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AAA CAPITAL ENERGY FUND L.P. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 13, 2014

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in the sale of goods or services. The Master's only assets are its equity in its trading accounts, consisting of cash, cash margin, net unrealized appreciation on open futures and exchange-cleared swap contracts and options purchased at fair value. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the second quarter of 2014.

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

For the six months ended June 30, 2014, Partnership capital decreased 20.1% from $72,987,283 to $58,295,728. This decrease was attributable to redemptions of 1,447.6580 Redeemable Units resulting in an outflow of $13,038,718, coupled with the net loss of $1,652,837. Future redemptions could impact the amount of funds available for investment in the Master in subsequent periods.

The Master's capital consists of the capital contributions of the members as increased or decreased by realized and/or unrealized gains or losses on trading and by expenses, interest income, redemptions of units and distributions of profits, if any.

For the six months ended June 30, 2014, the Master's capital decreased 15.7% from $462,745,604 to $390,131,964. This decrease was attributable to the redemptions of 9,200.1504 units totaling $85,873,945 and distribution of interest income to feeder funds totaling $43,309, coupled with the net loss of $5,706,652, which was partially offset by the subscriptions of 2,013.2522 units totaling $19,010,266. Future redemptions could impact the amount of funds available for investments in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Management believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership's significant accounting policies are described in detail in Note 6 of the Financial Statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners' Capital.

Results of Operations

During the Partnership's second quarter of 2014, the net asset value per unit decreased 1.7% from $9,014.56 to $8,860.89 as compared to a decrease of 0.1% in the same period of 2013. The Partnership, for its own account, through its investment in the Master experienced a net trading loss before fees and expenses in the second quarter of 2014 of $619,917. Losses were primarily attributable to the Master's trading of commodity futures in Brent Crude Oil and NYMEX Gasoline and were partially offset by gains in NYMEX Crude Oil, NYMEX Heating Oil and NYMEX Natural Gas. The Partnership, for its own account, through its investment in the Master experienced a net trading gain before brokerage commissions and related fees in the second quarter of 2013 of $982,257. Gains were primarily attributable to the Master's trading of commodity futures in IPE Gas Oil, and NYMEX Natural Gas and were partially offset by losses in IPE Brent Crude Oil, NYMEX Heating Oil, NYMEX Crude Oil and NYMEX Gasoline.

The most significant losses were incurred during May from short positions in Brent crude oil futures as prices advanced amid speculation geopolitical turmoil in Eastern Europe would diminish supplies from Russia. Additional losses were recorded during May from long positions in natural gas futures as prices declined during the first half of the month as U.S. stockpiles increased more than previously predicted. Losses were also recorded during June from short positions in Brent crude oil futures as prices rose after uprisings in Iraq and Libya threatened to curtail exports from the Middle East. These losses were partially offset by gains recorded during May from short positions in RBOB gasoline futures as prices declined on increased production from U.S. refineries. Additional gains were achieved during June from long positions in heating oil futures as prices advanced as the energy markets reacted to increased hostilities in Ukraine and the Middle East.

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During the six months ended June 30, 2014, the net asset value per unit decreased 2.6% from $9,093.12 to $8,860.89 as compared to a decrease of 7.6% in the same period of 2013. The Partnership, for its own account, through its investment in the Master experienced a net trading loss before brokerage commissions and related fees in the six months ended June 30, 2014 of $805,976. Losses were primarily attributable to the Master's trading of commodity futures in IPE Brent Crude Oil and were partially offset by gains in NYMEX Crude Oil, NYMEX Gasoline, NYMEX Heating Oil and NYMEX Natural Gas. The Partnership, for its own account, through its investment in the Master experienced a net trading loss before brokerage commissions and related fees in the six months ended June 30, 2013 of $8,316,902. Losses were primarily attributable to the Master's trading of commodity futures in IPE Brent Crude Oil, NYMEX Crude Oil, NYMEX Gasoline, NYMEX Energy Swaps and IPE Gas Oil, and were partially offset by gains in NYMEX Heating Oil and NYMEX Natural Gas.

The most significant losses were recorded during May from short positions in Brent crude oil futures as prices moved higher as tensions between Ukraine and Russia increased speculation of potential sanctions against Russia. Additional losses were incurred during June from short positions in Brent crude oil futures as prices rose after uprisings in Iraq and Libya threatened to curtail exports from the Middle East. A portion of the Partnership's losses during the first six months of the year was offset by gains achieved during April from long positions in natural gas futures as prices advanced as reports indicated U.S. storage levels were far lower than previously forecast. During February, gains were recorded from long natural gas positions as prices rallied early in the month after cold weather in the U.S. increased demand for heating homes and businesses. Additional gains during February were recorded from long positions in heating oil futures as prices advanced on increased demand in the U.S. due to persistent, prolonged cold weather throughout much of the country. Long positions in gasoline futures also recorded gains during February as prices moved higher after Energy Information Administration data indicated crude stockpiles declined during January.

Commodity markets are highly volatile. Broad and rapid price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility for profit or loss. The profitability of the Partnership (and the Master) depends on the Advisor's ability to forecast price changes in energy and energy-related commodities. Such price changes are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that the Advisor correctly makes such forecasts, the Partnership (and the Master) expects to increase capital through operations.

Ongoing selling agent fees/brokerage commissions are based on the number of trades executed by the Advisor and the Partnership's ownership percentage of the Master. Accordingly, they must be compared in relation to the number of trades executed during the period. Ongoing selling agent fees/brokerage commissions for the three and six months ended June 30, 2014 decreased by $353,160 and $838,871, respectively, as compared to the corresponding periods in 2013. This decrease is primarily due to a decrease in the number of trades during the three and six months ended June 30, 2014 as compared to the corresponding periods in 2013.

Interest income on 80% of the Partnership's average daily equity allocated to it by the Master during each month was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average noncompetitive yield on 3-month Treasury bills maturing in 30 days or at the monthly average of the 4-week U.S. Treasury bill discount rate. Interest income allocated from the Master for the three and six months ended June 30, 2014 decreased by $2,916 and $12,362, respectively, as compared to the corresponding periods in 2013. The decrease in interest income is primarily due to lower average daily equity and lower U.S. Treasury bill rates for the Partnership during the three and six months ended June 30, 2014 as compared to the corresponding periods in 2013. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership's (or the Partnership's allocable portion of the Master's account) and upon interest rates over which the Partnership, the Master and MS&Co. have no control.

Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Management fees for the three and six months ended June 30, 2014 decreased by $189,340 and $415,547, respectively, as compared to the corresponding periods in 2013. The decrease in management fees is due to lower average net assets during the three and six months ended June 30, 2014, as compared to the corresponding periods in 2013.

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Special Limited Partner profit share allocations are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement among the Partnership, the General Partner and the Advisor. There were no profit share allocations made for the three and six months ended June 30, 2014 and 2013. The Special Limited Partner will not be allocated a profit share until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considers the Advisor's past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.


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Source: Edgar Glimpses


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