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UHN > SEC Filings for UHN > Form 10-K on 26-Mar-2013All Recent SEC Filings

Show all filings for UNITED STATES DIESEL-HEATING OIL FUND, LP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for UNITED STATES DIESEL-HEATING OIL FUND, LP


26-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the financial statements and the notes thereto of USDHO included elsewhere in this annual report on Form 10-K.

Forward-Looking Information

This annual report on Form 10-K, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties and other factors that may cause USDHO's actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe USDHO's future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project," the negative of these words, other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and USDHO cannot assure investors that the projections included in these forward-looking statements will come to pass. USDHO's actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

USDHO has based the forward-looking statements included in this annual report on Form 10-K on information available to it on the date of this annual report on Form 10-K, and USDHO assumes no obligation to update any such forward-looking statements. Although USDHO undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised to consult any additional disclosures that USDHO may make directly to them or through reports that USDHO in the future files with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Introduction

USDHO, a Delaware limited partnership, is a commodity pool that issues units that may be purchased and sold on the NYSE Arca. The investment objective of USDHO is for the daily changes in percentage terms of its units' per unit NAV to reflect the daily changes in percentage terms of the spot price of heating oil, as measured by the daily changes in the price of the futures contract for heating oil (also known as No. 2 fuel oil) for delivery to the New York harbor, traded on the NYMEX that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire (the "Benchmark Futures Contract"), less USDHO's expenses. "Near month contract" means the next contract traded on the NYMEX due to expire. "Next month contract" means the first contract traded on the NYMEX due to expire after the near month contract. It is not the intent of USDHO to be operated in a fashion such that the per unit NAV will equal, in dollar terms, the spot price of heating oil or any particular futures contract based on heating oil. It is not the intent of USDHO to be operated in a fashion such that its per unit NAV will reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Diesel-Heating Oil-Related Investments.

USDHO seeks to achieve its investment objective by investing in a combination of Futures Contracts and Other Diesel-Heating Oil-Related Investments such that changes in its per unit NAV, measured in percentage terms, will closely track the changes in the price of the Benchmark Futures Contract, also measured in percentage terms. USCF believes the daily changes in the price of the Benchmark Futures Contract have historically exhibited a close correlation with the daily changes in the spot price of diesel-heating oil. It is not the intent of USDHO to be operated in a fashion such that the per unit NAV will equal, in dollar terms, the spot price of diesel-heating oil or any particular futures contract based on diesel-heating oil.

The regulation of commodity interest trading in the United States and other countries is an evolving area of the law, as exemplified by the various discussions of the Dodd-Frank Act. The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of the CFTC, the NFA, the SEC, the futures exchanges, clearing organizations and other regulatory bodies. Pending final resolution of all applicable regulatory requirements, some specific examples of how the new Dodd-Frank Act provisions and rules adopted thereunder could impact USDHO are discussed in "Item 1. Business" and "Item 1A. Risk Factors" in this annual report on Form 10-K.

Price Movements

Diesel-heating oil futures prices were volatile during the year ended December 31, 2012 with a general upward trend through the year ended December 31, 2012. The price of the Benchmark Futures Contract started the year at $2.914 per gallon. It hit a peak on February 24, 2012 at a price of $3.313 per gallon. The low of the year was on June 21, 2012, when the price dropped to $2.523 per gallon. The year ended with the Benchmark Futures Contract at $3.032 per gallon, an increase of approximately 4.04% over the year. USDHO's per unit NAV began the year at $32.79 and reached its high for the year on February 24, 2012 at $37.49. USDHO's per unit NAV reached its low for the year on June 21, 2012 at $28.27. USDHO's per unit NAV on December 31, 2012 was $33.77, up approximately 2.99% for the year. The Benchmark Futures Contract prices listed above began with the February 2012 contract and ended with the February 2013 contract. The return of approximately 4.04% on the Benchmark Futures Contract listed above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts. An investment in Futures Contracts would need to be rolled forward during the time period described in order to achieve such a result. Furthermore, the change in the nominal price of these differing Futures Contracts, measured from the start of the year to the end of the year, does not represent the actual benchmark results that USDHO seeks to track, which are more fully described below in the section titled "Tracking USDHO's Benchmark."

