Table of Contents







UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




x
            Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 for the fiscal year ended December 31,
  2008.


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: 001-33096




United
States Natural Gas Fund, LP


(Exact
name of registrant as specified in its charter)




Delaware
            
            20-5576760(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)




1320
Harbor Bay Parkway, Suite 145


Alameda,
California 94502


(Address
of principal executive offices) (Zip code)




(510)
522-3336


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:




Units
            NYSE
      Arca, Inc.(Title
      of each class)
            (Name
      of exchange on which registered)




Securities
registered pursuant to Section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    ̈
Yes    x No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    ̈
Yes    x No




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. x
Yes     ̈ No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.   x





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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      accelerated filer   x
            Accelerated
      filer    ̈Non-accelerated
      filer   ̈
            Smaller
      reporting company  ̈(Do
      not check if a 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    x No




The
aggregate market value of the registrant’s units held by non-affiliates of the
registrant as of June 30, 2008 was: $1,139,757,000.




The
registrant had 38,900,000 outstanding units as of February 27,
2009.




DOCUMENTS
INCORPORATED BY REFERENCE:


None.







Table of Contents
  UNITED
STATES NATURAL GAS FUND, LP





Table of Contents





Part I.
                                                          
                                                          PageItem 1. Business.
                                                          
                                                          1Item 1A. Risk Factors.
                                                          
                                                          42Item 1B. Unresolved Staff Comments.
                                                          
                                                          57Item 2. Properties.
                                                          
                                                          57Item 3. Legal Proceedings.
                                                          
                                                          58Item 4. Submission of Matters to a Vote of Security
      Holders.
                                                          
                                                          58Part II.Item 5. Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities.
                                                          
                                                          58Item 6. Selected Financial Data.
                                                          
                                                          59Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.
                                                          
                                                          59Item 7A. Quantitative and Qualitative Disclosures About
      Market Risk.
                                                          
                                                          74Item 8. Financial Statements and Supplementary
      Data.
                                                          
                                                          75Item 9. Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure.
                                                          
                                                          92Item 9A. Controls and Procedures.
                                                          
                                                          92Item 9B. Other Information.
                                                          
                                                          92Part III.Item 10. Directors, Executive Officers and Corporate
      Governance.
                                                          
                                                          92Item 11. Executive Compensation.
                                                          
                                                          96Item 12. Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters.
                                                          
                                                          97Item 13. Certain Relationships and Related Transactions,
      and Director Independence.
                                                          
                                                          97Item 14. Principal Accountant Fees and
      Services.
                                                          
                                                          98Part IV.Item 15. Exhibits and Financial Statement
      Schedules.
                                                          
                                                          99Exhibit Index.
                                                          
                                                          99Signatures
                                                          
                                                          100






Table of
Contents




Part I





Item 1.   Business.




What
is USNG?




The
United States Natural Gas Fund, LP (“USNG”) is a Delaware limited
partnership organized on September 11, 2006. USNG maintains its main business
office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California 94502. USNG is
a commodity pool that issues limited partnership interests (“units”) traded on
the NYSE Arca, Inc. (the “NYSE Arca”). It operates pursuant to the terms of the
Second Amended and Restated Agreement of Limited Partnership dated as of
December 4, 2007 (the “LP Agreement”), which grants full management control to
United States Commodity Funds LLC (the “General Partner”).





The
investment objective of USNG is for the changes in percentage terms of its
units’ net asset value (“NAV”) to reflect the changes in percentage terms of
the price of natural gas delivered at the Henry Hub, Louisiana, as
measured by the changes in the price of the futures contract for natural gas
traded on the New York Mercantile Exchange (the “NYMEX”), except when the
near month contract is within two weeks at expiration, in which case it
will be measured by the next month to expire, less USNG’s expenses (the
“Benchmark Futures Contract”).  USNG began trading on April 18,
2007.  The General Partner is the general partner of USNG and is
responsible for the management of USNG.




Who
is the General Partner?




The
General Partner is a single member limited liability company that was formed in
the state of Delaware on May 10, 2005. Prior to June 13, 2008, the General
Partner was known as Victoria Bay Asset Management, LLC. It maintains its main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. The General Partner is a wholly-owned subsidiary of Wainwright Holdings,
Inc., a Delaware corporation (“Wainwright”). Mr. Nicholas Gerber (discussed
below) controls Wainwright by virtue of his ownership of Wainwright’s shares.
Wainwright is a holding company that also owns an insurance company organized
under Bermuda law (currently being liquidated) and a registered investment
adviser firm named Ameristock Corporation. The General Partner is a member of
the National Futures Association (the “NFA”) and registered with the Commodity
Futures Trading Commission (the “CFTC”) on December 1, 2005. The General
Partner’s registration as a Commodity Pool Operator (“CPO”) was approved on
December 1, 2005.





On May
12, 2005, the General Partner formed the United States Oil Fund, LP (“USOF”),
another limited partnership that is a commodity pool
and issues units traded on the NYSE Arca. The investment
objective of USOF is for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the changes in the
price of the futures contract on light, sweet crude oil as traded on the NYMEX,
less USOF’s expenses. USOF began trading on April 10, 2006. The General Partner
is the general partner of USOF and is responsible for the management of
USOF.





On June
27, 2007, the General Partner formed the United States 12 Month Oil Fund, LP
(“US12OF”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of US12OF is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as
measured by the changes in the average of the prices of 12 futures contracts on
light, sweet crude oil traded on the NYMEX, consisting of the near month
contract to expire and the contracts for the following 11 months, for a total of
12 consecutive months’ contracts, less US12OF’s expenses. US12OF began trading
on December 6, 2007. The General Partner is the general partner of US12OF and is
responsible for the management of US12OF.




On April
12, 2007, the General Partner formed the United States Gasoline Fund, LP
(“UGA”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of UGA is for the changes
in percentage terms of its units’ NAV to reflect the changes in percentage terms
of the price of unleaded gasoline delivered to the New York harbor, as measured
by the changes in the price of the futures contract on gasoline traded on the
NYMEX, less UGA’s expenses. UGA began trading on February 26, 2008. The General
Partner is the general partner of UGA and is responsible for the management of
UGA.




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On April
13, 2007, the General Partner formed the United States Heating Oil Fund, LP
(“USHO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca. The investment objective of USHO is for the
changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the price of heating oil (also known as No. 2 fuel
oil) delivered to the New York harbor, as measured by the changes in the
price of the futures contract on heating oil traded on the NYMEX, less USHO’s
expenses. USHO began trading on April 9, 2008. The General Partner is the
general partner of USHO and is responsible for the management of
USHO.





USOF,
US12OF, UGA, and USHO are collectively referred to herein as the “Related Public
Funds”. For more information about each of the Related Public Funds, investors
in USNG may call 1-800-920-0259 or go online to
www.unitedstatescommodityfunds.com.





The
General Partner has filed a registration statement for two other exchange traded
security funds, the United States Short Oil Fund, LP (“USSO”) and the United
States 12 Month Natural Gas Fund, LP (“US12NG”). The investment objective of
USSO would be to have the changes in percentage terms of its units’ NAV
inversely reflect the changes in percentage terms the spot price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the changes in the
price of the futures contract on light, sweet crude oil as traded on the NYMEX,
less USSO’s expenses. The investment objective of US12NG would be to have the
changes in percentage terms of its units’ NAV reflect the changes in percentage
terms of the price of natural gas delivered at the Henry Hub, Louisiana, as
measured by the changes in the average of the prices of 12 futures contracts on
natural gas traded on the NYMEX, consisting of the near month contract to expire
and the contracts for the following 11 months, for a total of 12 consecutive
months’ contracts, less US12NG’s expenses.





The
General Partner is required to evaluate the credit risk of USNG to the futures
commission merchant, oversee the purchase and sale of USNG’s units by certain
authorized purchasers (“Authorized Purchasers”), review daily positions and
margin requirements of USNG and manage USNG’s investments. The General Partner
also pays the fees of ALPS Distributors, Inc. (the “Marketing Agent”) and Brown
Brothers Harriman & Co. (“BBH&Co.”), which acts as the administrator
(the “Administrator”) and the custodian (the “Custodian”) for
USNG.




Limited
partners have no right to elect the General Partner on an annual or any other
continuing basis. If the General Partner voluntarily withdraws, however, the
holders of a majority of USNG’s outstanding units (excluding for purposes of
such determination units owned, if any, by the withdrawing General Partner
and its affiliates) may elect its successor. The General Partner may not be
removed as general partner except upon approval by the affirmative vote of the
holders of at least 66 and 2/3 percent of USNG’s outstanding units (excluding
units owned, if any, by the General Partner and its affiliates), subject to
the satisfaction of certain conditions set forth in the LP
Agreement.




The
business and affairs of the General Partner are managed by a board of directors
(the “Board”), which is comprised of four management directors, some of whom are
also its executive officers (the “Management Directors”), and three independent
directors who meet the independent director requirements established by the NYSE
Arca and the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, the
Management Directors have the authority to manage the General Partner pursuant
to its limited liability company agreement. Through its Management Directors,
the General Partner manages the day-to-day operations of USNG. The Board has an
audit committee which is made up of the three independent directors (Peter M.
Robinson, Gordon L. Ellis and Malcolm R. Fobes III). For additional information
relating to the audit committee, please see “Item 10. Directors, Executive
Officers and Corporate Governance – Audit Committee” in this annual report on
Form 10-K.





How
Does USNG Operate?




The net
assets of USNG consist primarily of investments in futures contracts for natural
gas, crude oil, heating oil, gasoline, and other petroleum-based fuels that are
traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges
(collectively, “Futures Contracts”). USNG may also invest in other natural
gas-related investments such as cash-settled options on Futures Contracts,
forward contracts for natural gas, and over-the-counter transactions that are
based on the price of natural gas, oil and other petroleum-based fuels, Futures
Contracts and indices based on the foregoing (collectively, “Other Natural
Gas-Related Investments”). For convenience and unless otherwise specified,
Futures Contracts and Other Natural Gas-Related Investments collectively are
referred to as “Natural Gas Interests” in this annual report on Form
10-K.




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USNG
invests in Natural Gas Interests to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or collateral
obligations with respect to its investments in Futures Contracts and Other
Natural Gas-Related Investments. In pursuing this objective, the primary focus
of the General Partner is the investment in Futures Contracts and the management
of USNG’s investments in short-term obligations of the United States of two
years or less (“Treasuries”), cash and/or cash equivalents for margining
purposes and as collateral.




The
investment objective of USNG is to have the changes in percentage terms of its
units’ NAV reflect the changes in percentage terms of the spot price
of natural gas delivered at the Henry Hub, Louisiana, as measured by the
changes in the price of the futures contract on natural gas as traded on the
NYMEX that is the near month contract to expire, except when the near month
contract is within two weeks of expiration, in which case it will be measured by
the futures contract that is the next month contract to expire, less
USNG’s expenses. It is not the intent of USNG to be operated in a fashion such
that its NAV will equal, in dollar terms, the spot price of natural gas or any
particular futures contract based on natural gas.





USNG
seeks to achieve its investment objective by investing in a mix of Futures
Contracts and Other Natural Gas-Related Investments such that the changes in its
NAV will closely track the changes in the price of the Benchmark Futures
Contract. The General Partner believes changes in the price of the Benchmark
Futures Contract have historically exhibited a close correlation with the
changes in the spot price of natural gas. On any valuation day (a valuation
day is any trading day as of which USNG calculates its NAV as described herein),
the Benchmark Futures Contract is the near month contract for natural gas
traded on the NYMEX unless the near month contract will expire within two weeks
of the valuation day, in which case the Benchmark Futures Contract is the next
month contract for natural gas traded on the NYMEX.





As a
specific benchmark, the General Partner endeavors to place USNG’s trades in
Futures Contracts and Other Natural Gas-Related Investments and otherwise manage
USNG’s investments so that A will be within plus/minus 10 percent of B,
where:





·
            A
      is the average daily change in USNG’s NAV for any period of 30 successive
      valuation days; i.e., any trading day
      as of which USNG calculates its NAV,
and


·
            B
      is the average daily change in the price of the Benchmark Futures Contract
      over the same period.





The
General Partner believes that market arbitrage opportunities cause daily changes
in USNG’s unit price on the NYSE Arca to closely track daily changes in USNG’s
NAV per unit. The General Partner further believes that the daily changes in
prices of the Benchmark Futures Contract have historically closely tracked the
daily changes in the spot price of natural gas. The General Partner
believes that the net effect of these two relationships and the expected
relationship described above between USNG’s NAV and the Benchmark Futures
Contract will be that the daily changes in the price of USNG’s units on the NYSE
Arca will continue to closely track the daily changes in the spot price of
10,000 million British thermal units (“mmBtu”) of natural gas, less USNG’s
expenses. The following two graphs demonstrate the correlation between the daily
changes in the NAV of USNG and the daily changes in the Benchmark Futures
Contract both since the initial public offering of USNG’s units on April 18,
2007 through December 31, 2008 and during the last thirty valuation days ended
December 31, 2008.






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An
investment in the units provides a means for diversifying an investor’s
portfolio or hedging exposure to changes in natural gas prices. An investment in
the units allows both retail and institutional investors to easily gain this
exposure to the natural gas market in a transparent, cost-effective
manner.




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Contents





The
expected correlation of the price of USNG’s units, USNG’s NAV and the Benchmark
Futures Contract is illustrated in the following diagram:









The
General Partner employs a “neutral” investment strategy in order to track
changes in the price of the Benchmark Futures Contract regardless of whether the
price goes up or goes down. USNG’s “neutral” investment strategy is designed to
permit investors generally to purchase and sell USNG’s units for the purpose of
investing indirectly in natural gas in a cost-effective manner, and/or to permit
participants in the natural gas or other industries to hedge the risk of losses
in their natural gas-related transactions. Accordingly, depending on the
investment objective of an individual investor, the risks generally associated
with investing in natural gas and/or the risks involved in hedging may exist. In
addition, an investment in USNG involves the risk that the changes in the price
of USNG’s units will not accurately track the changes in the Benchmark Futures
Contract.





The
Benchmark Futures Contract will be changed from the near month contract to the
next month contract over a four-day period. Each month, the Benchmark Futures
Contract will change starting at the end of the day on the date two weeks prior
to expiration of the near month contract for that month. During the first three
days of the period, the applicable value of the Benchmark Futures Contract will
be based on a combination of the near month contract and the next month contract
as follows:  (1) day 1 will consist of 75% of the then near month
contract’s total return for the day, plus 25% of the total return for the day of
the next month contract,  (2) day 2 will consist of 50% of the then
near month contract’s total return for the day, plus 50% of the total return for
the day of the next month contract, and  (3) day 3 will consist of 25%
of the then near month contract’s total return for the day, plus 75% of the
total return for the day of the next month contract. On day 4, the Benchmark
Futures Contract will be the next month contract to expire at that time and that
contract will remain the Benchmark Futures Contract until the beginning of
following month’s change in the Benchmark Futures Contract over a four-day
period.





On each
day during the four-day period, the General Partner anticipates it will “roll”
USNG’s positions in natural gas investments by closing, or selling, a
percentageof
USNG’s positions in natural gas interests and reinvesting the proceeds from
closing those positions in new natural gas interests that reflect the change in
the Benchmark Futures Contract.





The
anticipated dates that the monthly four-day roll period will commence for 2009
will be posted on USNG’s website at www.unitedstatesnaturalgasfund.com, and are
subject to change without notice.




USNG’s
total portfolio composition is disclosed on its website each business day that
the NYSE Arca is open for trading. The website disclosure of portfolio holdings
is made daily and includes, as applicable, the name and value of each natural
gas interest, the specific types of Other Natural Gas-Related Investments and
characteristics of such Other Natural Gas-Related Investments, Treasuries, and
amount of the cash and/or cash equivalents held in USNG’s portfolio. USNG’s
website is publicly accessible at no charge. USNG’s assets are held in
segregated accounts pursuant to the Commodity Exchange Act (the “CEA”) and
CFTC regulations.




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The
units issued by USNG may only be purchased by Authorized Purchasers
and only in blocks of 100,000 units called Creation Baskets. The amount of the
purchase payment for a Creation Basket is equal to the aggregate NAV of units in
the Creation Basket. Similarly, only Authorized Purchasers may redeem units and
only in blocks of 100,000 units called Redemption Baskets. The amount of the
redemption proceeds for a Redemption Basket is equal to the aggregate NAV of
units in the Redemption Basket. The purchase price for Creation Baskets and the
redemption price for Redemption Baskets are the actual NAV calculated at the end
of the business day when notice for a purchase or redemption is received by
USNG. The NYSE Arca publishes an approximate intra-day NAV based on the
prior day’s NAV and the current price of the Benchmark Futures Contract,
but the basket price is determined based on the actual NAV at the end of the
day.





While
USNG issues units only in Creation Baskets, units may also be
purchased and sold in much smaller increments on the NYSE Arca. These
transactions, however, are effected at the bid and ask prices established
by specialist firm(s). Like any listed security, units can be purchased and sold
at any time a secondary market is open.





What
is USNG’s Investment Strategy?





In
managing USNG’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs a
quantitative methodology whereby each time a Creation Basket is sold, the
General Partner purchases natural gas interests, such as the Benchmark Futures
Contract, that have an aggregate market value that approximates the amount of
Treasuries and/or cash received upon the issuance of the Creation
Basket.





As an
example, assume that a Creation Basket is sold by USNG, and that USNG’s closing
NAV per unit is $50.00. In that case, USNG would receive $5,000,000 in proceeds
from the sale of the Creation Basket ($50.00 NAV per unit multiplied by 100,000
units, and excluding the Creation Basket fee of $1,000). If one were to assume
further that the General Partner wants to invest the entire proceeds from the
Creation Basket in the Benchmark Futures Contract and that the market value of
the Benchmark Futures Contract is $59,950, USNG would be unable to buy the exact
number of Benchmark Futures Contracts with an aggregate market value equal to
$5,000,000. Instead, USNG would be able to purchase 83 Benchmark Futures
Contracts with an aggregate market value of $4,975,850. Assuming a margin
requirement equal to 10% of the value of the Benchmark Futures Contract, USNG
would be required to deposit $497,585 in Treasuries and cash with the futures
commission merchant through which the Benchmark Futures Contracts were
purchased. The remainder of the proceeds from the sale of the Creation Basket,
$4,502,415, would remain invested in cash, cash equivalents, and Treasuries as
determined by the General Partner from time to time based on factors such as
potential calls for margin or anticipated redemptions.





The
specific Futures Contracts purchased depend on various factors, including a
judgment by the General Partner as to the appropriate diversification of USNG’s
investments in futures contracts with respect to the month of expiration, and
the prevailing price volatility of particular contracts. While the General
Partner has made significant investments in NYMEX Futures Contracts, as USNG
reaches certain accountability levels or position limits on the NYMEX, or for
other reasons, it has also and may continue to invest in Futures Contracts
traded on other exchanges or invest in Other Natural Gas-Related Investments
such as contracts in the “over-the-counter” market.




The
General Partner does not anticipate letting its Futures Contracts expire and
taking delivery of the underlying commodity. Instead, the General Partner will
close existing positions, e.g., when it changes the
Benchmark Futures Contract or it otherwise determines it would be appropriate to
do so and reinvest the proceeds in new Futures Contracts. Positions may also be
closed out to meet orders for Redemption Baskets and in such case proceeds for
such baskets will not be reinvested.




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By
remaining invested as fully as possible in Futures Contracts or Other Natural
Gas-Related Investments, the General Partner believes that the changes in
percentage terms in USNG’s NAV will continue to closely track the changes
in percentage terms in the prices of the Futures Contracts in which USNG
invests. The General Partner believes that certain arbitrage opportunities
result in the price of the units traded on the NYSE Arca closely tracking the
NAV of USNG. Additionally, natural gas Futures Contracts traded on the NYMEX
have closely tracked the spot price of the underlying natural gas. Based on
these interrelationships, the General Partner believes that the changes in the
price of USNG’s units as traded on the NYSE Arca will continue to closely track
the changes in the spot price of natural gas. For performance data relating
to USNG’s ability to track its benchmark, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Tracking USNG’s
Benchmark.”





What
are Futures Contracts?





Futures
Contracts are agreements between two parties. One party agrees to buy natural
gas from the other party at a later date at a price and quantity agreed upon
when the contract is made. Futures Contracts are traded on futures exchanges,
including the NYMEX. For example, the Benchmark Futures Contract is traded on
the NYMEX in units of 10,000 mmBtu. Natural gas Futures Contracts traded on the
NYMEX are priced by floor brokers and other exchange members both through an
“open outcry” of offers to purchase or sell the contracts and through an
electronic, screen-based system that determines the price by matching
electronically offers to purchase and sell.




Certain
typical and significant characteristics of Futures Contracts are discussed
below. Additional risks of investing in Futures Contracts are included in “What
are the Risk Factors Involved with an Investment in USNG?”




Impact of Accountability Levels,
Position Limits and Price Fluctuation Limits. Futures Contracts include
typical and significant characteristics. Most significantly, the CFTC and U.S.
designated contract markets such as the NYMEX have established accountability
levels and position limits on the maximum net long or net short futures
contracts in commodity interests that any person or group of persons under
common trading control (other than as a hedge, which an investment by USNG is
not) may hold, own or control. The net position is the difference between an
individual or firm’s open long contracts and open short contracts in any one
commodity. In addition, most U.S. futures exchanges, such as the NYMEX, limit
the daily price fluctuation for Futures Contracts.




The
accountability levels for the Benchmark Futures Contract and other Futures
Contracts traded on the NYMEX are not a fixed ceiling, but rather a threshold
above which the NYMEX may exercise greater scrutiny and control over an
investor’s positions. The current accountability level for investments for any
one month in the Benchmark Futures Contract is 12,000 contracts. In addition,
the NYMEX imposes an accountability level for all months of 12,000 net futures
contracts in natural gas. If USNG and the Related Public Funds exceed these
accountability levels for investments in futures contracts for natural gas, the
NYMEX will monitor USNG’s and the Related Public Funds’ exposure and ask for
further information on their activities, including the total size of all
positions, investment and trading strategy, and the extent of liquidity
resources of USNG and the Related Public Funds. If deemed necessary by the
NYMEX, it could also order USNG to reduce its position back to the
accountability level. As of December 31, 2008, USNG and the Related Public Funds
held 12,375 Benchmark Futures Contracts, all of which are traded
on the NYMEX.





If the
NYMEX orders USNG to reduce its position back to the accountability level, or to
an accountability level that the NYMEX deems appropriate for USNG, such an
accountability level may impact the mix of investments in Natural Gas Interests
made by USNG. To illustrate, assume that the price of the Benchmark Futures
Contract and the unit price of USNG are each $10, and that the NYMEX has
determined that USNG may not own more than 10,000 natural gas Futures
Contracts. In such case, USNG could invest up to $1 billion of its daily net
assets in the Benchmark Futures Contract (i.e., $10 per contract
multiplied by 10,000 (a Benchmark Futures Contract is a contract for 10,000
mmBtu multiplied by 10,000 contracts)) before reaching the accountability level
imposed by the NYMEX. Once the daily net assets of the portfolio exceed $1
billion in the Benchmark Futures Contract, the portfolio may not be able to make
any further investments in the Benchmark Futures Contract, depending on whether
the NYMEX imposes limits. If the NYMEX does impose limits at the $1 billion
level (or another level), USNG anticipates that it will invest the majority of
its assets above that level in a mix of other Futures Contracts or Other Natural
Gas-Related Investments.




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In
addition to accountability levels, the NYMEX imposes position limits on
contracts held in the last few days of trading in the near month contract to
expire. It is unlikely that USNG will run up against such position limits
because USNG’s investment strategy is to close out its positions and “roll” from
the near month contract to expire to the next month contract during a four-day
period beginning two weeks from expiration of the contract.




U.S.
futures exchanges, including the NYMEX, also limit the amount of price
fluctuation for Futures Contracts. For example, the NYMEX imposes a $3.00 per
mmBtu ($30,000 per contract) price fluctuation limit for Benchmark Futures
Contracts. This limit is initially based off the previous trading day’s
settlement price. If any Benchmark Futures Contract is traded, bid, or offered
at the limit for five minutes, trading is halted for five minutes. When trading
resumes, it begins at the point where the limit was imposed and the limit is
reset to be $3.00 per mmBtu in either direction of that point. If another halt
were triggered, the market would continue to be expanded by $3.00 per mmBtu in
either direction after each successive five-minute trading halt. There is no
maximum price fluctuation limit during any one trading session.




USNG
anticipates that to the extent it invests in Futures Contracts other
than natural gas contracts (such as futures contracts for light, sweet
crude oil, heating oil, and gasoline) and Other Natural Gas-Related Investments,
it will enter into various non-exchange-traded derivative contracts to hedge the
short-term price movements of such natural gas Futures Contracts and Other
Natural Gas-Related Investments against the current Benchmark Futures
Contract.





Examples
of the position and price limits imposed are as follows:





Futures
      Contract
            
            Position
      Accountability
              Levels
      and Limits
            
            Maximum
      Daily
              Price
      FluctuationNYMEX
      Natural Gas
              (physically
      settled)
            
            Any
      one month/all months: 12,000 net futures, but not to exceed 1,000
      contracts in the last three days of trading in the spot
    month.
            
            $3.00
      per mmBtu ($30,000 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $3.00 per
      mmBtu in either direction. If another halt were triggered, the market
      would continue to be expanded by $3.00 per mmBtu in either direction after
      each successive five-minute trading halt. There will be no maximum price
      fluctuation limits during any one trading session.NYMEX
      Light, Sweet Crude Oil
              (physically
      settled)
            
            Any
      one month: 10,000 net futures / all months: 20,000 net futures, but not to
      exceed 3,000 contracts in the last three days of trading in the spot
      month.
            
            $10.00
      per barrel ($10,000 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $10.00
      per barrel in either direction. If another halt were triggered, the market
      would continue to be expanded by $10.00 per barrel in either direction
      after each successive five-minute trading halt. There will be no maximum
      price fluctuation limits during any one trading
session.NYMEX
      Light, Sweet Crude Oil
              (financially
      settled)
            
            Any
      one month: 20,000 net futures / all months: 20,000 net futures, but not to
      exceed 2,000 contracts in the last three days of trading in the spot
      month.
            
            There
      is no maximum daily price fluctuation
limit.






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Futures
      Contract
                  
                  Position
      Accountability
                    Levels
      and Limits
                  
                  Maximum
      Daily
                    Price
      FluctuationICE
      West Texas Intermediate (“WTI”) Crude Futures
                    (financially
      settled)
                  
                  Any
      one month: 10,000 net futures / all months: 20,000 net futures, but not to
      exceed 3,000 contracts in the last three days of trading in the spot
      month.
                  
                  There
      is no maximum daily price fluctuation.ICE
      Brent Crude Futures
                    (physically
      settled)
                  
                  There
      are no position limits.
                  
                  There
      is no maximum daily price fluctuation limit.NYMEX
      Heating Oil
                    (physically
      settled)
                  
                  Any
      one month/all months: 7,000 net futures, but not to exceed 1,000 contracts
      in the last three days of trading in the spot month.
                  
                  $0.25
      per gallon ($10,500 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $0.25 per
      gallon in either direction. If another halt were triggered, the market
      would continue to be expanded by $0.25 per gallon in either direction
      after each successive five-minute trading halt. There will be no maximum
      price fluctuation limits during any one trading
session.NYMEX
      Gasoline
                    (physically
      settled)
                  
                  Any
      one month/all months: 7,000 net futures, but not to exceed 1,000 contracts
      in the last three days of trading in the spot month.
                  
                  $0.25
      per gallon ($10,500 per contract) for all months. If any contract is
      traded, bid, or offered at the limit for five minutes, trading is halted
      for five minutes. When trading resumes, the limit is expanded by $0.25 per
      gallon in either direction. If another halt were triggered, the market
      would continue to be expanded by $0.25 per gallon in either direction
      after each successive five-minute trading halt. There will be no maximum
      price fluctuation limits during any one trading
  session.




Price Volatility. Despite
daily price limits, the price volatility of Futures Contracts generally has been
historically greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day-to-day as opposed to intra-day.
Futures Contracts tend to be more volatile than stocks and bonds because price
movements for natural gas are more currently and directly influenced by economic
factors for which current data is available and are traded by natural gas
futures traders throughout the day. These economic factors include changes in
interest rates; governmental, agricultural, trade, fiscal, monetary and exchange
control programs and policies; weather and climate conditions; changing supply
and demand relationships; changes in balances of payments and trade; U.S. and
international rates of inflation; currency devaluations and revaluations; U.S.
and international political and economic events; and changes in philosophies and
emotions of market participants. Because USNG invests a significant portion of
its assets in Futures Contracts, the assets of USNG, and therefore the prices of
USNG units, may be subject to greater volatility than traditional
securities.





Marking-to-Market Futures
Positions. Futures Contracts are marked to market at the end of each
trading day and the margin required with respect to such contracts is adjusted
accordingly. This process of marking-to-market is designed to prevent losses
from accumulating in any futures account. Therefore, if USNG’s futures positions
have declined in value, USNG may be required to post variation margin to
cover this decline. Alternatively, if USNG futures positions have increased in
value, this increase will be credited to USNG’s account.




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What
is the Natural Gas Market and the Petroleum-Based Fuel Market?





Natural
Gas.  Natural gas accounts for almost a quarter of U.S. energy
consumption. The price of natural gas is established by the supply and demand
conditions in the North American market, and more particularly, in the main
refining center of the U.S. Gulf Coast. The natural gas market essentially
constitutes an auction, where the highest bidder wins the supply. When markets
are “strong” (i.e.,
when demand is high and/or supply is low), the bidder must be willing to pay a
higher premium to capture the supply. When markets are “weak” (i.e., when demand is low
and/or supply is high), a bidder may choose not to outbid competitors, waiting
instead for later, possibly lower priced, supplies. Demand for natural gas by
consumers, as well as agricultural, manufacturing and transportation industries,
determines overall demand for natural gas. Since the precursors of product
demand are linked to economic activity, natural gas demand will tend to reflect
economic conditions. However, other factors such as weather significantly
influence natural gas demand.





The NYMEX
is the world’s largest physical commodity futures exchange and the dominant
market for the trading of energy and precious metals. The Benchmark Futures
Contract trades in units of 10,000 mmBtu and is based on delivery at the Henry
Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline
systems that draw supplies from the region’s prolific gas deposits. The
pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the
Midwest, and up to the Canadian border. Because of the volatility of natural gas
prices, a vigorous basis market has developed in the pricing relationships
between the Henry Hub and other important natural gas market centers in the
continental United States and Canada. The NYMEX makes available for trading a
series of basis swap futures contracts that are quoted as price differentials
between approximately 30 natural gas pricing points and the Henry Hub. The basis
contracts trade in units of 2,500 mmBtu on the New York Mercantile Exchange
ClearPort® trading platform. The New York Mercantile Exchange ClearPort® is an
electronic trading platform through which a slate of energy futures contracts
are available for competitive trading. Transactions can also be consummated
off-NYMEX and submitted to the NYMEX for clearing via the NYMEX ClearPort®
clearing website as an exchange of futures for physicals or an exchange of
futures for swaps transactions.





Light, Sweet Crude
Oil.  Crude oil is the world’s most actively traded commodity.
The Futures Contracts for light, sweet crude oil that are traded on the NYMEX
are the world’s most liquid forum for crude oil trading, as well as the world’s
largest volume futures contract trading on a physical commodity. Due to the
liquidity and price transparency of oil Futures Contracts, they are used as a
principal international pricing benchmark. The Futures Contracts for light,
sweet crude oil trade on the NYMEX in units of 1,000 U.S. barrels (42,000
gallons) and, if not closed out before maturity, will result in delivery of oil
to Cushing, Oklahoma, which is also accessible to the international spot markets
by two major interstate petroleum pipeline systems.




Demand
for petroleum products by consumers, as well as agricultural, manufacturing and
transportation industries, determines demand for crude oil by refiners. Since
the precursors of product demand are linked to economic activity, crude oil
demand will tend to reflect economic conditions. However, other factors such as
weather also influence product and crude oil demand.




