17.39
)
 (119.89
)
 (40.78
)
Net Asset Value per Unit, beginning of period 5,050.18
2,933.49
3,866.04
1,815.32
Net Asset Value per Unit, end of period $ 4,590.85
$ 3,582.66
$ 4,590.85
$ 3,582.66
* Includes brokerage commissions
** Excludes brokerage commissions

Ratios to average net assets:***  
 
 
 
Net investment gain (loss)**** 3.1
%
 (0.1
)%
 3.0
%
 (0.4
)%
Operating expenses 0.3
%
 2.3
%
 0.4
%
 2.5
%
Total return (8.3
)%
 22.7
%
 21.8
%
 99.6
%
*** Annualized
**** Interest income less total expenses
The above ratios may vary for individual investors based on the timing of capital transactions during the period.

13



Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
September 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 respective 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 nine and twelve months ended September 30, 2006 and December 31, 2005, based on a monthly calculation, were $224,544,389 and $199,595,694, respectively. The fair values of these commodity interests, including options and swaps thereon, if applicable, at September 30, 2006 and December 31, 2005 were $198,783,202 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

14



Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements
September 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 September 30, 2006. However, due to the nature of the Partnership's/Master's business, these instruments may not be held to maturity.

15



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 third 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, redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2006, Partnership capital decreased 4.3% from $276,227,999 to $264,335,986. This decrease was attributable to the redemption of 10,313.1292 Redeemable Units totaling $65,387,580, which was partially offset by net income from operations of $44,334,363, coupled with the allocation to Special Limited Partner of 1,487.4258 Redeemable Units totaling $9,161,204. 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 nine months ended September 30, 2006, the Master's capital increased 3.7% from $954,082,152 to $989,425,808. This increase was attributable to net income from operations of $205,156,616, coupled with the addition of 48,633.8390 Units totaling $204,588,058 which was partially offset by the redemption of 79,897.7069 Units totaling $347,330,100 and distributions of interest totaling $27,070,918 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

16



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 third quarter of 2006, the Net Asset Value per Redeemable Unit decreased 7.5% from $6,656.10 to $6,159.10 as compared to an increase of 19.3% in the third quarter of 2005. The Partnership experienced a net trading loss before brokerage commissions and related fees in the third quarter of 2006 of $27,919,523. Losses were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Energy Swaps, NYMEX Gasoline, NYMEX Heating Oil, NYMEX Natural Gas, NYMEX Freight Futures, and IPE Gas Oil and were partially offset by gains in NYMEX Unleaded Gas and OTC Energy Swaps. The Partnership experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2005 of $55,382,701. Gains were primarily attributable to the Master's trading of commodity futures in IPE Gas Oil, NYMEX Natural Gas, OTC energy swaps, and NYMEX Unleaded Gas and were partially offset by losses in NYMEX Crude Oil and NYMEX energy swaps.

Trading in the petroleum sector was adversely impacted by a larger than expected decline in oil and gasoline prices, sharp fluctuations in the relationship between prices of oil and refined products, and continued compression of price volatility in the sector. In natural gas trading, rising price volatility in nearby contract months coupled with price weakness in longer dated contracts produced losses for the Fund.

During the nine months ended September 30, 2006, the Net Asset Value per Redeemable Unit increased 15.4% from $5,338.39 to $6,159.10 as compared to an increase of 78.2% in the same period of 2005. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2006 of $55,068,114. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, NYMEX Freight Futures, NYMEX Natural Gas, NYMEX Unleaded Gas and OTC Energy Swaps and were partially offset by losses in NYMEX Energy Swaps, NYMEX Gasoline, NYMEX Heating Oil and IPE Gas Oil. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2005 of $153,040,398. Gains were primarily attributable to the Master's trading of commodity futures in NYMEX Crude Oil, IPE Gas Oil, NYMEX Natural Gas, OTC Energy Swaps, and NYMEX Unleaded Gas and were partially offset by losses in NYMEX energy swaps, Gasoline and NYMEX Heating 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 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 its allocated share 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 nine months ended September 30, 2006 increased by $996,277 and $4,294,680, 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 nine months ended September 30, 2006 as compared to 2005.

17



Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance and redemptions. Management fees for the three and nine months ended September 30, 2006 increased by $44,159 and $1,264,627, as compared to the corresponding periods in 2005. The increase in management fees is due to higher average net assets during the three and nine months ended September 30, 2006 as compared to 2005.