During the year ended December 31, 2012, the diesel-heating oil futures market was in a state of contango for the majority of the year, with notable exceptions in late September through October 2012 and again in late December 2012, meaning that the price of the near month Futures Contract was typically lower than the price of the next month Futures Contract, or contracts further away from expiration. A backwardation market is one in which the price of the near month diesel-heating oil futures contract is higher than the price of the next month diesel-heating oil futures contract, or contracts further away from expiration. For a discussion of the impact of backwardation and contango on total returns, see "Term Structure of Diesel-Heating Oil Futures Prices and the Impact on Total Returns"below.

Valuation of Futures Contracts and the Computation of the NAV

The NAV of USDHO's units is calculated once each NYSE Arca trading day. The per unit NAV for a particular trading day is released after 4:00 p.m. New York time. Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. The Administrator uses the NYMEX closing price
(determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time)
for the contracts held on the NYMEX, but calculates or determines the value of all other USDHO investments, including ICE Futures contracts or other futures contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.

Results of Operations and the Diesel-Heating Oil Market

Results of Operations. On April 9, 2008, USDHO listed its units on the AMEX under the ticker symbol "UHN." On that day, USDHO established its initial offering price at $50.00 per unit and issued 200,000 units to the initial authorized purchaser, Merrill Lynch Professional Clearing Group., in exchange for $10,000,000 in cash. As a result of the acquisition of the AMEX by NYSE Euronext, USDHO's units no longer trade on the AMEX and commenced trading on the NYSE Arca on November 25, 2008.

Since its initial offering of 10,000,000 units, USDHO has registered one subsequent offering of its units: 50,000,000 units which were registered with the SEC on April 30, 2010. Units offered by USDHO in the subsequent offering were sold by it for cash at the units' per unit NAV as described in the applicable prospectus. As of December 31, 2012, USDHO had issued 1,000,000 units, 200,000 of which were outstanding. As of December 31, 2012, there were 59,000,000 units registered but not yet issued.

More units may have been issued by USDHO than are outstanding due to the redemption of units. Unlike funds that are registered under the 1940 Act, units that have been redeemed by USDHO cannot be resold by USDHO. As a result, USDHO contemplates that additional offerings of its units will be registered with the SEC in the future in anticipation of additional issuances and redemptions.

As of December 31, 2012, USDHO had the following authorized purchasers: Citadel Securities LLC, Citigroup Global Markets Inc., Credit Suisse USA LLC, Deutsche Bank Securities Inc., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., NewEdge USA LLC, Nomura Securities International Inc., RBC Capital Markets Corporation, SG Americas Securities LLC and Virtu Financial Capital Markets.

For the Year Ended December 31, 2012 Compared to the Years Ended December 31, 2011 and 2010

As of December 31, 2012, the total unrealized gain on Futures Contracts owned or held on that day was $173,628, and USDHO established cash deposits and investments in Treasuries and money market funds that were equal to $6,372,583. USDHO held 93.19% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 6.81% of the cash balance was held as margin deposits for Futures Contracts purchased. The ending per unit NAV on December 31, 2012 was $33.77.

By comparison, as of December 31, 2011, the total unrealized gain on Futures Contracts owned or held on that day was $348,096 and USDHO established cash deposits and investments in Treasuries and money market funds that were equal to $9,273,987. USDHO held 93.05% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 6.95% of the cash balance was held as margin deposits for the Futures Contracts purchased. The decrease in cash assets in overnight deposits and investments in Treasuries and money market funds for December 31, 2012, as compared to December 31, 2011, was the result of USDHO's smaller size during the year ended December 31, 2012 as measured by total net assets. The ending per unit NAV on December 31, 2011 was $32.79. The increase in the per unit NAV for December 31, 2012, as compared to December 31, 2011, was primarily a result of the increase in the price of the Benchmark Futures Contract between the year ended December 31, 2011 and the year ended December 31, 2012.

