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UHN > SEC Filings for UHN > Form 10-K on 26-Mar-2014All Recent SEC Filings

Show all filings for UNITED STATES DIESEL-HEATING OIL FUND, LP

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


26-Mar-2014

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 UHN 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 UHN'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 UHN'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 UHN cannot assure investors that the projections included in these forward-looking statements will come to pass. UHN's actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

UHN 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 UHN assumes no obligation to update any such forward-looking statements. Although UHN 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 UHN may make directly to them or through reports that UHN 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

UHN, a Delaware limited partnership, is a commodity pool that issues shares that may be purchased and sold on the NYSE Arca. The investment objective of UHN is for the daily changes in percentage terms of its shares' per share 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 UHN'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 UHN to be operated in a fashion such that the per share 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 UHN to be operated in a fashion such that its per share 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.

UHN 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 share 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 UHN to be operated in a fashion such that the per share 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. 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 examples of how new rules and regulations could impact UHN 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, 2013. The price of the Benchmark Futures Contract started the year at $3.0318 per gallon. It hit a peak on February 8, 2013 at a price of $3.2384 per gallon. The low of the year was on April 17, 2013, when the price dropped to $2.7295 per gallon. The year ended with the Benchmark Futures Contract at $3.0652 per gallon, an increase of approximately 1.10% over the year. UHN's per unit NAV began the year at $33.77 and reached its high for the year on February 8, 2013, 2013 at $36.11. UHN's per unit NAV reached its low for the year on April 17, 2013 at $29.70. UHN's per unit NAV on December 31, 2013 was $33.14, down approximately 1.87% for the year. The Benchmark Futures Contract prices listed above began with the February 2013 contract and ended with the February 2014 contract. The return of approximately 1.10% 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 UHN seeks to track, which are more fully described below in the section titled "Tracking UHN's Benchmark."

During the year ended December 31, 2013, the diesel-heating oil futures market exhibited periods of both contango and backwardation. When the market is in a state of contango, the near month Futures Contract is typically lower than the price of the next month Futures Contract, or contracts further away from expiration. During periods of backwardation, the near month Futures Contract is typically higher than the price of the next month Futures Contract, or contracts further away from expiration.

Valuation of Futures Contracts and the Computation of the Per Share NAV

The per share NAV of UHN's shares is calculated once each NYSE Arca trading day. The per share 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 UHN 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, UHN listed its shares on the AMEX under the ticker symbol "UHN." On that day, UHN established its initial offering price at $50.00 per share and issued 200,000 shares 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, UHN's shares 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 shares, UHN has registered one subsequent offering of its shares: 50,000,000 shares, which were registered with the SEC on April 30, 2010. Shares offered by UHN in the subsequent offering were sold by it for cash at the shares' per share NAV as described in the applicable prospectus. As of December 31, 2013, UHN had issued 1,000,000 shares, 150,000 of which were outstanding. As of December 31, 2013, there were 59,000,000 shares registered but not yet issued.

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

As of December 31, 2013, UHN 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, 2013 Compared to the Years Ended December 31, 2012 and 2011

As of December 31, 2013, the total unrealized gain on Futures Contracts owned or held on that day was $169,205, and UHN established cash deposits and investments in Treasuries and money market funds that were equal to $4,598,333. UHN held 96.60% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 3.40% of the cash balance was held as margin deposits for Futures Contracts purchased at the FCM. The ending per share NAV on December 31, 2013 was $33.14.

By comparison, as of December 31, 2012, the total unrealized gain on Futures Contracts owned or held on that day was $173,628 and UHN established cash deposits and investments in Treasuries and money market funds that were equal to $6,372,583. UHN 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 the Futures Contracts purchased at the FCM. The decrease in cash assets in overnight deposits and investments in Treasuries and money market funds for December 31, 2013, as compared to December 31, 2012, was primarily the result of UHN's smaller size. The ending per share NAV on December 31, 2013 was $33.77. The decrease in the per share NAV for December 31, 2013, as compared to December 31, 2012, was primarily a result of the impact of contango between the year ended December 31, 2012 and the year ended December 31, 2013.

By comparison, as of December 31, 2011, the total unrealized gain on Futures Contracts owned or held on that day was $348,096 and UHN established cash deposits and investments in money market funds that were equal to $9,273,987. UHN 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 by the FCM on behalf of UHN. 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 UHN's smaller size during the year ended December 31, 2012 as measured by total net assets. The ending per share NAV on December 31, 2011 was $32.79. The increase in the per share NAV for December 31, 2012, as compared to December 31, 2011, was primarily a result of higher prices for diesel-heating oil and the related increase in the value of the Futures Contracts that UHN had invested in between the year ended December 31, 2011 and the year ended December 31, 2012.