Crude oil
supply is determined by both economic and political factors. Oil prices (along
with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development
spending, which influence output capacity with a lag. In the short run,
production decisions by the Organization of Petroleum Exporting Countries
(“OPEC”) also affect supply and prices. Oil export embargoes and the current
conflict in Iraq represent other routes through which political developments
move the market. It is not possible to predict the aggregate effect of all or
any combination of these factors.




Heating Oil.Heating oil,
also known as No. 2 fuel oil, accounts for 25% of the yield of a barrel of crude
oil, the second largest “cut” from oil after gasoline. The heating oil Futures
Contract listed and traded on the NYMEX trades in units of 42,000 gallons
(1,000 barrels) and is based on delivery in the New York harbor, the principal
cash market center. The price of heating oil has historically been
volatile.




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Gasoline.Gasoline is the
largest single volume refined product sold in the U.S. and accounts for almost
half of national oil consumption. The gasoline Futures Contract listed and
traded on the NYMEX trades in units of 42,000 gallons (1,000 barrels) and is
based on delivery at petroleum products terminals in the New York harbor, the
major East Coast trading center for imports and domestic shipments from
refineries in the New York harbor area or from the Gulf Coast refining centers.
The price of gasoline has historically been volatile.




Why
Does USNG Purchase and Sell Futures Contracts?




USNG’s
investment objective is to have the changes in percentage terms of the units’
NAV reflect the changes in percentage terms of the Benchmark Futures Contract,
less USNG’s expenses. USNG invests primarily in Futures Contracts. USNG seeks to
have its aggregate NAV approximate at all times the aggregate market value of
the Futures Contracts (or Other Natural Gas-Related Investments) USNG
holds.




Other
than investing in Futures Contracts and Other Natural Gas-Related Investments,
USNG only invests in assets to support these investments in Natural Gas
Interests. At any given time, most of USNG’s investments are in Treasuries, cash
and/or cash equivalents that serve as segregated assets supporting USNG’s
positions in Futures Contracts and Other Natural Gas-Related Investments. For
example, the purchase of a Futures Contract with a stated value of $10 million
would not require USNG to pay $10 million upon entering into the contract;
rather, only a margin deposit, generally of 5% to 10% of the stated value of the
Futures Contract, would be required. To secure its Futures Contract obligations,
USNG would deposit the required margin with the futures commission merchant
and hold, through its Custodian, Treasuries, cash and/or cash
equivalents in an amount equal to the balance of the current market value
of the contract, which at the contract’s inception would be $10 million minus
the amount of the margin deposit, or $9.5 million (assuming a 5%
margin).




As a
result of the foregoing, typically only 5% to 10% of USNG’s assets are held as
margin in segregated accounts with the futures commission merchant. In
addition to the Treasuries or cash it posts with the futures commission
merchant for the Futures Contracts it owns, USNG holds, through the Custodian,
Treasuries, cash and/or cash equivalents that can be posted as additional
margin or as collateral to support its over-the-counter contracts. USNG earns
interest income from the Treasuries and/or cash equivalents that it
purchases, and on the cash it holds through the Custodian. USNG anticipates that
the earned interest income will increase the NAV and limited partners’ capital
contribution accounts. USNG reinvests the earned interest income, holds it in
cash, or uses it to pay its expenses. If USNG reinvests the earned interest
income, it will make investments that are consistent with its investment
objectives.




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What
is the Flow of Units?









What
are the Trading Policies of USNG?




Liquidity




USNG
invests only in Futures Contracts and Other Natural Gas-Related Investments that
are traded in sufficient volume to permit, in the opinion of the General
Partner, ease of taking and liquidating positions in these financial
interests.




Spot
Commodities




While the
Futures Contracts traded on the NYMEX can be physically settled, USNG does not
intend to take or make physical delivery. USNG may from time to time trade in
Other Natural Gas-Related Investments, including contracts based on the
spot price of natural gas.




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Leverage




The
General Partner endeavors to have the value of USNG’s Treasuries, cash and/or
cash equivalents, whether held by USNG or posted as margin or collateral, to at
all times approximate the aggregate market value of USNG’s obligations under its
Futures Contracts and Other Natural Gas-Related Investments.




Borrowings





Borrowings
are not used by USNG, unless USNG is required to borrow money in the event of
physical delivery, if USNG trades in cash commodities, or for short-term needs
created by unexpected redemptions. USNG expects to have the value of its
Treasuries, cash and/or cash equivalents whether held by USNG or posted as
margin or collateral, at all times approximate the aggregate market value of its
obligations under its Futures Contracts and Other Natural Gas-Related
Investments. USNG has not established and does not plan to establish credit
lines.




Pyramiding




USNG has
not and will not employ the technique, commonly known as pyramiding, in which
the speculator uses unrealized profits on existing positions as variation margin
for the purchase or sale of additional positions in the same or another
commodity interest.




Who
are the Service Providers?




BBH&Co.
is the registrar and transfer agent for the units. BBH&Co. is also the
Custodian for USNG. In this capacity, BBH&Co. holds USNG’s Treasuries,
cash and/or cash equivalents pursuant to a custodial agreement. In
addition, in its capacity as Administrator for USNG, BBH&Co. performs
certain administrative and accounting services for USNG and prepares certain
U.S. Securities and Exchange Commission (the “SEC”) and CFTC reports on behalf
of USNG. The General Partner pays BBH&Co. a fee for these
services.





BBH&Co.’s
principal business address is 50 Milk Street, Boston, MA
02109-3661. BBH&Co., a private bank founded in 1818, is not a publicly
held company nor is it insured by the Federal Deposit Insurance Corporation.
BBH&Co. is authorized to conduct a commercial banking business in accordance
with the provisions of Article IV of the New York State Banking Law, New York
Banking Law §§160–181, and is subject to regulation, supervision, and
examination by the New York State Banking Department. BBH&Co. is also
licensed to conduct a commercial banking business by the Commonwealths of
Massachusetts and Pennsylvania and is subject to supervision and examination by
the banking supervisors of those states.




USNG also
employs ALPS Distributors, Inc. as a Marketing Agent. The General Partner
pays the Marketing Agent an annual fee. In no event may the aggregate
compensation paid to the Marketing Agent and any affiliate of the General
Partner for distribution-related services in connection with the offering of
units exceed ten percent (10%) of the gross proceeds of the
offering.





ALPS’s
principal business address is 1290 Broadway, Suite 1100, Denver, CO 
80203.  ALPS is the marketing agent for USNG. ALPS is a broker-dealer
registered with the Financial Industry Regulatory Authority (“FINRA”) and a
member of the Securities Investor Protection Corporation.





USNG and
the futures commission merchant, UBS Securities LLC (“UBS Securities”) have
entered into an Institutional Futures Client Account Agreement. This Agreement
requires UBS Securities to provide services to USNG in connection with the
purchase and sale of natural gas interests that may be purchased or sold by or
through UBS Securities for USNG’s account. USNG pays UBS Securities commissions
for executing and clearing trades on behalf of USNG.





UBS
Securities is not affiliated with USNG or the General Partner. Therefore, USNG
does not believe that USNG has any conflicts of interest with UBS
Securities or their trading principals arising from their acting as USNG’s
futures commission merchant.




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UBS
Securities’s principal business address is 677 Washington Blvd, Stamford, CT
06901. UBS Securities is a futures clearing broker for USNG. UBS Securities is
registered in the U.S. with FINRA as a broker-dealer and with the CFTC as a
futures commission merchant. UBS Securities is a member of the NFA and various
U.S. futures and securities exchanges.





UBS
Securities will act only as clearing broker for USNG and as such will be paid
commissions for executing and clearing trades on behalf of USNG. UBS Securities
has not passed upon the adequacy or accuracy of this annual report on Form 10-K.
UBS Securities neither will act in any supervisory capacity with respect to the
General Partner nor participate in the management of USNG.





Currently,
the General Partner does not employ commodity trading advisors.  If,
in the future, the General Partner does employ commodity trading advisors, it
will choose each advisor based on arm’s-length negotiations and will consider
the advisor’s experience, fees and reputation.





Fees
of USNG


Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*




Service
      Provider
                Compensation
      Paid by the General PartnerBrown
      Brothers Harriman & Co.,
                  Custodian
      and Administrator
                Minimum
      amount of $75,000 annually* for its custody, fund accounting and fund
      administration services rendered to all funds, as well as a $20,000 annual
      fee for its transfer agency services. In addition, an asset-based charge
      of (a) 0.06% for the first $500 million of USNG’s and the Related Public
      Funds’ combined net assets, (b) 0.0465% for USNG’s and the Related Public
      Funds’ combined net assets greater than $500 million but less than $1
      billion, and (c) 0.035% once USNG’s and the Related Public Funds’ combined
      net assets exceed $1 billion.**ALPS
      Distributors, Inc., Marketing Agent
                0.06%
      on USNG’s assets up to $3 billion; 0.04% on USNG’s assets in excess of $3
      billion.




*
            The
      General Partner pays this
compensation.


**
            The
      annual minimum amount will not apply if the asset-based charge for all
      accounts in the aggregate exceeds $75,000. The General Partner also will
      pay transaction charge fees to BBH&Co., ranging from $7.00 to $15.00
      per transaction for the funds.





Compensation
to the General Partner





Assets
                Management
      FeeFirst
      $1,000,000,000
                0.60%
      of NAVAfter
      the first $1,000,000,000
                0.50%
      of NAV





Fees
and Compensation Arrangements between USNG and Non-Affiliated Service
Providers***





Service
      Provider
                Compensation
      Paid by USNGUBS
      Securities LLC, Futures Commission Merchant
                Approximately
      $3.50 per buy or sell; charges may varyNon-Affiliated
      Brokers
                Approximately
      0.13% of assets




***
            USNG
      pays this compensation.






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New
York Mercantile Exchange Licensing Fee****





Assets
                Licensing
      FeeFirst
      $1,000,000,000
                0.04%
      of NAVAfter
      the first $1,000,000,000
                0.02%
      of NAV





****
            Fees
      are calculated on a daily basis (accrued at 1/365 of the applicable
      percentage of NAV on that day) and paid on a monthly basis. USNG is
      responsible for its pro rata share of the assets held by USNG and the
      Related Public Funds as well as other funds managed by the General
      Partner, including USSO and US12NG, when and if such funds commence
      operations.





Expenses
Paid by USNG through December 31, 2008 in dollar terms:





Expenses:
                            
                            Amount in Dollar TermsAmount
      Paid to General Partner:
                            
                            $
                            5,613,585Amount
      Paid in Portfolio Brokerage Commissions:
                            
                            $
                            1,218,485Other
      Amounts Paid or Accrued:
                            
                            $
                            2,242,063Total
      Expenses Paid or Accrued:
                            
                            $
                            9,074,133





Expenses
Paid by USNG through December 31, 2008 as a Percentage of Average Daily Net
Assets:





Expenses:
                  Amount as a Percentage of Average
                    DailyNet AssetsGeneral
      Partner
                  0.60%
      annualizedPortfolio
      Brokerage Commissions
                  0.13%
      annualizedOther
      Amounts Paid or Accrued
                  0.24%
      annualizedTotal
      Expense Ratio
                  0.97%
      annualized




Form
of Units




Registered
Form. Units are issued in registered form in accordance with the LP
Agreement. The Administrator has been appointed registrar and transfer agent for
the purpose of transferring units in certificated form. The Administrator keeps
a record of all limited partners and holders of the units in certificated form
in the registry (the “Register”). The General Partner recognizes transfers of
units in certificated form only if done in accordance with the LP Agreement. The
beneficial interests in such units are held in book-entry form through
participants and/or accountholders in the Depository Trust Company
(“DTC”).




Book
Entry. Individual certificates are not issued for the units. Instead,
units are represented by one or more global certificates, which are deposited by
the Administrator with DTC and registered in the name of Cede & Co., as
nominee for DTC. The global certificates evidence all of the units outstanding
at any time. Unitholders are limited to (1) participants in DTC such as
banks, brokers, dealers and trust companies (“DTC Participants”), (2) those
who maintain, either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those banks, brokers,
dealers, trust companies and others who hold interests in the units through DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of units. DTC Participants acting on behalf of investors holding
units through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Units are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.




DTC. DTC
is a limited purpose trust company organized under the laws of the State of New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). DTC holds securities for
DTC Participants and facilitates the clearance and settlement of transactions
between DTC Participants through electronic book-entry changes in accounts of
DTC Participants.




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Transfer
of Units




Transfers of
Units Only Through DTC. The units are only transferable through the
book-entry system of DTC. Limited partners who are not DTC Participants may
transfer their units through DTC by instructing the DTC Participant holding
their units (or by instructing the Indirect Participant or other entity through
which their units are held) to transfer the units. Transfers are made in
accordance with standard securities industry practice.




Transfers
of interests in units with DTC are made in accordance with the usual rules and
operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders
of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act
on behalf of Indirect Participants, the ability of a person or entity having an
interest in a global certificate to pledge such interest to persons or entities
that do not participate in DTC, or otherwise take actions in respect of such
interest, may be affected by the lack of a definitive security in respect of
such interest.




DTC has
advised USNG that it takes any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate for
exchange) only at the direction of one or more DTC Participants in whose account
with DTC interests in global certificates are credited and only in respect of
such portion of the aggregate principal amount of the global certificate as to
which such DTC Participant or Participants has or have given such
direction.




Transfer/Application
Requirements. All purchasers of USNG’s units, and potentially any
purchasers of units in the future, who wish to become limited partners or other
record holders and receive cash distributions, if any, or have certain other
rights, must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by USNG’s LP Agreement and is eligible to purchase USNG’s securities. Each
purchaser of units must execute a transfer application and certification. The
obligation to provide the form of transfer application is imposed on the seller
of units or, if a purchase of units is made through an exchange, the form may be
obtained directly through USNG. Further, the General Partner may request each
record holder to furnish certain information, including that record holder’s
nationality, citizenship or other related status. A record holder is a
unitholder that is, or has applied to be, a limited partner. An investor who is
not a U.S. resident may not be eligible to become a record holder or one of
USNG’s limited partners if that investor’s ownership would subject USNG to the
risk of cancellation or forfeiture of any of USNG’s assets under any federal,
state or local law or regulation. If the record holder fails to furnish the
information or if the General Partner determines, on the basis of the
information furnished by the holder in response to the request, that such holder
is not qualified to become one of USNG’s limited partners, the General Partner
may be substituted as a holder for the record holder, who will then be treated
as a non-citizen assignee, and USNG will have the right to redeem those
securities held by the record holder.




A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. USNG may, at its discretion, treat the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.




A person
purchasing USNG’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the General
Partner obtained, USNG’s units are securities and are transferable according to
the laws governing transfers of securities.




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Any
transfer of units will not be recorded by the transfer agent or recognized by
the General Partner unless a completed transfer application is delivered to the
General Partner or the Administrator. When acquiring units, the transferee of
such units that completes a transfer application will:




·
            be
      an assignee until admitted as a substituted limited partner upon the
      consent and sole discretion of the General Partner and the recording of
      the assignment on the books and records of the
  partnership;





·
            automatically
      request admission as a substituted limited
  partner;





·         agree
to be bound by the terms and conditions of, and execute, USNG’s LP
Agreement;





·         represent
that such transferee has the capacity and authority to enter into USNG’s LP
Agreement;





·         grant
powers of attorney to USNG’s General Partner and any liquidator of us;
and





·         make
the consents and waivers contained in USNG’s LP Agreement.





An
assignee will become a limited partner in respect of the transferred units upon
the consent of USNG’s General Partner and the recordation of the name of the
assignee on USNG’s books and records. Such consent may be withheld in the sole
discretion of USNG’s General Partner.




If
consent of the General Partner is withheld, such transferee shall be an
assignee. An assignee shall have an interest in the partnership equivalent to
that of a limited partner with respect to allocations and distributions,
including, without limitation, liquidating distributions, of the partnership.
With respect to voting rights attributable to units that are held by assignees,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such units on
any matter, vote such units at the written direction of the assignee who is the
record holder of such units. If no such written direction is received, such
units will not be voted. An assignee shall have no other rights of a limited
partner.




Until a
unit has been transferred on USNG’s books, USNG and the transfer agent may treat
the record holder of the unit as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations.




Withdrawal
of Limited Partners




As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal of all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited
partner’s ownership of units would result in the violation of any law or
regulations applicable to the partnership or a partner. In these circumstances,
the General Partner without notice may require the withdrawal at any time, or
retroactively. The limited partner thus designated shall withdraw from the
partnership or withdraw that portion of its partner capital account specified,
as the case may be, as of the close of business on such date as determined by
the General Partner. The limited partner thus designated shall be deemed to have
withdrawn from the partnership or to have made a partial withdrawal from its
partner capital account, as the case may be, without further action on the part
of the limited partner and the provisions of the LP Agreement shall
apply.





Calculating
NAV




USNG’s
NAV is calculated by:





·         Taking
the current market value of its total assets; and





·         Subtracting
any liabilities.





BBH&Co.,
the Administrator, calculates the NAV of USNG once each trading day. The NAV for
a particular trading day is released after 4:15 p.m. New York time. It
calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New
York time. Trading on the NYSE Arca typically closes at 4:15 p.m. New York time.
The Administrator uses the NYMEX closing price (determined at the earlier of the
close of the NYMEX or 2:30 p.m. New York time) for the contracts traded on the
NYMEX, but determines the value of all other USNG investments as of the earlier
of the close of the NYSE or 4:00 p.m. New York time in accordance with the
current Administrative Agency Agreement among BBH&Co., USNG and the General
Partner which is
incorporated by reference into this annual report on Form
10-K.




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In
addition, in order to provide updated information relating to USNG for use by
investors and market professionals, the NYSE Arca calculates and disseminates
throughout the trading day an updated indicative fund value. The indicative fund
value is calculated by using the prior day’s closing NAV per unit of USNG as a
base and updating that value throughout the trading day to reflect changes in
the most recently reported trade price for the Benchmark Futures Contract on the
NYMEX. The prices reported for the active Benchmark Futures Contract month are
adjusted based on the prior day’s spread differential between settlement values
for that contract and the spot month contract. In the event that the spot month
contract is also the active contract, the last sale price for the active
contract is not adjusted. The indicative fund value unit basis disseminated
during NYSE Arca trading hours should not be viewed as an actual real time
update of the NAV, because the NAV is calculated only once at the end of each
trading day.




The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular NYSE Arca trading hours of 9:30 a.m. New York time to 4:15 p.m.
New York time. The normal trading hours of the NYMEX are 10:00 a.m. New York
time to 2:30 p.m. New York time. This means that there is a gap in time at the
beginning and the end of each day during which USNG’s units are traded on the
NYSE Arca, but real-time NYMEX trading prices for futures contracts traded on
the NYMEX are not available. As a result, during those gaps there will be no
update to the indicative fund value.




The NYSE
Arca disseminates the indicative fund value through the facilities of CTA/CQ
High Speed Lines. In addition, the indicative fund value is published on the
NYSE Arca’s website and is available through on-line information services such
as Bloomberg and Reuters.




Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of USNG units on the NYSE Arca.
Investors and market professionals are able throughout the trading day to
compare the market price of USNG and the indicative fund value. If the market
price of USNG units diverges significantly from the indicative fund value,
market professionals will have an incentive to execute arbitrage trades. For
example, if USNG appears to be trading at a discount compared to the indicative
fund value, a market professional could buy USNG units on the NYSE Arca and sell
short futures contracts. Such arbitrage trades can tighten the tracking between
the market price of USNG and the indicative fund value and thus can be
beneficial to all market participants.




In
addition, other Futures Contracts, Other Natural Gas-Related Investments and
Treasuries held by USNG are valued by the Administrator, using rates and points
received from client approved third party vendors (such as Reuters and WM
Company) and advisor quotes. These investments are not included in the
indicative value. The indicative fund value is based on the prior day’s NAV and
moves up and down according solely to changes in the price of the Benchmark
Futures Contract.





Creation
and Redemption of Units




USNG
creates and redeems units from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets are only
made in exchange for delivery to USNG or the distribution by USNG of the amount
of Treasuries and any cash represented by the baskets being created or redeemed,
the amount of which is based on the combined NAV of the number of units included
in the baskets being created or redeemed determined as of 4:00 p.m. New York
time on the day the order to create or redeem baskets is properly
received.




Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery of
the Treasuries and any cash required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached thereto may
be amended by USNG, without the consent of any limited partner or unitholder or
Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000 to
USNG for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with USNG in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of any
kind from either USNG or the General Partner, and no such person will have any
obligation or responsibility to the General Partner or USNG to effect any sale
or resale of units. As of December 31, 2008, 7 Authorized Purchasers had
entered into agreements with USNG to purchase Creation Baskets.




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Certain
Authorized Purchasers are expected to have the facility to participate directly
in the physical natural gas market and the natural gas futures market. In some
cases, an Authorized Purchaser or its affiliates may from time to time acquire
natural gas or sell natural gas and may profit in these instances. The General
Partner believes that the size and operation of the natural gas market make it
unlikely that an Authorized Purchaser’s direct activities in the natural gas or
securities markets will impact the price of natural gas, Futures Contracts, or
the price of the units.




Each
Authorized Purchaser is required to be registered as a broker-dealer under the
Exchange Act and is a member in good standing with FINRA, or exempt from being
or otherwise not required to be licensed as a broker-dealer or a member of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate in
light of its own regulatory regime.




Under the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify the
Authorized Purchasers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and to contribute to the payments the
Authorized Purchasers may be required to make in respect of those
liabilities.




The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is incorporated by reference into this annual
report on Form 10-K.




Creation
Procedures




On any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the NYSE Arca, the NYMEX or the NYSE is closed for regular trading. Purchase
orders must be placed by 12:00 p.m. New York time or the close of regular
trading on the NYSE Arca, whichever is earlier. The day on which the Marketing
Agent receives a valid purchase order is the purchase order date.




By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries,
cash, or a combination of Treasuries and cash with USNG, as described below.
Prior to the delivery of baskets for a purchase order, the Authorized Purchaser
must also have wired to the Custodian the non-refundable transaction fee due for
the purchase order. Authorized Purchasers may not withdraw a creation
request.




Determination
of Required Deposits





The total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasuries and/or cash that is in the same proportion to the total assets of
USNG (net of estimated accrued but unpaid fees, expenses and other liabilities)
on the date the order to purchase is accepted as the number of units to be
created under the purchase order is in proportion to the total number of units
outstanding on the date the order is received. The General Partner determines,
directly in its sole discretion or in consultation with the Administrator, the
requirements for Treasuries and the amount of cash, including the maximum
permitted remaining maturity of a Treasury and proportions of Treasury and cash
that may be included in deposits to create baskets. The amount of cash deposit
required is the difference between the aggregate market value of the Treasuries
required to be included in a Creation Basket Deposit as of 4:00 p.m. New York
time on the date the order to purchase is properly received and the total
required deposit.




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Delivery
of Required Deposits





An
Authorized Purchaser who places a purchase order is responsible for transferring
to USNG’s account with the Custodian the required amount of Treasuries and cash
by the end of the third business day following the purchase order date. Upon
receipt of the deposit amount, the Administrator directs DTC to credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk of delivery
and ownership of Treasuries until such Treasuries have been received by the
Custodian on behalf of USNG shall be borne solely by the Authorized
Purchaser.




Because
orders to purchase baskets must be placed by 12:00 p.m., New York time, but the
total payment required to create a basket during the continuous offering period
will not be determined until 4:00 p.m. New York time on the date the purchase
order is received, Authorized Purchasers will not know the total amount of the
payment required to create a basket at the time they submit an irrevocable
purchase order for the basket. USNG’s NAV and the total amount of the payment
required to create a basket could rise or fall substantially between the time an
irrevocable purchase order is submitted and the time the amount of the purchase
price in respect thereof is determined.





Rejection
of Purchase Orders





The
General Partner acting by itself or through the Marketing Agent may reject a
purchase order or a Creation Basket Deposit if:





·
            it
      determines that the investment alternative available to USNG at that time
      will not enable it to meet its investment
  objective;





·
            it
      determines that the purchase order or the Creation Basket Deposit is not
      in proper form;





·
            it
      believes that the purchase order or the Creation Basket Deposit would have
      adverse tax consequences to USNG or its
  unitholders;





·
            the
      acceptance or receipt of the Creation Basket Deposit would, in the opinion
      of counsel to the General Partner, be unlawful;
  or





·
            circumstances
      outside the control of the General Partner, Marketing Agent or Custodian
      make it, for all practical purposes, not feasible to process creations of
      baskets.





None of
the General Partner, Marketing Agent or Custodian will be liable for the
rejection of any purchase order or Creation Basket Deposit.




Redemption
Procedures




The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the Marketing Agent to redeem one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York time or
the close of regular trading on the NYSE, whichever is earlier. A redemption
order so received will be effective on the date it is received in satisfactory
form by the Marketing Agent. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual unitholder to
redeem any units in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to USNG not later than 3:00 p.m. New York time
on the third business day following the effective date of the redemption order.
Prior to the delivery of the redemption distribution for a redemption order, the
Authorized Purchaser must also have wired to USNG’s account at the Custodian the
non-refundable transaction fee due for the redemption order. Authorized
Purchasers may not withdraw a redemption request.




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Determination
of Redemption Distribution





The
redemption distribution from USNG consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and/or cash that is in the same
proportion to the total assets of USNG (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the date the order to redeem is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the date the
order is received. The General Partner, directly or in consultation with the
Administrator, determines the requirements for Treasuries and the amounts of
cash, including the maximum permitted remaining maturity of a Treasury, and the
proportions of Treasuries and cash that may be included in distributions to
redeem baskets.





Delivery
of Redemption Distribution





The
redemption distribution due from USNG will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following the
redemption order date if, by 3:00 p.m. New York time on such third business day,
USNG’s DTC account has been credited with the baskets to be redeemed. If USNG’s
DTC account has not been credited with all of the baskets to be redeemed by such
time, the redemption distribution will be delivered to the extent of whole
baskets received. Any remainder of the redemption distribution will be delivered
on the next business day to the extent of remaining whole baskets received if
USNG receives the fee applicable to the extension of the redemption distribution
date which the General Partner may, from time to time, determine and the
remaining baskets to be redeemed are credited to USNG’s DTC account by 3:00 p.m.
New York time on such next business day. Any further outstanding amount of the
redemption order shall be cancelled. Pursuant to information from the General
Partner, the Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are not credited to
USNG’s DTC account by 3:00 p.m. New York time on the third business day
following the redemption order date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the General Partner may from time to time
determine.





Suspension
or Rejection of Redemption Orders





The
General Partner may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during which the
NYSE Arca or the NYMEX is closed other than customary weekend or holiday
closings, or trading on the NYSE Arca or the NYMEX is suspended or restricted,
(2) for any period during which an emergency exists as a result of which
delivery, disposal or evaluation of Treasuries is not reasonably practicable, or
(3) for such other period as the General Partner determines to be necessary for
the protection of the limited partners. For example, the General Partner may
determine that it is necessary to suspend redemptions to allow for the orderly
liquidation of USNG’s assets at an appropriate value to fund a redemption. If
the General Partner has difficulty liquidating its positions, e.g., because of a market
disruption event in the futures markets, a suspension of trading by the exchange
where the futures contracts are listed or an unanticipated delay in the
liquidation of a position in an over the counter contract, it may be appropriate
to suspend redemptions until such time as such circumstances are rectified. None
of the General Partner, the Marketing Agent, the Administrator, or the Custodian
will be liable to any person or in any way for any loss or damages that may
result from any such suspension or postponement.





Redemption
orders must be made in whole baskets. The General Partner will reject a
redemption order if the order is not in proper form as described in the
Authorized Purchaser Agreement or if the fulfillment of the order, in the
opinion of its counsel, might be unlawful. The General Partner may also reject a
redemption order if the number of units being redeemed would reduce the
remaining outstanding units to 100,000 units (i.e., one basket) or less,
unless the General Partner has reason to believe that the placer of the
redemption order does in fact possess all the outstanding units and can deliver
them.




Creation
and Redemption Transaction Fee




To
compensate USNG for its expenses in connection with the creation and redemption
of baskets, an Authorized Purchaser is required to pay a transaction fee to USNG
of $1,000 per order to create or redeem baskets. An order may include multiple
baskets. The transaction fee may be reduced, increased or otherwise changed by
the General Partner. The General Partner shall notify DTC of any change in the
transaction fee and will not implement any increase in the fee for the
redemption of baskets until 30 days after the date of the
notice.




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Tax
Responsibility




Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and USNG if they are required by law to pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.




Secondary
Market Transactions




As noted,
USNG will create and redeem units from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
will only be made in exchange for delivery to USNG or the distribution by USNG
of the amount of Treasuries and cash represented by the baskets being created or
redeemed, the amount of which will be based on the aggregate NAV of the number
of units included in the baskets being created or redeemed determined on the day
the order to create or redeem baskets is properly received.





As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the NYSE Arca, the NAV of
USNG at the time the Authorized Purchaser purchased the Creation Baskets and the
NAV of the units at the time of the offer of the units to the public, the supply
of and demand for units at the time of sale, and the liquidity of the Futures
Contract market and the market for Other Natural Gas-Related Investments. The
prices of units offered by Authorized Purchasers are expected to fall between
USNG’s NAV and the trading price of the units on the NYSE Arca at the time of
sale. Units initially comprising the same basket but offered by Authorized
Purchasers to the public at different times may have different offering prices.
An order for one or more baskets may be placed by an Authorized Purchaser on
behalf of multiple clients. Authorized Purchasers who make deposits with USNG in
exchange for baskets receive no fees, commissions or other form of compensation
or inducement of any kind from either USNG or the General Partner, and no such
person has any obligation or responsibility to the General Partner or USNG to
effect any sale or resale of units. Units are expected to trade in the secondary
market on the NYSE Arca. Units may trade in the secondary market at prices that
are lower or higher relative to their NAV per unit. The amount of the discount
or premium in the trading price relative to the NAV per unit may be influenced
by various factors, including the number of investors who seek to purchase or
sell units in the secondary market and the liquidity of the Futures Contracts
market and the market for Other Natural Gas-Related Investments. While the units
trade on the NYSE Arca until 4:15 p.m. New York time, liquidity in the market
for Futures Contracts and Other Natural Gas-Related Investments may be reduced
after the close of the NYMEX at 2:30 p.m. New York time. As a result, during
this time, trading spreads, and the resulting premium or discount, on the units
may widen.




Prior
Performance of USNG




USNG’s
units began trading on the American Stock Exchange (the “AMEX”) on April 18,
2007 and are offered on a continuous basis. As a result of the acquisition of
the AMEX by NYSE Euronext, USNG’s units commenced trading on the NYSE Arca on
November 25, 2008. As of December 31, 2008, the total amount of money raised by
USNG from Authorized Purchasers was $4,150,671,803; the total number of
Authorized Purchasers was 7; the number of baskets purchased by Authorized
Purchasers was 1,077; and the aggregate amount of units purchased was
107,700,000. For more information on the performance of USNG, see the
Performance Tables below.




Since its
initial offering of 30,000,000 units, USNG has made three subsequent offerings
of its units: 50,000,000 units which were registered with the SEC on November
21, 2007, 30,000,000 units which were registered with the SEC on May 1, 2008 and
an additional 100,000,000 units which were registered with the SEC on August 28,
2008. Units offered by USNG in subsequent offerings were sold by it for cash at
the units’ NAV as described in the applicable prospectus. As of December 31,
2008, USNG had issued 107,700,000 units, 29,900,000 of which were outstanding.
As of December 31, 2008, there were 72,300,000 units registered but not yet
issued.
  Since the
offering of USNG units to the public on April 17, 2007 to December 31, 2008, the
simple average daily change in its benchmark futures contract was -0.507%, while
the simple average daily change in the NAV of USNG over the same time period
was -0.505%. The average daily difference was -0.002% (or -0.2 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was 0.346%, meaning that over this time period USNG’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.