By comparison, as of December 31, 2010, the total unrealized gain on Futures Contracts owned or held on that day was $267,658 and USDHO established cash deposits and investments in money market funds that were equal to $11,445,529. USDHO held 90.91% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 9.09% of the cash balance was held as margin deposits for the Futures Contracts purchased. The decrease in cash assets in overnight deposits and investments in Treasuries and money market funds for December 31, 2011, as compared to December 31, 2010, was the result of USDHO's smaller size during the year ended December 31, 2011 as measured by total net assets. The ending per unit NAV on December 31, 2010 was $29.82. The increase in the per unit NAV for December 31, 2011, as compared to December 31, 2010, was primarily a result of higher prices for diesel-heating oil and the related increase in the value of the Futures Contracts that USDHO had invested in between the year ended December 31, 2010 and the year ended December 31, 2011.

Portfolio Expenses. USDHO's expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee that USDHO pays to USCF is calculated as a percentage of the total net assets of USDHO. USDHO pays USCF a management fee of 0.60% of its average net assets. The fee is accrued daily and paid monthly.

During the year ended December 31, 2012, the average total net assets of USDHO were $8,156,198. The management fee incurred by USDHO during the year amounted to $48,937. By comparison, during the year ended December 31, 2011, the average total net assets of USDHO were $8,800,419. The management fee paid by USDHO during the year amounted to $52,803. By comparison, during the year ended December 31, 2010, the average total net assets of USDHO were $11,126,672. The management fee paid by USDHO during the year amounted to $66,760.

In addition to the management fee, USDHO pays all brokerage fees and other expenses, including tax reporting costs, licensing fees for the use of intellectual property, ongoing registration or other fees paid to the SEC, FINRA and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The gross total of these fees and expenses for the year ended December 31, 2012 was $115,494, as compared to $158,465 for the year ended December 31, 2011 and $216,692 for the year ended December 31, 2010. The decrease in gross total expenses excluding management fees for the year ended December 31, 2012, as compared to the years ended December 31, 2011 and 2010 was primarily due to decreased tax reporting, audit, licensing and other fees during the year ended December 31, 2012. For the year ended December 31, 2012, USDHO incurred $7,320 in ongoing registration fees and other expenses relating to the registration and offering of additional units. By comparison, for the years ended December 31, 2011 and 2010, USDHO incurred $7,300 and $1,571, respectively, in ongoing registration fees and other expenses relating to the registration and offering of additional units. The increase in registration fees and expenses incurred by USDHO for the year ended December 31, 2012, as compared to the years ended December 31, 2011 and 2010, was due to one extra day in the reporting period ended December 31, 2012, and as compared to the year ended December 31, 2010, was due to an increase in the amortization rate for registration expenses. During the years ended December 31, 2012, 2011 and 2010, an expense waiver was in effect which offset certain of the expenses incurred by USDHO. The total amount of the expense waiver was $87,974 for the year ended December 31, 2012, $132,085 for the year ended December 31, 2011 and $182,968 for the year ended December 31, 2010. For the years ended December 31, 2012, 2011 and 2010, the expenses of USDHO, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $164,431, $211,268 and $283,452, respectively, and after allowance for the expense waiver totaled, $76,457, $79,183 and $100,484, respectively.