Portfolio Expenses. UHN'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 UHN pays to USCF is calculated as a percentage of the total net assets of UHN. UHN 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, 2013, the average total net assets of UHN were $6,350,539. The management fee incurred by UHN during the year amounted to $38,103. By comparison, during the year ended December 31, 2012, the average total net assets of UHN were $8,156,198. The management fee paid by UHN during the year amounted to $48,937. By comparison, during the year ended December 31, 2011, the average total net assets of UHN were $8,800,419. The management fee paid by UHN during the year amounted to $52,803.

In addition to the management fee, UHN 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 shares 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, 2013 was $123,952, as compared to $115,494 for the year ended December 31, 2012 and $158,465 for the year ended December 31, 2011. The increase in gross total expenses excluding management fees for the year ended December 31, 2013, as compared to the years ended December 31, 2012 was primarily due to increased tax reporting, audit, licensing and other fees during the year ended December 31, 2013. The decrease in gross total expenses excluding management fees for the year ended December 31, 2012, as compared to the year ended December 31, 2011, 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, 2013, UHN incurred $7,300 in ongoing registration fees and other expenses relating to the registration and offering of additional shares. By comparison, for the years ended December 31, 2012 and 2011, UHN incurred $7,320 and $7,300, respectively, in ongoing registration fees and other expenses relating to the registration and offering of additional shares. The registration fees and expenses incurred by UHN for the year ended December 31, 2013, as compared to the year ended December 31, 2012 were essentially the same. The increase in registration fees and expenses incurred by UHN for the year ended December 31, 2012, as compared to the years ended December 31, 2011, was due to one extra day in the reporting period ended December 31, 2012. During the years ended December 31, 2013, 2012 and 2011, an expense waiver was in effect which offset certain of the expenses incurred by UHN. The total amount of the expense waiver was $100,808 for the year ended December 31, 2013, $87,974 for the year ended December 31, 2012 and $132,085 for the year ended December 31, 2011. For the years ended December 31, 2013, 2012 and 2011, the expenses of UHN, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $162,055, $164,431 and $211,268, respectively, and after allowance for the expense waiver totaled, $61,247, $76,457 and $79,183, respectively.

UHN is responsible for paying its portion of the directors' and officers' liability insurance of UHN and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of UHN 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. UHN 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, 2013 amounted to a total of $555,465 for UHN and the Related Public Funds. UHN's portion of such fees and expenses for the year ended December 31, 2013 was $1,370. By comparison, for the year ended December 31, 2012 the fees and expenses amounted to a total of $540,586 for UHN and the Related Public Funds. UHN's portion of such fees and expenses for the year ended December 31, 2012 was $1,514. The increase in directors' fees and expenses for the year ended December 31, 2013, as compared to the years ended December 31, 2012 was primarily due to an increase of UHN's pro rata share of the Related Public Funds assets. By comparison, for the year ended December 31, 2011, these fees and expenses amounted to a total of $607,582 for UHN and the Related Public Funds, except USCI, CPER, USAG and USMI. UHN's portion of such fees and expenses was $1,383 for the year ended December 31, 2011. The decrease in directors' fees and expenses for the year ended December 31, 2012, as compared to the year ended December 31, 2011 was primarily due to a decrease in UHN's pro rata shares of the Related Public Funds assets.

UHN 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, 2013, total commissions accrued to brokers amounted to $4,010. Of this amount, approximately $3,969, or 98.98%, was a result of rebalancing costs and approximately $41, or 1.02%, was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2012 total commissions accrued to brokers amounted to $5,226. Of this amount, approximately $5,140, or 98.35%, was a result of rebalancing costs and approximately $86, or 1.65%, 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 $5,296, or 95.11%, was a result of rebalancing costs and approximately $272, or 4.89%, 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, 2013, as compared to the year ended December 31, 2012 was primarily due to fewer contracts that were held and traded during the year ended December 31, 2013. 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 a result of the decrease in UHN's average total net assets during the year ended December 31, 2012, as compared to the year ended December 31, 2011. As an annualized percentage of average daily total net assets, the figure for the year ended December 31, 2013 represents approximately 0.06% of average daily total net assets. By comparison, the figure for the year ended December 31, 2012 represented approximately 0.06% of average daily total net assets and the figure for the year ended December 31, 2011 represented approximately 0.06% 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 UHN's audit expenses and tax accounting and reporting requirements are paid by UHN. These costs are estimated to be $85,000 for the year ended December 31, 2013. USCF has voluntarily agreed to pay certain expenses typically borne by UHN to the extent that such expenses exceeded 0.15% (15 basis points) of UHN's NAV, on an annualized basis, through at least June 30, 2014. USCF has no obligation to continue such payments into subsequent periods. For the year ended December 31, 2013, USCF waived $100,808 of UHN'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. UHN 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 UHN to pay the full amount of the contract value at the time of purchase, but rather require UHN to post an amount as a margin deposit against the eventual settlement of the contract. As a result, UHN retains an amount that is approximately equal to its total net assets, which UHN 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 UHN's Custodian. The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis. For the year ended December 31, 2013, UHN earned $1,855 in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on UHN's average total net assets, this was equivalent to an annualized yield of approximately 0.03%. UHN purchased Treasuries during the year ended December 31, 2013 and also held cash and/or cash equivalents during this time period. By comparison, for the years ended December 31, 2012 and 2011, UHN earned $2,410 and $1,838, respectively, in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on UHN's average total net assets, this was equivalent to an annualized yield of approximately 0.03% and 0.02%, respectively. UHN purchased Treasuries during the years ended December 31, 2012 and 2011 and also held cash and/or cash equivalents during these time periods. Interest rates on short-term investments, including cash, cash equivalents and Treasuries, were similar during the year ended December 31, 2013 compared to the year ended December 31, 2012 and similar as compared to the year ended December 31, 2011. As a result, the amount of income earned by UHN as a percentage of average daily total net assets was similar during the year ended December 31, 2013 compared to the years ended December 31, 2012 and was similar as compared to the year ended December 31, 2011.

