Invesco DB Energy Fund - Quarter Report: 2009 March (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33240
POWERSHARES DB ENERGY FUND
(A Series of PowerShares DB Multi-Sector Commodity Trust)
(Exact name of Registrant as specified in its charter)
Delaware | 87-0778060 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
c/o DB Commodity Services LLC 60 Wall Street New York, New York |
10005 | |
(Address of Principal Executive Offices) | (Zip Code) |
DB ENERGY MASTER FUND
(A Series of DB Multi-Sector Commodity Master Trust)
(Exact name of Rule 140 Co-Registrant as specified in its charter)
Delaware | 87-0778061 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
c/o DB Commodity Services LLC 60 Wall Street New York, New York |
10005 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (212) 250-5883
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, an Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of outstanding Shares as of March 31, 2009: 3,000,000 Shares.
Table of Contents
(A SERIES OF POWERSHARES DB MULTI-SECTOR COMMODITY TRUST)
QUARTER ENDED MARCH 31, 2009
TABLE OF CONTENTS
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ITEM 1. | FINANCIAL STATEMENTS. |
PowerShares DB Energy Fund and Subsidiary
Consolidated Statements of Financial Condition
March 31, 2009 (unaudited) and December 31, 2008
March 31, 2009 | December 31, 2008 | |||||
Assets |
||||||
Equity in broker trading accounts: |
||||||
United States Treasury Obligations, at fair value (cost $48,889,946 and $23,897,131, respectively) |
$ | 48,890,787 | $ | 23,899,032 | ||
Cash held by broker |
45,596,152 | 47,716,040 | ||||
Net unrealized depreciation on futures contracts |
(36,135,525) | (34,086,791) | ||||
Deposits with broker |
58,351,414 | 37,528,281 | ||||
Total assets |
$ | 58,351,414 | $ | 37,528,281 | ||
Liabilities |
||||||
Management fee payable |
31,519 | 21,326 | ||||
Brokerage fee payable |
50 | 29 | ||||
Total liabilities |
$ | 31,569 | $ | 21,355 | ||
Commitments and Contingencies (Note 9) |
||||||
Equity |
||||||
Shareholders equity |
||||||
General shares: |
||||||
Paid in capital - 40 shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively |
1,000 | 1,000 | ||||
Accumulated deficit |
(222) | (167) | ||||
Total General shares |
778 | 833 | ||||
Shares: |
||||||
Paid in capital - 3,000,000 and 1,800,000 redeemable shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively |
78,913,644 | 55,975,304 | ||||
Accumulated deficit |
(20,595,355) | (18,470,044) | ||||
Total Shares |
58,318,289 | 37,505,260 | ||||
Total shareholders equity |
58,319,067 | 37,506,093 | ||||
Non-controlling interest in consolidated subsidiary - related party |
778 | 833 | ||||
Total equity |
58,319,845 | 37,506,926 | ||||
Total liabilities and equity |
$ | 58,351,414 | $ | 37,528,281 | ||
Net asset value per share |
||||||
General shares |
$ | 19.45 | $ | 20.83 | ||
Shares |
$ | 19.44 | $ | 20.84 |
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Unaudited Consolidated Schedule of Investments
March 31, 2009
Description |
Percentage of Net Assets |
Fair Value |
Face Value | |||||||
United States Treasury Obligations |
||||||||||
U.S. Treasury Bills, 0.13% due April 9, 2009 |
8.57 | % | $ | 4,999,885 | $ | 5,000,000 | ||||
U.S. Treasury Bills, 0.05% due April 23, 2009 |
28.98 | 16,898,547 | 16,900,000 | |||||||
U.S. Treasury Bills, 0.17% due April 30, 2009 |
5.14 | 2,999,595 | 3,000,000 | |||||||
U.S. Treasury Bills, 0.18% due May 14, 2009 |
12.00 | 6,998,621 | 7,000,000 | |||||||
U.S. Treasury Bills, 0.28% due June 4, 2009 |
15.43 | 8,997,039 | 9,000,000 | |||||||
U.S. Treasury Bills, 0.25% due June 18, 2009 |
6.86 | 3,998,612 | 4,000,000 | |||||||
U.S. Treasury Bills, 0.23% due June 25, 2009 |
6.85 | 3,998,488 | 4,000,000 | |||||||
Total United States Treasury Obligations (cost $48,889,946) |
83.83 | % | $ | 48,890,787 | ||||||
A portion of the above United States Treasury Obligations are held as initial margin against open futures contracts, as noted in Note 4(e).
Description |
Percentage of Net Assets |
Fair Value |
|||||
Unrealized Depreciation on Futures Contracts |
|||||||
Light, Sweet Crude Oil (263 contracts, settlement date June 22, 2009) |
(18.63) | % | $ (10,866,910 | ) | |||
Brent Crude Oil (253 contracts, settlement date August 14, 2009) |
(14.71) | (8,576,460) | |||||
Heating Oil (206 contracts, settlement date May 29, 2009) |
(18.97) | (11,064,438) | |||||
Natural Gas (109 contracts, settlement date April 28, 2009) |
(7.49) | (4,370,170) | |||||
Gasoline RBOB (259 contracts, settlement date November 30, 2009) |
(2.16) | (1,257,547) | |||||
Net Unrealized Depreciation on Futures Contracts |
(61.96) | % | $ (36,135,525) | ||||
Net unrealized depreciation is comprised of unrealized losses of $37,319,044 and unrealized gains of $1,183,519.
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Consolidated Schedule of Investments
December 31, 2008
Description |
Percentage of Net Assets |
Fair Value |
Face Value | |||||||
United States Treasury Obligations |
||||||||||
U.S. Treasury Bills, 0.95% due January 15, 2009 |
8.00 | % | $ | 2,999,985 | $ | 3,000,000 | ||||
U.S. Treasury Bills, 0.65% due January 22, 2009 |
34.39 | 12,899,948 | 12,900,000 | |||||||
U.S. Treasury Bills, 0.03% due January 29, 2009 |
8.00 | 2,999,934 | 3,000,000 | |||||||
U.S. Treasury Bills, 0.14% due March 5, 2009 |
13.33 | 4,999,165 | 5,000,000 | |||||||
Total United States Treasury Obligations (cost $23,897,131) |
63.72 | % | $ | 23,899,032 | ||||||
A portion of the above United States Treasury Obligations are held as initial margin against open futures contracts, as noted in Note 4(e).