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PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




Experience
in Raising and Investing in Funds through December 31, 2008





Dollar
      Amount Offered*:
                  
                  $
                  7,631,500,000Dollar
      Amount Raised:
                  
                  $
                  4,150,671,803Organizational
      and Offering Expenses**:SEC registration
    fee:
                  
                  $
                  340,557FINRA registration
      fee:
                  
                  $
                  226,500Listing fee:
                  
                  $
                  5,000Auditor’s fees and
      expenses:
                  
                  $
                  206,850Legal fees and
      expenses:
                  
                  $
                  686,695Printing
expenses:
                  
                  $
                  56,130Length
      of offering:
                  
                  Continuous


——————


*
              Reflects
      the offering price per unit set forth on the cover page of the
      registration statementregistering
      such units filed with the SEC.
 **
              Amounts
      are for organizational and offering expenses incurred in connection with
      offerings from April 18, 2007 through December 31, 2008. Through April 18,
      2007, these expenses were paid for by the General Partner. Following
      April 18, 2007, USNG has borne the expenses related to the offering of its
      units.




Expenses
Paid by USNG through December 31, 2008 in dollar terms:





Expenses
                                    
                                    Amount in Dollar TermsAmount
      Paid to General Partner in USNG Offering:
                                    
                                    $
                                    5,613,585Amount
      Paid in Portfolio Brokerage Commissions in USNG Offering:
                                    
                                    $
                                    1,218,485Other
      Amounts Paid in USNG Offering:
                                    
                                    $
                                    2,242,063Total
      Expenses Paid in USNG Offering:
                                    
                                    $
                                    9,074,133





Compensation
to the General Partner and Other Compensation




Expenses in USNG Offering:
            
            Amount
      As a Percentage
              of Average Daily Net
  AssetsAmount
      Paid to General Partner in USNG Offering:
            
            0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions in USNG Offering:
            
            0.13%
      annualizedOther
      Amounts Paid in USNG Offering:
            
            0.24%
      annualizedTotal
      Expenses Paid in USNG Offering:
            
            0.97%
      annualized





USNG Performance:Name
      of Commodity Pool:
                        
                        USNGType
      of Commodity Pool:
                        
                        Exchange
      traded securityInception
      of Trading:
                        
                        April
      18, 2007Aggregate
      Subscriptions (from inception through
      December 31, 2008):
                        
                        $4,150,671,803Total
      Net Assets as of December 31, 2008:
                        
                        $695,714,510*Initial
      NAV Per Unit as of Inception:
                        
                        $50.00NAV
      per Unit as of December 31, 2008:
                        
                        $23.27Worst
      Monthly Percentage Draw-down:
                        
                        July
      2008 (32.13)%Worst
      Peak-to-Valley Draw-down:
                        
                        June
      2008 – December 2008
(62.86)%


——————


* Inclusive
of transactions recorded on a trade date + 1 basis.




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COMPOSITE
PERFORMANCE DATA FOR USNG
  PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of returnMonth
                          
                          2007
                          
                          
                          2008January
                          
                          
                          –
                          
                          
                          
                          8.87
                          %February
                          
                          
                          –
                          
                          
                          
                          15.87
                          %March
                          
                          
                          –
                          
                          
                          
                          6.90
                          %April
                          
                          
                          4.30
                          %*
                          
                          
                          6.42
                          %May
                          
                          
                          (0.84)
                          %
                          
                          
                          6.53
                          %June
                          
                          
                          (15.90)
                          %
                          
                          
                          13.29
                          %July
                          
                          
                          (9.68)
                          %
                          
                          
                          (32.13)
                          %August
                          
                          
                          (13.37)
                          %
                          
                          
                          (13.92)
                          %September
                          
                          
                          12.28
                          %
                          
                          
                          (9.67)
                          %October
                          
                          
                          12.09
                          %
                          
                          
                          (12.34)
                          %November
                          
                          
                          (16.16)
                          %
                          
                          
                          (6.31)
                          %December
                          
                          
                          0.75
                          %
                          
                          
                          (14.32)
                          %Annual
      Rate of Return
                          
                          
                          (27.64)
                          %
                          
                          
                          (35.68)
                          %


___________


*
            Partial
      from April 18, 2007





Terms
      Used in Performance Tables





Draw-down: Losses experienced
over a specified period. Draw-down is measured on the basis of monthly returns
only and does not reflect intra-month figures.





Worst Monthly Percentage
Draw-down: The largest single month loss sustained since inception of
trading.





Worst Peak-to-Valley
Draw-down: The largest percentage decline in the NAV per unit over the
history of the fund. This need not be a continuous decline, but can be a series
of positive and negative returns where the negative returns are larger than the
positive returns.  Worst Peak-to-Valley Draw-down represents the
greatest percentage decline from any month-end NAV per unit that occurs without
such month-end NAV per unit being equaled or exceeded as of a subsequent
month-end. For example, if the NAV per unit declined by $1 in each of January
and February, increased by $1 in March and declined again by $2 in April, a
“peak-to-trough drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February drawdown
would have ended as of the end of February at the $2 level.


Prior
Performance of the Related Public Funds




The
      General Partner is also currently the general partner of the Related
      Public Funds. Each of the General Partner and the Related Public Funds is
      located in California.





USOF is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USOF is to have the changes in percentage terms of its units’ NAV
reflect the changes in percentage terms of the price of light, sweet crude oil
delivered to Cushing, Oklahoma, as measured by the changes in the price of the
futures contract on light, sweet crude oil traded on the NYMEX, less USOF’s
expenses. USOF’s units began trading on April 10, 2006 and are offered on a
continuous basis. USOF invests in a mixture of listed crude oil futures
contracts, other non-listed oil related investments, Treasuries, cash and cash
equivalents. As of December 31, 2008, the total amount of money raised by USOF
from its authorized purchasers was $18,578,175,328; the total number of
authorized purchasers of USOF was 14; the number of baskets purchased by
authorized purchasers of USOF was 2,923; and the aggregate amount of units
purchased was 292,300,000. USOF employs an investment strategy in its operations
that is similar to the investment strategy of USNG, except that its benchmark is
the near month contract to expire for light, sweet crude oil delivered to
Cushing, Oklahoma.




- 24
-
 Table of Contents





Since the
offering of USOF units to the public on April 10, 2006 to December 31, 2008, the
simple average daily change in its benchmark oil futures contract was -0.074%,
while the simple average daily change in the NAV of USOF over the same time
period was -0.066%. The average daily difference was 0.008% (or 0.8 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark oil futures contract, the average error in daily
tracking by the NAV was 2.345%, meaning that over this time period USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.





US12OF is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12OF is to have the changes in percentage terms of its units’ NAV
reflect the changes in percentage terms of the price of light, sweet crude oil
delivered to Cushing, Oklahoma, as measured by the changes in the average of the
prices of 12 futures contracts on light, sweet crude oil traded on the NYMEX,
consisting of the near month contract to expire and the contracts for the
following 11 months, for a total of 12 consecutive months’ contracts, less
US12OF’s expenses. US12OF’s units began trading on December 6, 2007 and are
offered on a continuous basis. US12OF invests in a mixture of listed crude oil
futures contracts, other non-listed oil related investments, Treasuries, cash
and cash equivalents. As of December 31, 2008, the total amount of money raised
by US12OF from its authorized purchasers was $23,231,434; the total number of
authorized purchasers of US12OF was 2; the number of baskets purchased by
authorized purchasers of US12OF was 5; and the aggregate amount of units
purchased was 500,000. US12OF employs an investment strategy in its operations
that is similar to the investment strategy of USNG, except that its benchmark is
the average of the prices of the near month contract to expire and the following
eleven months contracts for light, sweet crude oil delivered to Cushing,
Oklahoma.





Since the
offering of US12OF units to the public on December 6, 2007 to December 31, 2008,
the simple average daily change in its benchmark oil futures contract was
-0.315%, while the simple average daily change in the NAV of US12OF over the
same time period was -0.323%. The average daily difference was 0.007% (or 0.7
basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the
daily movement of the benchmark oil futures contract, the average error in daily
tracking by the NAV was 0.024%, meaning that over this time period US12OF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.





UGA is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of UGA is to have the changes in percentage terms of its units’ NAV
reflect the changes in percentage terms in the price of unleaded gasoline for
delivery to the New York harbor, as measured by the changes in the price of the
futures contract on gasoline traded on the NYMEX, less UGA’s expenses. UGA
may invest in a mixture of listed gasoline futures contracts, other
non-listed gasoline related investments, Treasuries, cash and cash equivalents.
UGA’s units began trading on February 26, 2008 and are offered on a continuous
basis. As of December 31, 2008, the total amount of money raised by UGA
from its authorized purchasers was $46,114,901; the total number of authorized
purchasers of UGA was 4; the number of baskets purchased by authorized
purchasers of UGA was 13; and the aggregate amount of units purchased was
1,300,000. UGA employs an investment strategy in its operations that is similar
to the investment strategy of USNG, except that its benchmark is the near month
contract for unleaded gasoline delivered to the New York harbor.





Since the
offering of UGA units to the public on February 26, 2008 to December 31, 2008,
the simple average daily change in its benchmark futures contract was -0.386%,
while the simple average daily change in the NAV of UGA over the same time
period was -0.383%. The average daily difference was -0.003% (or -0.3 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.605%, meaning that over this time period UGA’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.





USHO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USHO is to have the changes in percentage terms of its units’ NAV
reflect the changes in percentage terms of the price of heating oil for delivery
to the New York harbor, as measured by the changes in the price of the futures
contract on heating oil traded on the NYMEX, less USHO’s expenses. USHO may
invest in a mixture of listed heating oil futures contracts, other non-listed
heating oil-related investments, Treasuries, cash and cash equivalents. USHO’s
units began trading on April 9, 2008 and are offered on a continuous basis. As
of December 31, 2008, the total amount of money raised by USHO from its
authorized purchasers was $17,556,271; the total number of authorized purchasers
of USHO was 4; the number of baskets purchased by authorized purchasers of USHO
was 4; and the aggregate amount of units purchased was 400,000. USHO employs an
investment strategy in its operations that is similar to the investment strategy
of USNG, except that its benchmark is the near month contract for heating oil
delivered to the New York harbor.




- 25
-
 Table of
Contents





Since the
offering of USHO units to the public on April 9, 2008 to December 31, 2008, the
simple average daily change in its benchmark futures contract was -0.720%, while
the simple average daily change in the NAV of USHO over the same time period
was -0.715%. The average daily difference was -0.005% (or -0.5 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.681%, meaning that over this time period USHO’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.





The
General Partner has filed a registration statement for two other exchange traded
security funds, USSO and US12NG. The investment objective of USSO would be to
have the changes in percentage terms of its units’ NAV to inversely reflect the
changes in the spot price of light, sweet crude oil delivered to Cushing,
Oklahoma, as measured by the changes in percentage terms of the price of the
futures contract on light, sweet crude oil as traded on the NYMEX. The
investment objective of US12NG would be to have the changes in percentage terms
of its units’ NAV reflect the changes in percentage terms of the price of
natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in
the average of the prices of 12 futures contracts on natural gas traded on the
NYMEX, consisting of the near month contract to expire and the contracts for the
following 11 months, for a total of 12 consecutive months’
contracts.





There are
significant differences between investing in USNG and the Related Public Funds
and investing directly in the futures market. The General Partner’s results with
USNG and the Related Public Funds may not be representative of results that may
be experienced with a fund directly investing in futures contracts or other
managed funds investing in futures contracts. Moreover, given the different
investment objectives of USNG and the Related Public Funds, the performance of
USNG may not be representative of results that may be experienced by the other
Related Public Funds. For more information on the performance of the Related
Public Funds, see the Performance Tables below.




USOF:





Experience
in Raising and Investing in Funds through December 31, 2008


PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered in USOF Offering*:
            $23,384,630,000Dollar
      Amount Raised in USOF Offering:Organizational
      and Offering Expenses**:
            $18,578,175,328SEC registration
    fee:
            $1,522,485FINRA registration
      fee:
            $528,000Listing fee:
            $5,000Auditor’s fees and
      expenses:
            $193,350Legal fees and
      expenses:
            $1,506,565Printing
expenses:
            $292,126Length
      of USOF Offering:
            Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            Amounts
      are for organizational and offering expenses incurred in connection with
      the offerings from April 10, 2006 through December 31, 2008. Through
      December 31, 2006, these expenses were paid for by an affiliate of the
      General Partner in connection with the initial public offering. Following
      December 31, 2006, USOF has borne the expenses related to the offering of
      its units.






- 26
-
 Table of Contents




Compensation
to the General Partner and Other Compensation





Expenses
paid by USOF through December 31, 2008 in dollar terms:





Expenses:
                          
                          Amount in Dollar TermsAmount
      Paid to General Partner in USOF Offering:
                          
                          $
                          9,141,311Amount
      Paid in Portfolio Brokerage Commissions in USOF Offering:
                          
                          $
                          3,271,301Other
      Amounts Paid in USOF Offering:
                          
                          $
                          4,002,391Total
      Expenses Paid in USOF Offering:
                          
                          $
                          16,415,003





Expenses
paid by USOF through December 31, 2008 as a Percentage of Average Daily Net
Assets:





Expenses in USOF Offering:
            
            Amount As a Percentage
              of Average Daily Net AssetsAmount
      Paid to General Partner in USOF Offering:
            
            0.48%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions in USOF Offering:
            
            0.17%
      annualizedOther
      Amounts Paid in USOF Offering:
            
            0.21%
      annualizedTotal
      Expenses Paid in USOF Offering:
            
            0.86%
      annualized





USOF Performance:Name
      of Commodity Pool:
                                                        USOFType
      of Commodity Pool:
                                                        Exchange
      traded securityInception
      of Trading:
                                                        April
      10, 2006Aggregate
      Subscriptions (from inception through December 31, 2008):
                                                        $18,578,175,328Total
      Net Assets as of December 31, 2008:
                                                        $2,569,623,931*Initial
      NAV per Unit as of Inception:
                                                        $67.39NAV
      per Unit as of December 31, 2008:
                                                        $34.31Worst
      Monthly Percentage Draw-down:
                                                        October
      2008 (31.57)%Worst
      Peak-to-Valley Draw-down:
                                                        June 2008
      – December 2008(69.72)%


COMPOSITE
PERFORMANCE DATA FOR USOF
  PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




Rates of returnMonth
                            
                            2006
                            
                            
                            2007
                            
                            
                            2008January
                            
                            
                            –
                            
                            
                            
                            (6.55)
                            %
                            
                            
                            (4.00)
                            %February
                            
                            
                            –
                            
                            
                            
                            5.63
                            %
                            
                            
                            11.03
                            %March
                            
                            
                            –
                            
                            
                            
                            4.61
                            %
                            
                            
                            0.63
                            %April
                            
                            
                            3.47
                            %*
                            
                            
                            (4.26)
                            %
                            
                            
                            12.38
                            %May
                            
                            
                            (2.91)
                            %
                            
                            
                            (4.91)
                            %
                            
                            
                            12.80
                            %June
                            
                            
                            3.16
                            %
                            
                            
                            9.06
                            %
                            
                            
                            9.90
                            %July
                            
                            
                            (0.50)
                            %
                            
                            
                            10.57
                            %
                            
                            
                            (11.72)
                            %August
                            
                            
                            (6.97)
                            %
                            
                            
                            (4.95)
                            %
                            
                            
                            (6.75)
                            %September
                            
                            
                            (11.72)
                            %
                            
                            
                            12.11
                            %
                            
                            
                            (12.97)
                            %October
                            
                            
                            (8.45)
                            %
                            
                            
                            16.98
                            %
                            
                            
                            (31.57)
                            %November
                            
                            
                            4.73
                            %
                            
                            
                            (4.82)
                            %
                            
                            
                            (20.65)
                            %December
                            
                            
                            (5.21)
                            %
                            
                            
                            8.67
                            %
                            
                            
                            (22.16)
                            %Annual
      Rate of Return
                            
                            
                            (23.03)
                            %
                            
                            
                            46.17
                            %
                            
                            
                            (54.75)
                            %





*         Partial
from April 10, 2006




- 27
-
 Table of Contents




US12OF:





Experience
in Raising and Investing in Funds through December 31, 2008


PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered in US12OF Offering*:
            $550,000,000Dollar
      Amount Raised in US12OF Offering:
            $23,232,434Organizational
      andOffering
      Expenses**:SEC registration
    fee:
            $16,885FINRA registration
      fee:
            $75,500Listing fee:
            $5,000Auditor’s fees and
      expenses:
            $35,700Legal fees and
      expenses:
            $213,235Printing
expenses:
            $23,755Length
      of US12OF Offering:
            Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            These
      expenses were paid for by the General
Partner.




Compensation
to the General Partner and Other Compensation





Expenses paid byUS12OF through December 31, 2008 in dollar
terms:





Expenses:
                  Amount in Dollar
      TermsAmount
      Paid to General Partner in US12OF Offering:
                  $57,977Amount
      Paid in Portfolio Brokerage Commissions in US12OF
Offering:
                  $3,217Other
      Amounts Paid in US12OF Offering:
                  $119,032Total
      Expenses Paid in US12OF Offering:
                  $180,226Expenses
      Waived in US12OF Offering*:
                  $(97,019)Net
      Expenses Paid or Accrued in US12OF Offering*:
                  $83,207




*
              The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of US12OF’s NAV, on an annualized basis, through December
      31, 2008. The General Partner has no obligation to continue such
      payment into subsequent
years.




Expenses paid byUS12OF through December 31, 2008 as a
Percentage of Average Daily Net Assets:





Expenses in US12OF
      Offering:
            Amount
      As a Percentage
              of Average Daily Net
      AssetsAmount
      Paid to General Partner in US12OF Offering:
            0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions in US12OF
Offering:
            0.03%
      annualizedOther
      Amounts Paid in US12OF Offering:
            1.23%
      annualizedTotal
      Expenses Paid in US12OF Offering:
            1.86%
      annualizedExpenses
      Waived in US12OF Offering:
            (1.00)%
      annualizedNet
      Expenses Paid in US12OF Offering:
            0.86%
      annualized




- 28
-
 Table of Contents




US12OF
      Performance:Name
      of Commodity Pool:
                      US12OFType
      of Commodity Pool:
                      Exchange
      traded securityInception
      of Trading:
                      December
      6, 2007Aggregate
      Subscriptions (from inception through December 31, 2008):
                      $23,231,434Total
      Net Assets as of December 31, 2008:
                      $6,247,578Initial
      NAV per Unit as of Inception:
                      $50.00NAV
      per Unit as of December 31, 2008:
                      $31.24Worst
      Monthly Percentage Draw-down:
                      October
      2008 (29.59)%Worst
      Peak-to-Valley Draw-down:
                      June
      2008 – December 2008
(62.83)%




COMPOSITE
PERFORMANCE DATA FOR US12OF




PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




Rates of returnMonth
                        
                        2007
                        
                        
                        2008January
                        
                        
                        –
                        
                        
                        
                        (2.03)
                        %February
                        
                        
                        –
                        
                        
                        
                        10.48
                        %March
                        
                        
                        –
                        
                        
                        
                        (0.66)
                        %April
                        
                        
                        –
                        
                        
                        
                        11.87
                        %May
                        
                        
                        –
                        
                        
                        
                        15.47
                        %June
                        
                        
                        –
                        
                        
                        
                        11.59
                        %July
                        
                        
                        –
                        
                        
                        
                        (11.39)
                        %August
                        
                        
                        –
                        
                        
                        
                        (6.35)
                        %September
                        
                        
                        –
                        
                        
                        
                        (13.12)
                        %October
                        
                        
                        –
                        
                        
                        
                        (29.59)
                        %November
                        
                        
                        –
                        
                        
                        
                        (16.17)
                        %December
                        
                        
                        8.46
                        %*
                        
                        
                        (12.66)
                        %Annual
      Rate of Return
                        
                        
                        8.46
                        %
                        
                        
                        (42.39)
                        %


*         Partial
from December 6, 2007





UGA:





Experience
in Raising and Investing in Funds through December 31, 2008


PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered in UGA Offering*:
                $1,500,000Dollar
      Amount Raised in UGA Offering:
                $46,115,901Organizational
      andOffering
      Expenses**:SEC registration
    fee:
                $58,520FINRA registration
      fee:
                $75,500Listing fee:
                $5,000Auditor’s fees and
      expenses:
                $2,500Legal fees and
      expenses:
                $117,891Printing
expenses:
                $31,867Length
      of UGA Offering:
                Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            These
      expenses were paid for by the General
Partner.




- 29
-
 Table of Contents




Compensation
to the General Partner and Other Compensation





Expenses paid by UGA through December 31, 2008 in dollar
terms:





Expenses:
                          
                          Amount in Dollar TermsAmount
      Paid to General Partner in UGA Offering:
                          
                          $
                          97,932Amount
      Paid in Portfolio Brokerage Commissions in UGA Offering:
                          
                          $
                          16,173Other
      Amounts Paid in UGA Offering:
                          
                          $
                          158,773Total
      Expenses Paid in UGA Offering:
                          
                          $
                          272,878Expenses
      Waived in UGA Offering*:
                          
                          $
                          (126,348
                          )Net
      Expenses Paid or Accrued*:
                          
                          $
                          146,530




*
              The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of UGA’s NAV, on an annualized basis, through December 31,
      2008. The General Partner has no obligation to continue such payment
      into subsequent years.




Expenses paid by UGA through December 31, 2008 as a
Percentage of Average Daily Net Assets:





Expenses in UGA Offering:
            
            Amount
      As a Percentage
              of Average Daily Net
  AssetsAmount
      Paid to General Partner in UGA Offering:
            
            0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions in UGA Offering:
            
            0.10%
      annualizedOther
      Amounts Paid in UGA Offering:
            
            0.97%
      annualizedTotal
      Expenses Paid in UGA Offering:
            
            1.67%
      annualizedExpenses
      Waived in UGA Offering:
            
            (0.77)%
      annualizedNet
      Expenses Paid or Accrued in UGA Offering:
            
            0.90%
      annualized








UGA Performance:Name
      of Commodity Pool:
                                              UGAType
      of Commodity Pool:
                                              Exchange
      traded securityInception
      of Trading:
                                              February
      26, 2008Aggregate
      Subscriptions (from inception through December 31, 2008):
                                              $46,114,901Total
      Net Assets as of December 31, 2008:
                                              $20,209,419Initial
      NAV per Unit as of Inception:
                                              $50.00NAV
      per Unit as of December 31, 2008:
                                              $20.21Worst
      Monthly Percentage Draw-down:
                                              October
      2008 (38.48%)Worst
      Peak-to-Valley Draw-down:
                                              June
      2008 – December 2008
(69.02%)




- 30
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 Table of Contents


COMPOSITE
PERFORMANCE DATA FOR UGA
 PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS


Rates of returnMonth
                  
                  2008January
                  
                  
                  –February
                  
                  
                  (0.56)
                  %*March
                  
                  
                  (2.39)
                  %April
                  
                  
                  10.94
                  %May
                  
                  
                  15.60
                  %June
                  
                  
                  4.80
                  %July
                  
                  
                  (12.79)
                  %August
                  
                  
                  (3.88)
                  %September
                  
                  
                  (9.36)
                  %October
                  
                  
                  (38.48)
                  %November
                  
                  
                  (21.35)
                  %December
                  
                  
                  (15.72)
                  %Annual
      Rate of Return
                  
                  
                  (59.58)
                  %





*         Partial
from February 26, 2008





USHO:





Experience
in Raising and Investing in Funds through December 31, 2008


PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered in USHO Offering*:
            $500,000Dollar
      Amount Raised in USHO Offering:
            $17,556,271Organizational
      andOffering
      Expenses**:SEC registration
    fee:
            $19,220FINRA registration
      fee:
            $50,500Listing fee:
            $5,000Auditor’s fees and
      expenses:
            $2,500Legal fees and
      expenses:
            $126,859Printing
expenses:
            $21,255Length
      of USHO Offering:
            Continuous





*
            Reflects
      the offering price per unit set forth on the cover page of the
      registration statement registering such units filed with the
      SEC.


**
            These
      expenses were paid for by the General
Partner.





Compensation
to the General Partner and Other Compensation





Expenses
paid by USHO through December 31, 2008 in dollar terms (unaudited):





Expenses:
                      
                      Amount in Dollar TermsAmount
      Paid to General Partner in USHO Offering:
                      
                      $
                      52,791Amount
      Paid in Portfolio Brokerage Commissions in USHO Offering:
                      
                      $
                      7,700Other
      Amounts Paid in USHO Offering:
                      
                      $
                      104,989Total
      Expenses Paid in USHO Offering:
                      
                      $
                      165,480Expenses
      Waived in USHO Offering*:
                      
                      $
                      (87,698
                      )Net
      Expenses Paid or Accrued in USHO Offering*:
                      
                      $
                      77,782


*
              The
      General Partner, though under no obligation to do so, agreed to pay
      certain expenses, to the extent that such expenses exceeded 0.15% (15
      basis points) of USHO’s NAV, on an annualized basis, through December 31,
      2008. The General Partner has no obligation to continue such payment
      into subsequent years.




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Expenses
paid by USHO through December 31, 2008 as a Percentage of Average Daily Net
Assets:





Expenses in USHO Offering:
            
            Amount
      As a Percentage
              of Average Daily Net
  AssetsAmount
      Paid to General Partner in USHO Offering:
            
            0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions in USHO Offering:
            
            0.09%
      annualizedOther
      Amounts Paid in USHO Offering:
            
            1.19%
      annualizedTotal
      Expenses Paid in USHO Offering:
            
            1.88%
      annualizedExpenses
      Waived in USHO Offering:
            
            (1.00)%
      annualizedNet
      Expenses Paid in USHO Offering:
            
            0.88%
      annualized





USHO
      Performance:Name
      of Commodity Pool:
                  USHOType
      of Commodity Pool:
                  Exchange
      traded securityInception
      of Trading:
                  April
      8, 2008Aggregate
      Subscriptions (from inception through December 31, 2008):
                  $17,556,271Total
      Net Assets as of December 31, 2008:
                  $4,387,898Initial
      NAV per Unit as of Inception:
                  $50.00NAV
      per Unit as of December 31, 2008:
                  $21.94Worst
      Monthly Percentage Draw-down:
                  October
      2008 (28.63)%Worst
      Peak-to-Valley Draw-down:
                  June
      2008 – December 2008
(65.25)%




COMPOSITE
PERFORMANCE DATA FOR USHO




PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




Rates of returnMonth
                  
                  2008January
                  
                  
                  –February
                  
                  
                  –March
                  
                  
                  –April
                  
                  
                  2.84
                  %*May
                  
                  
                  15.93
                  %June
                  
                  
                  5.91
                  %July
                  
                  
                  (12.18)
                  %August
                  
                  
                  (8.41)
                  %September
                  
                  
                  (9.77)
                  %October
                  
                  
                  (28.63)
                  %November
                  
                  
                  (18.38)
                  %December
                  
                  
                  (17.80)
                  %Annual
      Rate of Return
                  
                  
                  (56.12)
                  %





*         Partial
from April 8, 2008




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Other
Related Commodity Trading and Investment Management Experience





Ameristock
Corporation is an affiliate of the General Partner and it is a California-based
registered investment advisor registered under the Investment Advisers Act of
1940, as amended, that has been sponsoring and providing portfolio management
services to mutual funds since 1995. Ameristock Corporation is the investment
adviser to the Ameristock Mutual Fund, Inc., a mutual fund registered under the
Investment Company Act of 1940, as amended (the “1940 Act”) that focuses on
large cap U.S. equities that has approximately $188,835,336 in assets as of
December 31, 2008. Ameristock Corporation was also the investment advisor
to the Ameristock ETF Trust, an open-end management investment company
registered under the 1940 Act that consists of five separate investment
portfolios, each of which seeks investment results, before fees and expenses,
that correspond generally to the price and yield performance of a particular
U.S. Treasury securities index owned and compiled by Ryan Holdings LLC and Ryan
ALM, Inc. The Ameristock ETF Trust has liquidated its investment portfolios
and is in the process of winding up its affairs.





Investments





The
General Partner applies substantially all of USNG’s assets toward trading in
Futures Contracts and Other Natural Gas-Related Investments, Treasuries, cash
and/or cash equivalents. The General Partner has sole authority to determine the
percentage of assets that are:





·         held
on deposit with the futures commission merchant or other custodian,





·         used
for other investments, and





·         held
in bank accounts to pay current obligations and as reserves.





The
General Partner deposits substantially all of USNG’s net assets with the futures
commission merchant or other custodian for trading. When USNG purchases a
Futures Contract and certain exchange traded Other Natural Gas-Related
Investments, USNG is required to deposit with the selling futures commission
merchant on behalf of the exchange a portion of the value of the contract or
other interest as security to ensure payment for the obligation under natural
gas interests at maturity. This deposit is known as “margin.” USNG invests the
remainder of its assets equal to the difference between the margin deposited and
the market value of the futures contract in Treasuries, cash and/or cash
equivalents.




USNG’s
assets are held in segregated accounts pursuant to the CEA and CFTC regulations.
The General Partner believes that all entities that hold or trade USNG’s assets
are based in the United States and are subject to United States
regulations.




Approximately
5% to 10% of USNG’s assets have normally been committed as margin for Futures
Contracts. However, from time to time, the percentage of assets committed as
margin may be substantially more, or less, than such range. The General Partner
invests the balance of USNG’s assets not invested in natural gas interests or
held in margin as reserves to be available for changes in margin. All interest
income is used for USNG’s benefit.




The
futures commission merchant, a government agency or a commodity exchange could
increase margins applicable to USNG to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions taken.




The
Commodity Interest Markets




General




The CEA
governs the regulation of commodity interest transactions, markets and
intermediaries. In December 2000, the CEA was amended by the Commodity Futures
Modernization Act of 2000 (the “CFMA”), which substantially revised the
regulatory framework governing certain commodity interest transactions and the
markets on which they trade. The CEA, as amended by the CFMA, now provides for
varying degrees of regulation of commodity interest transactions depending upon
the variables of the transaction. In general, these variables include (1) the
type of instrument being traded (e.g., contracts for future delivery, options,
swaps or spot contracts), (2) the type of commodity underlying the instrument
(distinctions are made between instruments based on agricultural commodities,
energy and metals commodities and financial commodities), (3) the nature of the
parties to the transaction (retail, eligible contract participant, or eligible
commercial entity), (4) whether the transaction is entered into on a
principal-to-principal or intermediated basis, (5) the type of market on which
the transaction occurs, and (6) whether the transaction is subject to clearing
through a clearing organization. Information regarding commodity interest
transactions, markets and intermediaries, and their associated regulatory
environment, is provided below.




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Futures
Contracts




A futures
contract such as a Futures Contract is a standardized contract traded on, or
subject to the rules of, an exchange that calls for the future delivery of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of commodities, including
agricultural products, bonds, stock indices, interest rates, currencies, energy
and metals. The size and terms of futures contracts on a particular commodity
are identical and are not subject to any negotiation, other than with respect to
price and the number of contracts traded between the buyer and
seller.




The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying of commodity or by making
an offsetting sale or purchase of an identical futures contract on the same or
linked exchange before the designated date of delivery. The difference between
the price at which the futures contract is purchased or sold and the price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts, such as
stock index contracts, settle in cash (reflecting the difference between the
contract purchase/sale price and the contract settlement price) rather than by
delivery of the underlying commodity.




In market
terminology, a trader who purchases a futures contract is long in the market and
a trader who sells a futures contract is short in the market. Before a trader
closes out his long or short position by an offsetting sale or purchase, his
outstanding contracts are known as open trades or open positions. The aggregate
amount of open positions held by traders in a particular contract is referred to
as the open interest in such contract.




Forward
Contracts




A forward
contract is a contractual obligation to purchase or sell a specified quantity of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward contracts
for a given commodity are generally available for various amounts and maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the contract but
will settle and recognize the profit or loss on both positions simultaneously on
the delivery date. Thus, unlike in the futures contract market where a trader
who has offset positions will recognize profit or loss immediately, in the
forward market a trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and likewise a trader
with a position that has been offset at a loss will generally not have to pay
money until the delivery date. In recent years, however, the terms of forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to making or
taking delivery of the underlying commodity.