The Special Limited Partner profit share allocation made on September 30, 2006 was based on the new trading profits (as defined in the Amended and Restated Limited Partnership Agreement of the Partnership, dated as of September 30, 2006, by and among the General Partner, the Advisor, David J. Vogel and the other Limited Partners (the ‘‘Amended and Restated Limited Partnership Agreement’’)) generated by the Advisor during the nine months ended September 30, 2006. For the three months ended September 30, 2006 there was a reversal of the accrued profit share allocation of $6,084,658 based on the performance of the Partnership during the quarter. The profit share allocation accrued and allocated for the nine months ended September 30, 2006 was $9,161,204. The profit share allocation accrued for the three and nine months ended September 30, 2005 was $10,472,605 and $29,048,751, respectively. Beginning with the quarter ending December 31, 2006, the Special Limited Partner profit share allocation will be made quarterly based on the new trading profits generated by the Advisor during each quarter.

18



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 September 30, 2006 and the highest, lowest and average value during the three months ended September 30, 2006. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of September 30, 2006, the Master's total capitalization was $989,425,808. 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.

September 30, 2006
(Unaudited)


      Three Months Ended September 30, 2006
Market Sector Value
at Risk		 % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Energy $80,290,980
8.11%
$85,359,642
$52,516,591
$67,201,456
Energy Swaps 4,720,046
0.48%
4,720,046
4,130,046
4,326,713
Total $85,011,026
8.59%
 
 
 
* Average monthly Values at Risk

19



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.

20



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 quarters ended March 31, 2006 and June 30, 2006.

Enron Corp.

In light of the settlement of the securities class action (Newby, et al. v. Enron Corp., et al.), the plaintiffs have agreed to dismiss the following lawsuits against Citigroup and its affiliates: California Public Employees' Retirement System v. Banc of America Securities LLC, et al., Headwaters Capital LLC v. Lay et al., and Variable Annuity Life Ins. Co. v. Credit Suisse First Boston Corp., et al. Plaintiffs in two other cases, which are not part of the Newby class, have also voluntarily dismissed their claims against Citigroup and its affiliates: Steiner v. Enron Corp., et al. and Town of New Hartford v. Lay, et al.

Research

On August 17, 2006, the United States District Court for the Southern District of New York approved the class action settlement of Citigroup and its affiliates in In Re Salomon Analyst AT&T Litigation, and on September 29, 2006 that same court 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 September 14, 2006, Citigroup and its affiliates settled all claims in Sturm, et al. v. Citigroup, et al. The settlement was covered by existing reserves.

On October 6, 2006, the United States Court of Appeals granted a review of the district court's decision certifying a plaintiff class in In Re Salomon Analyst Metromedia Litigation.

Adelphia Communications Corporation

Defendant banks in In Re Adelphia Communications Corporation Securities and Derivative Litigation, including the Citigroup Parties, have entered into settlement agreements with the Los Angeles County Employees Retirement Association and with The Division of Investment of the New Jersey Department of Treasury. The Citigroup Parties' share of the settlement was 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.

21



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
July 1, 2006 –
July 31, 2006		 291.6671
$6,422.71 N/A
N/A
August 1, 2006 –
August 31, 2006		 1,033.4538
$6,118.43 N/A
N/A
September 1, 2006 –
September 30, 2006		 1,409.3123
$6,159.10 N/A
N/A
Total 2,734.4332
$6,233.41 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

On or about July 10, 2006, the General Partner mailed to all Limited Partners a Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, soliciting the approval by the Limited Partners of an amendment to the Limited Partnership Agreement to the effect that the profit share allocation due to the Advisor, as Special Limited Partner of the Partnership, be made quarterly rather than annually. As of September 30, 2006, 22,711.7774 units had been voted for the amendment; 2,692.5984 units had been voted against the amendment; votes on 21,453.1846 units had been withheld and holders of 485.1531 units had abstained. The Limited Partnership Agreement required that 22,082.482 units, or more than 50% of the units outstanding, be voted in favor of the amendment.

The Amended and Restated Limited Partnership Agreement was entered into as of September 30, 2006, reflecting the change to the profit share allocation as submitted to and approved by the Limited Partners. A copy of the Amended and Restated Limited Partnership Agreement is attached to this Form 10-Q as Exhibit 10.1.

Item 5.    Other Information – None

22



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 – 10.1 – Amended and Restated Limited Partnership Agreement of the Partnership, dated as of September 30, 2006, by and among the General Partner, the Advisor, David J. Vogel and the other Limited Partners.

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).

23



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: November 14, 2006  
By: /s/ Jennifer Magro  
  Jennifer Magro
Chief Financial Officer and
Director		  
Date: November 14, 2006