Description |
Percentage of Net Assets |
Fair Value | |||||
Unrealized Depreciation on Futures Contracts |
|||||||
Brent Crude Oil (152 contracts, settlement date August 14, 2009) |
(21.50) | % | $ | (8,063,500) | |||
Gasoline RBOB (155 contracts, settlement date November 30, 2009) |
(5.37) | (2,014,677) | |||||
Heating Oil (124 contracts, settlement date May 29, 2009) |
(27.68) | (10,380,514) | |||||
Light, Sweet Crude Oil (158 contracts, settlement date June 22, 2009) |
(28.77) | (10,791,030) | |||||
Natural Gas (65 contracts, settlement date April 28, 2009) |
(7.56) | (2,837,070) | |||||
Net Unrealized Depreciation on Futures Contracts |
(90.88) | % | $ | (34,086,791) | |||
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Unaudited Consolidated Statements of Income and Expenses
For the Three Months Ended March 31, 2009 and 2008
Three Months Ended | ||||||
March 31, 2009 | March 31, 2008 | |||||
Income |
||||||
Interest Income |
$ | 10,988 | $ | 331,187 | ||
Expenses |
||||||
Management fee |
77,706 | 93,369 | ||||
Brokerage commissions and fees |
3,808 | 3,735 | ||||
Total expenses |
81,514 | 97,104 | ||||
Net investment income (loss) |
(70,526) | 234,083 | ||||
Net Realized and Net Change in Unrealized Gain (Loss) on United States Treasury Obligations and Futures |
||||||
Net Realized Gain (Loss) on |
||||||
United States Treasury Obligations |
(606) | 1,425 | ||||
Futures |
(4,495) | 3,859,021 | ||||
Net realized gain (loss) |
(5,101) | 3,860,446 | ||||
Net Change in Unrealized Gain (Loss) on |
||||||
United States Treasury Obligations |
(1,060) | (223) | ||||
Futures |
(2,048,734) | 522,661 | ||||
Net change in unrealized gain (loss) |
(2,049,794) | 522,438 | ||||
Net realized and net change in unrealized gain (loss) on United States Treasury Obligations and Futures |
(2,054,895) | 4,382,884 | ||||
Net Income (Loss) |
$ | (2,125,421) | $ | 4,616,967 | ||
Less: net (income) loss attributed to the non-controlling interest in consolidated subsidiary - related party |
55 | (559) | ||||
Net Income (Loss) Attributable to PowerShares DB Energy Fund and Subsidiary |
$ | (2,125,366) | $ | 4,616,408 | ||
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Unaudited Consolidated Statement of Changes in Shareholders Equity
For the Three Months Ended March 31, 2009
General Shares | Shares | ||||||||||||||||||||||||||||||
Shares | Paid in Capital |
Accumulated Earnings (Deficit) |
Total Equity |
Shares | Paid in Capital |
Accumulated Earnings (Deficit) |
Total Equity |
Total Shareholders Equity |
Non-controlling Interest |
Total Equity | |||||||||||||||||||||
Balance at January 1, 2009 |
40 | $ | 1,000 | $ | (167) | $ | 833 | 1,800,000 | $ | 55,975,304 | $ | (18,470,044) | $ | 37,505,260 | $ | 37,506,093 | $ | 833 | $ | 37,506,926 | |||||||||||
Sale of Shares |
1,200,000 | 22,938,340 | 22,938,340 | 22,938,340 | 22,938,340 | ||||||||||||||||||||||||||
Net Income (Loss) |
|||||||||||||||||||||||||||||||
Net investment income (loss) |
(2) | (2) | (70,522) | (70,522) | (70,524) | (2) | (70,526) | ||||||||||||||||||||||||
Net realized loss on United States Treasury Obligations and Futures |
(5,101) | (5,101) | (5,101) | (5,101) | |||||||||||||||||||||||||||
Net change in unrealized loss on United States Treasury Obligations and Futures |
(53) | (53) | (2,049,688) | (2,049,688) | (2,049,741) | (53) | (2,049,794) | ||||||||||||||||||||||||
Net Income (Loss) |
(55) | (55) | (2,125,311) | (2,125,311) | (2,125,366) | (55) | (2,125,421) | ||||||||||||||||||||||||
Balance at March 31, 2009 |
40 | $ | 1,000 | $ | (222) | $ | 778 | 3,000,000 | $ | 78,913,644 | $ | (20,595,355) | $ | 58,318,289 | $ | 58,319,067 | $ | 778 | $ | 58,319,845 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Unaudited Consolidated Statement of Changes in Shareholders Equity
For the Three Months Ended March 31, 2008
General Shares | Shares | ||||||||||||||||||||||||||||||
Shares | Paid in Capital |
Accumulated Earnings |
Total Equity |
Shares | Paid in Capital |
Accumulated Earnings |
Total Equity |
Total Shareholders Equity |
Non-controlling Interest |
Total Shareholders Equity | |||||||||||||||||||||
Balance at January 1, 2008 |
40 | $ | 1,000 | $ | 407 | $ | 1,407 | 1,400,000 | $ | 35,847,624 | $ | 13,383,981 | $ | 49,231,605 | $ | 49,233,012 | $ | 1,000 | $ | 49,234,012 | |||||||||||
Sale of Shares |
600,000 | 23,033,306 | 23,033,306 | 23,033,306 | 23,033,306 | ||||||||||||||||||||||||||
Redemption of Shares |
(200,000) | (6,732,916) | (6,732,916) | (6,732,916) | (6,732,916) | ||||||||||||||||||||||||||
Net Income |
|||||||||||||||||||||||||||||||
Net investment income |
7 | 7 | 234,051 | 234,051 | 234,058 | 25 | 234,083 | ||||||||||||||||||||||||
Net realized gain (loss) on United States Treasury Obligations and futures |
122 | 122 | 3,859,875 | 3,859,875 | 3,859,997 | 449 | 3,860,446 | ||||||||||||||||||||||||
Net change in unrealized gain (loss) on United States Treasury Obligations and futures |
23 | 23 | 522,330 | 522,330 | 522,353 | 85 | 522,438 | ||||||||||||||||||||||||
Net Income |
152 | 152 | 4,616,256 | 4,616,256 | 4,616,408 | 559 | 4,616,967 | ||||||||||||||||||||||||
Balance at March 31, 2008 |
40 | $ | 1,000 | $ | 559 | $ | 1,559 | 1,800,000 | $ | 52,148,014 | $ | 18,000,237 | $ | 70,148,251 | $ | 70,149,810 | $ | 1,559 | $ | 70,151,369 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2009 and 2008
Three Months Ended | ||||||
March 31, 2009 | March 31, 2008 | |||||
Cash flow provided by operating activities: |
||||||
Net Income (Loss) |
$ (2,125,421) | $ | 4,616,967 | |||
Adjustments to reconcile net income to net cash used for operating activities: |
||||||
Cost of securities purchased |
(51,881,078) | (65,698,680) | ||||
Proceeds from securities sold and matured |
26,898,927 | 29,992,709 | ||||
Net accretion of discount on United States Treasury Obligations |
(11,270) | (287,437) | ||||
Net realized (gain) loss on United States Treasury Obligations |
606 | (1,425) | ||||
Net change in unrealized (gain) loss on United States Treasury Obligations and futures |
2,049,794 | (522,438) | ||||
Change in operating receivables and liabilities: |
||||||
Payable to broker |
- | 4,565,470 | ||||
Management fee payable |
10,193 | 32,616 | ||||
Other assets |
- | (112) | ||||
Brokerage fee payable |
21 | - | ||||
Net cash used for operating activities |
(25,058,228) | (27,302,330) | ||||
Cash flows from financing activities: |
||||||
Proceeds from sale of Shares |
22,938,340 | 23,033,306 | ||||
Redemption of Shares |
- | (6,732,916) | ||||
Net cash provided by financing activities |
22,938,340 | 16,300,390 | ||||
Net change in cash held by broker |
(2,119,888) | (11,001,940) | ||||
Cash held by broker at beginning of period |
47,716,040 | 11,001,940 | ||||
Cash held by broker at end of period |
$ | 45,596,152 | $ | - | ||
See accompanying notes to unaudited consolidated financial statements.
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PowerShares DB Energy Fund and Subsidiary
Notes to Unaudited Consolidated Financial Statements
March 31, 2009
(1) | Organization |
PowerShares DB Energy Fund (the Fund Fund may also refer to the Fund and the Master Fund, collectively, as the context requires), a separate series of PowerShares DB Multi-Sector Commodity Trust (the Trust), a Delaware statutory trust organized in seven separate series, and its subsidiary, DB Energy Master Fund (the Master Fund), a separate series of DB Multi-Sector Commodity Master Trust (the Master Trust), a Delaware statutory trust organized in seven separate series were formed on August 3, 2006. DB Commodity Services LLC, a Delaware limited liability company (DBCS or the Managing Owner), funded both the Fund and the Master Fund with a capital contribution of $1,000 in exchange for 40 General Shares of each of the Fund and the Master Fund. The fiscal year end of the Fund is December 31st . The term of the Fund is perpetual (unless terminated earlier in certain circumstances) as provided in the Amended and Restated Declaration of Trust and Trust Agreement of the Trust and the Master Trust (each a Trust Agreement, and collectively, the Trust Agreements).
The Fund offers common units of beneficial interest (the Shares) only to certain eligible financial institutions (the Authorized Participants) in one or more blocks of 200,000 Shares, called a Basket. The proceeds from the offering of Shares are invested in the Master Fund. The Fund and the Master Fund commenced investment operations on January 3, 2007. The Fund commenced trading on the American Stock Exchange (now known as the NYSE Alternext US LLC (the NYSE Alternext)) on January 5, 2007 and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the NYSE Arca).
This report covers the three months ended March 31, 2009 and 2008 (hereinafter referred to as the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008, respectively).
(2) | Fund Investment Overview |
The Master Fund invests with a view to tracking the changes, whether positive or negative, in the level of the Deutsche Bank Liquid Commodity IndexOptimum Yield Energy Excess Return (DBLCI-OY Energy ER, or the Index) plus the excess, if any, of the Master Funds income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund and the Master Fund.
The Index is intended to reflect the change in market value of the energy sector. The commodities comprising the Index are light, sweet crude oil, heating oil, brent crude oil, RBOB gasoline and natural gas (the Index Commodities). The Commodity Futures Trading Commission (the CFTC) and commodity exchanges impose position limits on market participants trading in certain commodities included in the Index. The Index is comprised of futures contracts on the Index Commodities that expire in a specific month and trade on a specific exchange (the Index Contracts). As disclosed in the Funds Prospectus, if the Managing Owner determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Master Fund to gain full or partial exposure to any Index Commodity by investing in a specific Index Contract, the Master Fund may invest in a futures contract referencing the particular Index Commodity other than the Index Contract or, in the alternative, invest in other futures contracts not based on the particular Index Commodity if, in the commercially reasonable judgment of the Managing Owner, such futures contracts tend to exhibit trading prices that correlate with such Index Commodity.
The Master Fund also holds United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Master Funds commodity broker as margin and for investment.
The Fund does not employ leverage. As of March 31, 2009 and December 31, 2008, the Fund had $58,351,414 (or 100%) and $37,528,281 (or 100%), respectively, of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation on futures contracts on deposit with its Commodity Broker. Of this, $8,519,293 (or 14.60%) and $5,997,933 (or 15.98%), respectively, of the Funds holdings of cash and United States Treasury Obligations are required to be deposited as margin in support of the Funds long futures positions. For additional information, please see the unaudited Consolidated Schedule of Investments as of March 31, 2009 and the audited Consolidated Schedule of Investments as of December 31, 2008 for a breakdown of the Funds portfolio holdings.