The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward markets are
largely unregulated. Forward contracts are, in general, not cleared or
guaranteed by a third party. Commercial banks participating in trading foreign
exchange forward contracts often do not require margin deposits, but rely upon
internal credit limitations and their judgments regarding the creditworthiness
of their counterparties. In recent years, however, many over-the-counter market
participants in foreign exchange trading have begun to require that their
counterparties post margin.




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Further,
as the result of the CFMA, over-the-counter derivative instruments such as
forward contracts and swap agreements (and options on forwards and physical
commodities) may begin to be traded on lightly-regulated exchanges or electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that trading are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, USNG’s trading in foreign exchange and
other forward contracts is exposed to the creditworthiness of the counterparties
on the other side of the trade.





Options
on Futures Contracts




Options
on futures contracts are standardized contracts traded on an exchange. An option
on futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike, or
exercise price) in the underlying futures contract or underlying interest. The
buyer of a call option acquires the right, but not the obligation, to purchase
or take a long position in the underlying interest, and the buyer of a put
option acquires the right, but not the obligation, to sell or take a short
position in the underlying interest.




The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer if the
option is exercised. Thus, the seller of a call option must stand ready to take
a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand, must
stand ready to take a long position in the underlying interest at the strike
price.




A call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market levels.
Conversely, a put option is said to be in-the-money if the strike price is above
the current market levels and out-of-the-money if the strike price is below
current market levels.




Options
have limited life spans, usually tied to the delivery or settlement date of the
underlying interest. Some options, however, expire significantly in advance of
such date. The purchase price of an option is referred to as its premium, which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the time
value shrinks and the market and intrinsic values move into parity. An option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options simply
become worthless after their expiration date.




Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and the money
goes to the option seller. Option sellers, on the other hand, face risks similar
to participants in the futures markets. For example, since the seller of a call
option is assigned a short futures position if the option is exercised, his risk
is the same as someone who initially sold a futures contract. Because no one can
predict exactly how the market will move, the option seller posts margin to
demonstrate his ability to meet any potential contractual
obligations.




Options
on Forward Contracts or Commodities




Options
on forward contracts or commodities operate in a manner similar to options on
futures contracts. An option on a forward contract or commodity gives the buyer
of the option the right, but not the obligation, to take a position at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward contracts
and physical commodities possess many of the same characteristics of forward
contracts with respect to offsetting positions and credit risk that are
described above.




Swap
Contracts




Swap
transactions generally involve contracts between two parties to exchange a
stream of payments computed by reference to a notional amount and the price of
the asset that is the subject of the swap. Swap contracts are principally traded
off-exchange, although recently, as a result of regulatory changes enacted as
part of the CFMA, certain swap contracts are now being traded in electronic
trading facilities and cleared through clearing organizations.




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Swaps are
usually entered into on a net basis, that is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
agreement, with the parties receiving or paying, as the case may be, only the
net amount of the two payments. Swaps do not generally involve the delivery of
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps is generally limited to the net amount of payments that the party is
contractually obligated to make. In some swap transactions one or both parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments that
the party is contractually entitled to receive less any collateral deposits
it is holding.




Participants




The two
broad classes of persons who trade commodities are hedgors and speculators.
Hedgors include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios, and
commercial market participants, such as farmers and manufacturers, that market
or process commodities. Hedging is a protective procedure designed to
effectively lock in prices that would otherwise change due to an adverse
movement in the price of the underlying commodity, for example, the adverse
price movement between the time a merchandiser or processor enters into a
contract to buy or sell a raw or processed commodity at a certain price and the
time he must perform the contract. In such a case, at the time the hedgor
contracts to physically sell the commodity at a future date he will
simultaneously buy a futures or forward contract for the necessary equivalent
quantity of the commodity. At the time for performance of the contract, the
hedgor may accept delivery under his futures contract and sell the commodity
quantity as required by his physical contract or he may buy the actual
commodity, sell if under the physical contract and close out his position by
making an offsetting sale of a futures contract.





The
commodity interest markets enable the hedgor to shift the risk of price
fluctuations. The usual objective of the hedgor is to protect the profit that he
expects to earn from farming, merchandising, or processing operations rather
than to profit from his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives, and hedgors can end
up paying higher prices than they would have, for example, if current market
prices are lower than the locked in price.




Unlike
the hedgor, the speculator generally expects neither to make nor take delivery
of the underlying commodity. Instead, the speculator risks his capital with the
hope of making profits from price fluctuations in the commodities. The
speculator is, in effect, the risk bearer who assumes the risks that the hedgor
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to the
delivery date. Because the speculator may take either a long or short position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.




Futures
Exchanges and Clearing Organizations




Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of trades at
a physical location utilizing trading pits and/or may provide for trading to be
done electronically through computerized matching of bids and offers pursuant to
various algorithms. Members of a particular exchange and the trades executed on
such exchanges are subject to the rules of that exchange. Futures exchanges and
clearing organizations are given reasonable latitude in promulgating rules and
regulations to control and regulate their members. Examples of regulations by
exchanges and clearing organizations include the establishment of initial margin
levels, rules regarding trading practices, contract specifications, speculative
position limits, daily price fluctuation limits, and execution and clearing
fees.




Clearing
organizations provide services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or electronic trading
facility have been confirmed, the clearing organization becomes substituted for
the clearing member acting on behalf of each buyer and each seller of contracts
traded on the exchange or trading platform and in effect becomes the other party
to the trade. Thereafter, each clearing member party to the trade looks only to
the clearing organization for performance. The clearing organization generally
establishes some sort of security or guarantee fund to which all clearing
members of the exchange must contribute; this fund acts as an emergency buffer
that is intended to enable the clearing organization to meet its obligations
with regard to the other side of an insolvent clearing member’s contracts.
Furthermore, the clearing organization requires margin deposits and continuously
marks positions to market to provide some assurance that its members will be
able to fulfill their contractual obligations. Thus, a central function of the
clearing organization is to ensure the integrity of trades, and members
effecting transactions on an exchange need not concern themselves with the
solvency of the party on the opposite side of the trade; their only remaining
concerns are the respective solvencies of their own customers, their clearing
broker and the clearing organization. The clearing organizations do not deal
with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers.




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U.S.
Futures Exchanges




Futures
exchanges in the United States are subject to varying degrees of regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.




A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail customers on
an unrestricted basis. To be designated as a contract market, the exchange must
demonstrate that it satisfies specified general criteria for designation, such
as having the ability to prevent market manipulation, rules and procedures to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of market
participants. Among the principal designated contract markets in the United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange and the
NYMEX. Each of the designated contract markets in the United States must provide
for the clearance and settlement of transactions with a CFTC-registered
derivatives clearing organization.





A
derivatives transaction execution facility (a “DTEF”), is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant limitations.
DTEFs limit access to eligible traders that qualify as either eligible contract
participants or eligible commercial entities for futures and option contracts on
commodities that have a nearly inexhaustible deliverable supply, are highly
unlikely to be susceptible to the threat of manipulation, or have no cash
market, security futures products, and futures and option contracts on
commodities that the CFTC may determine, on a case-by-case basis, are highly
unlikely to be susceptible to the threat of manipulation. In addition, certain
commodity interests excluded or exempt from the CEA, such as swaps, etc. may be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts, in
which case the clearing organization must be a securities clearing agency.
However, if futures contracts and options on futures contracts on a DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded on a DTEF
may be cleared through a clearing organization other than one registered with
the CFTC.




An exempt
board of trade is also a newly designated form of exchange. An exempt board of
trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to trade
futures contracts and options on futures contracts provided that the underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board of trade
must qualify as eligible contract participants. Contracts deemed eligible to be
traded on an exempt board of trade include contracts on interest rates, exchange
rates, currencies, credit risks or measures, debt instruments, measures of
inflation, or other macroeconomic indices or measures. There is no requirement
that an exempt board of trade use a clearing organization. However, if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade electing to
operate as an exempt board of trade must file a written notification with the
CFTC.





An
electronic trading facility is a new form of trading platform that operates by
means of an electronic or telecommunications network and maintains an automated
audit trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not apply to, and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to CFTC
anti-fraud and anti-manipulation authority. In general, excluded commodities
include interest rates, currencies, securities, securities indices or other
financial, economic or commercial indices or measures.




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The
General Partner intends to monitor the development of and opportunities and
risks presented by the new less-regulated exchanges and exempt boards as well as
other trading platforms currently in place or that are being considered by
regulators and may, in the future, allocate a percentage of USNG’s assets to
trading in products on these exchanges. Provided USNG maintains assets exceeding
$5 million, USNG would qualify as an eligible contract participant and thus
would be able to trade on such exchanges.




Non-U.S.
Futures Exchanges




Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation by the
CFTC, but rather are regulated by their home country regulator. In contrast to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved, and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system, such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the individual
creditworthiness of each entity with which they enter into a trade. Trading on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, USNG is subject to the additional risk of fluctuations in the
exchange rate between such currencies and U.S. dollars and the possibility that
exchange controls could be imposed in the future. Trading on non-U.S. exchanges
may differ from trading on U.S. exchanges in a variety of ways and, accordingly,
may subject USNG to additional risks.





Accountability
Levels and Position Limits




The CFTC
and U.S. designated contract markets have established accountability levels and
position limits on the maximum net long or net short futures contracts in
commodity interests that any person or group of persons under common
trading control (other than a hedgor, which USNG is not) may hold, own or
control. Among the purposes of accountability levels and position limits is to
prevent a corner or squeeze on a market or undue influence on prices by any
single trader or group of traders. The position limits currently established by
the CFTC apply to certain agricultural commodity interests, such as grains
(oats, barley, and flaxseed), soybeans, corn, wheat, cotton, eggs, rye, and
potatoes, but not to interests in energy products. In addition, U.S. exchanges
may set accountability levels and position limits for all commodity interests
traded on that exchange. For example, the current accountability level for
investments at any one time in Futures Contracts for natural gas (including
investments in the Benchmark Futures Contract) on the NYMEX is 12,000 contracts
for one month and 12,000 contracts for all months. The NYMEX also imposes
position limits on contracts held in the last few days of trading in the near
month contract to expire. Certain exchanges or clearing organizations also set
limits on the total net positions that may be held by a clearing broker. In
general, no position limits are in effect in forward or other over-the-counter
contract trading or in trading on non-U.S. futures exchanges, although the
principals with which USNG and the clearing brokers may trade in such markets
may impose such limits as a matter of credit policy. For purposes of determining
accountability levels and position limits, USNG’s commodity interest positions
will not be attributable to investors in their own commodity interest
trading.




Daily
Price Limits




Most U.S.
futures exchanges (but generally not non-U.S. exchanges) may limit the amount of
fluctuation in some futures contract or options on a futures contract prices
during a single trading day by regulations. These regulations specify what are
referred to as daily price fluctuation limits or, more commonly, daily limits.
The daily limits establish the maximum amount that the price of a futures or
options on futures contract may vary either up or down from the previous day’s
settlement price. Once the daily limit has been reached in a particular futures
or options on futures contract, no trades may be made at a price beyond the
limit. Positions in the futures or options contract may then be taken or
liquidated, if at all, only at inordinate expense or if traders are willing to
effect trades at or within the limit during the period for trading on such day.
Because the daily limit rule governs price movement only for a particular
trading day, it does not limit losses and may in fact substantially increase
losses because it may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days, thus preventing prompt liquidation of positions and
subjecting the trader to substantial losses for those days. The concept of daily
price limits is not relevant to over-the-counter contracts, including forwards
and swaps, and thus such limits are not imposed by banks and others who deal in
those markets.




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In
contrast, the NYMEX does not impose daily limits but rather limits the amount of
price fluctuation for Futures Contracts. For example, the NYMEX imposes a
$3.00 per mmBtu ($30,000 per contract) price fluctuation limit for the
Benchmark Futures Contract. This limit is initially based off the previous
trading day’s settlement price. If any Benchmark Futures Contract is traded,
bid, or offered at the limit for five minutes, trading is halted for five
minutes. When trading resumes it begins at the point where the limit was imposed
and the limit is reset to be $3.00 per mmBtu in either direction of that point.
If another halt were triggered, the market would continue to be expanded by
$3.00 per mmBtu in either direction after each successive five-minute trading
halt. There is no maximum price fluctuation limit during any one trading
session.




Commodity
Prices




Commodity
prices are volatile and, although ultimately determined by the interaction of
supply and demand, are subject to many other influences, including the
psychology of the marketplace and speculative assessments of future world and
economic events. Political climate, interest rates, treaties, balance of
payments, exchange controls and other governmental interventions as well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader to predict
reliably commodity prices.





Regulation




Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility. Derivatives
clearing organizations are also subject to the CEA and CFTC regulation. The CFTC
is the governmental agency charged with responsibility for regulation of futures
exchanges and commodity interest trading conducted on those exchanges. The
CFTC’s function is to implement the CEA’s objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and clearing
organizations themselves exercise regulatory and supervisory authority over
their member firms.




The CFTC
possesses exclusive jurisdiction to regulate the activities of CPOs and
commodity trading advisors and has adopted regulations with respect to the
activities of those persons and/or entities. Under the CEA, a registered CPO,
such as the General Partner, is required to make annual filings with the CFTC
describing its organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require and review books
and records of, and documents prepared by, registered CPOs. Pursuant to this
authority, the CFTC requires CPOs to keep accurate, current and orderly records
for each pool that they operate. The CFTC may suspend the registration of a CPO
(1) if the CFTC finds that the operator’s trading practices tend to disrupt
orderly market conditions, (2) if any controlling person of the operator is
subject to an order of the CFTC denying such person trading privileges on any
exchange, and (3) in certain other circumstances. Suspension, restriction or
termination of the General Partner’s registration as a CPO would prevent it,
until that registration were to be reinstated, from managing USNG, and might
result in the termination of USNG. USNG itself is not required to be registered
with the CFTC in any capacity.




The CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor would be
unable, until the registration were to be reinstated, to render trading advice
to USNG.




The CEA
requires all futures commission merchants, such as USNG’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’
funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution of
trades. The CEA authorizes the CFTC to regulate trading by futures commission
merchants and by their officers and directors, permits the CFTC to require
action by exchanges in the event of market emergencies, and establishes an
administrative procedure under which customers may institute complaints for
damages arising from alleged violations of the CEA. The CEA also gives the
states powers to enforce its provisions and the regulations of the
CFTC.




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USNG’s
investors are afforded prescribed rights for reparations under the CEA.
Investors may also be able to maintain a private right of action for violations
of the CEA. The CFTC has adopted rules implementing the reparation provisions of
the CEA, which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor broker or a futures
commission merchant, introducing broker, commodity trading advisor, CPO, and
their respective associated persons.




Pursuant
to authority in the CEA, the NFA has been formed and registered with the CFTC as
a registered futures association. At the present time, the NFA is the only
self-regulatory organization for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA responsibility for the
registration of commodity trading advisors, CPOs, futures commission merchants,
introducing brokers, and their respective associated persons and floor brokers.
The General Partner, each trading advisor, the selling agents and the clearing
brokers are members of the NFA. As such, they are subject to NFA standards
relating to fair trade practices, financial condition and consumer protection.
USNG itself is not required to become a member of the NFA. As the
self-regulatory body of the commodity interest industry, the NFA promulgates
rules governing the conduct of professionals and disciplines those professionals
that do not comply with these rules. The NFA also arbitrates disputes between
members and their customers and conducts registration and fitness screening of
applicants for membership and audits of its existing members.





The
regulations of the CFTC and the NFA prohibit any representation by a person
registered with the CFTC or by any member of the NFA, that registration with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed that person or that person’s
trading program or objectives. The registrations and memberships of the parties
described in this summary must not be considered as constituting any such
approval or endorsement. Likewise, no futures exchange has given or will give
any similar approval or endorsement.




The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made in this
summary are subject to modification by legislative action and changes in the
rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.




The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among other
things, provides that the trading of commodity interest contracts generally must
be upon exchanges designated as contract markets or DTEFs and that all trading
on those exchanges must be done by or through exchange members. Under the CFMA,
commodity interest trading in some commodities between sophisticated persons may
be traded on a trading facility not regulated by the CFTC. As a general matter,
trading in spot contracts, forward contracts, options on forward contracts or
commodities, or swap contracts between eligible contract participants is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions on behalf of
USNG in reliance on this exclusion from regulation.




In
general, the CFTC does not regulate the interbank and forward foreign currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as USNG or between certain regulated institutions and retail
investors. Although U.S. banks are regulated in various ways by the Federal
Reserve Board, the Comptroller of the Currency and other U.S. federal and state
banking officials, banking authorities do not regulate the forward
markets.




While the
U.S. government does not currently impose any restrictions on the movements of
currencies, it could choose to do so. The imposition or relaxation of exchange
controls in various jurisdictions could significantly affect the market for that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes USNG to a risk of default since failure of a bank with which USNG had
entered into a forward contract would likely result in a default and thus
possibly substantial losses to USNG.




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The CFTC
is prohibited by statute from regulating trading on non-U.S. futures exchanges
and markets. The CFTC, however, has adopted regulations relating to the
marketing of non-U.S. futures contracts in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold in
the United States.




Commodity
Margin




Original
or initial margin is the minimum amount of funds that must be deposited by a
commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally
less than the original margin) to which a trader’s account may decline before he
must deliver additional margin. A margin deposit is like a cash performance
bond. It helps assure the trader’s performance of the futures contracts that he
or she purchases or sells. Futures contracts are customarily bought and sold on
initial margin that represents a very small percentage (ranging upward from less
than 2%) of the aggregate purchase or sales price of the contract. Because of
such low margin requirements, price fluctuations occurring in the futures
markets may create profits and losses that, in relation to the amount invested,
are greater than are customary in other forms of investment or speculation. As
discussed below, adverse price changes in the futures contract may result in
margin requirements that greatly exceed the initial margin. In addition, the
amount of margin required in connection with a particular futures contract is
set from time to time by the exchange on which the contract is traded and may be
modified from time to time by the exchange during the term of the
contract.





Brokerage
firms, such as USNG’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require higher,
amounts of margin as a matter of policy to further protect themselves. The
clearing brokers require USNG to make margin deposits equal to exchange minimum
levels for all commodity interest contracts. This requirement may be altered
from time to time in the clearing brokers’ discretion.




Trading
in the over-the-counter markets where no clearing facility is provided generally
does not require margin but generally does require the extension of credit
between counterparties.




When a
trader purchases an option, there is no margin requirement; however, the option
premium must be paid in full. When a trader sells an option, on the other hand,
he or she is required to deposit margin in an amount determined by the margin
requirements established for the underlying interest and, in addition, an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to reflect the
probability that out-of-the-money options will not be exercised, can in fact be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which are
complex trading strategies in which a trader acquires a mixture of options
positions and positions in the underlying interest.




Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes to a point
where the margin on deposit does not satisfy maintenance margin requirements, a
margin call is made by the broker. If the margin call is not met within a
reasonable time, the broker may close out the trader’s position. With respect to
USNG’s trading, USNG (and not its investors personally) is subject to margin
calls.




Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the total risk of
the combined positions.




SEC
Reports




USNG
makes available, free of charge, on its website, its annual reports on Form
10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after these forms
are filed with, or furnished to, the SEC. These reports are also available
from the SEC though its website at:  www.sec.gov.




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CFTC
Reports





USNG also
makes available its monthly reports and its annual reports required to be
prepared and filed with the NFA under the CFTC regulations.





Item 1A.   Risk Factors.





The
risk factors should be read in connection with the other information included in
this annual report on Form 10-K, including Management’s Discussion and Analysis
of Financial Condition and Results of Operations and USNG’s financial statements
and the related notes.




Risks
Associated With Investing Directly or Indirectly in Natural Gas





Investing
in Natural Gas Interests subjects USNG to the risks of the natural gas industry
and this could result in large fluctuations in the price of USNG’s
units.




USNG is
subject to the risks and hazards of the natural gas industry because it invests
in Natural Gas Interests. The risks and hazards that are inherent in the natural
gas industry may cause the price of natural gas to widely fluctuate. If the
changes in percentage terms of USNG’s units accurately track the percentage
changes in the Benchmark Futures Contract or the spot price of natural gas, then
the price of its units may also fluctuate. The exploration for, and production
of, natural gas is an uncertain process with many risks. The cost of drilling,
completing and operating wells for natural gas is often uncertain, and a number
of factors can delay or prevent drilling operations or production,
including:




·         unexpected
drilling conditions;





·         pressure
or irregularities in formations;





·         equipment
failures or repairs;





·         fires
or other accidents;





·
            adverse
      weather conditions;





·
            pipeline
      ruptures or spills; and





·
            shortages
      or delays in the availability of drilling rigs and the delivery of
      equipment.





Natural
gas transmission, distribution, gathering, and processing activities involve
numerous risks that may affect the price of natural gas.





There are
a variety of hazards inherent in natural gas transmission, distribution,
gathering, and processing, such as leaks, explosions, pollution, release of
toxic substances, adverse weather conditions (such as hurricanes and flooding),
pipeline failure, abnormal pressures, uncontrollable flows of natural gas,
scheduled and unscheduled maintenance, physical damage to the gathering or
transportation system, and other hazards which could affect the price of natural
gas. To the extent these hazards limit the supply or delivery of natural gas,
natural gas prices will increase.





The
price of natural gas may fluctuate on a seasonal and quarterly basis and this
would result in fluctuations in the price of USNG’s units.





Natural
gas prices fluctuate seasonally. For example, in some parts of the United States
and other markets, the natural gas demand for power peaks during the cold winter
months, with market prices peaking at that time. As a result, in the future, the
overall price of natural gas may fluctuate substantially on a seasonal and
quarterly basis and thus make consecutive period to period comparisons less
relevant.





Natural
gas transmission and storage operations are subject to government regulations
and rate proceedings which could have an impact on the price of natural
gas.





Natural
gas transmission and storage operations in North America are subject to
regulation and oversight by the Federal Energy Regulatory Commission, various
state regulatory agencies, and Canadian regulatory authorities. These regulatory
bodies have the authority to effect rate settlements on natural gas storage,
transmission and distribution services. As a consequence, the price of natural
gas may be affected by a change in the rate settlements effected by one or more
of these regulatory bodies.




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The
price of USNG’s units may be influenced by factors such as the short-term supply
and demand for natural gas and the short-term supply and demand for USNG’s
units. This may cause the units to trade at a price that is above or below
USNG’s NAV per unit. Accordingly, changes in the price of units may
substantially vary from the changes in the spot price of natural gas. If this
variation occurs, then investors  may not be able to effectively use
USNG as a way to hedge against natural gas-related losses or as a way to
indirectly invest in natural gas.





While it
is expected that the trading prices of the units will fluctuate in accordance
with changes in USNG’s NAV, the prices of units may also be influenced by other
factors, including the short-term supply and demand for natural gas and the
units. There is no guarantee that the units will not trade at appreciable
discounts from, and/or premiums to, USNG’s NAV. This could cause changes in the
price of the units to substantially vary from changes in the spot price of
natural gas. This may be harmful to investors because if changes in the price of
units vary substantially from changes in the spot price of natural gas, then
investors may not be able to effectively use USNG as a way to hedge the risk of
losses in their natural gas-related transactions or as a way to indirectly
invest in natural gas.





Changes
in USNG’s NAV may not correlate with changes in the price of the Benchmark
Futures Contract. If this were to occur, investors  may not be able to
effectively use USNG as a way to hedge against natural gas-related losses or as
a way to indirectly invest in natural gas.





The
General Partner endeavors to invest USNG’s assets as fully as possible in
short-term Futures Contracts and Other Natural Gas-Related Investments so that
the changes in percentage terms of the NAV closely correlate with the changes in
percentage terms in the price of the Benchmark Futures Contract. However,
changes in USNG’s NAV may not correlate with the changes in the price of the
Benchmark Futures Contract for several reasons as set forth below:





·
            USNG
      (i) may not be able to buy/sell the exact amount of Futures Contracts and
      Other Natural Gas-Related Investments to have a perfect correlation with
      NAV; (ii) may not always be able to buy and sell Futures Contracts or
      Other Natural Gas-Related Investments at the market price; (iii) may not
      experience a perfect correlation between the spot price of natural gas and
      the underlying investments in Futures Contracts, Other Natural Gas-Related
      Investments and Treasuries, cash and/or cash equivalents; and (iv) is
      required to pay fees, including brokerage fees and the management fee,
      which will have an effect on the
correlation.





·
            Short-term
      supply and demand for natural gas may cause the changes in the market
      price of the Benchmark Futures Contract to vary from changes in USNG’s NAV
      if USNG has fully invested in Futures Contracts that do not reflect such
      supply and demand and it is unable to replace such contracts with Futures
      Contracts that do reflect such supply and demand. In addition, there are
      also technical differences between the two markets, e.g., one is a physical
      market while the other is a futures market traded on exchanges, that may
      cause variations between the spot price of natural gas and the prices of
      related futures contracts.





·
            USNG
      plans to buy only as many Futures Contracts and Other Natural Gas-Related
      Investments that it can to get the changes in percentage terms of the NAV
      as close as possible to the changes in percentage terms in the price of
      the Benchmark Futures Contract. The remainder of its assets will be
      invested in Treasuries, cash and/or cash equivalents and will be used to
      satisfy initial margin and additional margin requirements, if any, and to
      otherwise support its investments in Natural Gas Interests. Investments in
      Treasuries, cash and/or cash equivalents, both directly and as margin,
      will provide rates of return that will vary from changes in the value of
      the spot price of natural gas and the price of the Benchmark Futures
      Contract.






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·
            In
      addition, because USNG incurs certain expenses in connection with its
      investment activities, and holds most of its assets in more liquid
      short-term securities for margin and other liquidity purposes and for
      redemptions that may be necessary on an ongoing basis, the General Partner
      is generally not able to fully invest USNG’s assets in Futures Contracts
      or Other Natural Gas-Related Investments and there cannot be perfect
      correlation between changes in USNG’s NAV and changes in the price of the
      Benchmark Futures Contract.





·
            As
      USNG grows, there may be more or less correlation. For example, if USNG
      only has enough money to buy three Benchmark Futures Contracts and it
      needs to buy four contracts to track the price of natural gas then the
      correlation will be lower, but if it buys 20,000 Benchmark Futures
      Contracts and it needs to buy 20,001 contracts then the correlation will
      be higher. At certain asset levels, USNG may be limited in its ability to
      purchase the Benchmark Futures Contract or other Futures Contracts due to
      accountability levels imposed by the relevant exchanges. To the extent
      that USNG invests in these other Futures Contracts or Other Natural
      Gas-Related Investments, the correlation with the Benchmark Futures
      Contract may be lower. If USNG is required to invest in other Futures
      Contracts and Other Natural Gas-Related Investments that are less
      correlated with the Benchmark Futures Contract, USNG would likely invest
      in over-the-counter contracts to increase the level of correlation of
      USNG’s assets. Over-the-counter contracts entail certain risks described
      below under “Over-the-Counter Contract
Risk.”





·
            USNG
      may not be able to buy the exact number of Futures Contracts and Other
      Natural Gas-Related Investments to have a perfect correlation with the
      Benchmark Futures Contract if the purchase price of Futures Contracts
      required to be fully invested in such contracts is higher than the
      proceeds received for the sale of a Creation Basket on the day the basket
      was sold. In such case, USNG could not invest the entire proceeds from the
      purchase of the Creation Basket in such futures contracts (for example,
      assume USNG receives $4,000,000 for the sale of a Creation Basket and
      assume that the price of a Futures Contract for natural gas is $59,950,
      then USNG could only invest in only 66 Futures Contracts with an aggregate
      value of $3,956,700), USNG would be required to invest a percentage of the
      proceeds in cash, Treasuries or other liquid securities to be deposited as
      margin with the futures commission merchant through which the contract was
      purchased. The remainder of the purchase price for the Creation Basket
      would remain invested in cash and/or cash equivalents and Treasuries or
      other liquid securities as determined by the General Partner from time to
      time based on factors such as potential calls for margin or anticipated
      redemptions. If the trading market for Futures Contracts is suspended or
      closed, USNG may not be able to purchase these investments at the last
      reported price for such
investments.





If
changes in USNG’s NAV do not correlate with changes in the price of the
Benchmark Futures Contract, then investing in USNG may not be an effective way
to hedge against natural gas-related losses or indirectly invest in natural
gas.





The
Benchmark Futures Contract may not correlate with the spot price of natural gas
and this could cause changes in the price of the units to substantially vary
from the changes in the spot price of natural gas. If this were to occur, then
investors  may not be able to effectively use USNG as a way to hedge
against natural gas-related losses or as a way to indirectly invest in natural
gas.





When
using the Benchmark Futures Contract as a strategy to track the spot price of
natural gas, at best the correlation between changes in prices of such Natural
Gas Interests and the spot price of natural gas can be only approximate. The
degree of imperfection of correlation depends upon circumstances such as
variations in the speculative natural gas market, supply of and demand for such
Natural Gas Interests and technical influences in futures trading. If there is a
weak correlation between the Natural Gas Interests and the spot price of natural
gas, then the price of units may not accurately track the spot price of natural
gas and investors may not be able to effectively use USNG as a way to hedge the
risk of losses in their natural gas-related transactions or as a way to
indirectly invest in natural gas.




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USNG
may experience a loss if it is required to sell Treasuries at a price lower than
the price at which they were acquired.





The value
of Treasuries generally moves inversely with movements in interest rates. If
USNG is required to sell Treasuries at a price lower than the price at which
they were acquired, USNG will experience a loss. This loss may adversely impact
the price of the units and may decrease the correlation between the price of the
units, the price of the Benchmark Futures Contract and Other Natural Gas-Related
Investments, and the spot price of natural gas.





Certain
of USNG’s investments could be illiquid which could cause large losses to
investors at any time or from time to time.





USNG may
not always be able to liquidate its positions in its investments at the desired
price. It is difficult to execute a trade at a specific price when there is a
relatively small volume of buy and sell orders in a market. A market disruption,
such as a foreign government taking political actions that disrupt the market in
its currency, its natural gas production or exports, or in another major export,
can also make it difficult to liquidate a position. Alternatively, limits
imposed by futures exchanges or other regulatory organizations, such as
accountability levels, position limits and daily price fluctuation limits, may
contribute to a lack of liquidity with respect to some commodity
interests.





Unexpected
market illiquidity may cause major losses to investors at any time or from time
to time. In addition, USNG has not and does not intend at this time to establish
a credit facility, which would provide an additional source of liquidity and
instead will rely only on the Treasuries, cash and/or cash equivalents that it
holds. The anticipated large value of the positions in Futures Contracts that
the General Partner will acquire or enter into for USNG increases the risk of
illiquidity. The Other Natural Gas-Related Investments that USNG invests in,
such as negotiated over-the-counter contracts, may have a greater likelihood of
being illiquid since they are contracts between two parties that take into
account not only market risk, but also the relative credit, tax, and settlement
risks under such contracts. Such contracts also have limited transferability
that results from such risks and the contract’s express
limitations.





Because
both Futures Contracts and Other Natural Gas-Related Investments may be
illiquid, USNG’s Natural Gas Interests may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may be incurred
during the period in which positions are being liquidated.





If
the nature of hedgors and speculators in futures markets has shifted such that
natural gas purchasers are the predominant hedgors in the market, USNG might
have to reinvest at higher futures prices or choose Other Natural Gas-Related
Investments.





The
changing nature of the hedgors and speculators in the natural gas market
influences whether futures prices are above or below the expected future spot
price. In order to induce speculators to take the corresponding long side of the
same futures contract, natural gas producers must generally be willing to sell
futures contracts at prices that are below expected future spot prices.
Conversely, if the predominant hedgors in the futures market are the purchasers
of the natural gas who purchase futures contracts to hedge against a rise in
prices, then speculators will only take the short side of the futures contract
if the futures price is greater than the expected future spot price of natural
gas. This can have significant implications for USNG when it is time to reinvest
the proceeds from a maturing Futures Contract into a new Futures
Contract.





While
USNG does not intend to take physical delivery of natural gas under its Futures
Contracts, physical delivery under such contracts impacts the value of the
contracts.