USDHO is responsible for paying its portion of the directors' and officers' liability insurance of USDHO and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USDHO and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust. USDHO shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses for the year ended December 31, 2012 amounted to a total of $540,586 for USDHO and the Related Public Funds. USDHO's portion of such fees and expenses for the year ended December 31, 2012 was $1,514. By comparison, for the year ended December 31, 2011 the fees and expenses amounted to a total of $607,582 for USDHO and the Related Public Funds. USDHO's portion of such fees and expenses for the year ended December 31, 2011 was $1,383. The decrease in directors' fees and expenses for the year ended December 31, 2012, as compared to the years ended December 31, 2011 was primarily due to the non-incurrence of the independent directors' deferred compensation expense for the year ended December 31, 2012, which was amortized during the years ended December 31, 2011 and 2010. By comparison, for the year ended December 31, 2010, these fees and expenses amounted and $1,107,140 for USDHO and the Related Public Funds, except USCI, CPER, USAG and USMI. USDHO's portion of such fees and expenses was $2,864 for the year ended December 31, 2010. The decrease in directors' fees and expenses for the year ended December 31, 2011, as compared to the year ended December 31, 2010 was primarily due to the non-incurrence of the independent directors' deferred compensation expense for the year ended December 31, 2011, the majority of which was amortized in the year ended December 31, 2010. Effective as of April 1, 2010, USDHO became responsible for paying its portion of any payments that may become due to the independent directors pursuant to the deferred compensation agreements entered into between the independent directors, USCF, USDHO and the Related Public Funds.

USDHO also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Diesel-Heating Oil-Related Investments or Treasuries. During the year ended December 31, 2012, total commissions accrued to brokers amounted to $5,226. Of this amount, approximately $5,128 was a result of rebalancing costs and approximately $86 was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2011 total commissions accrued to brokers amounted to $5,568. Of this amount, approximately $5,629 was a result of rebalancing costs and approximately $272 was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2010, total commissions accrued to brokers amounted to $9,950. Of this amount, approximately $9,555 was a result of rebalancing costs and approximately $395 was the result of trades necessitated by creation and redemption activity. The decrease in the total commissions accrued to brokers for the year ended December 31, 2012, as compared to the year ended December 31, 2011 was primarily due to fewer Futures Contracts held and traded as well as reduced creation and redemption activity during the year ended December 31, 2012. The decrease in total commissions accrued to brokers for the year ended December 31, 2011 as compared to the year ended December 31, 2010 was primarily a function of fewer Futures Contracts traded due to USDHO's smaller size and fewer creations and redemptions during the year ended December 31, 2011. The decrease in assets during the year ended December 31, 2011 required USDHO to purchase fewer Futures Contracts and incur a smaller amount of brokerage commissions. As an annualized percentage of average daily total net assets, the figure for the year ended December 31, 2012 represents approximately 0.07% of average daily total net assets. By comparison, the figure for the year ended December 31, 2011 represented approximately 0.06% of average daily total net assets and the figure for the year ended December 31, 2010 represented approximately 0.09% of average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.

The fees and expenses associated with USDHO's audit expenses and tax accounting and reporting requirements are paid by USDHO. These costs are estimated to be $50,000 for the year ended December 31, 2012. USCF has voluntarily agreed to pay certain expenses typically borne by USDHO to the extent that such expenses exceeded 0.15% (15 basis points) of USDHO's NAV, on an annualized basis, through at least June 30, 2013. USCF has no obligation to continue such payments into subsequent periods. For the year ended December 31, 2012, USCF waived $87,974 of USDHO's expenses. This voluntary expense waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 4 in Item 8 of this annual report on Form 10-K.

Dividend and Interest Income. USDHO seeks to invest its assets such that it holds Futures Contracts and Other Diesel-Heating Oil-Related Investments in an amount equal to the total net assets of its portfolio. Typically, such investments do not require USDHO to pay the full amount of the contract value at the time of purchase, but rather require USDHO to post an amount as a margin deposit against the eventual settlement of the contract. As a result, USDHO retains an amount that is approximately equal to its total net assets, which USDHO invests in Treasuries, cash and/or cash equivalents. This includes both the amount on deposit with the FCM as margin, as well as unrestricted cash and cash equivalents held with USDHO's Custodian. The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis. For the year ended December 31, 2012, USDHO earned $2,410 in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on USDHO's average total net assets, this was equivalent to an annualized yield of approximately 0.03%. USDHO purchased Treasuries during the year ended December 31, 2012 and also held cash and/or cash equivalents during this time period. By comparison, for the years ended December 31, 2011 and 2010, USDHO earned $1,838 and $4,212, respectively, in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on USDHO's average total net assets, this was equivalent to an annualized yield of approximately 0.02% and 0.04%, respectively. USDHO purchased Treasuries during the year ended December 31, 2011 and also held cash and/or cash equivalents during this time period. By comparison, USDHO did not purchase Treasuries during the year ended December 31, 2010 and held only cash and/or cash equivalents during this time period. Interest rates on short-term investments, including cash, cash equivalents and Treasuries, were higher during the year ended December 31, 2012 compared to the year ended December 31, 2011 and lower as compared to the year ended December 31, 2010. As a result, the amount of income earned by USDHO as a percentage of average daily total net assets was higher during the year ended December 31, 2012 compared to the years ended December 31, 2011 and lower as compared to the year ended December 31, 2010.