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DBLCI and Deutsche Bank Liquid Commodity Index are trademarks of Deutsche Bank AG London (the Index Sponsor). The Index Sponsor is an affiliate of the Trust, the Fund, the Master Trust, the Master Fund and the Managing Owner.
(3) | Service Providers and Related Party Agreements |
The Trustee
Under the Trust Agreements, Wilmington Trust Company, the Trustee of the Fund and the Master Fund has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust, the Fund, the Master Trust and the Master Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.
The Managing Owner
The Managing Owner serves the Fund and Master Fund as commodity pool operator, commodity trading advisor and managing owner, and is an indirect wholly-owned subsidiary of Deutsche Bank AG. During the Three Months Ended March 31, 2009 and 2008, the Fund and the Master Fund incurred Management Fees of $77,706 and $93,369, respectively. As of March 31, 2009 and December 31, 2008, Management Fees payable to the Managing Owner were $31,519 and $21,326, respectively.
The Commodity Broker
Deutsche Bank Securities Inc., a Delaware corporation, serves as the Master Funds clearing broker (the Commodity Broker). The Commodity Broker is an indirect wholly-owned subsidiary of Deutsche Bank AG. In its capacity as clearing broker, the Commodity Broker executes and clears each of the Master Funds futures transactions and performs certain administrative services for the Master Fund. The Commodity Broker is an affiliate of the Managing Owner. For the Three Months Ended March 31, 2009 and 2008, the Fund and Master Fund incurred brokerage fees of $3,808 and $3,735, respectively. As of March 31, 2009 and December 31, 2008, brokerage fees payable to the Commodity Broker were $50 and $29, respectively.
The Administrator
The Bank of New York Mellon (the Administrator) has been appointed by the Managing Owner as the administrator, custodian and transfer agent of the Master Fund and the Fund, and have entered into separate administrative, custodian, transfer agency and service agreements (collectively referred to as the Administration Agreement).
Pursuant to the Administration Agreement, the Administrator performs or supervises the performance of services necessary for the operation and administration of the Fund and the Master Fund (other than making investment decisions), including receiving and processing orders from Authorized Participants to create and redeem Baskets, net asset value calculations, accounting and other fund administrative services. The Administrator retains certain financial books and records, including: Basket creation and redemption books and records, fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details, and trading and related documents received from futures commission merchants.
The Administration Agreement will continue in effect from the commencement of trading operations unless terminated on at least 90 days prior written notice by either party to the other party. Notwithstanding the foregoing, the Administrator may terminate the administrative portion of the Administration Agreement upon 30 days prior written notice if the Fund and/or Master Fund has materially failed to perform its obligations under the Administration Agreement.
The Distributor
ALPS Distributors, Inc. (the Distributor) provides certain distribution services to the Fund. Pursuant to the Distribution Services Agreement between the Managing Owner in its capacity as managing owner of the Fund, the Fund and the Distributor, the Distributor assists the Managing Owner and the Administrator with certain functions and duties relating to distribution and marketing services to the Fund including reviewing and approving marketing materials.
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The Distribution Services Agreement is terminable without penalty on sixty days written notice by the Managing Owner or by the Distributor. The Distribution Services Agreement will automatically terminate in the event of its assignment.
Invesco Powershares Capital Management LLC
Under the License Agreement among Invesco Powershares Capital Management LLC (the Licensor) and the Managing Owner in its own capacity and in its capacity as managing owner of the Fund (the Fund and the Managing Owner, collectively, the Licensees), the Licensor granted to each Licensee a non-exclusive license to use the PowerShares® trademark (the Trademark) anywhere in the world, solely in connection with the marketing and promotion of the Fund and to use or refer to the Trademark in connection with the issuance and trading of the Fund as necessary.
Invesco Aim Distributors, Inc.
Through a marketing agreement between the Managing Owner and Invesco Aim Distributors, Inc. (Invesco Aim Distributors), an affiliate of Invesco PowerShares Capital Management LLC (Invesco PowerShares), the Managing Owner, on behalf of the Fund and the Master Fund, has appointed Invesco Aim Distributors as a marketing agent. Invesco Aim Distributors assists the Managing Owner and the Administrator with certain functions and duties such as providing various educational and marketing activities regarding the Fund, primarily in the secondary trading market, which activities include, but are not limited to, communicating the Funds name, characteristics, uses, benefits, and risks, consistent with the prospectus. Invesco Aim Distributors will not open or maintain customer accounts or handle orders for the Fund. Invesco Aim Distributors engages in public seminars, road shows, conferences, media interviews, and distributes sales literature and other communications (including electronic media) regarding the Fund.
(4) | Summary of Significant Accounting Policies |
(a) | Basis of Presentation and Consolidation |
The consolidated financial statements of the Fund have been prepared using U.S. generally accepted accounting principles, and they include the consolidated financial statement balances of the Fund and the Master Fund. Upon the initial offering of the Shares on January 3, 2007, the capital raised by the Fund was used to purchase 100% of the common units of beneficial interest of the Master Fund (the Master Fund Limited Units) (excluding common units of beneficial interest of the Master Fund held by the Managing Owner (the Master Fund General Units)). The Master Fund Limited Units owned by the Fund provide the Fund and its investors certain controlling rights and abilities over the Master Fund. Consequently, the financial statement balances of the Master Fund have been consolidated with the Funds financial statement balances, and all significant inter-company balances and transactions have been eliminated. Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 presentation.
(b) | Use of Estimates |
The preparation of the consolidated 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, revenues and expenses and related disclosure of contingent assets and liabilities during the reporting period of the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
(c) | Financial Instruments and Fair Value |
United States Treasury Obligations and commodity futures contracts are recorded in the consolidated statements of financial condition on a trade date basis at fair value with changes in fair value recognized in earnings in each period. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).
The Fund adopted FASB Statement No. 157, Fair Value Measurements (Statement No. 157), effective January 1, 2008. Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under Statement No. 157 are described below:
Basis of Fair Value Measurement
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
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Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
In determining fair value of United States Treasury Obligations and commodity futures contracts, the Fund uses unadjusted quoted market prices in active markets. United States Treasury Obligations and commodity futures contracts are classified within Level 1 of the fair value hierarchy. The Fund does not adjust the quoted prices for United States Treasury Obligations and commodity futures contracts.
(d) | Deposits with Broker |
The Fund deposits cash and United States Treasury Obligations with its Commodity Broker subject to CFTC regulations and various exchange and broker requirements. The combination of the Funds deposits with its Commodity Broker of cash and United States Treasury Obligations and the unrealized profit or loss on open futures contracts (variation margin) represents the Funds overall equity in its broker trading account. To meet the Funds initial margin requirements, the Fund holds United States Treasury Obligations. The Fund uses its cash held by the Commodity Broker to satisfy variation margin requirements. The Fund earns interest on its cash deposited with the Commodity Broker.
(e) | United States Treasury Obligations |
The Fund records purchases and sales of United States Treasury Obligations on a trade date basis. These holdings are marked to market based on quoted market closing prices. The Fund holds United States Treasury Obligations for deposit with the Master Funds Commodity Broker to meet margin requirements and for trading purposes. Interest income is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United States Treasury Obligations. Included in the United States Treasury Obligations as of March 31, 2009 and December 31, 2008 was $8,519,293 and $5,997,933, respectively, which is restricted and held against initial margin of the open futures contracts.
(f) | Cash held by Broker |
The Funds arrangement with the Commodity Broker requires the Fund to meet its variation margin requirement related to the price movements, both positive and negative, on futures contracts held by the Fund by keeping cash on deposit with the Commodity Broker. The Fund defines cash and cash equivalents to be highly liquid investments, with original maturities of three months or less when purchased. As of March 31, 2009 and December 31, 2008, the Fund had cash held by the Commodity Broker of $45,596,152 and $47,716,040, respectively, of which $36,135,525 and $34,086,791 was on deposit to satisfy the Funds negative variation margin on open futures contracts, respectively.
(g) | Income Taxes |
The Fund and the Master Fund are classified as partnerships for U.S. federal income tax purposes. Accordingly, neither the Fund nor the Master Fund will incur U.S. federal income taxes. No provision for federal, state, and local income taxes has been made in the accompanying consolidated financial statements, as investors are individually liable for income taxes, if any, on their allocable share of the Funds share of the Master Funds income, gain, loss, deductions and other items.
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The following are the major tax jurisdictions for the Fund and the earliest tax year subject to examination:
Jurisdiction | Tax Year | |
US Federal |
2007 | |
State of New York |
2007 | |
New York City |
2007 | |
State of Florida |
2007 | |
State of Georgia |
2007 | |
State of Maine |
2007 | |
State of Oregon |
2007 | |
State of Utah |
2007 | |
State of West Virginia |
2007 |
(h) | Futures Contracts |
All commodity futures contracts are held and used for trading purposes. The commodity futures are recorded on a trade date basis and open contracts are recorded in the consolidated statement of financial condition at fair value on the last business day of the period, which represents market value for those commodity futures for which market quotes are readily available. However, when market closing prices are not available, the Managing Owner may value an asset of the Master Fund pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards. Realized gains (losses) and changes in unrealized appreciation (depreciation) on open positions are determined on a specific identification basis and recognized in the consolidated statement of income and expenses in the period in which the contract is closed or the changes occur, respectively. As of March 31, 2009 and December 31, 2008, the futures contracts held by the Fund were in an unrealized depreciation position of $36,135,525 and $34,086,791, respectively.