While it is not the current intention
of USNG to take physical delivery of natural gas under its Futures Contracts,
futures contracts are not required to be cash-settled and it is possible to take
delivery under these contracts. Storage costs associated with purchasing natural
gas could result in costs and other liabilities that could impact the value of
Futures Contracts or Other Natural Gas-Related Investments. Storage costs
include the time value of money invested in natural gas as a physical commodity
plus the actual costs of storing the natural gas less any benefits from
ownership of natural gas that are not obtained by the holder of a futures
contract. In general, Futures Contracts have a one-month delay for contract
delivery and the back month (the back month is any future delivery month other
than the spot month) includes storage costs. To the extent that these storage
costs change for natural gas while USNG holds Futures Contracts or Other Natural
Gas-Related Investments, the value of the Futures Contracts or Other Natural
Gas-Related Investments, and therefore USNG’s NAV, may change as
well.




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The
price relationship between the near month contract and the next month contract
that compose the Benchmark Futures Contract will vary and may impact both the
total return over time of USNG’s NAV, as well as the degree to which its total
return tracks other natural gas price indices’ total returns.





The
Benchmark Futures Contract is the near month contract to expire until the near
month contract is within two weeks of expiration, when, over a four day period,
it transitions to the next month contract to expire as its benchmark contract
and keeps that contract as its benchmark until it becomes the near month
contract and close to expiration. In the event of a natural gas futures market
where near month contracts trade at a higher price than next month to expire
contracts, a situation described as “backwardation” in the futures market, then
absent the impact of the overall movement in natural gas prices the value of the
benchmark contract would tend to rise as it approaches expiration. As a result
the total return of the Benchmark Futures Contract would tend to track higher.
Conversely, in the event of a natural gas futures market where near month
contracts trade at a lower price than next month contracts, a situation
described as “contango” in the futures market, then absent the impact of the
overall movement in natural gas prices the value of the benchmark contract would
tend to decline as it approaches expiration. As a result the total return of the
Benchmark Futures Contract would tend to track lower. When compared to total
return of other price indices, such as the spot price of natural gas, the impact
of backwardation and contango may lead the total return of USNG’s NAV to vary
significantly. In the event of a prolonged period of contango, and absent the
impact of rising or falling natural gas prices, this could have a significant
negative impact on USNG’s NAV and total return.





Regulation
of the commodity interests and energy markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect USNG.




The
futures markets are subject to comprehensive statutes, regulations, and margin
requirements. In addition, the CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency, including, for
example, the retroactive implementation of speculative position limits or higher
margin requirements, the establishment of daily price limits and the suspension
of trading. The regulation of futures transactions in the United States is a
rapidly changing area of law and is subject to modification by government and
judicial action.




The
regulation of commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on
non-traditional investment pools which are publicly distributed in the United
States. There is a possibility of future regulatory changes altering, perhaps to
a material extent, the nature of an investment in USNG or the ability of USNG to
continue to implement its investment strategy. In addition, various national
governments have expressed concern regarding the disruptive effects of
speculative trading in the energy markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory change on
USNG is impossible to predict, but could be substantial and
adverse.





Investing
in USNG for purposes of hedging may be subject to several risks including the
possibility of losing the benefit of favorable market movement.





Participants
in the natural gas or in other industries may use USNG as a vehicle to hedge the
risk of losses in their natural gas-related transactions. There are several
risks in connection with using USNG as a hedging device. While hedging can
provide protection against an adverse movement in market prices, it can also
preclude a hedgor’s opportunity to benefit from a favorable market movement. In
a hedging transaction, the hedgor may be concerned that the hedged item will
increase in price, but must recognize the risk that the price may instead
decline and if this happens he will have lost his opportunity to profit from the
change in price because the hedging transaction will result in a loss rather
than a gain. Thus, the hedgor foregoes the opportunity to profit from favorable
price movements.




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In
addition, if the hedge is not a perfect one, the hedgor can lose on the hedging
transaction and not realize an offsetting gain in the value of the underlying
item being hedged.





When
using futures contracts as a hedging technique, at best, the correlation between
changes in prices of futures contracts and of the items being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative markets, demand for futures and
for natural gas products, technical influences in futures trading, and
differences between anticipated energy costs being hedged and the instruments
underlying the standard futures contracts available for trading. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior as well as the expenses associated with creating the
hedge.





In
addition, using an investment in USNG as a hedge for changes in energy costs
(e.g., investing in
natural gas, crude oil, gasoline, or other fuels, or electricity) may not
correlate because changes in the spot price may vary from changes in energy
costs because the spot price of natural gas may not be at the same rate as
changes in the price of other energy products, and, in any case, the price of
natural gas does not reflect the refining, transportation, and other costs that
may impact the hedgor’s energy costs.





An
investment in USNG may provide little or no diversification benefits. Thus, in a
declining market, USNG may have no gains to offset losses from other
investments, and an investor may suffer losses on an investment in USNG while
incurring losses with respect to other asset classes.





Historically,
Futures Contracts and Other Natural Gas-Related Investments have generally been
non-correlated to the performance of other asset classes such as stocks and
bonds. Non-correlation means that there is a low statistically valid
relationship between the performance of futures and other commodity interest
transactions, on the one hand, and stocks or bonds, on the other hand. However,
there can be no assurance that such non-correlation will continue during future
periods. If, contrary to historic patterns, USNG’s performance were to move in
the same general direction as the financial markets, investors will obtain
little or no diversification benefits from an investment in the units. In such a
case, USNG may have no gains to offset losses from other investments, and
investors may suffer losses on their investment in USNG at the same time they
incur losses with respect to other investments.





Variables
such as drought, floods, weather, embargoes, tariffs and other political events
may have a larger impact on natural gas prices and natural gas-linked
instruments, including Futures Contracts and Other Natural Gas-Related
Investments, than on traditional securities. These additional variables may
create additional investment risks that subject USNG’s investments to greater
volatility than investments in traditional securities.





Non-correlation
should not be confused with negative correlation, where the performance of two
asset classes would be opposite of each other. There is no historic evidence
that the spot price of natural gas and prices of other financial assets, such as
stocks and bonds, are negatively correlated. In the absence of negative
correlation, USNG cannot be expected to be automatically profitable during
unfavorable periods for the stock market, or vice versa.





USNG’s
Operating Risks




USNG
is not a registered investment company so unitholders do not have the
protections of the 1940 Act.




USNG is
not an investment company subject to the 1940 Act. Accordingly, investors
do not have the protections afforded by that statute which, for example,
requires investment companies to have a majority of disinterested directors and
regulates the relationship between the investment company and its investment
manager.




The
General Partner is leanly staffed and relies heavily on key personnel to manage
trading activities.




In
managing and directing the day-to-day activities and affairs of USNG, the
General Partner relies heavily on Messrs. Nicholas Gerber, John Love
and John Hyland. If Messrs. Gerber, Love or Hyland were to leave
or be unable to carry out their present responsibilities, it may have an adverse
effect on the management of USNG. Furthermore, Messrs. Gerber, Love
and Hyland are currently involved in the management of the Related Public
Funds, and the General Partner has filed a registration statement for two other
exchange traded security funds, USSO and US12NG.  Mr. Gerber is also
employed by Ameristock Corporation, a registered investment adviser that manages
a public mutual fund. It is estimated that Mr. Gerber will spend approximately
50% of his time on USNG and Related Public Fund matters. Mr. Love will
spend approximately 100% of his time on USNG and Related Public Fund matters and
Mr. Hyland will spend approximately 85% of his time on USNG and Related Public
Fund matters. To the extent that the General Partner establishes additional
funds, even greater demands will be placed on Messrs. Gerber, Love
and Hyland, as well as the other officers of the General Partner, including
Mr. Howard Mah, the Chief Financial Officer, and its Board of
Directors.




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Accountability
levels, position limits, and daily price fluctuation limits set by the exchanges
have the potential to cause a tracking error, which could cause the price of
units to substantially vary from the price of the Benchmark Futures Contract and
prevent investors from being able to effectively use USNG as a way to hedge
against natural gas-related losses or as a way to indirectly invest in natural
gas.




U.S.
designated contract markets such as the NYMEX have established accountability
levels and position limits on the maximum net long or net short futures
contracts in commodity interests that any person or group of persons under
common trading control (other than as a hedge, which an investment by USNG is
not) may hold, own or control. For example, the current accountability level for
investments at any one time in the Benchmark Futures Contract is 12,000.
While this is not a fixed ceiling, it is a threshold above which the NYMEX may
exercise greater scrutiny and control over an investor, including limiting an
investor to holding no more than 12,000 Benchmark Futures Contracts. With regard
to position limits, the NYMEX limits an investor from holding more than 1,000
net futures in the last 3 days of trading in the near month contract to
expire.





In
addition to accountability levels and position limits, the NYMEX also sets daily
price fluctuation limits on the Futures Contracts. The daily price fluctuation
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day’s settlement price. Once the daily
price fluctuation limit has been reached in a particular Futures Contract, no
trades may be made at a price beyond that limit.




For
example, the NYMEX imposes a $3.00 per mmBtu ($30,000 per contract) price
fluctuation limit for the Benchmark Futures Contract. This limit is initially
based off of the previous trading day’s settlement price. If any Benchmark
Futures Contract is traded, bid, or offered at the limit for five minutes,
trading is halted for five minutes. When trading resumes it begins at the point
where the limit was imposed and the limit is reset to be $3.00 per mmBtu in
either direction of that point. If another halt were triggered, the market would
continue to be expanded by $3.00 per mmBtu in either direction after each
successive five-minute trading halt. There is no maximum price fluctuation limit
during any one trading session.




All of
these limits may potentially cause a tracking error between the price of the
units and the price of the Benchmark Futures Contract. This may in turn prevent
investors from being able to effectively use USNG as a way to hedge against
natural gas-related losses or as a way to indirectly invest in natural
gas.





USNG has
not limited the size of its offering and is committed to utilizing substantially
all of its proceeds to purchase Futures Contracts and Other Natural Gas-Related
Investments. If USNG encounters accountability levels, position limits, or price
fluctuation limits for Futures Contracts on the NYMEX, it may then, if permitted
under applicable regulatory requirements, purchase Futures Contracts on the ICE
Futures (formerly, the International Petroleum Exchange) or other exchanges that
trade listed natural gas futures. Futures Contracts available on ICE Futures and
other exchanges may have different underlying commodities, sizes, deliveries,
and prices which
could affect USNG's ability to track the Benchmark Futures
Contract.




There
are technical and fundamental risks inherent in the trading system the General
Partner intends to employ.




The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In addition, it is
also possible that a computer or software program may malfunction and cause an
error in computation.




To
the extent that the General Partner uses spreads and straddles as part of its
trading strategy, there is the risk that the NAV may not closely track the
changes in the Benchmark Futures Contract.





Spreads
combine simultaneous long and short positions in related futures contracts that
differ by commodity (e.g., long crude oil and
short gasoline), by market (e.g., long WTI crude futures,
short Brent crude futures), or by delivery month (e.g., long December, short
November). Spreads gain or lose value as a result of relative changes in price
between the long and short positions. Spreads often reduce risk to investors,
because the contracts tend to move up or down together. However, both legs of
the spread could move against an investor simultaneously, in which case the
spread would lose value. Certain types of spreads may face unlimited risk, e.g., because the price of a
futures contract underlying a short position can increase by an unlimited amount
and the investor would have to take delivery or offset at that
price.




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A
commodity straddle takes both long and short option positions in the same
commodity in the same market and delivery month simultaneously. The buyer of a
straddle profits if either the long or the short leg of the straddle moves
further than the combined cost of both options. The seller of a straddle profits
if both the long and short positions do not trade beyond a range equal to the
combined premium for selling both options.
 
 If the
General Partner were to utilize a spread or straddle position and the spread
performed differently than expected, the results could impact USNG’s tracking
error. This could affect USNG’s investment objective of having its NAV closely
track the changes in the Benchmark Futures Contract. Additionally, a loss on a
spread position would negatively impact USNG’s absolute return.
 
 USNG
and the General Partner may have conflicts of interest, which may permit them to
favor their own interests to the detriment of unitholders.
  USNG and
the General Partner may have inherent conflicts to the extent the General
Partner attempts to maintain USNG’s asset size in order to preserve its fee
income and this may not always be consistent with USNG’s objective of having the
value of its units’ NAV track changes in the Benchmark Futures Contract. The
General Partner’s officers, directors and employees do not devote their time
exclusively to USNG. These persons are directors, officers or employees of other
entities that may compete with USNG for their services. They could have a
conflict between their responsibilities to USNG and to those other
entities.
 
 In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account. A conflict of
interest may exist if their trades are in the same markets and at the same time
as USNG trades using the clearing broker to be used by USNG. A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by
USNG.
  The
General Partner has sole current authority to manage the investments and
operations of USNG, and this may allow it to act in a way that furthers its own
interests which may create a conflict with the best interests of investors.
Limited partners have limited voting control, which will limit the ability to
influence matters such as amendment of the LP Agreement, change in USNG’s basic
investment policy, dissolution of this fund, or the sale or distribution of
USNG’s assets.
  The
General Partner serves as the general partner to each of USNG and the Related
Public Funds and will serve as the general partner for USSO and US12NG, if such
funds offer their securities to the public or begin operations. The General
Partner may have a conflict to the extent that its trading decisions for USNG
may be influenced by the effect they would have on the other funds it manages.
These trading decisions may be influenced since the General Partner also serves
as the general partner for all of the funds and is required to meet all of the
funds’ investment objectives as well as USNG’s. If the General Partner believes
that a trading decision it made on behalf of USNG might (i) impede its other
funds from reaching their investment objectives, or (ii) improve the likelihood
of meeting its other funds’ objectives, then the General Partner may choose to
change its trading decision for USNG, which could either impede or improve the
opportunity for USNG to meet its investment objective. In addition, the General
Partner is required to indemnify the officers and directors of its other funds
if the need for indemnification arises. This potential indemnification will
cause the General Partner’s assets to decrease. If the General Partner’s other
sources of income are not sufficient to compensate for the indemnification, then
the General Partner may terminate and investors could lose their
investment.
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  Unitholders
may only vote on the removal of the General Partner and limited partners have
only limited voting rights. Unitholders and limited partners will not
participate in the management of USNG and do not control the General Partner so
they will not have influence over basic matters that affect USNG.
  Unitholders
that have not applied to become limited partners have no voting rights, other
than to remove the General Partner. Limited partners will have limited voting
rights with respect to USNG’s affairs. Unitholders may remove the General
Partner only if 66 2/3% of the unitholders elect to do so. Unitholders and
limited partners will not be permitted to participate in the management or
control of USNG or the conduct of its business. Unitholders and limited partners
must therefore rely upon the duties and judgment of the General Partner to
manage USNG’s affairs.
 
 The
General Partner may manage a large amount of assets and this could affect USNG’s
ability to trade profitably.
  Increases
in assets under management may affect trading decisions. In general, the General
Partner does not intend to limit the amount of assets of USNG that it may
manage. The more assets the General Partner manages, the more difficult it may
be for it to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of managing
risk associated with larger positions.
 
 USNG
could terminate at any time and cause the liquidation and potential loss of an
investor’s investment and could upset the overall maturity and timing of an
investor’s investment portfolio.
  USNG may
terminate at any time, regardless of whether USNG has incurred losses, subject
to the terms of the LP Agreement. In particular, unforeseen circumstances,
including the death, adjudication of incompetence, bankruptcy, dissolution, or
removal of the General Partner could cause USNG to terminate unless a majority
in interest of the limited partners within 90 days of the event elects to
continue the partnership and appoints a successor general partner, or the
affirmative vote of a majority interest of the limited partners subject to
certain conditions. However, no level of losses will require the General Partner
to terminate USNG. USNG’s termination would cause the liquidation and potential
loss of an investor’s investment. Termination could also negatively affect the
overall maturity and timing of an investor’s investment
portfolio.
 
 Limited
partners may not have limited liability in certain circumstances, including
potentially having liability for the return of wrongful
distributions.
 
 Under
Delaware law, a limited partner might be held liable for USNG’s obligations as
if it were a General Partner if the limited partner participates in the control
of the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
  A limited
partner will not be liable for assessments in addition to its initial capital
investment in any of USNG’s capital securities representing units. However, a
limited partner may be required to repay to USNG any amounts wrongfully returned
or distributed to it under some circumstances. Under Delaware law, USNG may not
make a distribution to limited partners if the distribution causes USNG’s
liabilities (other than liabilities to partners on account of their partnership
interests and nonrecourse liabilities) to exceed the fair value of USNG’s
assets. Delaware law provides that a limited partner who receives such a
distribution and knew at the time of the distribution that the distribution
violated the law will be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution.
  With
adequate notice, a limited partner may be required to withdraw from the
partnership for any reason.
  If the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its sole discretion,
require any such limited partner to withdraw entirely from the partnership or to
withdraw a portion of its partner capital account. The General Partner may
require withdrawal even in situations where the limited partner has complied
completely with the provisions of the LP Agreement.
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  USNG’s
existing units are, and any units USNG issues in the future will be, subject to
restrictions on transfer. Failure to satisfy these requirements will preclude a
transferee from being able to have all the rights of a limited
partner.
  No
transfer of any unit or interest therein may be made if such transfer would (a)
violate the then applicable federal or state securities laws or rules and
regulations of the SEC, any state securities commission, the CFTC or any other
governmental authority with jurisdiction over such transfer, or (b) cause USNG
to be taxable as a corporation or affect USNG’s existence or qualification as a
limited partnership. In addition, investors may only become limited partners if
they transfer their units to purchasers that meet certain conditions outlined in
the LP Agreement, which provides that each record holder or limited partner or
unitholder applying to become a limited partner (each a record holder) may be
required by the General Partner to furnish certain information, including that
holder’s nationality, citizenship or other related status. A transferee who is
not a U.S. resident may not be eligible to become a record holder or a limited
partner if its ownership would subject USNG to the risk of cancellation or
forfeiture of any of its assets under any federal, state or local law or
regulation. All purchasers of USNG’s units, who wish to become limited partners
or record holders, and receive cash distributions, if any, or have certain other
rights, must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by USNG’s LP Agreement and is eligible to purchase USNG’s securities. Any
transfer of units will not be recorded by the transfer agent or recognized by
USNG unless a completed transfer application is delivered to the General Partner
or the Administrator. A person purchasing USNG’s existing units, who does not
execute a transfer application and certify that the purchaser is eligible to
purchase those securities acquires no rights in those securities other than the
right to resell those securities. Whether or not a transfer application is
received or the consent of the General Partner obtained, USNG’s units will be
securities and will be transferable according to the laws governing transfers of
securities. See “Transfer of Units.”
  USNG
does not expect to make cash distributions.
  The
General Partner has not previously made any cash distributions and intends to
re-invest any realized gains in Natural Gas Interests rather than distributing
cash to limited partners. Therefore, unlike mutual funds, commodity pools or
other investment pools that actively manage their investments in an attempt to
realize income and gains from their investing activities and distribute such
income and gains to their investors, USNG generally does not expect to
distribute cash to limited partners. An investor should not invest in USNG if it
will need cash distributions from USNG to pay taxes on its share of income and
gains of USNG, if any, or for any other reason. Although USNG does not intend to
make cash distributions, the income earned from its investments held directly or
posted as margin may reach levels that merit distribution, e.g., at levels where such
income is not necessary to support its underlying investments in Natural Gas
Interests and investors adversely react to being taxed on such income without
receiving distributions that could be used to pay such tax. If this income
becomes significant then cash distributions may be made.
 
 There
is a risk that USNG will not earn trading gains sufficient to compensate for the
fees and expenses that it must pay and as such USNG may not earn any
profit.
  USNG pays
brokerage charges of approximately 0.13%, based on futures commission merchant
fees of $3.50 per buy or sell, management fees of 0.60% of NAV on the first
$1,000,000,000 of assets and 0.50% of NAV after the first $1,000,000,000 of its
average net assets, and over-the-counter spreads and extraordinary expenses
(e.g., subsequent
offering expenses, other expenses not in the ordinary course of business,
including the indemnification of any person against liabilities and obligations
to the extent permitted by law and required under the LP Agreement and under
agreements entered into by the General Partner on USNG’s behalf and the bringing
and defending of actions at law or in equity and otherwise engaging in the
conduct of litigation and the incurring of legal expenses and the settlement of
claims and litigation) that can not be quantified. These fees and expenses must
be paid in all cases regardless of whether USNG’s activities are profitable.
Accordingly, USNG must earn trading gains sufficient to compensate for these
fees and expenses before it can earn any profit.
  USNG
has historically depended upon its affiliates to pay all its expenses. If this
offering of units does not raise sufficient funds to pay USNG’s future expenses
and no other source of funding of expenses is found, USNG may be forced to
terminate and investors may lose all or part of their investment.
 
 Prior to
the offering of units that commenced on April 17, 2007, all of USNG’s expenses
were funded by the General Partner and its affiliates. These payments by the
General Partner and its affiliates were designed to allow USNG the ability
to commence the public offering of its units. USNG now directly pays certain of
these fees and expenses. The General Partner will continue to pay other
fees and expenses, as set forth in the LP Agreement. If the General Partner and
USNG are unable to raise sufficient funds to cover their expenses or locate any
other source of funding, USNG may be forced to terminate and investors may lose
all or part of their investment.
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 USNG
may incur higher fees and expenses upon renewing existing or entering into new
contractual relationships.
  The
clearing arrangements between the clearing brokers and USNG generally are
terminable by the clearing brokers once the clearing broker has given USNG
notice. Upon termination, the General Partner may be required to renegotiate or
make other arrangements for obtaining similar services if USNG intends to
continue trading in Futures Contracts or Other Natural Gas-Related Investments
at its present level of capacity. The services of any clearing broker may not be
available, or even if available, these services may not be available on the
terms as favorable as those of the expired or terminated clearing
arrangements.
  USNG
may miss certain trading opportunities because it will not receive the benefit
of the expertise of independent trading advisors.
  The
General Partner does not employ trading advisors for USNG; however, it reserves
the right to employ them in the future. The only advisor to USNG is the General
Partner. A lack of independent trading advisors may be disadvantageous to USNG
because it will not receive the benefit of a trading advisor’s
expertise.
  An
unanticipated number of redemption requests during a short period of time could
have an adverse effect on the NAV of USNG.
  If a
substantial number of requests for redemption of Redemption Baskets are received
by USNG during a relatively short period of time, USNG may not be able to
satisfy the requests from USNG’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in USNG’s trading
positions before the time that the trading strategies would otherwise dictate
liquidation.
  The
financial markets are  currently in a period of disruption and
recession and USNG does not expect these conditions to improve in the near
future.
 
 Currently
and throughout 2008, the financial markets have experienced very difficult
conditions and volatility as well as significant adverse trends. The
deteriorating conditions in these markets have resulted in a decrease in
availability of corporate credit and liquidity and have led indirectly to the
insolvency, closure or acquisition of a number of major financial institutions
and have contributed to further consolidation within the financial services
industry. A continued recession or a depression could adversely affect the
financial condition and results of operations of USNG’s service providers and
Authorized Purchasers which would impact the ability of the General Partner to
achieve USNG’s investment objective.
 
 The
failure or bankruptcy of a clearing broker could result in a substantial loss of
USNG’s assets; the clearing broker could be subject to proceedings that impair
its ability to execute USNG’s trades.
  Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or is unable to satisfy
a substantial deficit in a customer account, its other customers may be subject
to risk of a substantial loss of their funds in the event of that clearing
broker’s bankruptcy. In that event, the clearing broker’s customers, such as
USNG, are entitled to recover, even in respect of property specifically
traceable to them, only a proportional share of all property available for
distribution to all of that clearing broker’s customers. The bankruptcy of a
clearing broker could result in the complete loss of USNG’s assets posted with
the clearing broker; though, the vast majority of USNG’s assets are held in
Treasuries, cash and/or cash equivalents with USNG’s custodian and would not be
impacted by the bankruptcy of a clearing broker. USNG also may be subject to the
risk of the failure of, or delay in performance by, any exchanges and markets
and their clearing organizations, if any, on which commodity interest contracts
are traded.
 
 From time
to time, the clearing brokers may be subject to legal or regulatory proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear USNG’s
trades.
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  The
failure or insolvency of USNG’s custodian could result in a substantial loss of
USNG’s assets.
  As noted
above, the vast majority of USNG’s assets are held in Treasuries, cash and/or
cash equivalents with USNG’s custodian. The insolvency of the custodian could
result in a complete loss of USNG’s assets held by that custodian, which, at any
given time, would likely comprise a substantial portion of USNG’s total
assets.
 
 Third
parties may infringe upon or otherwise violate intellectual property rights or
assert that the General Partner has infringed or otherwise violated their
intellectual property rights, which may result in significant costs and diverted
attention.
  Third
parties may utilize USNG’s intellectual property or technology, including the
use of its business methods, trademarks and trading program software, without
permission. The General Partner has a patent pending for USNG’s business method
and it is registering its trademarks. USNG does not currently have any
proprietary software. However, if it obtains proprietary software in the future,
then any unauthorized use of USNG’s proprietary software and other technology
could also adversely affect its competitive advantage. USNG may have difficulty
monitoring unauthorized uses of its patents, trademarks, proprietary software
and other technology. Also, third parties may independently develop business
methods, trademarks or proprietary software and other technology similar to that
of the General Partner or claim that the General Partner has violated their
intellectual property rights, including their copyrights, trademark rights,
trade names, trade secrets and patent rights. As a result, the General Partner
may have to litigate in the future to protect its trade secrets, determine the
validity and scope of other parties’ proprietary rights, defend itself against
claims that it has infringed or otherwise violated other parties’ rights, or
defend itself against claims that its rights are invalid. Any litigation of this
type, even if the General Partner is successful and regardless of the merits,
may result in significant costs, divert its resources from USNG, or require it
to change its proprietary software and other technology or enter into royalty or
licensing agreements.
  The
success of USNG depends on the ability of the General Partner to accurately
implement trading systems, and any failure to do so could subject USNG to losses
on such transactions.
  The
General Partner uses mathematical formulas built into a generally available
spreadsheet program to decide whether it should buy or sell Natural Gas
Interests each day. Specifically, the General Partner uses the spreadsheet to
make mathematical calculations and to monitor positions in Natural Gas Interests
and Treasuries and correlations to the Benchmark Futures Contract. The General
Partner must accurately process the spreadsheets’ outputs and execute the
transactions called for by the formulas. In addition, USNG relies on the General
Partner to properly operate and maintain its computer and communications
systems. Execution of the formulas and operation of the systems are subject to
human error. Any failure, inaccuracy or delay in implementing any of the
formulas or systems and executing USNG’s transactions could impair its ability
to achieve USNG’s investment objective. It could also result in decisions to
undertake transactions based on inaccurate or incomplete information. This could
cause substantial losses on transactions.
  USNG
may experience substantial losses on transactions if the computer or
communications system fails.
  USNG’s
trading activities, including its risk management, depend on the integrity and
performance of the computer and communications systems supporting them.
Extraordinary transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or even fail. Any
significant degradation or failure of the systems that the General Partner uses
to gather and analyze information, enter orders, process data, monitor risk
levels and otherwise engage in trading activities may result in substantial
losses on transactions, liability to other parties, lost profit opportunities,
damages to the General Partner’s and USNG’s reputations, increased operational
expenses and diversion of technical resources.
  If
the computer and communications systems are not upgraded, as needed, USNG’s
financial condition could be harmed.
  The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting USNG’s
trading activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the systems of
exchanges, clearing brokers and the executing brokers. As a result, if these
third parties upgrade their systems, the General Partner will need to make
corresponding upgrades to continue effectively its trading activities. USNG’s
future success will depend on USNG’s ability to respond to changing technologies
on a timely and cost-effective basis.
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 USNG
depends on the reliable performance of the computer and communications systems
of third parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.
  USNG
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other data
providers that the General Partner uses to conduct trading activities. Failure
or inadequate performance of any of these systems could adversely affect the
General Partner’s ability to complete transactions, including its ability to
close out positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a material adverse
effect on revenues and materially reduce USNG’s available capital. For example,
unavailability of price quotations from third parties may make it difficult or
impossible for the General Partner to use its proprietary software that it
relies upon to conduct its trading activities. Unavailability of records from
brokerage firms may make it difficult or impossible for the General Partner to
accurately determine which transactions have been executed or the details,
including price and time, of any transaction executed. This unavailability of
information also may make it difficult or impossible for the General Partner to
reconcile its records of transactions with those of another party or to
accomplish settlement of executed transactions.
  The
occurrence of a terrorist attack, or the outbreak, continuation or expansion of
war or other hostilities could disrupt USNG’s trading activity and materially
affect USNG’s profitability.
  The
operations of USNG, the exchanges, brokers and counterparties with which USNG
does business, and the markets in which USNG does business could be severely
disrupted in the event of a major terrorist attack or the outbreak, continuation
or expansion of war or other hostilities. The terrorist attacks of September 11,
2001 and the war in Iraq, global anti-terrorism initiatives and political unrest
in the Middle East and Southeast Asia continue to fuel this
concern.
  Risk
of Leverage and Volatility
  If
the General Partner permits USNG to become leveraged, investors could lose all
or substantially all of their investment if USNG’s trading positions suddenly
turn unprofitable.
  Commodity
pools’ trading positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds that represent
only a small percentage of a futures contract’s (or other commodity interests’)
entire market value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity interests)
with an aggregate value in excess of the commodity pool’s assets. While this
leverage can increase the pool’s profits, relatively small adverse movements in
the price of the pool’s futures contracts can cause significant losses to the
pool. While the General Partner has not and does not currently intend to
leverage USNG’s assets, it is not prohibited from doing so under the LP
Agreement or otherwise.
  The
price of natural gas is volatile which could cause large fluctuations in the
price of units.
  Movements
in the price of natural gas may be the result of factors outside of the General
Partner’s control and may not be anticipated by the General Partner. Among the
factors that can cause volatility in the price of natural gas are:
 
 ·         worldwide
or regional demand for energy, which is affected by economic
conditions;
 
 ·         the
domestic and foreign supply and inventories of oil and gas;
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·
            weather
      conditions, including abnormally mild winter or summer weather, and
      abnormally harsh winter or summer
weather;





·         availability
and adequacy of pipeline and other transportation facilities;





·         domestic
and foreign governmental regulations and taxes;





·         political
conditions in gas or oil producing regions;





·
            the
      ability of members of OPEC to agree upon and maintain oil prices and
      production levels;





·         the
price and availability of alternative fuels; and





·         the
impact of energy conservation efforts.





Since
USNG’s commencement of operations on April 18, 2007, there has been tremendous
volatility in the price of the Benchmark Futures Contract.  For
example, the price of the NYMEX futures contract on natural gas rose to a 2008
high of $13.694 on July 2, 2008 from a 2007 low of $5.192 on August 27,
2007. The General Partner anticipates that there will be continued
volatility in the price of the NYMEX futures contract for natural gas and
futures contracts for other petroleum-based
commodities.  Consequently, investors should know that this volatility
can lead to a loss of all or substantially all of their investment in
USNG.





The
impact of environmental and other governmental laws and regulations may affect
the price of natural gas.





Environmental
and other governmental laws and regulations have increased the costs to plan,
design, drill, install, operate and abandon natural gas and oil wells. Other
laws have prevented exploration and drilling of natural gas in certain
environmentally sensitive federal lands and waters. Several environmental laws
that have a direct or an indirect impact on the price of natural gas include,
but are not limited to, the Clean Air Act, Clean Water Act, Resource
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980.





The
limited method for transporting and storing natural gas may cause the price of
natural gas to increase.





Natural
gas is primarily transported and stored throughout the United States by way of
pipeline and underground storage facilities. These systems may not be adequate
to meet demand, especially in times of peak demand or in areas of the United
States where gas service is already limited due to minimal pipeline and storage
infrastructure. As a result of the limited method for transporting and storing
natural gas, the price of natural gas may increase.





Over-the-Counter
Contract Risk





Over-the-counter
transactions are subject to little, if any, regulation.