For the Three Months Ended December 31, 2012 Compared to the Three Months Ended December 31, 2011 and 2010

Portfolio Expenses. During the three months ended December 31, 2012, the average daily total net assets of USDHO were $6,801,311. The management fee incurred by USDHO during the period amounted to $10,258. By comparison, during the three months ended December 31, 2011, the average daily total net assets of USDHO were $8,016,105. The management fee incurred by USDHO during the period amounted to $12,123. By comparison, during the three months ended December 31, 2010, the average daily total net assets of USDHO were $9,787,332. The management fee paid by USDHO during the period amounted to $14,802.

In addition to the management fee, USDHO pays all brokerage fees and other expenses, including tax reporting costs, licensing fees for the use of intellectual property, ongoing registration or other fees paid to the SEC, FINRA and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The gross total of these fees and expenses for the three months ended December 31, 2012 was $35,879 as compared to $3,810 for the three months ended December 31, 2011 and $44,169 for the three months ended December 31, 2010. The increase in gross total expenses excluding management fees for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011 was primarily due to increased tax reporting, audit, licensing and other fees during the three months ended December 31, 2012. The decrease in gross total expenses excluding management fees for the three months ended December 31, 2011, as compared to the three months ended December 31, 2010 was primarily due to the relative size of USHO and activity that resulted from its decreased size, including decreased brokerage fees, decreased licensing fees and decreased tax reporting costs during the three months ended December 31, 2011. The decrease in gross total expenses excluding management fees was especially impacted by a lower revised estimate for tax reporting costs for the three months ended December 31, 2011 as compared to the three months ended December 31, 2010. For the three months ended December 31, 2012, USDHO incurred $1,840 in ongoing registration fees and other expenses relating to the registration and offering of additional units, and incurred the same amount in ongoing registration fees and other expenses related to the registration and offering of additional units for the three months ended December 31, 2011. By comparison, for the three months ended December 31, 2010, USDHO incurred $368 in ongoing registration fees and other expenses relating to the registration and offering of additional units. The increase in registration fees and expenses incurred by USDHO for the three months ended December 31, 2011 as compared to the three months ended December 31, 2010 was primarily due to an increase in creation and redemption activity during the three months ended December 31, 2011. During the three months ended December 31, 2012, 2011 and 2010, an expense waiver was in effect which offset certain of the expenses incurred by USDHO. The total amount of the expense waiver was $29,496 during the three months ended December 31, 2012. During the three months ended December 31, 2011, USDHO's expenses did not exceed 0.15% (15 basis points) of its NAV; therefore, no expenses were waived by USCF. During the three months ended December 31, 2010, the total amount of the expense waiver was $36,988. For the three months ended December 31, 2012 and 2010, the expenses of USDHO, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $46,137 and $58,971, respectively, and after allowance for the expense waiver, totaled $16,641 and $21,983, respectively.

USDHO is responsible for paying its portion of the directors' and officers' liability insurance of USDHO and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USDHO and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust. USDHO shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses for the year ended December 31, 2012 amounted to a total of $540,586 for USDHO and the Related Public Funds. USDHO's portion of such fees and expenses for the year ended December 31, 2012 was $1,514.

USDHO also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Diesel-Heating Oil-Related Investments or Treasuries. During the three months ended December 31, 2012, total commissions accrued to brokers amounted to $1,056, approximately all of which was a result of rebalancing . . .

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