(i) | Management Fee |
The Master Fund pays the Managing Owner a management fee (the Management Fee), monthly in arrears, in an amount equal to 0.75% per annum of the daily net asset value of the Master Fund. No separate Management Fee is paid by the Fund. The Management Fee is paid in consideration of the Managing Owners commodity futures trading advisory services.
(j) | Brokerage Commissions and Fees |
The Master Fund incurs all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities by the Commodity Broker. These costs are recorded as brokerage commissions and fees in the consolidated statement of income and expenses as incurred. The Commodity Brokers brokerage commissions and trading fees are determined on a contract-by-contract basis. On average, total charges paid to the Commodity Broker were less than $10.00 per round-turn trade for the Three Months Ended March 31, 2009 and 2008.
(k) | Routine Operational, Administrative and Other Ordinary Expenses |
The Managing Owner assumes all routine operational, administrative and other ordinary expenses of the Fund and the Master Fund, including, but not limited to, computer services, the fees and expenses of the Trustee, legal and accounting fees and expenses, tax preparation expenses, filing fees and printing, mailing and duplication costs. Accordingly, all such expenses are not reflected in the consolidated statement of income and expenses of the Fund.
(l) | Organizational and Offering Costs |
All organizational and offering expenses of the Fund and its Master Fund are incurred and assumed by the Managing Owner. Expenses incurred in connection with the continuous offering of Shares also will be paid by the Managing Owner.
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(m) | Non-Recurring and Unusual Fees and Expenses |
The Master Fund pays all fees and expenses, if any, of the Fund and the Master Fund, which are non-recurring and unusual in nature. Such expenses include legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such fees and expenses, by their nature, are unpredictable in terms of timing and amount. For the Three Months Ended March 31, 2009 and 2008, the Fund and the Master Fund did not incur such expenses.
(5) | Fair Value Measurements |
The Funds assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with Statement No. 157. See Note 4(c) for discussion of the Funds policies regarding this hierarchy.
Assets and Liabilities Measured at Fair Value as of March 31, 2009:
United States Treasury Obligations (Level 1) |
$ | 48,890,787 | |
Commodity Futures Contracts (Level 1) |
$ | (36,135,525) |
There were no Level 2 or Level 3 holdings as of March 31, 2009.
(6) | Financial Instrument Risk |
In the normal course of its business, the Master Fund is party to financial instruments with off-balance sheet risk. The term off-balance sheet risk refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in a future obligation or loss. The financial instruments used by the Master Fund are commodity futures, whose values are based upon an underlying asset and generally represent future commitments that have a reasonable possibility of being settled in cash or through physical delivery. The financial instruments are traded on an exchange and are standardized contracts.
Market risk is the potential for changes in the value of the financial instruments traded by the Master Fund due to market changes, including fluctuations in commodity prices. In entering into these futures contracts, there exists a market risk that such futures contracts may be significantly influenced by adverse market conditions, resulting in such futures contracts being less valuable. If the markets should move against all of the futures contracts at the same time, the Master Fund could experience substantial losses.
Credit risk is the possibility that a loss may occur due to the failure of an exchange clearinghouse to perform according to the terms of a futures 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 Master Funds risk of loss in the event of counterparty default is typically limited to the amounts recognized in the consolidated statement of financial condition and not represented by the futures contract or notional amounts of the instruments.
The Fund and the Master Fund have not utilized, nor do they expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements entered into in the normal course of business noted above.
(7) | Share Purchases and Redemptions |
(a) | Purchases |
Shares may be purchased from the Fund only by Authorized Participants in one or more blocks of 200,000 Shares, called a Basket. The Fund issues Shares in Baskets only to Authorized Participants continuously as of noon, New York time, on the business day immediately following the date on which a valid order to create a Basket is accepted by the Fund, at the net asset value of 200,000 Shares as of the closing time of the NYSE Arca or the last to close of the exchanges on which the Master Funds assets are traded, whichever is later, on the date that a valid order to create a Basket is accepted by the Fund.
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(b) | Redemptions |
On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption orders must be placed by 10:00 a.m., New York time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Baskets. Individual shareholders may not redeem directly from the Fund.
By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through The Depository Trust Companys (the DTC) book-entry system to the Fund not later than noon, New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants DTC account is charged the non-refundable transaction fee due for the redemption order.
The redemption proceeds from the Fund consist of the cash redemption amount. The cash redemption amount is equal to the net asset value of the number of Basket(s) requested in the Authorized Participants redemption order as of the closing time of the NYSE Arca or the last to close of the exchanges on which the Master Funds assets are traded, whichever is later, on the redemption order date. The Fund will distribute the cash redemption amount at noon, New York time, on the business day immediately following the redemption order date through DTC to the account of the Authorized Participant as recorded on DTCs book-entry system.
The redemption proceeds due from the Fund are delivered to the Authorized Participant at noon, New York time, on the business day immediately following the redemption order date if, by such time on such business day immediately following the redemption order date, the Funds DTC account has been credited with the Baskets to be redeemed. If the Funds DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption proceeds are delivered to the extent of whole Baskets received. Any remainder of the redemption proceeds are delivered on the next business day to the extent of remaining whole Baskets received if the Managing Owner receives the fee applicable to the extension of the redemption distribution date which the Managing Owner may, from time-to-time, determine and the remaining Baskets to be redeemed are credited to the Funds DTC account by noon, New York time, on such next business day. Any further outstanding amount of the redemption order will be canceled. The Managing Owner is also authorized to deliver the redemption proceeds notwithstanding that the Baskets to be redeemed are not credited to the Funds DTC account by noon, New York time, on the business day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Baskets through DTCs book-entry system on such terms as the Managing Owner may from time-to-time agree upon.
(c) | Share Transactions |
The Fund and the Master Fund commenced investment operations on January 3, 2007. The Shares commenced trading on the NYSE Alternext on January 5, 2007 and, as of November 25, 2008, are listed for trading on the NYSE Arca.
Summary of Share Transactions for the Three Months Ended March 31, 2009 and 2008
Shares | Paid in Capital | |||||||||
Three Months Ended | Three Months Ended | |||||||||
March 31, 2009 | March 31, 2008 | March 31, 2009 | March 31, 2008 | |||||||
Shares Sold |
1,200,000 | 600,000 | $ | 22,938,340 | $ | 23,033,306 | ||||
Shares Redeemed |
- | (200,000) | - | (6,732,916) | ||||||
Net Increase |
1,200,000 | 400,000 | $ | 22,938,340 | $ | 16,300,390 | ||||
(8) | Profit and Loss Allocations and Distributions |
Pursuant to the Amended and Restated Declaration of Trust and Trust Agreement of the Master Trust, income and expenses are allocated pro rata to the Managing Owner as holder of the General Shares and the Shareholders monthly based on their respective percentage interests as of the close of the last trading day of the preceding month. Any losses allocated to
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the Managing Owner (as the owner of the General Shares) which are in excess of the Managing Owners capital balance are allocated to the Shareholders in accordance with their respective interest in the Master Fund as a percentage of total shareholders equity. Distributions (other than redemption of units) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the shareholders.
(9) | Commitments and Contingencies |
The Managing Owner, either in its own capacity or in its capacity as the Managing Owner and on behalf of the Fund and the Master Fund, has entered into various service agreements that contain a variety of representations, or provide indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Funds. As of March 31, 2009 no claims had been received by the Fund or the Master Fund and it was therefore not possible to estimate the Funds and the Master Funds potential future exposure under such indemnification provisions.
(10) | Net Asset Value and Financial Highlights |
The Fund is presenting the following net asset value and financial highlights related to investment performance and operations for a Share outstanding for the Three Months Ended March 31, 2009 and 2008. The net investment income and total expense ratios are calculated using average net asset value. The net asset value presentation is calculated using daily Shares outstanding. The net investment income and total expense ratios have been annualized. The total return is based on the change in net asset value of the Shares during the period. An individual investors return and ratios may vary based on the timing of capital transactions.
The Fund invests substantially all of its assets in the Master Fund in a master-feeder structure. The Fund holds no investment assets other than Master Fund Limited Units. The Fund is the majority Master Fund Limited Unit owner and the Managing Owner holds a non-controlling interest in the Master Fund. Each Share issued by the Fund correlates with the Master Fund Limited Unit issued by the Master Fund and held by the Fund.
Net asset value per Master Fund Limited Unit and Master Fund General Unit (collectively, Master Fund Units) is the net asset value of the Master Fund divided by the number of outstanding Master Fund Units. Because there is a one-to-one correlation between Shares and the Master Fund Limited Units, the net asset value per Share and the net asset value per Master Fund Limited Unit are equal.