A portion
of USNG’s assets may be used to trade over-the-counter natural gas interest
contracts, such as forward contracts or swap or spot contracts. Over-the-counter
contracts are typically traded on a principal-to-principal basis through dealer
markets that are dominated by major money center and investment banks and other
institutions and are essentially unregulated by the CFTC. Investors therefore do
not receive the protection of CFTC regulation or the statutory scheme of the CEA
in connection with this trading activity by USNG. The markets for
over-the-counter contracts rely upon the integrity of market participants in
lieu of the additional regulation imposed by the CFTC on participants in the
futures markets. The lack of regulation in these markets could expose USNG in
certain circumstances to significant losses in the event of trading abuses or
financial failure by participants.




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USNG
will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by USNG or held by special purpose or
structured vehicles.




USNG
faces the risk of non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these contracts is
generally a single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a result, there
will be greater counterparty credit risk in these transactions. A counterparty
may not be able to meet its obligations to USNG, in which case USNG could suffer
significant losses on these contracts.




If a
counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, USNG may experience significant delays in obtaining
any recovery in a bankruptcy or other reorganization proceeding. USNG may obtain
only limited recovery or may obtain no recovery in such
circumstances.




USNG
may be subject to liquidity risk with respect to its over-the-counter
contracts.




Over-the-counter
contracts may have terms that make them less marketable than Futures Contracts.
Over-the-counter contracts are less marketable because they are not traded on an
exchange, do not have uniform terms and conditions, and are entered into based
upon the creditworthiness of the parties and the availability of credit support,
such as collateral, and in general, they are not transferable without the
consent of the counterparty. These conditions diminish the ability to realize
the full value of such contracts.




Risk
of Trading in International Markets




Trading
in international markets would expose USNG to credit and regulatory
risk.




The
General Partner invests primarily in Futures Contracts, a significant portion of
which are traded on United States exchanges, including the NYMEX. However, a
portion of USNG’s trades may take place on markets and exchanges outside the
United States. Some non-U.S. markets present risks because they are not subject
to the same degree of regulation as their U.S. counterparts. None of the CFTC,
NFA, or any domestic exchange regulates activities of any foreign boards of
trade or exchanges, including the execution, delivery and clearing of
transactions, nor has the power to compel enforcement of the rules of a foreign
board of trade or exchange or of any applicable non-U.S. laws. Similarly, the
rights of market participants, such as USNG, in the event of the insolvency or
bankruptcy of a non-U.S. market or broker are also likely to be more limited
than in the case of U.S. markets or brokers. As a result, in these markets, USNG
has less legal and regulatory protection than it does when it trades
domestically.




In some
of these non-U.S. markets, the performance on a contract is the responsibility
of the counterparty and is not backed by an exchange or clearing corporation and
therefore exposes USNG to credit risk. Trading in non-U.S. markets also leaves
USNG susceptible to swings in the value of the local currency against the U.S.
dollar. Additionally, trading on non-U.S. exchanges is subject to the risks
presented by exchange controls, expropriation, increased tax burdens and
exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the profit or
increase the loss earned on trades in the affected international
markets.





International
trading activities subject USNG to foreign exchange risk.




The price
of any non-U.S. Futures Contract, option on any non-U.S. Futures Contract or
other non-U.S. Natural Gas-Related Investment, and, therefore, the potential
profit and loss on such contract, may be affected by any variance in the foreign
exchange rate between the time the order is placed and the time it is
liquidated, offset or exercised. As a result, changes in the value of the local
currency relative to the U.S. dollar may cause losses to USNG even if the
contract traded is profitable.




USNG’s
international trading could expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.




Some
non-U.S. exchanges may be in a more developmental stage so that prior price
histories may not be indicative of current price dynamics. In addition, USNG may
not have the same access to certain positions on foreign trading exchanges as do
local traders, and the historical market data on which the General Partner bases
its strategies may not be as reliable or accessible as it is for U.S.
exchanges.




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Tax
Risk




An
investor’s tax liability may exceed the amount of distributions, if any, on its
units.




Cash or
property will be distributed at the sole discretion of the General Partner. The
General Partner has not and does not currently intend to make cash or other
distributions with respect to units. Investors will be required to pay U.S.
federal income tax and, in some cases, state, local, or foreign income tax, on
their allocable share of USNG’s taxable income, without regard to whether they
receive distributions or the amount of any distributions. Therefore, the tax
liability of an investor with respect to its units may exceed the amount of
cash or value of property (if any) distributed.





An
investor’s allocable share of taxable income or loss may differ from its
economic income or loss on its units.




Due to
the application of the assumptions and conventions applied by USNG in making
allocations for tax purposes and other factors, an investor’s allocable share of
USNG’s income, gain, deduction or loss may be different than its economic profit
or loss from its units for a taxable year. This difference could be temporary or
permanent and, if permanent, could result in it being taxed on amounts in excess
of its economic income.





Items
of income, gain, deduction, loss and credit with respect to units could be
reallocated if the IRS does not accept the assumptions and conventions applied
by USNG in allocating those items, with potential adverse consequences for an
investor.




The U.S.
tax rules pertaining to partnerships are complex and their application to large,
publicly traded partnerships such as USNG is in many respects uncertain. USNG
applies certain assumptions and conventions in an attempt to comply with the
intent of the applicable rules and to report taxable income, gains, deductions,
losses and credits in a manner that properly reflects unitholders’ economic
gains and losses. These assumptions and conventions may not fully comply with
all aspects of the Internal Revenue Code (the “Code”) and applicable Treasury
Regulations, however, and it is possible that the U.S. Internal Revenue Service
will successfully challenge USNG’s allocation methods and require USNG to
reallocate items of income, gain, deduction, loss or credit in a manner that
adversely affects investors. If this occurs, investors may be required to file
an amended tax return and to pay additional taxes plus deficiency
interest.





USNG
could be treated as a corporation for federal income tax purposes, which may
substantially reduce the value of the units.




USNG has
received an opinion of counsel that, under current U.S. federal income tax laws,
USNG will be treated as a partnership that is not taxable as a corporation for
U.S. federal income tax purposes, provided that (i) at least 90 percent of
USNG’s annual gross income consists of “qualifying income” as defined in the
Code, (ii) USNG is organized and operated in accordance with its governing
agreements and applicable law and (iii) USNG does not elect to be taxed as a
corporation for federal income tax purposes. Although the General Partner
anticipates that USNG has satisfied and will continue to satisfy the “qualifying
income” requirement for all of its taxable years, that result cannot be assured.
USNG has not requested and will not request any ruling from the IRS with respect
to its classification as a partnership not taxable as a corporation for federal
income tax purposes. If the IRS were to successfully assert that USNG is taxable
as a corporation for federal income tax purposes in any taxable year, rather
than passing through its income, gains, losses and deductions proportionately to
unitholders, USNG would be subject to tax on its net income for the year at
corporate tax rates. In addition, although the General Partner does not
currently intend to make distributions with respect to units, any distributions
would be taxable to unitholders as dividend income. Taxation of USNG as a
corporation could materially reduce the after-tax return on an investment in
units and could substantially reduce the value of the units.





Item 1B.    Unresolved Staff
Comments.





Not
applicable.





Item 2.    Properties.





Not
applicable.




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Item 3.    Legal Proceedings.


Although
USNG may, from time to time, be involved in litigation arising out of its
operations in the normal course of business or otherwise, USNG is currently not
a party to any pending material legal proceedings.
 
 Item 4.    Submission of Matters to a Vote of Security
Holders.
 
 Not
applicable.
 
 Part II
 
 Item 5.    Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases ofEquity
Securities.
  Price
Range of Units
  USNG’s
units have traded on the NYSE Arca under the symbol “UNG” since November
25, 2008.  Prior to trading on the NYSE Arca, USNG’s units previously
traded on the AMEX under the symbol “UNG” since its initial public offering on
April 18, 2007. The following table sets forth the range of reported high and
low sales prices of the units as reported on AMEX and NYSE Arca, as applicable,
for the periods indicated below.
  High
                
                
                LowFiscal year
      2008First
      quarter
                
                $
                50.12
                
                
                $
                36.29Second
      quarter
                
                $
                63.15
                
                
                $
                44.93Third
      quarter
                
                $
                63.89
                
                
                $
                31.20Fourth
      quarter
                
                $
                35.25
                
                
                $
                21.72
  High
                  
                  
                  LowFiscal year
      2007Second quarter (beginningApril
      18, 2007)
                  
                  $
                  54.68
                  
                  
                  $
                  42.05Third
      quarter
                  
                  $
                  45.59
                  
                  
                  $
                  33.23Fourth
      quarter
                  
                  $
                  44.55
                  
                  
                  $
                  33.58
  As of
December 31, 2008, USNG had 59,745 holders of units.
 
 Dividends
 
 USNG has
not made and does not currently intend to make cash distributions to its
unitholders.
 
 Issuer
Purchases of Equity Securities
 
 USNG does
not purchase units directly from its unitholders; however, in connection with
its redemption of baskets held by Authorized Purchasers, USNG redeemed778 baskets (comprising
77,800,000 units) during the year ended December 31, 2008.
  - 58
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 Item 6.    Selected Financial Data.
 
 Financial
Highlights (for the year ended December 31, 2008 and the period ended December
31, 2007)
 (Dollar
amounts in 000’s except for per unit information)
  Year
      ended
                  December
      31, 2008
                
                
                For the period
                  from
                  April 18, 2007
                  to
                  December 31,
                  2007Total
      assets
                
                $
                706,337
                
                
                $
                594,010Net
      realized and unrealized gain (loss) on futures transactions, inclusive of
      commissions
                
                $
                (498,471
                )
                
                $
                (20,247
                )Net
      income (loss)
                
                $
                (492,205
                )
                
                $
                (13,592
                )Weighted-average
      limited partnership units
                
                
                19,303,825
                
                
                
                7,644,574Net
      income (loss) per unit
                
                $
                (12.91
                )
                
                $
                (13.82
                )Net
      income (loss) per weighted average unit
                
                $
                (25.50
                )
                
                $
                (1.78
                )Cash
      and cash equivalents at end of year / period
                
                $
                419,930
                
                
                $
                488,067
 
 Item 7.    Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
  The
following discussion should be read in conjunction with the financial statements
and the notes thereto of USNG included elsewhere in this annual report on
Form 10-K.
  Forward-Looking
Information
  This
annual report on Form 10-K, including this “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” contains forward-looking
statements regarding the plans and objectives of management for future
operations. This information may involve known and unknown risks, uncertainties
and other factors that may cause USNG’s actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe USNG’s
future plans, strategies and expectations, are generally identifiable by use of
the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and USNG cannot
assure investors that these projections included in these forward-looking
statements will come to pass. USNG’s actual results could differ materially
from those expressed or implied by the forward-looking statements as a result of
various factors.
  USNG has
based the forward-looking statements included in this annual report on Form 10-K
on information available to it on the date of this annual report on Form
10-K, and USNG assumes no obligation to update any such forward-looking
statements. Although USNG undertakes no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, investors are advised to consult any additional disclosures
that USNG may make directly to them or through reports that USNG in the
future files with the SEC, including annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K.
 
 Introduction
 
 USNG, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca. The investment objective of USNG is to have
the changes in percentage terms of the units’ NAV  reflect the changes
in percentage terms of the spot price of natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the price of the futures contract on
natural gas traded on the NYMEX that is the near month contract to expire,
except when the near month contract is within two weeks of expiration, in which
case it will be measured by the futures contract that is the next month contract
to expire, less USNG’s expenses.
 
 USNG
seeks to achieve its investment objective by investing in a combination of
natural gas Futures Contracts and Other Natural Gas-Related Investments such
that changes in its NAV, measured in percentage terms, will closely track the
changes in the price of the Benchmark Futures Contract, also measured in
percentage terms. USNG’s General Partner believes the Benchmark Futures Contract
historically has exhibited a close correlation with the spot price of
natural gas. It is not the intent of USNG to be operated in a fashion such that
the NAV will equal, in dollar terms, the spot price of natural gas or any
particular futures contract based on natural gas. Management believes that it is
not practical to manage the portfolio to achieve such an investment goal when
investing in listed natural gas Futures Contracts.
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 On any
valuation day, the Benchmark Futures Contract is the near month futures contract
for natural gas traded on the NYMEX unless the near month contract will
expire within two weeks of the valuation day, in which case the Benchmark
Futures Contract is the next month contract for natural gas traded on the NYMEX.
“Near month contract” means the next contract traded on the NYMEX due to expire.
“Next month contract” means the first contract traded on the NYMEX due to expire
after the near month contract.
 
 USNG may
also invest in other Futures Contracts and Other Natural Gas-Related
Investments. The General Partner of USNG, which is registered as a CPO with the
CFTC, is authorized by the LP Agreement to manage USNG. The General Partner
is authorized by USNG in its sole judgment to employ and establish the terms of
employment for, and termination of, commodity trading advisors or futures
commission merchants.
  Natural
gas futures prices were very volatile during all of 2008 and exhibited wide
swings. The price of the Benchmark Futures Contract started the year near $7.50.
It rose sharply over the course of the year and hit a peak in early 2008 July of
approximately $13.57. After that the price steadily declined, with the decline
becoming more pronounced with the onset of the global financial crisis in
mid-to-late September 2008. The low price of the year was in late December 2008
when prices reached the $5.33 level. The year ended with the Benchmark Futures
Contract near $5.62, down approximately 25% over the year. Similarly, USNG’s NAV
also rose during the year from a starting level of $39.39 per unit to a high in
early July 2008 of $63.72 per unit. USNG’s NAV reached its low for the year in
late December 2008 at approximately $22.06 per unit. The NAV on December 31,
2008 was $23.27, down 41% over the year.
 For the
first month of 2008, the natural gas futures market remained in a state of
backwardation, meaning that the price of the front month natural gas futures
contract was typically higher than the price of the second month natural gas
futures contract, or contracts further away from expiration. For much of the
rest of the year until late August, the natural gas futures market moved into a
mild contango market. A contango market is one in which the price of the front
month natural gas futures contract is less than the price of the second month
natural gas futures contract, or contracts further away from expiration. From
late August 2008 until late November 2008, and during the period when the global
financial crisis began to impact the U.S. economy, the market moved into a much
steeper contango market. Finally, the market moved into a mild contango market
with periods of backwardation. For a discussion of the impact of backwardation
and contango on total returns see “Term Structure of Natural Gas Futures Prices
and the Impact on Total Returns”.
 Valuation
of Futures Contracts and the Computation of the NAV
 
 The NAV
of USNG units is calculated once each trading day as of the earlier of the close
of the NYSE or 4:00 p.m. New York time. The NAV for a particular
trading day is released after 4:15 p.m. New York time. Trading on the
NYSE typically closes at 4:00 p.m. New York time. USNG uses the NYMEX
closing price (determined at the earlier of the close of the NYMEX or
2:30 p.m. New York time) for the contracts held on the NYMEX, but
calculates or determines the value of all other USNG investments, including ICE
Futures or other futures contracts, as of the earlier of the close of
the NYSE or 4:00 p.m. New York time.
  Results
of Operations and the Natural Gas Market
 
 Results of
Operations. On April 18, 2007, USNG listed its units on the
AMEX under the ticker symbol “UNG.” On that day USNG established its initial
offering price at $50.00 per unit and issued 200,000 units to the initial
Authorized Purchaser, Merrill Lynch Professional Clearing Corp, in exchange for
$10,001,000 in cash. As a result of the acquisition of the AMEX by NYSE
Euronext, USNG’s units no longer trade on the AMEX and commenced trading on the
NYSE Arca on November 25, 2008.
  Since its
initial offering of 30,000,000 units, USNG has made three subsequent offerings
of its units: 50,000,000 units which were registered with the SEC on
November 21, 2007, 30,000,000 units which were registered with the SEC on May 1,
2008 and an additional 100,000,000 units which were registered with the SEC
on August 28, 2008. Units offered by USNG in subsequent offerings were sold by
it for cash at the units’ NAV as described in the applicable prospectus. As of
December 31, 2008, USNG had issued 107,700,000 units, 29,900,000 of
which were outstanding.  As of December 31, 2008, there were
72,300,000 units registered but not yet issued.
  More
units have been issued by USNG than are outstanding due to the redemption of
units. Unlike mutual funds that are registered under the 1940 Act, units that
have been redeemed by USNG cannot be resold by USNG. As a result, USNG
contemplates that further offerings of its units will be registered with
the SEC in the future in anticipation of additional issuances.
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-
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  For the Year Ended December
31, 2008 Compared to the Period from April 18, 2007 to December 31,
2007
 
 As of
December 31, 2008, the total unrealized loss on natural gas Futures
Contracts owned or held on that day was $7,704,870 and USNG established
cash deposits, including cash investments in money market funds, that were equal
to $713,549,385. The majority of cash assets were held in overnight deposits at
USNG’s Custodian, while 41.15% of the cash balance was held as margin deposits
for the Futures Contracts purchased. The ending per unit NAV on December 31,
2008 was $23.27.
 
 By
comparison, as of December 31, 2007, the total unrealized gain on natural
gas Futures Contracts owned or held on that day was $20,043,880 and USNG
established cash deposits, including cash investments in money market funds,
that were equal to $573,183,088. The majority of cash assets were held in
overnight deposits at USNG’s Custodian, while less than 14.85% of the cash
balance was held as margin deposits for the Futures Contracts purchased. The
ending per unit NAV on December 31, 2007 was $36.18.  The change in
the per unit NAV for December 31, 2007 compared to December 31, 2008 was
primarily a result of sharply lower prices for natural gas and the related
decline in the value of natural gas futures contracts that USNG had invested in
during the year.
  Portfolio Expenses. USNG’s
expenses consist of investment management fees, brokerage fees and
commissions, certain offering costs, licensing fees and the fees and expenses of
the independent directors of the General Partner and other extraordinary
expenses. The management fee that USNG pays to the General Partner is
calculated as a percentage of the total net assets of USNG. For total net assets
of up to $1 billion, the management fee is 0.60%. For total net assets over $1
billion, the management fee is 0.50% on the incremental amount of assets. The
fee is accrued daily.
 
 During
the year ended December 31, 2008, the daily average total net assets
of USNG were $732,301,901. During the year ended December 31,
2008, total net assets of USNG exceeded $1 billion on a number of
days. The management fee paid by USNG amounted to $4,373,723, which was
calculated at the 0.60% rate for the total net assets up to and including $1
billion and at the rate of 0.50% on total net assets over $1 billion, and
accrued daily. Management expenses as a percentage of total net assets averaged
0.60% over the course of the period.
 
 By
comparison, during the period from April 18, 2007 through December 31, 2007, the
daily average total net assets of USNG were $292,344,830. During
the period ended December 31, 2007, total net assets of USNG did not exceed
$1 billion on any day. The management fee paid by USNG amounted to
$1,239,862, which was calculated at the 0.60% rate, and accrued daily.
Management expenses as a percentage of total net assets averaged 0.60% over the
course of the period. Total
management expenses expressed in dollar terms were lower in 2007 due to a
combination of lower daily total net assets and a less than a full-year period
compared to 2008.
 
 In
addition to the management fee, USNG pays for all brokerage fees, taxes and
other expenses, including certain tax reporting costs, licensing fees for the
use of intellectual property, ongoing registration or other fees paid to the
SEC, FINRA and any other regulatory agency in connection
with offers and sales of its units subsequent to the initial offering and
all legal, accounting, printing and other expenses associated
therewith. The total of these fees, taxes and expenses for 2008 was
$2,655,089, as compared to $805,459 in 2007. The increase in expenses
during 2008 was primarily due to the registration and the offering of additional
units, increased brokerage fees and increased tax reporting costs due to the
greater number of unit holders during 2008. For the year ended December 31,
2008, USNG incurred $348,874 in fees and other expenses relating to the
registration and offering of additional units. By comparison, for the period
from April 18, 2007 through December 31, 2007, USNG incurred $41,980 in fees and
other expenses relating to the registration and offering of additional units.
Total
non-management expenses were lower in 2007 due to a combination of lower daily
total net assets and a less than a full-year period compared to
2008.
 
 USNG is
responsible for paying its portion of the fees and expenses, including
directors’ and officers’ liability insurance, of the independent directors
of the General Partner who are also its audit committee members. In 2008,
USNG shared these fees with the Related Public Funds based on the
relative assets of each fund computed on a daily basis. These fees for the year
ended December 31, 2008 amounted to a total of $282,000 for all five funds, and
USNG’s portion of such fees was $130,371. By comparison, for the period from
April 18, 2007 through December 31, 2007, these fees were $286,000 and USNG’s
portion of such fees was $59,420.
 
 USNG also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Natural Gas-Related Investments or Treasuries. During the year ended
December 31, 2008, total commissions paid to brokers amounted to $867,175. By
comparison, during the period from April 18, 2007 to December 31, 2007, total
commissions paid to brokers amounted to $351,310. The increase in the total
commissions paid to brokers was primarily a function of the increase in USNG’s
average total net assets as the increase in assets that required USNG Prior to
the initial offering of its units, USNG to purchase a greater number of Futures
Contracts and incur a larger amount of commissions and also due to increased
redemptions and creations of units during 2008. As an annualized percentage of
total net assets, the figure for 2008 represents approximately 0.12% of
total net assets. By comparison, the figure for 2007 represented approximately
0.17% of total net assets. However, there can be no assurance that commission
costs and portfolio turnover will not cause commission expenses to rise in
future quarters.
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Contents
  The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which were borne by the General Partner, are
paid by USNG. These costs are estimated to be $1,150,000 for the year ended
December 31, 2008.
  Interest Income. USNG seeks
to invest its assets such that it holds Futures Contracts and Other Natural
Gas-Related Investments in an amount equal to the total net assets of the
portfolio. Typically, such investments do not require USNG to pay the full
amount of the contract value at the time of purchase, but rather require USNG to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USNG retains an amount that is approximately equal to its
total net assets, which USNG invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash and cash equivalents
held with USNG’s Custodian. The Treasuries, cash and/or cash equivalents earn
interest that accrues on a daily basis. For 2008, USNG earned $12,225,534 in
interest income on such cash holdings. Based on USNG’s average daily total net
assets, this is equivalent to an annualized yield of 1.67%. USNG did not
purchase Treasuries during 2008 and held all of its funds in cash and/or
cash equivalents during this time period. By comparison, for 2007, USNG earned
$8,242,264 in interest income on such cash holdings. Based on USNG’s average
daily total net assets, this is equivalent to an annualized yield of 3.99%. USNG
did not purchase Treasuries during 2007 and held all of its funds in cash
and/or cash equivalents during this time period. Interest rates on short-term
investments in the United States, including cash, cash equivalents and
short-term Treasuries were sharply lower in 2008 compared to the same time
period in 2007. As a result, the amount of interest earned by USNG as a
percentage of total net assets was lower in 2008.
 
 For the Three Months Ended
December 31, 2008 Compared to the Three Months Ended December 31,
2007
  Portfolio Expenses. During
the three months ended December 31, 2008, the daily average total net assets
of USNG were $794,047,075. During the three months ended December
31, 2008, total net assets of USNG exceeded $1 billion on a number of
days. The management fee paid by USNG amounted to $1,196,109, which was
calculated at the 0.60% rate for the total net assets up to and including $1
billion and at the rate of 0.50% on total net assets over $1 billion, and
accrued daily. Management expenses as a percentage of total net assets averaged
0.60% over the course of the period.
 
 By
comparison, during the three months ended December 31, 2007, the daily average
total net assets of USNG were $525,339,178. During the three
months ended December 31, 2007, total net assets of USNG did not exceed $1
billion on any day. The management fee paid by USNG amounted to $794,486,
which was calculated at the 0.60% rate, and accrued daily. Management expenses
as a percentage of total net assets averaged 0.60% over the course of the
period. Total
management expenses expressed in dollar terms were lower during the three months
ended December 31, 2007 due to lower daily total net assets compared to the same
period in 2008.
 
 USNG pays
for all brokerage fees, taxes and other expenses, including certain tax
reporting costs, licensing fees for the use of intellectual property, ongoing
registration or other fees paid to the SEC, FINRA and any other
regulatory agency in connection with offers and sales of its units
subsequent to the initial offering and all legal, accounting, printing and other
expenses associated therewith. For the three months ended December 31,
2008, USNG incurred $173,293 in ongoing registration fees and other
offering expenses. By comparison, for the three months ended December 31, 2007,
USNG incurred $49,497 in ongoing registration fees and other offering
expenses.
 
 USNG is
responsible for paying its portion of the fees and expenses, including
directors’ and officers’ liability insurance, of the independent directors
of the General Partner who are also audit committee members. In 2008,
USNG shared these fees with the Related Public Funds based on the
relative assets of each fund computed on a daily basis. These fees for the three
months ended December 31, 2008 amounted to a total of $68,750 for all five
funds, and USNG’s portion of such fees was $29,210. By comparison, for the three
months ended December 31, 2007, these fees were $68,750 and USNG’s portion of
such fees was $37,184.
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Contents
 
 USNG also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Natural Gas-Related Investments or Treasuries. During the three
months ended December 31, 2008, total commissions paid to brokers amounted to
$262,441. By comparison, during the three months ended December 31, 2007, total
commissions paid to brokers amounted to $192,776. Total
commissions in dollar terms were lower during the three month period ended
December 31, 2007 compared to the similar period for 2008 due to USNG having a
lower daily average total net assets, which meant that fewer futures contracts
needed to be bought or sold on behalf of USNG.
    The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which were borne by the General Partner, are
paid by USNG. No amounts were required to be paid for audit expenses
and tax accounting and reporting requirements for the quarter ended December 31,
2008.
  Interest Income. USNG seeks
to invest its assets such that it holds Futures Contracts and Other Natural
Gas-Related Investments in an amount equal to the total net assets of the
portfolio. Typically, such investments do not require USNG to pay the full
amount of the contract value at the time of purchase, but rather require USNG to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USNG retains an amount that is approximately equal to its
total net assets, which USNG invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash held with USNG’s
Custodian. The Treasuries, cash and/or cash equivalents earn interest that
accrues on a daily basis. For the three months ended December 31, 2008, USNG
earned $1,845,515 in interest income on such cash holdings. Based on USNG’s
average daily total net assets, this is equivalent to an annualized yield of
0.92%. USNG did not purchase Treasuries during the three months ended
December 31, 2008 and held all of its funds in cash and/or cash equivalents
during this time period. By comparison, for the three months ended December 31,
2007, USNG earned $4,955,246 in interest income on such cash holdings. Based on
USNG’s average daily total net assets, this is equivalent to an annualized yield
of 3.74%. USNG did not purchase Treasuries during the three months ended
December 31, 2007 and held all of its funds in cash and/or cash equivalents
during this time period. Interest rates on short-term investments in the United
States, including cash, cash equivalents and short-term Treasuries were sharply
lower in the three months ended December 31, 2008 compared to the same time
period in 2007. As a result, the amount of interest earned by USNG as a
percentage of total net assets was down.
 
 Tracking USNG’s Benchmark.
USNG seeks to manage its portfolio such that changes in its average daily NAV,
on a percentage basis, closely track changes in the average daily price of the
Benchmark Futures Contract, also on a percentage basis. Specifically, USNG seeks
to manage the portfolio such that over any rolling period of 30 valuation days,
the average daily change in the NAV is within a range of 90% to 110% (0.9 to
1.1) of the average daily change of the Benchmark Futures Contract. As an
example, if the average daily movement of the price of the Benchmark Futures
Contract for a particular 30-day time period was 0.5% per day, USNG management
would attempt to manage the portfolio such that the average daily movement of
the NAV during that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of
the benchmark’s results). USNG’s portfolio management goals do not include
trying to make the nominal price of USNG’s NAV equal to the nominal price of the
current Benchmark Futures Contract or the spot price for natural gas. Management
believes that it is not practical to manage the portfolio to achieve such an
investment goal when investing in listed natural gas Futures
Contracts.
 
 For the
30 valuation days ended December 31, 2008, the simple average daily change in
the Benchmark Futures Contract was -5.05%, while the simple average daily change
in the NAV of USNG over the same time period was -5.07%. The average daily
difference was -0.002% (or -0.2 basis points, where 1 basis point equals 1/100
of 1%). As a percentage of the daily movement of the Benchmark Futures Contract,
the average error in daily tracking by the NAV was 0.346%, meaning that over
this time period USNG’s tracking error was within the plus or minus 10% range
established as its benchmark tracking goal. The first chart below shows the
daily movement of USNG’s NAV versus the daily movement of the Benchmark Futures
Contract for the 30-day period ending December 31, 2008.
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  Since the
offering of USNG units to the public on April 18, 2007 to December 31,
2008, the simple average daily change in the Benchmark Futures Contract was
-0.142%, while the simple average daily change in the NAV of USNG over the same
time period was -0.136%. The average daily difference was 0.006% (or 0.6 basis
point, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the Benchmark Futures Contract, the average error in daily tracking
by the NAV was 0.953%, meaning that over this time period USNG’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.
 
 An
alternative tracking measurement of the return performance of USNG versus the
return of its Benchmark Futures Contract can be calculated by comparing the
actual return of USNG, measured by changes in its NAV, versus the expected changes in its NAV
under the assumption that USNG’s returns had been exactly the same as the daily
changes in its Benchmark Futures Contract.
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 For the
year ended December 31, 2008, the actual total return of USNG as measured
by changes in its NAV was -35.68%. This is based on an initial NAV of
$36.18 on December 31, 2007 and an ending NAV as of December 31,
2008 of $23.27. During this time period, USNG made no distributions to its
unitholders. However, if USNG’s daily changes in its NAV had instead exactly
tracked the changes in the daily return of the Benchmark Futures Contract, USNG
would have ended 2008 with an estimated NAV of $23.13, for a total return over
the relevant time period of -36.08%. The difference between the actual NAV total
return of USNG of -35.68% and the expected total return based on the Benchmark
Futures Contract of -36.08% was an error over the time period of 0.40%, which is
to say that USNG’s actual total return exceeded the benchmark result by that
percentage. Management believes that a portion of the difference between
the actual return and the expected benchmark return can be attributed to the
impact of the interest that USNG collects on its cash and cash equivalent
holdings.  During 2008, USNG received interest income of $12,225,534,
which is equivalent to a weighted average interest rate of 1.67% for 2008. In
addition, during the year ended December 31, 2008, USNG also collected $202,000
from brokerage firms creating or redeeming baskets of units. During 2008, USNG
incurred total expenses of $7,028,812.  Income from interest and
brokerage collections net of expenses was $5,398,722, which is equivalent to a
weighted average net interest rate of 0.74% for 2008. This income also
contributed to USNG’s actual return exceeding the benchmark results. However, if
the total assets of USNG continue to increase, management believes that the
impact on total returns of these fees from creations and redemptions will
diminish as a percentage of the total return.
 
 By
comparison, for the period from April 18, 2007 through December 31, 2007, the
actual total return of USNG as measured by changes in its NAV was -27.64%. This
is based on an initial NAV of $50.00 on April 18, 2007 and an ending NAV as
of December 31, 2007 of $36.18. During this time period, USNG made no
distributions to its unitholders. However, if USNG’s daily changes in its NAV
had instead exactly tracked the changes in the daily return of the Benchmark
Futures Contract, USNG would have ended 2007 with an estimated NAV of $35.45,
for a total return over the relevant time period of -29.11%. The difference
between the actual NAV total return of USNG of -27.64% and the expected total
return based on the Benchmark Futures Contract of -29.11% was an error over the
time period of +1.47%, which is to say that USNG’s actual total return exceeded
the benchmark result by that percentage. Management believes that a portion
of the difference between the actual return and the expected benchmark
return can be attributed to the impact of the interest that USNG collects on its
cash and cash equivalent holdings. During 2007, USNG received interest income of
$8,242,264, which is equivalent to a weighted average interest rate of 3.99% for
2007. In addition, during the period ended December 31, 2007, USNG also
collected $107,000 from brokerage firms creating or redeeming baskets of units.
This income also contributed to USNG’s actual return exceeding the benchmark
results.
 
 There are
currently three factors that have impacted or are most likely
to impact USNG’s ability to accurately track its Benchmark Futures
Contract.
 