For the Three Months Ended December 31, 2013 Compared to the Three Months Ended December 31, 2012 and 2011

Portfolio Expenses. During the three months ended December 31, 2013, the average daily total net assets of UHN were $5,708,092. The management fee paid by UHN during the period amounted to $8,632. By comparison, during the three months ended December 31, 2012, the average daily total net assets of UHN were $6,801,311. The management fee incurred by UHN during the period amounted to $10,258. By comparison, during the three months ended December 31, 2011, the average daily total net assets of UHN were $8,016,105. The management fee paid by UHN during the period amounted to $12,123.

In addition to the management fee, UHN 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 shares 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, 2013 was $35,107 as compared to $35,879 for the three months ended December 31, 2012 and $3,810 for the three months ended December 31, 2011. The decrease in gross total expenses excluding management fees for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012 was primarily due to decreased tax reporting, audit, licensing and other fees during the three months ended December 31, 2013. 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. For the three months ended December 31, 2013, 2012 and 20111, UHN incurred $1,840 in ongoing registration fees and other expenses relating to the registration and offering of additional shares, respectively. During the three months ended December 31, 2013, 2012 and 2011, an expense waiver was in effect which offset certain of the expenses incurred by UHN. The total amount of the expense waiver was $29,675 during the three months ended December 31, 2013 and 29,496 during the three months ended December 31, 2012. During the three months ended December 31, 2011, UHN's expenses did not exceed 0.15% (15 basis points) of its NAV; therefore, no expenses were waived by USCF. For the three months ended December 31, 2013 and 2012, the expenses of UHN, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $43,739 and $46,137, respectively, and after allowance for the expense waiver, totaled $14,064 and $16,641, respectively.

UHN is responsible for paying its portion of the directors' and officers' liability insurance of UHN and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of UHN 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. UHN 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, 2013 amounted to a total of $555,465 for UHN and the Related Public Funds. UHN's portion of such fees and expenses for the year ended December 31, 2013 was $1,370.

UHN 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, 2013, total commissions accrued to brokers amounted to $886. Of this amount, approximately $845, or 95.37%, was a result of rebalancing costs and approximately $41, or 4.63%, was the result of trades necessitated by creation and redemption activity. By comparison, during the three months ended December 31, 2012, total commissions accrued to brokers amounted to $1,056. Of this amount, approximately $1,056, or 100%, was a result of rebalancing costs and there were no trades necessitated by creation and redemption activity. By comparison, during the three months ended December 31, 2011 total commissions accrued to brokers amounted to $1,328. Of this amount, approximately $1,238, or 93.22%, was a result of rebalancing costs and approximately $90, or 6.78%, was the result of trades necessitated by creation and redemption activity. The decrease in the total commissions accrued to brokers for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012 was primarily a function of decreased brokerage fees due to UHN's smaller size during the three months ended December 31, 2013. The decrease in the total commissions accrued to brokers for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011 was primarily due to fewer Futures Contracts held and traded during the three months ended December 31, 2012. As an annualized percentage of average daily total net assets, the figure for the three months ended December 31, 2013 represents approximately 0.06% of average daily total net assets. By comparison, the figure for the three months ended December 31, 2012 and 2011 represented approximately 0.06% and 0.06%, respectively 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 UHN's audit expenses and tax accounting and reporting requirements are paid by UHN. These costs are estimated to be $85,000 for the year ending December 31, 2013. USCF has voluntarily agreed to pay certain expenses normally borne by UHN to the extent that such expenses exceed 0.15% (15 basis points) of UHN's NAV, on an annualized basis, through at least June 30, 2014. USCF has no obligation to continue such payments into . . .

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