Three Months Ended | ||||
March 31, 2009 | March 31, 2008 | |||
Net Asset Value |
||||
Net asset value per Share, beginning of period |
$ 20.84 | $ 35.17 | ||
Net realized and change in unrealized gain (loss) on United States Treasury Obligations and Futures |
(1.37) | 3.63 | ||
Net investment income (loss) |
(0.03) | 0.17 | ||
Net income (loss) |
(1.40) | 3.80 | ||
Net asset value per Share, end of period |
$ 19.44 | $ 38.97 | ||
Market value per Share, beginning of period |
$ 20.09 | $ 35.30 | ||
Market value per Share, end of period |
$ 19.32 | $ 38.95 | ||
Ratio to average Shares* |
||||
Net investment income (loss) |
(0.68)% | 1.87% | ||
Total expenses |
0.78% | 0.78% | ||
Total Return, at net asset value ** |
(6.72)% | 10.80% | ||
Total Return, at market value ** |
(3.83)% | 10.34% | ||
* | Percentages are annualized. |
** | Percentages are not annualized. |
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(11) | Recently Adopted Accounting Standards |
In December 2007, the Financial Accounting Standards Board released FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment to ARB No. 51 (Statement No. 160). Statement No. 160 requires noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. The Fund adopted Statement No. 160 on January 1, 2009.
On March 19, 2008, the Financial Accounting Standards Board released FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (Statement No. 161). Statement No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The Fund adopted Statement No. 161 on January 1, 2009.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
This information should be read in conjunction with the consolidated financial statements and notes included in Item 1 of Part I of this Quarterly Report (the Report). The discussion and analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. Words such as anticipate, expect, intend, plan, believe, seek, outlook and estimate, as well as similar words and phrases, signify forward-looking statements. PowerShares DB Energy Funds forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties may cause our actual results to differ materially from those expressed in our forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, DB Commodity Services LLC (the Managing Owner), undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Overview/Introduction
The Fund and the Master Fund seek to track changes, whether positive or negative, in the level of the Deutsche Bank Liquid Commodity IndexOptimum Yield Energy Excess Return (DBLCI-OY Energy ER, or the Index), over time, plus the excess, if any, of the Master Funds interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund and the Master Fund. The Shares are designed for investors who want a cost-effective and convenient way to invest in a group of commodity futures on U.S. and non-U.S. markets.
The Fund pursues its investment objective by investing substantially all of its assets in the Master Fund. The Master Fund pursues its investment objective by investing in a portfolio of exchange traded futures contracts that expire in a specific month and trade on a specific exchange (the Index Contracts) on the commodities comprising the Index (the Index Commodities). The Index Commodities are light, sweet crude oil, heating oil, brent crude oil, RBOB gasoline and natural gas. The Index is composed of notional amounts of each of the Index Commodities. The Master Funds portfolio also includes United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Master Funds Commodity Broker as margin.
The notional amount of each Index Commodity included in the Index is intended to reflect the changes in market value of each such Index Commodity within the Index. The closing level of the Index is calculated on each business day by the Index Sponsor based on the closing price of the futures contracts for each of the underlying Index Commodities and the notional amounts of such Index Commodities.
The Index is rebalanced annually in November to ensure that each of the Index Commodities is weighted in the same proportion that such Index Commodities were weighted on June 4, 1990 (the Base Date). The following table reflects the index base weights (the Index Base Weights) of each Index Commodity on the Base Date:
Index Commodity
|
Index Base Weight (%)
| |
Light, Sweet Crude Oil
|
22.50
| |
Heating Oil
|
22.50
| |
Brent Crude Oil
|
22.50
| |
RBOB Gasoline
|
22.50
| |
Natural Gas
|
10.00
| |
Closing Level on Base Date:
|
100.00
|
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The composition of the Index may be adjusted in the event that the Index Sponsor is not able to calculate the closing prices of the Index Commodities.
The Index includes provisions for the replacement of futures contracts as they approach maturity. This replacement takes place over a period of time in order to lessen the impact on the market for the futures contracts being replaced. With respect to each Index Commodity, the Master Fund employs a rule-based approach when it rolls from one futures contract to another. Rather than select a new futures contract based on a predetermined schedule (e.g., monthly), each Index Commodity rolls to the futures contract which generates the best possible implied roll yield. The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will be included in each Index. As a result, each Index Commodity is able to potentially maximize the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.
In general, as a futures contract approaches its expiration date, its price will move towards the spot price in a contangoed market. Assuming the spot price does not change, this would result in the futures contract price decreasing and a negative implied roll yield. The opposite is true in a backwardated market. Rolling in a contangoed market will tend to cause a drag on an Index Commoditys contribution to the Funds return while rolling in a backwardated market will tend to cause a push on an Index Commoditys contribution to the Funds return.
The Deutsche Bank Liquid Commodity IndexOptimum Yield Energy is calculated in USD on both an excess return (unfunded) and total return (funded) basis.
The futures contract price for each Index Commodity will be the exchange closing price for such Index Commodity on each weekday when banks in New York, New York are open (the Index Business Days). If a weekday is not an Exchange Business Day (as defined in the following sentence) but is an Index Business Day, the exchange closing price from the previous Index Business Day will be used for each Index Commodity. Exchange Business Day means, in respect of an Index Commodity, a day that is a trading day for such Index Commodity on the relevant exchange (unless either an Index disruption event or force majeure event has occurred).
On the first New York business day (the Verification Date) of each month, each Index Commodity futures contract will be tested in order to determine whether to continue including it in the Index. If the Index Commodity futures contract requires delivery of the underlying commodity in the next month, known as the Delivery Month, a new Index Commodity futures contract will be selected for inclusion in the Index. For example, if the first New York business day is May 1, 2009, and the Delivery Month of the Index Commodity futures contract currently in such Index is June 2009, a new Index Commodity futures contract with a later Delivery Month will be selected.
For each underlying Index Commodity of the Index, the new Index Commodity futures contract selected will be the Index Commodity futures contract with the best possible implied roll yield based on the closing price for each eligible Index Commodity futures contract. Eligible Index Commodity futures contracts are any Index Commodity futures contracts having a Delivery Month (i) no sooner than the month after the Delivery Month of the Index Commodity futures contract currently in such Index, and (ii) no later than the 13th month after the Verification Date. For example, if the first New York business day is May 1, 2009 and the Delivery Month of an Index Commodity futures contract currently in the Index is June 2009, the Delivery Month of an eligible new Index Commodity futures contract must be between July 2009 and July 2010. The implied roll yield is then calculated and the futures contract on the Index Commodity with the best possible implied roll yield is then selected. If two futures contracts have the same implied roll yield, the futures contract with the minimum number of months prior to the Delivery Month is selected.
After the futures contract selection, the monthly roll for each Index Commodity subject to a roll in that particular month unwinds the old futures contract and enters a position in the new futures contract. This takes place between the 2nd and 6th Index Business Day of the month.
On each day during the roll period, new notional holdings are calculated. The calculations for the futures contracts on the old Index Commodities that are leaving the Index and the futures contracts on the new Index Commodities are then calculated.
On all days that are not monthly index roll days, the notional holdings of each Index Commodity future remains constant.
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The Index is re-weighted on an annual basis on the 6th Index Business Day of each November.
The calculation of the Index is expressed as the weighted average return of the Index Commodities.
The Commodity Futures Trading Commission (the CFTC) and commodity exchanges impose position limits on market participants trading in certain commodities included in the Index. As disclosed in the Funds Prospectus, if the Managing Owner determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Master Fund to gain full or partial exposure to any Index Commodity by investing in a specific Index Contract, the Master Fund may invest in a futures contract referencing the particular Index Commodity other than the Index Contract or, in the alternative, invest in other futures contracts not based on the particular Index Commodity if, in the commercially reasonable judgment of the Managing Owner, such futures contracts tend to exhibit trading prices that correlate with such Index Commodity.
Under the Amended and Restated Declaration of Trust and Trust Agreement of each of the Trust and the Master Trust (the Trust Agreements), Wilmington Trust Company, the Trustee of the Trust and the Master Trust, has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust, the Fund and the Master Trust and Master Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.
The Index Sponsor obtains information for inclusion in, or for use in the calculation of, the Index from sources the Index Sponsor considers reliable. None of the Index Sponsor, the Managing Owner, the Trust, the Fund, the Master Trust, the Master Fund or any of their respective affiliates accepts responsibility for or guarantees the accuracy and/or completeness of the Index or any data included in the Index.
The Shares are intended to provide investment results that generally correspond to the changes, positive or negative, in the levels of the Index over time. The value of the Shares is expected to fluctuate in relation to changes in the value of the Master Funds portfolio. The market price of the Shares may not be identical to the net asset value per Share, but these two valuations are expected to be very close.
Performance Summary
This Report covers the three months ended March 31, 2009 and 2008 (hereinafter referred to as the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008, respectively). The Fund commenced trading on the American Stock Exchange (now known as the NYSE Alternext US LLC (the NYSE Alternext)) on January 5, 2007, and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the NYSE Arca).
Performance of the Fund and the exchange traded Shares are detailed below in Results of Operations. Past performance of the Fund is not necessarily indicative of future performance.