 First,
USNG may buy or sell its holdings in the then current Benchmark Futures Contract
at a price other than the closing settlement price of that contract on the day
in which USNG executes the trade. In that case, USNG may pay  a price
that is higher, or lower, than that of the Benchmark Futures Contract,
which could cause the changes in the daily NAV of USNG to either be too
high or too low relative to the changes in the Benchmark Futures Contract. In
2008, management attempted to minimize the effect of these transactions by
seeking to execute its purchase or sales of the Benchmark Futures Contracts at,
or as close as possible to, the end of the day settlement price. However, it may
not always be possible for USNG to obtain the closing settlement price and there
is no assurance that failure to obtain the closing settlement price in the
future will not adversely impact USNG’s attempt to track the Benchmark Futures
Contract over time.
 
 Second,
USNG earns interest on its cash, cash equivalents and Treasury
holdings. USNG is not required to distribute any portion of its income to its
unitholders and did not make any distribution to unitholders in 2008. Interest
payments, and any other income, were retained within the portfolio and added to
USNG’s NAV. When this income exceeds the level of USNG’s expenses for its
management fee, brokerage commissions and other expenses (including ongoing
registration fees, licensing fees and the fees and expenses of the
independent directors of the General Partner), USNG will realize a net yield
that will tend to cause daily changes in the NAV of USNG to track slightly
higher than daily changes in the Benchmark Futures Contracts. During 2008, USNG
earned, on an annualized basis, approximately 1.67% on its cash holdings. It
also incurred cash expenses on an annualized basis of 0.60% for management fees
and approximately 0.12% in brokerage commission costs related to the purchase
and sale of futures contracts, and 0.24% for other expenses. The foregoing fees
and expenses resulted in a net yield on an annualized basis of approximately
0.71% and affected USNG’s ability to track its benchmark. If short-term interest
rates rise above the current levels, the level of deviation created by the yield
would increase. Conversely, if short-term interest rates were to decline, the
amount of error created by the yield would decrease. If short-term yields drop
to a level lower than the combined expenses of the management fee and the
brokerage commissions, then the tracking error would become a negative number
and would tend to cause the daily returns of the NAV to underperform the daily
returns of the Benchmark Futures Contract.
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 Third,
USNG may hold Other Natural Gas-Related Investments in its portfolio that
may fail to closely track the Benchmark Futures Contract’s total return
movements. In that case, the error in tracking the Benchmark Futures Contract
could result in daily changes in the NAV of USNG that are either too high, or
too low, relative to the daily changes in the Benchmark Futures Contract. During
2008, USNG did not hold any Other Natural Gas-Related Investments. However,
there can be no assurance that in the future USNG will not make use of such
Other Natural Gas-Related Investments.
  Term Structure of Natural Gas
Futures Prices and the Impact on Total Returns.Several factors determine
the total return from investing in a futures contract position. One factor that
impacts the total return that will result from investing in near month
natural gas Futures Contracts and “rolling” those contracts forward each month
is the price relationship between the current near month contract and the later
month contracts. For example, if the price of the near month contract is higher
than the next month contract (a situation referred to as “backwardation” in the
futures market), then absent any other change there is a tendency for the price
of a next month contract to rise in value as it becomes the near month contract
and approaches expiration. Conversely, if the price of a near month contract is
lower than the next month contract (a situation referred to as “contango” in the
futures market), then absent any other change there is a tendency for the price
of a next month contract to decline in value as it becomes the near month
contract and approaches expiration.
  As an
example, assume that the price of natural gas for immediate delivery (the “spot”
price), was $7 per 10,000 mmBtu, and the value of a position in the near month
futures contract was also $7. Over time, the price of 10,000 mmBtu of natural
gas will fluctuate based on a number of market factors, including demand
for natural gas relative to its supply. The value of the near month contract
will likewise fluctuate in reaction to a number of market factors. If
investors seek to maintain their holding in a near month contract position and
not take delivery of the natural gas, every month they must sell their current
near month contract as it approaches expiration and invest in the next month
contract.
 
 If the
futures market is in backwardation, e.g., when the expected price
of natural gas in the future would be less, the investor would be buying a next
month contract for a lower price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing natural gas
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on Treasuries, cash and/or cash equivalents), the value of the
next month contract would rise as it approaches expiration and becomes the new
near month contract. In this example, the value of the $7 investment would tend
to rise faster than the spot price of natural gas, or fall slower. As a result,
it would be possible in this hypothetical example for the price of spot natural
gas to have risen to $9 after some period of time, while the value of the
investment in the futures contract would have risen to $10, assuming
backwardation is large enough or enough time has elapsed. Similarly, the spot
price of natural gas could have fallen to $5 while the value of an investment in
the futures contract could have fallen to only $6. Over time, if backwardation
remained constant, the difference would continue to increase.
 
 If the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing natural gas
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on cash), the value of the next month contract would fall as it
approaches expiration and becomes the new near month contract. In this example,
it would mean that the value of the $7 investment would tend to rise slower than
the spot price of natural gas, or fall faster. As a result, it would be possible
in this hypothetical example for the spot price of natural gas to have
risen to $9 after some period of time, while the value of the investment in the
futures contract will have risen to only $8, assuming contango is large enough
or enough time has elapsed. Similarly, the spot price of natural gas could have
fallen to $6 while the value of an investment in the futures contract could have
fallen to $7. Over time, if contango remained constant, the difference would
continue to increase.
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  The chart
below compares the price of the near month contract to the price of the second
month contract over the last 10 years (1999-2008). When the price of the near
month contract is higher than the price of the second contract, the market would
be described as being in backwardation. When the price of the near month
contract is lower than the price of the second month contract, the market would
be described as being in contango. Although the prices of the near month
contract and the price of the second month contract do tend to move up or down
together, it can be seen that at times the near month prices are clearly higher
than the price of the second month contract (backwardation), and other times
they are below the price of the second month contract (contango). In addition,
investors can observe that natural gas prices, both front month and second
month, often display a seasonal pattern in which the price of natural gas tends
to rise in the early winter months and decline in the summer months. This
mirrors the physical demand for natural gas, which typically peaks in the
winter.
  
  *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
 
 Another
way to view backwardation and contango data over time is to subtract the dollar
price of the near month natural gas Futures Contract from the dollar price of
the second month natural gas Futures Contract. If the resulting number is a
positive number, then the near month price is higher than the price of the
second month and the market could be described as being in backwardation. If the
resulting number is a negative number, than the near month price is lower than
the price of the second month and the market could be described as being in
contango. The chart below shows the results from subtracting the near month
price from the price of the second month contract for the 10 year period between
1999 and 2008. Investors will note that the natural gas market spent time
in both backwardation and contango. Investors will further note that the markets
display a seasonal pattern that corresponds to the seasonal demand patterns for
natural gas above. That is, in many, but not all, cases the price of the second
month is higher than the front month during the approach to the winter months as
the price of natural gas for delivery in those winter months rises on
expectations of demand. At the same time, the price of the front month, when
that month is just before the onset of
winter, does not rise as far or as fast as the price of a second month contract
whose delivery falls during the winter season.
  
 *PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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  Historically,
the natural gas futures markets have experienced periods of contango
and backwardation. Because natural gas demand is seasonal, it is possible for
the price of Futures Contracts for delivery within one or two months to
rapidly move from backwardation into contango and back again within a relatively
short period of time of less than one year. While the investment objective of
USNG is not to have the market price of its units match, dollar for dollar,
changes in the spot price of natural gas, contango has impacted the total return
on an investment in USNG units during the year ended December 31, 2008 relative
to a hypothetical direct investment in natural gas. For example, an
investment in USNG units made on December 31, 2007 and held to December 31, 2008
decreased, based upon the changes in the NAV for USNG units on those days, by
approximately 41%, while the spot price of natural gas for immediate delivery
during the same period decreased by approximately 25% (note: this comparison
ignores the potential costs associated with physically owning and storing
natural gas, which could be substantial). By comparison, during the period
from April 18, 2007 to December 31, 2007, contango has impacted the total return
on an investment in USNG units relative to a hypothetical direct investment
in natural gas. For example, an investment in USNG units made on April 18, 2007
and held to December 31, 2007 decreased, based upon the changes in the NAV for
USNG units on those days, by approximately 28%, while the spot price of natural
gas for immediate delivery during the same period decreased by approximately 1%
(note: this comparison ignores the potential costs associated with physically
owning and storing natural gas, which could be substantial).
 Periods
of contango or backwardation do not materially impact USNG’s investment
objective of having percentage changes in its per unit NAV track percentage
changes in the price of the Benchmark Futures Contract since the impact of
backwardation and contango tended to equally impact the percentage changes in
price of both USNG’s units and the Benchmark Futures Contract. It is
impossible to predict with any degree of certainty whether backwardation or
contango will occur in the future. It is likely that both conditions will occur
during different periods and, because of the seasonal nature of natural gas
demand, both may occur within a single year’s time.
 
 Natural Gas Market. During
the year ended December 31, 2008, natural gas prices in the United States were
impacted by several factors and demonstrated a great deal of price volatility.
At the beginning of the first quarter of 2008, the amount of natural gas in
storage was at higher than average levels versus the previous five years. The
winter weather in the United States was moderate through much of the first
quarter of 2008. A major use of natural gas in winter months is the generation
of heat for residential and commercial buildings. A major variable in the use of
natural gas is weather, and the amount of natural gas burned for heating
purposes. The mild weather had the effect of reducing the rate at which the
storage levels of natural gas fell. During the entire first quarter of 2008, the
seasonally adjusted inventory levels of stored natural gas remained above
five-year averages.
 
 However,
natural gas usage increased in the second quarter of 2008 and storage levels
trended downwards. As a result of all the factors mentioned above, the natural
gas market in the United States started the year reasonably well supplied but
grew tighter towards the middle of the second quarter of 2008. In addition, the
price of natural gas was also strongly influenced by the rise in the price of
crude oil, which rose sharply during the second quarter and early third quarter
of 2008. Finally, demand for natural gas outside of the United States also
influenced prices upward. The price of natural gas rose sharply at the end
of the second quarter and the start of the third quarter of 2008. Natural gas
reached a peak price during the year for the front month contract of $13.57 in
early July 2008. However, a combination of slowing U.S. economic growth,
increased natural gas production, as well as the sharp drop-off in crude oil
prices starting in July 2008, all contributed to a very significant decline in
natural gas prices during the balance of 2008, with prices reaching a low
of $5.48 near the end of the year before finally ending the year with
a price of $5.62.
 
 By
comparison, during the period from April 18, 2007 to December 31, 2007, natural
gas prices in the United States were impacted by several factors. At the
beginning of the period, the amount of natural gas in storage was at higher than
average levels versus the previous five years. The summer weather in the
United States was moderate through much of the season. A major use of natural
gas in summer months is the production of electricity for residential and
commercial buildings. A major variable in the use of natural gas for electricity
production for residential or commercial buildings is weather, as it impacts the
use of air conditioners and thus can cause wide swings in peak demand for
electricity. The mild weather had the effect of reducing the rate at which the
storage levels of natural gas fell. Later in the period, during the fall and
early winter, weather also remained relatively warm, reducing the need for
natural gas for heating purposes. During the entire period, the seasonally
adjusted inventory levels of stored natural gas remained above five-year
averages. Finally, the natural gas producing portions of the United States
located near the Gulf of Mexico were not adversely impacted by major hurricanes
as has happened in the recent past. As a result of all the factors mentioned
above, the natural gas market in the United States remained reasonably well
supplied. The price of natural gas remained fairly range-bound for most of the
period in the $6.00 to $8.00 level. Prices ranged from a low of $5.468 to a high
of $8.637 per mmBtu with an average price of $7.201.
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  Natural Gas Price Movements in
Comparison to other Energy Commodities and Investment Categories. The
General Partner believes that investors frequently measure the degree to which
prices or total returns of one investment or asset class move up or down in
value in concert with another investment or asset class. Statistically, such a
measure is usually done by measuring the correlation of the price movements of
the two different investments or asset classes over some period of time. The
correlation is scaled between 1 and -1, where 1 indicates that the two
investment options move up or down in price or value together, known as
“positive correlation,” and -1 indicating that they move in completely opposite
directions, known as “negative correlation.” A correlation of 0 would mean that
the movements of the two are neither positively or negatively correlated, known
as “non-correlation.” That is, the investment options sometimes move up and down
together and other times move in opposite directions.
 
 For the
ten year time period between 1998 and 2008, the chart below compares the monthly
movements of natural gas versus the monthly movements of several other energy
commodities, crude oil, heating oil, and unleaded gasoline, as well as several
major non-commodity investment asset classes such as large cap U.S. equities,
U.S. government bonds and global equities. It can be seen that over this
particular time period, the movement of natural gas on a monthly basis was NOT
strongly correlated, positively or negatively, with the movements of large cap
U.S. equities, U.S. government bonds or global equities. However, movements in
natural gas had a positive correlation to movements in heating oil. Finally,
natural gas had a positive, but very weak, correlation with crude oil and
unleaded gasoline.
 
 10
      Year Correlation Matrix
                1998-2008
              
              Large
      Cap U.S. Equities (S&P 500)
              
              
              U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
              
              
              Global
      Equities (FTSE World Index)
              
              
              Unleaded
      Gasoline
              
              
              Crude
      Oil
              
              
              Heating
      Oil
              
              
              Natural
      GasLarge
      Cap U.S. Equities (S&P 500)
              
              
              1
              
              
              
              -0.223
              
              
              
              0.936
              
              
              
              0.266
              
              
              
              0.063
              
              
              
              0.003
              
              
              
              0.045U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
              
              
              
              
              
              
              1
              
              
              
              -0.214
              
              
              
              -0.134
              
              
              
              -0.027
              
              
              
              0.037
              
              
              
              0.054Global
      Equities (FTSE World Index)
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.384
              
              
              
              0.155
              
              
              
              0.084
              
              
              
              0.072Unleaded
      Gasoline
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.747
              
              
              
              0.663
              
              
              
              0.254Crude
      Oil
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.738
              
              
              
              0.292Heating
      Oil
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.394Natural
      Gas
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1source:
      Bloomberg, NYMEX
 
 PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
  - 69
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 The chart
below covers a more recent, but much shorter, range of dates than the above
chart. Over the year ended December 31, 2008, natural gas had a stronger
positive correlation with crude oil and unleaded gasoline than it had displayed
over the prior ten year period. The correlation between natural gas and U.S.
government bonds, which had been essentially non-correlated over the prior ten
years, appeared to remain non-correlated over this shorter time period. However,
correlations compared to global equities appeared to be weakly correlated over
this shorter time period, while correlations against U.S. large cap equities was
much stronger than in the prior ten year period. This may have been as a result
of the drop in both industrial production in the U.S. as well as natural gas
demand as a result of the slowing economy.
  Correlation
      Matrix 2008
              
              Large
      Cap U.S. Equities (S&P 500)
              
              
              U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
              
              
              Global
      Equities (FTSE World Index)
              
              
              Unleaded
      Gasoline
              
              
              Crude
      Oil
              
              
              Heating
      Oil
              
              
              Natural
      GasLarge
      Cap U.S. Equities (S&P 500)
              
              
              1
              
              
              
              -0.515
              
              
              
              0.839
              
              
              
              0.337
              
              
              
              0.248
              
              
              
              0.264
              
              
              
              0.083U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
              
              
              
              
              
              
              1
              
              
              
              -0.406
              
              
              
              -0.233
              
              
              
              -0.224
              
              
              
              -0.159
              
              
              
              -0.053Global
      Equities (FTSE World Index)
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.486
              
              
              
              0.575
              
              
              
              0.429
              
              
              
              0.202Unleaded
      Gasoline
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.786
              
              
              
              0.900
              
              
              
              0.407Crude
      Oil
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.812
              
              
              
              0.408Heating
      Oil
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1
              
              
              
              0.853Natural
      Gas
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1source:
      Bloomberg, NYMEX
 
 PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
 
 Investors
are cautioned that the historical price relationships between natural gas and
various other energy commodities, as well as other investment asset classes, as
measured by correlation may not be reliable predictors of future price movements
and correlation results. The results pictured above would have been different if
a different range of dates had been selected. The General Partner believes that
natural gas has historically not demonstrated a strong correlation with equities
or bonds over long periods of time. However, the General Partner also believes
that in the future it is possible that natural gas could have long term
correlation results that indicate prices of natural gas more closely track the
movements of equities or bonds. In addition, the General Partner believes that,
when measured over time periods shorter than ten years, there will always be
some periods where the correlation of natural gas to equities and bonds will be
either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
  The
correlations between natural gas, crude oil, heating oil and gasoline are
relevant because the General Partner endeavors to invest USNG’s assets in
natural gas Futures Contracts and Other Natural Gas-Related Investments so that
daily changes in USNG’s NAV correlate as closely as possible with daily changes
in the price of the Benchmark Futures Contract. If certain other fuel-based
commodity futures contracts do not closely correlate with the natural gas
Futures Contracts then their use could lead to greater tracking error. As noted,
the General Partner also believes that the changes in the price of the Benchmark
Futures Contract will closely correlate with changes in the spot price of
natural gas.
 Critical
Accounting Policies
 
 Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. USNG’s application of these policies involves judgments
and actual results may differ from the estimates used.
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  The
General Partner has evaluated the nature and types of estimates that
it makes in preparing USNG’s financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy.  The values which are used by USNG for its forward
contracts are provided by its commodity broker who uses market prices when
available, while over-the-counter contracts are valued based on the present
value of estimated future cash flows that would be received from or paid to a
third party in settlement of these derivative contracts prior to their delivery
date and valued on a daily basis. In addition, USNG estimates interest income on
a daily basis using prevailing interest rates earned on its cash and cash
equivalents. These estimates are adjusted to the actual amount received on
a monthly basis and the difference, if any, is not considered
material.
  Liquidity
and Capital Resources
 
 USNG has
not made, and does not anticipate making, use of borrowings or other lines of
credit to meet its obligations. USNG has met, and it is anticipated that USNG
will continue to meet, its liquidity needs in the normal course of business from
the proceeds of the sale of its investments or from the Treasuries, cash
and/or cash equivalents that it intends to hold at all times. USNG’s
liquidity needs include: redeeming units, providing margin deposits for its
existing natural gas Futures Contracts or the purchase of additional natural gas
Futures Contracts and posting collateral for its over-the-counter contracts and
payment of its expenses, summarized below under “Contractual
Obligations.”
 
 USNG
currently generates cash primarily from (i) the sale of Creation Baskets and
(ii) interest earned on Treasuries, cash and/or cash equivalents. USNG has
allocated substantially all of its net assets to trading in natural gas
interests. USNG invests in natural gas interests to the fullest extent possible
without being leveraged or unable to satisfy its current or potential margin or
collateral obligations with respect to its investments in Futures Contracts and
Other Natural Gas-Related Investments. A significant portion of the NAV is held
in cash and cash equivalents that are used as margin and as collateral for
USNG’s trading in natural gas interests. The balance of the net assets is held
in USNG’s account at its custodian bank. Interest
earned on USNG’s interest-bearing funds is paid to USNG. In prior
periods, the amount of cash earned by USNG from the sale of Creation
Baskets and from interest earned has exceeded the amount of cash required to pay
USNG’s expenses. However, there can be no assurance that the amount of cash
earned will do so in a period of very low short-term interest rates. In that
event, USNG would be forced to use other assets to pay cash expenses which could
cause a drop in USNG’s NAV over time.
  USNG’s
investment in natural gas interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in Futures Contracts
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 Futures Contract has increased or decreased by an amount equal to
the daily limit, positions in the contracts can neither be taken nor liquidated
unless the traders are willing to effect trades at or within the specified daily
limit. Such market conditions could prevent USNG from promptly liquidating its
positions in Futures Contracts. During the year ended December 31, 2008, USNG
was not forced to purchase or liquidate any of its positions while daily limits
were in effect; however, USNG cannot predict whether such an event may occur in
the future.
  Since the
initial offering of units, USNG has been responsible for expenses relating to
(i) investment management fees, (ii) brokerage fees and commissions, (iii)
licensing fees for the use of intellectual property, (iv) ongoing registration
expenses in connection with offers and sales of its units subsequent to the
initial offering, (v) taxes and other expenses, including certain tax reporting
costs, (vi) fees and expenses of the independent directors of the General
Partner and (vii) other extraordinary expenses not in the ordinary course of
business, while the General Partner is responsible for expenses relating to the
fees of the Marketing Agent, the Administrator and the Custodian. If the
General Partner and USNG are unsuccessful in raising sufficient funds to cover
these respective expenses or in locating any other source of funding, USNG will
terminate and investors may lose all or part of their investment.
  - 71
-
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  Market
Risk
 
 Trading
in Futures Contracts and Other Natural Gas-Related Investments, such as
forwards, involves USNG entering into contractual commitments to purchase
or sell natural gas at a specified date in the future. The aggregate market
value of the contracts will significantly exceed USNG’s future cash
requirements since USNG intends to close out its open positions prior to
settlement. As a result, USNG is generally only subject to the risk of
loss arising from the change in value of the contracts. USNG considers the “fair
value” of its derivative instruments to be the unrealized gain or loss on the
contracts. The market risk associated with USNG’s commitments to purchase
natural gas is limited to the aggregate market value of the contracts held.
However, should USNG enter into a contractual commitment to sell natural gas, it
would be required to make delivery of the natural gas at the contract price,
repurchase the contract at prevailing prices or settle in cash. Since there are
no limits on the future price of natural gas, the market risk to USNG could be
unlimited.
  USNG’s
exposure to market risk depends on a number of factors, including the
markets for natural gas, the volatility of interest rates and foreign exchange
rates, the liquidity of the Futures Contracts and Other Natural Gas-Related
Investments markets and the relationships among the contracts held by USNG. The
limited experience that USNG has had in utilizing its model to trade in
natural gas interests in a manner intended to track the changes in the spot
price of natural gas, as well as drastic market occurrences, could ultimately
lead to the loss of all or substantially all of an investor’s
capital.
 
 Credit
Risk
 
 When USNG
enters into Futures Contracts and Other Natural Gas-Related Investments, it is
exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Futures Contracts traded on the NYMEX and
on most other foreign futures exchanges is the clearinghouse associated
with the particular exchange. In general, clearinghouses are backed by their
members who may be required to share in the financial burden resulting from the
nonperformance of one of their members and, therefore, this additional member
support should significantly reduce credit risk. Some foreign exchanges are not
backed by their clearinghouse members but may be backed by a consortium of banks
or other financial institutions. There can be no assurance that any
counterparty, clearinghouse, or their members or their financial backers will
satisfy their obligations to USNG in such circumstances.
  The
General Partner attempts to manage the credit risk of USNG by following
various trading limitations and policies. In particular, USNG generally posts
margin and/or holds liquid assets that are approximately equal to the face
amount of its obligations to counterparties under the Futures Contracts and
Other Natural Gas-Related Investments it holds. The General Partner has
implemented procedures that include, but are not limited to, executing and
clearing trades only with creditworthy parties and/or requiring the posting of
collateral or margin by such parties for the benefit of USNG to limit its credit
exposure. UBS Securities LLC, USNG’s commodity broker, or any other broker that
may be retained by USNG in the future, when acting as USNG’s futures commission
merchant in accepting orders to purchase or sell Futures Contracts on United
States exchanges, is required by CFTC regulations to separately account for
and segregate as belonging to USNG, all assets of USNG relating to domestic
Futures Contracts trading. These futures commission merchants are not allowed to
commingle USNG’s assets with its other assets. In addition, the CFTC requires
commodity brokers to hold in a secure account the USNG assets related to foreign
Futures Contracts trading.
    As of December 31, 2008, USNG had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amount of $713,549,385. This amount is
subject to loss should these institutions cease operations.
  - 72
-
 Table of Contents
  Off
Balance Sheet Financing
 
 As of
December 31, 2008, USNG has no loan guarantee, credit support or other
off-balance sheet arrangements of any kind other than agreements entered into in
the normal course of business, which may include indemnification provisions
relating to certain risks that service providers undertake in performing
services which are in the best interests of USNG. While USNG’s exposure under
these indemnification provisions cannot be estimated, they are not expected to
have a material impact on USNG’s financial position.
  Redemption
Basket Obligation
 
 In order
to meet its investment objective and pay its contractual obligations described
below, USNG requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called Redemption Baskets. USNG has to date satisfied
this obligation by paying from the cash or cash equivalents it holds or through
the sale of its Treasuries in an amount proportionate to the number of units
being redeemed.
  Contractual
Obligations
 
 USNG’s
primary contractual obligations are with the General Partner. In return for its
services, the General Partner is entitled to a management fee calculated as a
fixed percentage of USNG’s NAV, currently 0.60% for a NAV of $1 billion or less,
and thereafter at a rate of 0.50% for a NAV above $1 billion.
 
 The
General Partner agreed to pay the start-up costs associated with the
formation of USNG, primarily its legal, accounting and other costs in connection
with the General Partner’s registration with the CFTC as a CPO and the
registration and listing of USNG and its units with the SEC, FINRA and the
AMEX, respectively. However, following USNG’s initial offering of units,
offering costs incurred in connection with registering and listing additional
units of USNG are directly borne on an ongoing basis by USNG, and not by the
General Partner.
 
 The General Partner pays the fees
of the Marketing Agent and the fees of the custodian and transfer agent,
BBH&Co., as well as BBH&Co.’s fees for performing administrative
services, including in connection with the preparation of USNG’s financial
statements and its SEC and CFTC reports. The General Partner and USNG have
also entered into a licensing agreement with the NYMEX pursuant to which
USNG and the affiliated funds managed by the General Partner pay a licensing fee
to the NYMEX. The General Partner also pays certain initial
implementation services fees and base services fees charged by the accounting
firm for its tax accounting and reporting requirements; however, USNG pays the
fees and expenses associated with its tax accounting and reporting
requirements.
  In addition to the General Partner’s
management fee, USNG pays its brokerage fees (including fees to a futures
commission merchant), over-the-counter dealer spreads, any licensing fees
for the use of intellectual property, and, subsequent to the initial offering,
registration and other fees paid to the SEC, FINRA, or other regulatory agencies
in connection with the offer and sale of units, as well as legal, printing,
accounting and other expenses associated therewith, and extraordinary expenses.
The latter are expenses not incurred in the ordinary course of USNG’s
business, including expenses relating to the indemnification of any person
against liabilities and obligations to the extent permitted by law and under the
LP Agreement, the bringing or defending of actions in law or in equity or
otherwise conducting litigation and incurring legal expenses and the settlement
of claims and litigation. Commission payments to a futures commission
merchant are on a contract-by-contract, or round turn, basis. USNG also pays a
portion of the fees and expenses of the independent directors of the General
Partner. See Note 3 to the Notes to Financial Statements.
 
 The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods, as USNG’s NAVs and trading levels to meet
its investment objectives will not be known until a future date. These
agreements are effective for a specific term agreed upon by the parties with an
option to renew, or, in some cases, are in effect for the duration of USNG’s
existence. Either party may terminate these agreements earlier for certain
reasons described in the agreements.
  - 73
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 Table of Contents
  Item 7A.    Quantitative and Qualitative Disclosure
About Market Risk
 
 Over-the-Counter
Derivatives (Including Spreads and Straddles)
  In the
future, USNG may purchase over-the-counter contracts. Unlike most of the
exchange-traded Futures Contracts or exchange-traded options on such futures,
each party to an over-the-counter contract bears the credit risk that the
other party may not be able to perform its obligations under its
contract.
  Some
natural gas-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other natural
gas-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of natural gas- or petroleum-based fuels that
have terms similar to the Futures Contracts. Others take the form of “swaps” in
which the two parties exchange cash flows based on pre-determined formulas tied
to the spot price of natural gas, forward natural gas prices or natural gas
futures prices. For example, USNG may enter into over-the-counter derivative
contracts whose value will be tied to changes in the difference between
the spot price of natural gas, the price of Futures Contracts traded on the
NYMEX and the prices of other Futures Contracts that may be invested in by
USNG.
 
 To
protect itself from the credit risk that arises in connection with such
contracts, USNG may enter into agreements with each counterparty that provide
for the netting of its overall exposure to such counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USNG also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address USNG’s exposure to the
counterparty. In addition, it is also possible for USNG and its counterparty to
agree to clear their agreement through an established futures clearing house
such as those connected to the NYMEX or the ICE Futures. In that event, USNG
would no longer have credit risk of its original counterparty, as the
clearinghouse would now be USNG’s counterparty. USNG would still retain any
price risk associated with its transaction.
 
 The
creditworthiness of each potential counterparty will be assessed by the General
Partner. The General Partner will assess or review, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the Board.
Furthermore, the General Partner on behalf of USNG only enters into
over-the-counter contracts with (a) members of the Federal Reserve System or
foreign banks with branches regulated by the Federal Reserve Board; (b) primary
dealers in U.S. government securities; (c) broker-dealers; (d) commodity futures
merchants; or (e) affiliates of the foregoing. Existing counterparties are also
reviewed periodically by the General Partner.
 
 USNG
anticipates that the use of Other Natural Gas-Related Investments together with
its investments in Futures Contracts will produce price and total return results
that closely track the investment goals of USNG.
 
 USNG may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Futures
Contract. USNG would use a spread when it chooses to take simultaneous long and
short positions in futures written on the same underlying asset, but with
different delivery months. The effect of holding such combined positions is to
adjust the sensitivity of USNG to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
USNG would use such a spread if the General Partner felt that taking such long
and short positions, when combined with the rest of its holdings, would more
closely track the investment goals of USNG, or if the General Partner felt it
would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in natural gas prices. USNG would enter into a
straddle when it chooses to take an option position consisting of a long (or
short) position in both a call option and put option. The economic effect of
holding certain combinations of put options and call options can be very similar
to that of owning the underlying futures contracts. USNG would make use of such
a straddle approach if, in the opinion of the General Partner, the resulting
combination would more closely track the investment goals of USNG or if it would
lead to an overall lower cost of trading to achieve a given level of economic
exposure to movements in natural gas prices.
  During the year ended December 31,
2008, USNG did not employ any hedging methods such as those described above
since all of its investments were made over an exchange. Therefore, USNG was not
exposed to counterparty risk.
  - 74
-
 Table of Contents
  Item 8.    Financial Statements and Supplementary
Data.
  United
States Natural Gas Fund, LP
  Index
to Financial Statements
  Documents
              
              PageManagement’s Annual Report on Internal Control Over
      Financial Reporting
              
              76Reports of Independent Registered
      Public Accounting Firm
              
              77Statements of Financial Condition
      at December 31, 2008 and 2007
              
              79Schedule of Investments at December
      31, 2008 and 2007
              
              80Statements of Operations for the
      year ended December 31, 2008 and the periods from April 18, 2007
      (commencement of operations) to December 31, 2007 and
      September 11, 2006 (inception) to December 31, 2006
              
              82Statements of Changes in
      Partners’Capital for the year ended December 31, 2008 and
      the periods from April 18, 2007 (commencement of operations) to December
      31, 2007 and September 11, 2006 (inception) to December 31,
      2006
              
              83Statements of Cash Flows for the
      year ended December 31, 2008 and the periods from April 18, 2007
      (commencement of operations) to December 31, 2007 and
      September 11, 2006 (inception) to December 31, 2006
              
              84Notes to Financial
      Statements for the year ended December 31, 2008 and the periods ended
      December 31, 2007 and 2006.
              
              85
 
 - 75
-
 Table of Contents
  Management’s Annual Report on Internal Control Over Financial
Reporting.
  USNG’s
management assessed the effectiveness of USNG’s internal control over financial
reporting as of December 31, 2008. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control
Integrated Framework.Based on the assessment, USNG believes that, as of
December 31, 2008, its internal control over financial reporting is
effective.
 