The Index is intended to reflect the change in market value of the Index Commodities. In turn, the Index is intended to reflect the energy sector. The Deutsche Bank Liquid Commodity Index-Optimum Yield Energy Total Return (the DBLCI-OY Energy TR), consists of the Index plus 3 month United States Treasury Obligations returns. Past Index results are not necessarily indicative of future changes, positive or negative, in the Index closing levels.
The section Summary of DBLCI-OY Energy TR and Underlying Index Commodity Returns for the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008 below provides an overview of the changes in the closing levels of DBLCI-OY Energy TR by disclosing the change in market value of each underlying component Index Commodity through a surrogate (and analogous) index plus 3 month United States Treasury Obligations returns. Please note also that the Funds objective is to track the Index (not DBLCI-OY Energy TR) and the Fund does not attempt to outperform or underperform the Index. The Index employs the optimum yield roll method with the objective of mitigating the negative effects of contango, the condition in which distant delivery prices for futures exceed spot prices, and maximizing the positive effects of backwardation, a condition opposite of contango.
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Summary of DBLCI-OY Energy TR and Underlying Index Commodity
Returns for the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008
Underlying Index |
Total returns for indexes in the DBLCI-OY Energy TR | |||
Three Months Ended March 31, 2009 |
Three Months Ended March 31, 2008 | |||
Light, Sweet Crude Oil (WTI) Indices |
(2.64)% | 7.88% | ||
Heating Oil Indices |
(9.26)% | 13.51% | ||
Brent Crude Oil Indices |
(7.27)% | 8.59% | ||
RBOB Gasoline Indices |
5.88% | 4.12% | ||
Natural Gas Indices |
(34.81)% | 33.37% | ||
TOTAL RETURN |
(6.45)% | 10.89% | ||
If the Funds interest income from its holdings of fixed income securities were to exceed the Funds fees and expenses, the total return on an investment in the Fund is expected to outperform the Index and underperform the DBLCI-OY Energy TR. The only difference between the Index and the DBLCI-OY Energy TR is that the Index does not include interest income from a hypothetical basket of fixed income securities while the DBLCI-OY Energy TR does include such a component. The difference between the Index and the DBLCI-OY Energy TR is attributable entirely to the hypothetical interest income from this hypothetical basket of fixed income securities. If the Funds interest income from its holdings of fixed-income securities exceeds the Funds fees and expenses, then the amount of such excess is expected to be distributed periodically. The market price of the Shares is expected to closely track the Index. The total return on an investment in the Fund over any period is the sum of the capital appreciation or depreciation of the Shares over the period, plus the amount of any distributions during the period. Consequently, the Funds total return is expected to outperform the Index by the amount of the excess, if any, of its interest income over its fees and expenses but, as a result of the Funds fees and expenses, the total return on the Fund is expected to underperform the DBLCI-OY Energy TR. If the Funds fees and expenses were to exceed the Funds interest income from its holdings of fixed income securities, the total return on an investment in the Fund is expected to underperform the Index.
Net Asset Value
Net asset value means the total assets of the Master Fund, including, but not limited to, all futures, cash and investments less total liabilities of the Master Fund, each determined on the basis of U.S. generally accepted accounting principles, consistently applied under the accrual method of accounting. In particular, net asset value includes any unrealized appreciation or depreciation on open commodity futures contracts, and any other credit or debit accruing to the Master Fund but unpaid or not received by the Master Fund. All open commodity futures contracts will be calculated at their then current market value, which will be based upon the settlement price for that particular commodity futures contract traded on the applicable exchange on the date with respect to which net asset value is being determined; provided, that if a commodity futures contract could not be liquidated on such day, due to the operation of daily limits or other rules of the exchange upon which that position is traded or otherwise, the settlement price on the most recent day on which the position could have been liquidated will be the basis for determining the market value of such position for such day. The Managing Owner may in its discretion (and only under extraordinary circumstances, including, but not limited to, periods during which a settlement price of a futures contract is not available due to exchange limit orders or force majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance) value any asset of the Master Fund pursuant to such other principles as the Managing Owner deems fair and equitable so long as such principles are consistent with normal industry standards. Interest earned on the Master Funds brokerage account is accrued monthly. The amount of any distribution is a liability of the Master Fund from the day when the distribution is declared until it is paid.
The Fund invests substantially all of its assets in the Master Fund in a master-feeder structure. The Fund holds no investment assets other than Master Fund Limited Units. The Fund is the majority Master Fund Limited Unit owner and the Managing Owner holds a minority interest in the Master Fund. Each Share issued by the Fund correlates with the Master Fund Limited Unit issued by the Master Fund and held by the Fund.
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Net asset value per Master Fund Limited Unit and Master Fund General Unit (collectively, Master Fund Units) is the net asset value of the Master Fund divided by the number of outstanding Master Fund Units. Because there is a one-to-one correlation between Shares and the Master Fund Limited Units, the net asset value per Share and the net asset value per Master Fund Limited Unit are equal.
Critical Accounting Policies
The Funds and Master Funds critical accounting policies are as follows:
Preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the application of appropriate accounting rules and guidance, as well as the use of estimates, and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense and related disclosure of contingent assets and liabilities during the reporting period of the consolidated financial statements and accompanying notes. Both the Funds and the Master Funds application of these policies involve judgments and actual results may differ from the estimates used.
The Master Fund holds a significant portion of its assets in futures contracts and United States Treasury Obligations, both of which are recorded on a trade date basis and at fair value in the consolidated financial statements, with changes in fair value reported in the consolidated statement of income and expenses.
The use of fair value to measure financial instruments, with related unrealized gains or losses recognized in earnings in each period is fundamental to the Funds financial statements. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).
In determining fair value of United States Treasury Obligations and commodity futures contracts, the Fund uses unadjusted quoted market prices in active markets. FASB Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 4(c) within the financial statements in Item I for further information regarding FASB Statement No. 157.
When market closing prices are not available, the Managing Owner may value an asset of the Master Fund pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards.
Realized gains (losses) and changes in unrealized gain (loss) on open positions are determined on a specific identification basis and recognized in the consolidated statement of income and expenses in the period in which the contract is closed or the changes occur, respectively.
Interest income on United States Treasury Obligations is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United States Treasury Obligations.
Market Risk
Trading in futures contracts involves the Master Fund entering into contractual commitments to purchase a particular commodity at a specified date and price. The market risk associated with the Master Funds commitments to purchase commodities is limited to the gross or face amount of the contracts held.
The Master Funds exposure to market risk is also influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Master Funds trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of the investors capital.
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Credit Risk
When the Master Fund enters into futures contracts, the Master Fund will be exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and on most foreign futures exchanges is the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Master Fund.
The Commodity Broker, when acting as the Master Funds futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Master Fund all assets of the Master Fund relating to domestic futures trading and the Commodity Broker is not allowed to commingle such assets with other assets of the Commodity Broker. In addition, CFTC regulations also require the Commodity Broker to hold in a secure account assets of the Master Fund related to foreign futures trading.
Liquidity
All of the Master Funds source of capital is derived from the Fund through the Funds offering of Shares to Authorized Participants. Authorized Participants may then subsequently redeem such Shares. The Master Fund in turn allocates its net assets to commodities trading. A significant portion of the net asset value is held in United States Treasury Obligations and cash, which is used as margin for the Master Funds trading in commodities. The percentage that United States Treasury Obligations bear to the total net assets will vary from period to period as the market values of the Master Funds commodity interests change. The balance of the net assets is held in the Master Funds commodity trading account. Interest earned on the Master Funds interest-bearing funds is paid to the Master Fund.
The Master Funds commodity contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations or for other reasons. For example, commodity exchanges generally have the ability to limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as daily limits. During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a particular futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Master Fund from promptly liquidating its commodity futures positions.
Because the Master Fund trades futures contracts, its capital is at risk due to changes in the value of futures contracts (market risk) or the inability of counterparties (including exchange clearinghouses) to perform under the terms of the contracts (credit risk).
On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption orders must be placed by 10:00 a.m., New York time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Baskets. Individual Shareholders may not redeem directly from the Fund. By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTCs book-entry system to the Fund no later than noon, New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants DTC account is charged the non-refundable transaction fee due for the redemption order.
Cash Flows
The primary cash flow activities of the Fund is to raise capital from Authorized Participants through the issuance of Shares. This cash is invested into the Master Fund where it is used to invest in United States Treasury Obligations and to meet margin requirements as a result of the positions taken in futures contracts to match the fluctuations of the Index the Fund is tracking.
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Operating Activities
Net cash flow used for operating activities was $25.1 million and $27.3 million for the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008, respectively. This amount primarily includes net purchases and sales of United States Treasury Obligations which are held at fair value on the statement of financial condition.
During the Three Months Ended March 31, 2009, $51.9 million was paid to purchase United States Treasury Obligations and $26.9 million was received from sales and maturing contracts. During the Three Months Ended March 31, 2008, $65.7 million was paid to purchase United States Treasury Obligations and $30.0 million was received from sales and maturing contracts. Unrealized appreciation on United States Treasury Obligations and futures decreased by $2.0 million and increased by $0.5 million during the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008, respectively.
Financing Activities
The Funds net cash flow provided by financing activities was $22.9 million and $16.3 million during the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008, respectively. This included $22.9 million and $23.0 million from the sale of Shares to Authorized Participants during the Three Months Ended March 31, 2009 and the Three Months Ended March 31, 2008, respectively.
Results of Operations
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
The Fund was launched on January 3, 2007 at $25.00 per Share. The Shares of the Fund traded on the NYSE Alternext from January 5, 2007 to November 25, 2008 and have been trading on the NYSE Arca since November 25, 2008.
The Fund and the Master Fund seek to track changes in the closing levels of the Deutsche Bank Liquid Commodity IndexOptimum Yield Energy Excess Return (DBLCI-OY Energy ER, or the Index) over time, plus the excess, if any, of the Master Funds interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund and the Master Fund. The following graphs illustrate changes in (i) the price of the Shares (as reflected by the graph DBE), (ii) the Funds NAV (as reflected by the graph DBENAV), and (iii) the closing levels of the Index (as reflected by the graph DBENIX). Whenever the interest income earned by the Fund exceeds Fund expenses, the price of the Shares generally has exceeded the levels of the Index primarily because the Share price reflects interest income from the Master Funds collateral holdings whereas the Index does not consider such interest income. There can be no assurances that the price of the Shares will continue to exceed the Index levels.
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COMPARISON OF DBE, DBENAV AND DBENIX
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE,
SHOULD BE TAKEN AS AN INDICATION OF THE FUNDS FUTURE PERFORMANCE.
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE,
SHOULD BE TAKEN AS AN INDICATION OF THE FUNDS FUTURE PERFORMANCE.
See Additional Legends below.
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Additional Legends
Deutsche Bank Liquid Commodity IndexOptimum Yield Energy Excess Return is an index and does not reflect (i) actual trading and (ii) any fees or expenses.
WHILE THE FUNDS OBJECTIVE IS NOT TO GENERATE PROFIT THROUGH ACTIVE PORTFOLIO MANAGEMENT, BUT IS TO TRACK THE INDEX, BECAUSE THE INDEX WAS ESTABLISHED IN JULY 2006, CERTAIN INFORMATION RELATING TO THE INDEX CLOSING LEVELS MAY BE CONSIDERED TO BE HYPOTHETICAL. HYPOTHETICAL INFORMATION MAY HAVE CERTAIN INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.
WITH RESPECT TO INDEX DATA, NO REPRESENTATION IS BEING MADE THAT THE INDEX WILL OR IS LIKELY TO ACHIEVE ANNUAL OR CUMULATIVE CLOSING LEVELS CONSISTENT WITH OR SIMILAR TO THOSE SET FORTH HEREIN. SIMILARLY, NO REPRESENTATION IS BEING MADE THAT THE FUND WILL GENERATE PROFITS OR LOSSES SIMILAR TO THE FUNDS PAST PERFORMANCE OR THE HISTORICAL ANNUAL OR CUMULATIVE CHANGES IN THE INDEX CLOSING LEVELS. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY INVESTMENT METHODOLOGIES, WHETHER ACTIVE OR PASSIVE.
WITH RESPECT TO INDEX DATA, ONE OF THE LIMITATIONS OF HYPOTHETICAL INFORMATION IS THAT IT IS GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. TO THE EXTENT THAT INFORMATION PRESENTED HEREIN RELATES TO THE PERIOD JUNE 1990 THROUGH JUNE 2006, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEXS METHODOLOGY, AND SELECTION OF INDEX COMMODITIES, IN HINDSIGHT.
NO HYPOTHETICAL RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THERE ARE NUMEROUS FACTORS, INCLUDING THOSE DESCRIBED UNDER ITEM 1A: -RISK FACTORS SET FORTH IN THE FUNDS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008, RELATED TO THE COMMODITIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUNDS EFFORTS TO TRACK THE INDEX OVER TIME WHICH CANNOT BE, AND HAVE NOT BEEN, ACCOUNTED FOR IN THE PREPARATION OF THE INDEX INFORMATION SET FORTH ON THE FOLLOWING PAGES, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL PERFORMANCE RESULTS FOR THE FUND. FURTHERMORE, THE INDEX INFORMATION DOES NOT INVOLVE FINANCIAL RISK OR ACCOUNT FOR THE IMPACT OF FEES AND COSTS ASSOCIATED WITH THE FUND.
THE MANAGING OWNER HAS HAD LIMITED EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CLIENTS. BECAUSE THERE ARE LIMITED ACTUAL TRADING RESULTS TO COMPARE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THE ANNUAL OR CUMULATIVE INDEX RESULTS.
FOR THE THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2008
Fund Share Price Performance
For the Three Months Ended March 31, 2009, the NYSE Arca market value of each Share decreased 3.83% from $20.09 per Share to $19.32 per Share. The Share price high and low for the Three Months Ended March 31, 2009 and related change from the Share price on December 31, 2008 was as follows: Shares traded from a high of $22.42 per Share (+11.60%) on January 6, 2009 to a low of $16.43 per Share (-18.22%) on February 18, 2009.
For the Three Months Ended March 31, 2008, the NYSE Alternext market value of each Share increased 10.34% from $35.30 per Share to $38.95 per Share. The Share price low and high for the Three Months Ended March 31, 2008 and related change from the Share price on December 31, 2007 was as follows: Shares traded from a low of $33.07 per Share (-6.32%) on January 23, 2008 to a high of $40.96 per Share (+16.03%) on March 13, 2008.
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Fund Share Net Asset Performance
For the Three Months Ended March 31, 2009, the net asset value of each Share decreased 6.72% from $20.84 per Share to $19.44 per Share. Falling futures contract prices for light, sweet crude oil, heating oil, brent crude oil and natural gas were partially offset by rising prices for RBOB gasoline during the Three Months Ended March 31, 2009 contributing to an overall 6.45% decrease in the level of the DBLCI-OY Energy TR.
Net loss for the Three Months Ended March 31, 2009 was $2.1 million, resulting from $0.01 million of interest income, net realized losses of $0.005 million, net unrealized losses of $2.0 million and operating expenses of $0.08 million.
For the Three Months Ended March 31, 2008, the net asset value of each Share increased 10.80% from $35.17 per Share to $38.97 per Share. Strong appreciation in the futures contract prices of light, sweet crude oil, heating oil, brent crude oil, RBOB gasoline and natural gas futures prices during the Three Months Ended March 31, 2008 contributed to an overall 10.89% increase in the level of the DBLCI-OY Energy TR.
Net income for the Three Months Ended March 31, 2008 was $4.6 million, resulting from $0.3 million of interest income, net realized gains of $3.9 million, net unrealized gains of $0.5 million and operating expenses of $0.1 million.
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of its business, the Master Fund is party to financial instruments with off-balance sheet risk. The term off-balance sheet risk refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in a future obligation or loss. The financial instruments used by the Master Fund are commodity futures, whose values are based upon an underlying asset and generally represent future commitments which have a reasonable possibility to be settled in cash or through physical delivery. The financial instruments are traded on an exchange and are standardized contracts.
The Fund and the Master Fund have not utilized, nor do they expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements entered into in the normal course of business noted above, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund and the Master Fund. While the Funds and the Master Funds exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on either the Funds or the Master Funds financial position.
The Fund and Master Funds contractual obligations are with the Managing Owner and the Commodity Broker. Management Fee payments made to the Managing Owner are calculated as a fixed percentage of the Master Funds net asset value. Commission payments to the Commodity Broker are on a contract-by-contract, or round-turn, basis. As such, the Managing Owner cannot anticipate the amount of payments that will be required under these arrangements for future periods as net asset values are not known until a future date. These agreements are effective for one year terms, renewable automatically for additional one year terms unless terminated. Additionally, these agreements may be terminated by either party for various reasons.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
INTRODUCTION
The Fund is designed to replicate positions in a commodity index. The market sensitive instruments held by it are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Funds main line of business.
Market movements can produce frequent changes in the fair market value of the Funds open positions and, consequently, in its earnings and cash flow. The Funds market risk is primarily influenced by changes in the price of commodities.
Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty in the markets in which the Fund trades and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Funds experience to date (i.e., risk of ruin). In light of this, as well as the risks
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and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Funds losses in any market sector will be limited to Value at Risk or by the Funds attempts to manage its market risk.
Standard of Materiality
Materiality as used in this section, Quantitative and Qualitative Disclosures About Market Risk, is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, and multiplier features of the Funds market sensitive instruments.
QUANTIFYING THE FUNDS TRADING VALUE AT RISK
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Funds market risk exposures contain forward-looking statements within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact (such as the dollar amount of maintenance margin required for market risk sensitive instruments held at the end of the reporting period).
The Funds risk exposure in the various market sectors traded by the Fund is quantified below in terms of Value at Risk. Exchange maintenance margin requirements have been used by the Fund as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed 95-99% of the maximum one-day losses at fair value of any given contract incurred during the time period over which historical price fluctuations are researched for purposes of establishing margin levels. The maintenance margin levels are established by exchanges using historical price studies as well as an assessment of current market volatility and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
THE FUNDS TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the trading Value at Risk associated with the Funds open positions by market category as of March 31, 2009.
Market Sector | Delivery Month |
Value at Risk (VaR) $ Value* |
Value at Risk (VaR)* % of Net Assets |
Number of times VaR Exceeded | ||||
Light, Sweet Crude Oil |
June 2009 | 1,360,391 | 2.33% | 7 | ||||
Heating Oil |
May 2009 | 998,204 | 1.71% | 8 | ||||
Brent Crude Oil |
August 2009 | 1,197,955 | 2.05% | 10 | ||||
RBOB Gasoline |
November 2009 | 1,315,783 | 2.26% | 12 | ||||
Natural Gas |
April 2009 | 434,872 | 0.75% | 9 | ||||
Aggregate/Total |
4,924,824 | 8.45% | 3 |
The following table indicates the trading Value at Risk associated with the Funds open positions by market category as of December 31, 2008.
Market Sector | Delivery Month |
Value at Risk (VaR) $ Value* |
Value at Risk (VaR)* % of Net Assets |
Number of times VaR Exceeded | ||||
Light, Sweet Crude Oil |
June 2009 | 667,281 | 1.78% | 12 | ||||
Heating Oil |
May 2009 | 539,251 | 1.44% | 9 | ||||
Brent Crude Oil |
August 2009 | 654,671 | 1.75% | 11 | ||||
RBOB Gasoline |
November 2009 | 642,711 | 1.71% | 11 | ||||
Natural Gas |
April 2009 | 257,615 | 0.69% | 11 | ||||
Aggregate/Total |
2,362,187 | 6.30% | 8 |
* The VaR for a contract represents the one day, downside risk, under normal market conditions, with a 99% confidence level. It is calculated using the variance/co-variance methodology taking historical market moves for the contract and using a one year look-back. The aggregate VaR for the Fund represents the VaR of the Funds open positions across all contracts, and is less than the sum of VaRs for each individual contract due to the diversification benefit across the contracts.
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NON-TRADING RISK
The Fund has non-trading market risk as a result of investing in short-term United States Treasury Obligations. The market risk represented by these investments is expected to be immaterial.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Funds market risk exposures except for those disclosures that are statements of historical fact constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Funds primary market risk exposures are subject to numerous uncertainties, contingencies and risks. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures of the Fund. There can be no assurance that the Funds current market exposure will not change materially. Investors may lose all or substantially all of their investment in the Fund.
The following were the primary trading risk exposures of the Fund as of March 31, 2009 by Index Commodities:
Light, Sweet Crude Oil
The price of light, sweet crude oil is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for light, sweet crude oil. In addition, various other factors can affect the demand for light, sweet crude oil, such as weather, political events and labor activity. The supply of light, sweet crude oil can be affected by many events, in particular, the meetings of the Organization of Petroleum Exporting Countries. Market expectations about events that will influence either demand or supply can cause prices for light, sweet crude oil to fluctuate greatly. A significant amount of the world oil production capacity is controlled by a relatively small number of producers. Any large change in production by one of these producers could have a substantial effect on the price of light, sweet crude oil.
Heating Oil
The price of heating oil is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for heating oil. In addition, the seasonal temperatures in countries throughout the world can also heavily influence the demand for heating oil. Heating oil is derived from crude oil and as such, any factors that influence the supply of crude oil may also influence the supply of heating oil.
Brent Crude Oil
The price of Brent crude oil is volatile and is affected by numerous factors. The price of Brent crude oil is influenced by many factors, including, but not limited to, the amount of output by oil producing nations, worldwide supply/stockpiles, weather, various geopolitical factors that cause supply disruptions (e.g., war, terrorism), global demand (particularly from emerging nations), currency fluctuations, and activities of market participants such as hedgers and speculators.
RBOB Gasoline
The price of RBOB Gasoline is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for RBOB Gasoline. In addition, the demand has seasonal variations, which occur during driving seasons usually considered the summer months in North America and Europe. RBOB Gasoline is derived from crude oil and as such, any factors that influence the supply of crude oil may also influence the supply of RBOB Gasoline.
Natural Gas
The price of natural gas is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for natural gas. In addition to the seasonal temperatures in countries throughout the world, any fluctuations in temperature may also heavily influence the demand for natural gas.
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QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
General
The Fund is unaware of any (i) anticipated known demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a material effect on operations.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
Under ordinary circumstances, the Managing Owners discretionary power is limited to determining whether the Fund will make a distribution. Under emergency or extraordinary circumstances, the Managing Owners discretionary powers increase, but remain circumscribed. These special circumstances, for example, include the unavailability of the Index or certain natural or man-made disasters. The Managing Owner does not apply risk management techniques. The Fund initiates positions only on the long side of the market and does not employ stop-loss techniques.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of the Managing Owner, including Hans Ephraimson, its Chief Executive Officer and Michael Gilligan, its Principal Financial Officer, the Fund carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this quarterly report, and, based upon that evaluation, Hans Ephraimson, the Chief Executive Officer and Michael Gilligan, the Principal Financial Officer of the Managing Owner, concluded that the Funds disclosure controls and procedures were effective to ensure that information the Fund is required to disclose in the reports that it files or submits with the Securities and Exchange Commission (the SEC) under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms, and to ensure that information required to be disclosed by the Fund in the reports that it files or submits under the Exchange Act is accumulated and communicated to management of the Managing Owner, including its Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in internal control over financial reporting (as defined in the Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Funds last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Funds internal control over financial reporting.
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Item 1. | Legal Proceedings. |
Not Applicable.
Item 1A. | Risk Factors. |
There are no material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008, filed March 10, 2009.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) There have been no unregistered sales of the Funds securities. No Fund securities are authorized for issuance by the Fund under equity compensation plans.
(b) The Registrants Registration Statement on Form S-1 (Registration No. 333-135422-14) was declared effective on January 3, 2007 with information with respect to the use of proceeds from the sale of Shares being disclosed therein. A Registration Statement on Form S-1 was declared effective on May 15, 2007 (Registration No. 333-142163-15) and on January 15, 2008 (File No. 333-148613-05) with information with respect to the use of proceeds from the sale of Shares being disclosed therein. A Registration Statement on Form S-1 was declared effective on July 14, 2008 (Registration No. 333-150501-14) with information with respect to the use of proceeds from the sale of Shares being disclosed therein. A Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-150501-14) was declared effective on April 30, 2009, which also contained this information. Accordingly, upon effectiveness, the Registrants Registration Statement on Form S-1 (Registration No. 333-150501-14) also acts as Post-Effective Amendment No. 2 to File No. 333-148613-05, Post-Effective Amendment No. 3 to File No. 333-142163-15 and acts as Post-Effective Amendment No. 4 to the Registrants Registration Statement on Form S-1 File No. 333-135422-14, which also contained this information. The Shares commenced trading on the NYSE Alternext on January 5, 2007 and, as of November 25, 2008, are listed for trading on the NYSE Arca.
The proceeds from the sale of the Shares are used to purchase Master Fund Limited Units. The Master Fund uses the proceeds from the sale of the Master Fund Limited Units for general corporate purposes in accordance with its investment objectives and policies.
For the Three Months Ended March 31, 2009, 1.2 million Shares were created for $22.9 million and no Shares were redeemed. On March 31, 2009, 3.0 million Shares of the Fund were outstanding for a market capitalization of $58.0 million.
(c) The following table summarizes the redemptions by Authorized Participants during the Three Months Ended March 31, 2009 and 2008.
Period of Redemption
|
Total Number of Shares Redeemed
|
Average Price Paid per Share
| ||
Three Months Ended March 31, 2009
|
-
|
$ -
| ||
Three Months Ended March 31, 2008
|
200,000
|
$ 33.66
|
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) |
31.2 | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
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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.
PowerShares DB Multi-Sector Commodity Trust with respect to PowerShares DB Energy Fund | ||||||||
By: | DB Commodity Services LLC, its Managing Owner |
|||||||
By: | /s/ Hans Ephraimson |
|||||||
Name: Hans Ephraimson | ||||||||
Title: Chief Executive Officer | ||||||||
By: | /s/ Michael Gilligan |
|||||||
Name: Michael Gilligan | ||||||||
Title: Principal Financial Officer | ||||||||
DB Multi-Sector Commodity Master Trust with respect to DB Energy Master Fund | ||||||||
By: | DB Commodity Services LLC, its Managing Owner |
|||||||
By: | /s/ Hans Ephraimson |
|||||||
Name: Hans Ephraimson | ||||||||
Title: Chief Executive Officer | ||||||||
Date: May 8, 2009 | By: | /s/ Michael Gilligan |
||||||
Name: Michael Gilligan | ||||||||
Title: Principal Financial Officer |
32
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Exhibit Number |
Description of Document | Page Number | ||
31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | E-2 | ||
31.2 | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | E-3 | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | E-4 | ||
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | E-5 |
E-1