 - 76
-
 Table of Contents
 
 Attestation
Report of Registered Public Accounting Firm.
  Report of Independent Registered Public Accounting
Firm
 Auditors’
Report on Internal Control over Financial Reporting
 
 To the
Partners of
 United
States Natural Gas Fund, LP
  We have
audited the internal control over financial reporting of United States Natural
Gas Fund, LP (the “Fund”) as of December 31, 2008, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Fund’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Fund’s internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
  A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
 
 Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 In our
opinion, the Fund maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
  We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the financial statements as of and for the year
ended December 31, 2008, of the Fund and our report dated February 18, 2009
expressed an unqualified opinion on those financial statements.
  /s/
Spicer Jeffries LLP
 Greenwood
Village, Colorado
 February
18, 2009
 
 - 77
-
 Table of Contents
  Report
of Independent Registered Public Accounting Firm
 
 To the
Partners of
 United
States Natural Gas Fund, LP
  We have
audited the accompanying statements of financial condition of United
States Natural Gas Fund, LP, (the “Fund”) as of December 31, 2008 and
2007, including the schedule of investments as of December 31, 2008 and
2007, and the related statements of operations, changes in partners’ capital and
cash flows for the year ended December 31, 2008 and the periods from April 18,
2007 (commencement of operations) through December 31, 2007 and September 11,
2006 (inception) through December 31, 2006. These financial statements are the
responsibility of the Fund’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of United States Natural Gas
Fund, LP as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for the year ended December 31, 2008 and the
periods from April 18, 2007 (commencement of operations) through December 31,
2007 and September 11, 2006 (inception) through December 31, 2006, in conformity
with accounting principles generally accepted in the United States of
America.
 
 We also
have audited, in accordance with standards of the Public Company Accounting
Oversight Board (United States), the Fund’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 18, 2009
expressed an unqualified opinion on the Fund’s internal control over financial
reporting.
 
  Greenwood
Village, Colorado
 February 18, 2009
   - 78
-
 Table of Contents
 
  United
      States Natural Gas Fund, LPStatements of Financial ConditionAt
      December 31, 2008 and 20072008
                                      
                                      
                                      2007AssetsCash
      and cash equivalents
                                      
                                      $
                                      419,929,831
                                      
                                      
                                      $
                                      488,067,199Equity
      in UBS Securities LLC trading accounts:Cash
                                      
                                      
                                      293,619,554
                                      
                                      
                                      
                                      85,115,889Unrealized
      gain (loss) on open commodity futures contracts
                                      
                                      
                                      (7,704,870
                                      )
                                      
                                      
                                      20,043,880Interest
      receivable
                                      
                                      
                                      355,156
                                      
                                      
                                      
                                      690,046Other
      assets
                                      
                                      
                                      137,786
                                      
                                      
                                      
                                      92,955Total
      assets
                                      
                                      $
                                      706,337,457
                                      
                                      
                                      $
                                      594,009,969Liabilities
      and Partners’ CapitalGeneral
      Partner management fees (Note 3)
                                      
                                      $
                                      370,060
                                      
                                      
                                      $
                                      264,556Payable
      for units redeemed
                                      
                                      
                                      9,307,208
                                      
                                      
                                      
                                      -Tax
      reporting fees payable
                                      
                                      
                                      680,773
                                      
                                      
                                      
                                      239,954License
      fees payable
                                      
                                      
                                      61,226
                                      
                                      
                                      
                                      51,560Directors’
      fees payable
                                      
                                      
                                      27,880
                                      
                                      
                                      
                                      36,118Other
      liabilities
                                      
                                      
                                      175,800
                                      
                                      
                                      
                                      22,800Total
      liabilities
                                      
                                      
                                      10,622,947
                                      
                                      
                                      
                                      614,988Commitments and Contingencies(Notes 3, 4 and 5)Partners’
      CapitalGeneral
      Partner
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Limited
      Partners
                                      
                                      
                                      695,714,510
                                      
                                      
                                      
                                      593,394,981Total
      Partners’ Capital
                                      
                                      
                                      695,714,510
                                      
                                      
                                      
                                      593,394,981Total
      liabilities and partners’ capital
                                      
                                      $
                                      706,337,457
                                      
                                      
                                      $
                                      594,009,969Limited
      Partners’ units outstanding
                                      
                                      
                                      29,900,000
                                      
                                      
                                      
                                      16,400,000Net
      asset value per unit
                                      
                                      $
                                      23.27
                                      
                                      
                                      $
                                      36.18Market
      value per unit
                                      
                                      $
                                      23.17
                                      
                                      
                                      $
                                      36.24See
      accompanying notes to financial statements.
 
 
 - 79
-
 Table of Contents
 
 
 United
      States Natural Gas Fund, LPSchedule of InvestmentsAt
      December 31, 2008
  Open
      Futures ContractsNumber
      of
                  
                  
                  Loss on
      Open Commodity
                  
                  
                  %
      of Partners’Contracts
                  
                  
                  Contracts
                  
                  
                  CapitalUnited
      States ContractsNatural
      Gas Futures contracts, expire February 2009
                  
                  
                  12,375
                  
                  
                  $
                  (7,704,870
                  )
                  
                  
                  (1.11
                  )
 
 Cash
      EquivalentsCost
                                    
                                    
                                    Market
      ValueUnited
      States - Money Market FundGoldman
      Sachs Financial Square Funds - Government Fund
                                    
                                    $
                                    298,603,373
                                    
                                    
                                    
                                    298,603,373
                                    
                                    
                                    
                                    42.92$
                                    298,603,373
                                    
                                    
                                    
                                    298,603,373
                                    
                                    
                                    
                                    42.92Cash
                                    
                                    
                                    
                                    121,326,458
                                    
                                    
                                    
                                    17.44Total
      Cash and Cash Equivalents
                                    
                                    
                                    
                                    419,929,831
                                    
                                    
                                    
                                    60.36Cash
      on deposit with broker
                                    
                                    
                                    
                                    293,619,554
                                    
                                    
                                    
                                    42.20Liabilities,
      less receivables and other assets
                                    
                                    
                                    
                                    (10,130,005
                                    )
                                    
                                    
                                    (1.45
                                    )Total
      Partners’ Capital
                                    
                                    
                                    $
                                    695,714,510
                                    
                                    
                                    
                                    100.00
 
 - 80
-
 Table of Contents
 
 
 United
      States Natural Gas Fund, LPSchedule of InvestmentsAt
      December 31, 2007Open
      Futures ContractsGain on OpenNumber
      of
                                  
                                  Commodity
                                  
                                  %
      of Partners’Contracts
                                  
                                  Contracts
                                  
                                  CapitalUnited
      States ContractsNatural
      Gas Futures contracts, expire February 2008
                                  
                                  
                                  7,924
                                  
                                  
                                  $
                                  20,043,880
                                  
                                  
                                  
                                  3.38Cash
      EquivalentsCost
                                  
                                  Market
      ValueUnited
      States - Money Market FundsGoldman
      Sachs Financial Square Funds - Government Fund
                                  
                                  $
                                  25,791,412
                                  
                                  
                                  
                                  25,791,412
                                  
                                  
                                  
                                  4.34Goldman
      Sachs Financial Square Funds - Treasury Instruments Fund
                                  
                                  
                                  150,704,628
                                  
                                  
                                  
                                  150,704,628
                                  
                                  
                                  
                                  25.40$
                                  176,496,040
                                  
                                  
                                  
                                  176,496,040
                                  
                                  
                                  
                                  29.74Cash
                                  
                                  
                                  
                                  311,571,159
                                  
                                  
                                  
                                  52.51Total
      Cash and Cash Equivalents
                                  
                                  
                                  
                                  488,067,199
                                  
                                  
                                  
                                  82.25Cash
      on deposit with broker
                                  
                                  
                                  
                                  85,115,889
                                  
                                  
                                  
                                  14.34Other
      assets and receivables in excess of liabilities
                                  
                                  
                                  
                                  168,013
                                  
                                  
                                  
                                  0.03Total
      Partners’ Capital
                                  
                                  
                                  $
                                  593,394,981
                                  
                                  
                                  
                                  100.00See
      accompanying notes to financial statements.
 
  
 - 81
-
 Table of Contents
 
 
 United
      States Natural Gas Fund, LPStatements of OperationsFor
      the year ended December 31, 2008 and the periods from April 18, 2007
      (commencement of operations) to December 31, 2007 and September 11, 2006
      (inception) to December 31, 2006
  Period
      from
                                      
                                      
                                      Period
      fromYear
      ended
                                      
                                      
                                      April
      18, 2007 to
                                      
                                      
                                      September
      11, 2006 toDecember
      31, 2008
                                      
                                      
                                      December
      31, 2007
                                      
                                      
                                      December
      31, 2006IncomeGains
      (losses) on trading of commodity futures contracts:Realized losses
      on closed positions
                                      
                                      $
                                      (469,854,610
                                      )
                                      
                                      $
                                      (39,939,850
                                      )
                                      
                                      $
                                      -Change
      in unrealized gains (losses) on openpositions
                                      
                                      
                                      (27,748,750
                                      )
                                      
                                      
                                      20,043,880
                                      
                                      
                                      
                                      -Interest
      income
                                      
                                      
                                      12,225,534
                                      
                                      
                                      
                                      8,242,264
                                      
                                      
                                      
                                      -Other
      income
                                      
                                      
                                      202,000
                                      
                                      
                                      
                                      107,000
                                      
                                      
                                      
                                      -Total loss
                                      
                                      
                                      (485,175,826
                                      )
                                      
                                      
                                      (11,546,706
                                      )
                                      
                                      
                                      -ExpensesGeneral
      Partner management fees (Note 3)
                                      
                                      
                                      4,373,723
                                      
                                      
                                      
                                      1,239,862
                                      
                                      
                                      
                                      -Professional
      fees
                                      
                                      
                                      1,072,269
                                      
                                      
                                      
                                      272,472
                                      
                                      
                                      
                                      -Brokerage
      commission fees
                                      
                                      
                                      867,175
                                      
                                      
                                      
                                      351,310
                                      
                                      
                                      
                                      -Registration
      fees
                                      
                                      
                                      348,874
                                      
                                      
                                      
                                      41,980
                                      
                                      
                                      
                                      -License
      fees
                                      
                                      
                                      236,664
                                      
                                      
                                      
                                      81,317
                                      
                                      
                                      
                                      -Directors’
      fees
                                      
                                      
                                      130,107
                                      
                                      
                                      
                                      58,380
                                      
                                      
                                      
                                      -Total
      expenses
                                      
                                      
                                      7,028,812
                                      
                                      
                                      
                                      2,045,321
                                      
                                      
                                      
                                      -Net loss
                                      
                                      $
                                      (492,204,638
                                      )
                                      
                                      $
                                      (13,592,027
                                      )
                                      
                                      $
                                      -Net loss
      per limited partnership unit
                                      
                                      $
                                      (12.91
                                      )
                                      
                                      $
                                      (13.82
                                      )
                                      
                                      $
                                      -Net loss
      per weighted average limited partnership unit
                                      
                                      $
                                      (25.50
                                      )
                                      
                                      $
                                      (1.78
                                      )
                                      
                                      $
                                      -Weighted
      average limited partnership units outstanding
                                      
                                      
                                      19,303,825
                                      
                                      
                                      
                                      7,644,574
                                      
                                      
                                      
                                      -See
      accompanying notes to financial statements.
 
 - 82
-
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 United
      States Natural Gas Fund, LPStatements of Changes in Partners’
CapitalFor
      the year ended December 31, 2008 and the periods from April 18,
      2007
                (commencement
      of operations) to December 31, 2007 and September 11, 2006
                (inception)
      to December 31, 2006
  General
      Partner
                            
                            
                            Limited
      Partners
                            
                            TotalBalances, at
      Inception
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Initial contribution of capital
                            
                            
                            20
                            
                            
                            
                            980
                            
                            
                            
                            1,000Balances,
      at December 31, 2006
                            
                            
                            20
                            
                            
                            
                            980
                            
                            
                            
                            1,000Addition
      of 37,900,000 partnership units
                            
                            
                            -
                            
                            
                            
                            1,458,786,977
                            
                            
                            
                            1,458,786,977Redemption
      of 21,500,000 partnership units
                            
                            
                            (20
                            )
                            
                            
                            (851,800,949
                            )
                            
                            
                            (851,800,969
                            )Net
      loss
                            
                            
                            -
                            
                            
                            
                            (13,592,027
                            )
                            
                            
                            (13,592,027
                            )Balances,
      at December 31, 2007
                            
                            
                            -
                            
                            
                            
                            593,394,981
                            
                            
                            
                            593,394,981Addition
      of 69,800,000 partnership units
                            
                            
                            -
                            
                            
                            
                            2,691,884,826
                            
                            
                            
                            2,691,884,826Redemption
      of 56,300,000partnership
      units
                            
                            
                            -
                            
                            
                            
                            (2,097,360,659
                            )
                            
                            
                            (2,097,360,659
                            )Net
      loss
                            
                            
                            -
                            
                            
                            
                            (492,204,638
                            )
                            
                            
                            (492,204,638
                            )Balances,
      at December 31, 2008
                            
                            $
                            -
                            
                            
                            $
                            695,714,510
                            
                            
                            $
                            695,714,510Net
      Asset Value Per UnitAt December 31, 2006
                            
                            $
                            -At
      April 18, 2007 (commencement of operations)
                            
                            $
                            50.00At
      December 31, 2007
                            
                            $
                            36.18At
      December 31, 2008
                            
                            $
                            23.27See
      accompanying notes to financial statements.
  - 83
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 United
      States Natural Gas Fund, LPStatements of Cash FlowsFor
      the year ended December 31, 2008 and the periods from April 18,
      2007
                (commencement
      of operations) to December 31, 2007 and September 11, 2006
                (inception)
      to December 31, 2006
  Year
      ended
                            
                            
                            Period
      from
                              April
      18, 2007 to
                            
                            
                            Period
      from September 11,2006
      toDecember
      31, 2008
                            
                            
                            December
      31, 2007
                            
                            
                            December
      31, 2006Cash
      Flows from Operating Activities:Net
      loss
                            
                            $
                            (492,204,638
                            )
                            
                            $
                            (13,592,027
                            )
                            
                            $
                            -Adjustments
      to reconcile net loss to net cash used in operating
      activities:Increase
      in commodity futures trading account - cash
                            
                            
                            (208,503,665
                            )
                            
                            
                            (85,115,889
                            )
                            
                            
                            -Unrealized
      (gains) losses on futures contracts
                            
                            
                            27,748,750
                            
                            
                            
                            (20,043,880
                            )
                            
                            
                            -Decrease
      (increase) in interest receivable and other assets
                            
                            
                            290,059
                            
                            
                            
                            (783,001
                            )
                            
                            
                            -Increase
      in General Partner management fees payable
                            
                            
                            105,504
                            
                            
                            
                            264,556
                            
                            
                            
                            -Increase
      in tax reporting fees payable
                            
                            
                            440,819
                            
                            
                            
                            239,954
                            
                            
                            
                            -Increase
      in license fees payable
                            
                            
                            9,666
                            
                            
                            
                            51,560
                            
                            
                            
                            -Increase
      (decrease) in directors’ fees payable
                            
                            
                            (8,238
                            )
                            
                            
                            36,118
                            
                            
                            
                            -Increase
      in other liabilities
                            
                            
                            153,000
                            
                            
                            
                            22,800
                            
                            
                            
                            -Net
      cash used in operating activities
                            
                            
                            (671,968,743
                            )
                            
                            
                            (118,919,809
                            )
                            
                            
                            -Cash
      Flows from Financing Activities:Subscription
      of partnership units
                            
                            
                            2,691,884,826
                            
                            
                            
                            1,458,786,977
                            
                            
                            
                            1,000Redemption
      of partnership units
                            
                            
                            (2,088,053,451
                            )
                            
                            
                            (851,800,969
                            )
                            
                            
                            -Net
      cash provided by financing activities
                            
                            
                            603,831,375
                            
                            
                            
                            606,986,008
                            
                            
                            
                            1,000Net
      Increase (Decrease) in Cash and Cash Equivalents
                            
                            
                            (68,137,368
                            )
                            
                            
                            488,066,199
                            
                            
                            
                            1,000Cash and Cash
      Equivalents, beginning of period
                            
                            
                            488,067,199
                            
                            
                            
                            1,000
                            
                            
                            
                            -Cash and Cash
      Equivalents, end of period
                            
                            $
                            419,929,831
                            
                            
                            $
                            488,067,199
                            
                            
                            $
                            1,000See
      accompanying notes to financial statements.
 
 - 84
-
 Table of Contents




United
States Natural Gas Fund, LP
 Notes to Financial Statements
 For
the year ended December 31, 2008
 and
the periods ended December 31, 2007 and 2006
  NOTE
1 - ORGANIZATION AND BUSINESS
 
 The
United States Natural Gas Fund, LP (“USNG”) was organized as a limited
partnership under the laws of the state of Delaware on September 11, 2006. USNG
is a commodity pool that issues units that may be purchased and sold on the NYSE
Arca, Inc. (the “NYSE Arca”). Prior to November 25, 2008, USNG’s units traded on
the American Stock Exchange (the “AMEX”). USNG will continue in perpetuity,
unless terminated sooner upon the occurrence of one or more events as described
in its Second Amended and Restated Agreement of Limited Partnership dated
as of December 4, 2007 (the “LP Agreement”). The investment objective of USNG is
for the changes in percentage terms of its net asset value reflect the changes
in percentage terms of the price of natural gas delivered at the Henry Hub,
Louisiana as measured by the changes in the price of the futures contract on
natural gas as traded on the New York Mercantile Exchange (the “NYMEX”) that is
the near month contract to expire, except when the near month contract is within
two weeks of expiration, in which case the futures contract will be the next
month contract to expire, less USNG’s expenses. USNG accomplishes its
objective through investments in futures contracts for natural gas, crude
oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are
traded on the NYMEX, ICE Futures or other U.S. and foreign
exchanges (collectively, “Futures Contracts”) and other natural gas related
investments such as cash-settled options on Futures Contracts, forward contracts
for natural gas and over-the-counter transactions that are based on the price of
natural gas, crude oil and other petroleum-based fuels, Futures
Contracts and indices based on the foregoing (collectively, “Other Natural
Gas-Related Investments”). As of December 31, 2008, USNG held 12,375 Futures
Contracts traded on the NYMEX.
 
 USNG
commenced investment operations on April 18, 2007 and has a fiscal year ending
on December 31. United States Commodity Funds LLC (formerly known as Victoria
Bay Asset Management, LLC) (the “General Partner”) is responsible for the
management of USNG. The General Partner is a member of the National Futures
Association (the “NFA”) and became a commodity pool operator with the
Commodity Futures Trading Commission effective December 1, 2005. The General
Partner is also the general partner of the United States Oil Fund, LP
(“USOF”), the United States 12 Month Oil Fund, LP (“US12OF”), the United
States Gasoline Fund, LP (“UGA”) and the United States Heating Oil Fund, LP
(“USHO”), which listed their limited partnership units on the AMEX under the
ticker symbols “USO” on April 10, 2006, “USL” on December 6, 2007,
“UGA” on February 26, 2008 and “UHN” on April 9, 2008, respectively. As a result
of the acquisition of the AMEX by NYSE Euronext, each of USOF’s, US12OF’s, UGA’s
and USHO’s units commenced trading on the NYSE Arca on November 25,
2008.
 
 USNG
issues limited partnership interests (“units”) to certain authorized purchasers
(“Authorized Purchasers”) by offering baskets consisting of 100,000 units
(“Creation Baskets”) through ALPS Distributors, Inc. (the “Marketing
Agent”). The purchase price for a Creation Basket is based upon the net asset
value of a unit determined as of the earlier of the close of the New York
Stock Exchange (the “NYSE”) or 4:00 p.m. New York time on the day the order to
create the basket is properly received.
 
 In
addition, Authorized Purchasers pay USNG a $1,000 fee for each order
to create one or more Creation Baskets. Units may be purchased or sold
on a nationally recognized securities exchange in smaller increments than a
Creation Basket. Units purchased or sold on a nationally recognized securities
exchange are not purchased or sold at the net asset value of USNG but rather at
market prices quoted on such exchange.
 
 In April
2007, USNG initially registered 30,000,000 units on Form S-1 with the U.S.
Securities and Exchange Commission (the “SEC”). On April 18, 2007, USNG listed
its units on the AMEX under the ticker symbol “UNG”. On that day, USNG
established its initial net asset value by setting the price at $50.00 per unit
and issued 200,000 units in exchange for $10,001,000. USNG also commenced
investment operations on April 18, 2007 by purchasing Futures Contracts traded
on the NYMEX based on natural gas. As a result of the acquisition
of the AMEX by NYSE Euronext, USNG’s units commenced trading on the NYSE Arca on
November 25, 2008. As of December 31, 2008, USNG had registered a total of
180,000,000 units.
  - 85
-
 Table of Contents
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Revenue
Recognition
 
 Commodity
futures contracts, forward contracts, physical commodities, and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses on
open contracts are reflected in the statement of financial condition and in
the difference between the original contract amount and the market value (as
determined by exchange settlement prices for futures contracts and related
options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business day of
the year or as of the last date of the financial statements. Changes in the
unrealized gains or losses between periods are reflected in the statement
of operations. USNG earns interest on its assets denominated in U.S. dollars on
deposit with the futures commission merchant at the overnight Federal Funds
Rate less 32 basis points. In addition, USNG earns interest on funds held at the
custodian at prevailing market rates earned on such investments.
 
 Brokerage
Commissions
 
 Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
  Income
Taxes
 
 USNG is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income tax
return.
  Additions
and Redemptions
 
 Authorized
Purchasers may purchase Creation Baskets or redeem units (“Redemption Baskets”)
only in blocks of 100,000 units equal to the net asset value of the units
determined as of the earlier of the close of the NYSE or 4:00 p.m. New York time
on the day the order is placed.
 
 USNG
records units sold or redeemed one business day after the trade date of the
purchase or redemption. The amounts due from Authorized Purchasers are reflected
in USNG’s statement of financial condition as receivable for units sold, and
amounts payable to Authorized Purchasers upon redemption are reflected as
payable for units redeemed.
 
 Partnership
Capital and Allocation of Partnership Income and Losses
 
 Profit or
loss shall be allocated among the partners of USNG in proportion to the number
of units each partner holds as of the close of each month. The General Partner
may revise, alter or otherwise modify this method of allocation as described in
the LP Agreement.
 
 Calculation
of Net Asset Value
 
 USNG
calculates its net asset value on each trading day by taking the current market
value of its total assets, subtracting any liabilities and dividing the amount
by the total number of units issued and outstanding. USNG uses the closing
price for the contracts on the relevant exchange on that day to determine the
value of contracts held on such exchange.
 
 Net
Income (Loss) per Unit
 
 Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The
weighted average number of units outstanding was computed for purposes of
disclosing net income (loss) per weighted average unit. The weighted average
units are equal to the number of units outstanding at the end of the period,
adjusted proportionately for units redeemed based on the amount of time the
units were outstanding during such period. There were no units held by the
General Partner at December 31, 2008.
  - 86
-
 Table of Contents
  Offering
Costs
 
 Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by USNG. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated therewith. These costs will be accounted
for as a deferred charge and thereafter amortized to expense over twelve months
on a straight-line basis or a shorter period if warranted.
 
 Cash
Equivalents
 
 Cash and
cash equivalents include money market funds and overnight deposits or time
deposits with original maturity dates of three months or less.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires USNG’s management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of the revenue and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions.
  NOTE 3
- FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
 
 General
Partner Management Fee
 
 Under the
LP Agreement, the General Partner is responsible for investing the assets of
USNG in accordance with the objectives and policies of USNG. In addition, the
General Partner has arranged for one or more third parties to provide
administrative, custody, accounting, transfer agency and other necessary
services to USNG. For these services, USNG is contractually obligated to pay the
General Partner a fee, which is paid monthly and based on average daily net
assets, that is equal to 0.60% per annum on average daily net assets of
$1,000,000,000 or less and 0.50% per annum on average daily net assets that are
greater than $1,000,000,000.
 
 Ongoing
Registration Fees and Other Offering Expenses
 
 USNG pays
all costs and expenses associated with the ongoing registration of units
subsequent to the initial offering. These costs include registration or other
fees paid to regulatory agencies in connection with the offer and sale of units,
and all legal, accounting, printing and other expenses associated with such
offer and sale. For the year ended December 31, 2008 and the period ended
December 31, 2007, USNG incurred $348,874 and $41,980, respectively, in
registration fees and other offering expenses.
  Directors’
Fees
  USNG is
responsible for paying the fees and expenses, including directors’ and officers’
liability insurance, of the independent directors of the General Partner who are
also audit committee members. During 2008, USNG shared these fees with
USOF, US12OF, UGA and USHO based on the relative assets of each fund, computed
on a daily basis. These fees for calendar year 2008 amounted to a total of
$282,000 for all five funds, and USNG’s portion of such fees was $130,371. For
the periods from April 18, 2007 (inception) through December 31, 2007,
these fees were $286,000 and USNG’s portion of such fees was
$59,420.
 
 Licensing
Fees
 
 As
discussed in Note 4, USNG entered into a licensing agreement with the NYMEX
on May 30, 2007. The agreement has an effective date of April 10, 2006. Pursuant
to the agreement, USNG and the affiliated funds managed by the General Partner
pay a licensing fee that is equal to 0.04% for the first $1,000,000,000 of
combined assets of the funds and 0.02% for combined assets above $1,000,000,000.
During the year ended December 31, 2008 and the period from April 18, 2007
through December 31, 2007, USNG incurred $236,664 and $81,317, respectively,
under this arrangement.
  - 87
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  Investor
Tax Reporting Cost
  The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which were borne by the General Partner, are
paid by USNG. These costs are estimated to be $1,150,000 for the year ended
December 31, 2008.
  Other
Expenses and Fees
  In
addition to the fees described above, USNG pays all brokerage fees, taxes
and other expenses in connection with the operation of USNG, excluding costs and
expenses paid by the General Partner as outlined in Note 4.
  NOTE
4 - CONTRACTS AND AGREEMENTS
 
 USNG is
party to a marketing agent agreement, dated as of April 17, 2007, with the
Marketing Agent, whereby the Marketing Agent provides certain marketing services
for USNG as outlined in the agreement. The fee of the Marketing Agent, which is
borne by the General Partner, is equal to 0.06% on USNG’s assets up to $3
billion; and 0.04% on USNG’s assets in excess of $3 billion.
 
 The above
fees do not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
 
 USNG is
also party to a custodian agreement, dated March 13, 2006, with Brown Brothers
Harriman & Co. (“BBH&Co.”), whereby BBH&Co. holds investments on
behalf of USNG. The General Partner pays the fees of the custodian, which
are determined by the parties from time to time. In addition, USNG is party to
an administrative agency agreement, dated March 13, 2006, with the General
Partner and BBH&Co., whereby BBH&Co. acts as the administrative agent,
transfer agent and registrar for USNG. The General Partner also pays the fees of
BBH&Co. for its services under this agreement and such fees are determined
by the parties from time to time.
 
 Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, the greater of a minimum amount of $75,000 annually for its custody,
fund accounting and fund administration services rendered to all funds, as well
as a $20,000 annual fee for its transfer agency services. In addition, an
asset-based charge of (a) 0.06% for the first $500 million of USNG’s, USOF’s,
US12OF’s, UGA’s and USHO’s combined net assets, (b) 0.0465% for USNG’s, USOF’s,
US12OF’s, UGA’s and USHO’s combined net assets greater than $500 million but
less than $1 billion, and (c) 0.035% once USNG’s, USOF’s, US12OF’s, UGA’s and
USHO’s combined net assets exceed $1 billion. The annual minimum amount will not
apply if the asset-based charge for all accounts in the aggregate exceeds
$75,000. The General Partner also pays transaction fees ranging from $7.00 to
$15.00 per transaction.
 
 USNG has
entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”).
The agreement requires UBS Securities to provide services to USNG in connection
with the purchase and sale of Futures Contracts and Other Natural Gas-Related
Investments that may be purchased and sold by or through UBS Securities for
USNG’s account. The agreement provides that UBS Securities charge USNG
commissions of approximately $7 per round-turn trade, plus applicable exchange
and NFA fees for Futures Contracts and options on Futures
Contracts.
 
 USNG
invests primarily in Futures Contracts traded on the NYMEX. On May 30, 2007,
USNG and the NYMEX entered into a license agreement whereby USNG was granted a
non-exclusive license to use certain of the NYMEX’s settlement prices and
service marks. The agreement has an effective date of April 10, 2006. Under
the license agreement, USNG and the affiliated funds managed by the General
Partner pay the NYMEX an asset-based fee for the license, the terms of which are
described in Note 3.
 
 USNG
expressly disclaims any association with the NYMEX or endorsement of USNG by the
NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
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  NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
 
 USNG engages
in the speculative trading of futures contracts and options on futures contracts
(collectively, “derivatives”). USNG is exposed to both market risk, which is the
risk arising from changes in the market value of the contracts, and credit risk,
which is the risk of failure by another party to perform according to the terms
of a contract.
 
 All of
the contracts currently traded by USNG are exchange-traded. The risks associated
with exchange-traded contracts are generally perceived to be less than those
associated with over-the-counter transactions since, in over-the-counter
transactions, USNG must rely solely on the credit of its respective individual
counterparties. However, in the future, if USNG were to enter into
non-exchange traded contracts, it would be subject to the credit risk associated
with counterparty non-performance. The credit risk from counterparty
non-performance associated with such instruments is the net unrealized gain, if
any. USNG also has credit risk since the sole counterparty to all domestic
and foreign futures contracts is the exchange on which the relevant
contracts are traded. In addition, USNG bears the risk of financial failure by
the clearing broker.
 
 The
purchase and sale of futures and options on futures contracts require margin
deposits with a futures commission merchant. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act requires a
futures commission merchant to segregate all customer transactions and assets
from the futures commission merchant’s proprietary activities.
 
 USNG’s
cash and other property, such as U.S. Treasuries, deposited with a futures
commission merchant are considered commingled with all other customer funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited. The insolvency of a futures commission merchant could result in the
complete loss of USNG’s assets posted with that futures commission merchant;
however, the vast majority of USNG’s assets are held in Treasuries, cash and/or
cash equivalents with USNG’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
USNG’s custodian could result in a substantial loss of USNG’s
assets.
  USNG
invests its cash in money market funds that seek to maintain a stable net asset
value. USNG is exposed to any risk of loss associated with an investment in
these money market funds. As of December 31, 2008 and 2007, USNG had deposits in
domestic and foreign financial institutions, including cash investments in money
market funds, in the amounts of $713,549,385 and $573,183,088, respectively.
This amount is subject to loss should these institutions cease
operations.
  For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, USNG is exposed to a market risk equal to the value of futures
contracts purchased and unlimited liability on such contracts sold short. As
both a buyer and a seller of options, USNG pays or receives a premium at the
outset and then bears the risk of unfavorable changes in the price of the
contract underlying the option.
 
 USNG’s
policy is to continuously monitor its exposure to market and counterparty risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, USNG has a policy of requiring
review of the credit standing of each broker or counterparty with which it
conducts business.
 
 The
financial instruments held by USNG are reported in its statement of
financial condition at market or fair value, or at carrying amounts that
approximate fair value, because of their highly liquid nature and short-term
maturity.
  - 89
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 NOTE 6
- FINANCIAL HIGHLIGHTS
 
 The
following table presents per unit performance data and other supplemental
financial data for the year ended December 31, 2008 the period from April 18,
2007 (commencement of operations) to December 31, 2007 and September 11,
2006 (inception) to December 31, 2006. This information has been derived from
information presented in the financial statements.
  For
      the period from
                            
                            
                            For
      the period fromYear
      ended
                            
                            
                            April
      18, 2007 to
                            
                            
                            September
      11, 2006December 31,
      2008
                            
                            
                            December
      31, 2007
                            
                            
                            December
      31, 2006Per Unit Operating
    Performance:Net
      asset value, beginning of period
                            
                            $
                            36.18
                            
                            
                            $
                            50.00
                            
                            
                            $
                            -Total loss
                            
                            
                            (12.55
                            )
                            
                            
                            (13.55
                            )
                            
                            
                            -Total
      expenses
                            
                            
                            (0.36
                            )
                            
                            
                            (0.27
                            )
                            
                            
                            -Net
      decrease in net asset value
                            
                            
                            (12.91
                            )
                            
                            
                            (13.82
                            )
                            
                            
                            -Net
      asset value, end of period
                            
                            $
                            23.27
                            
                            
                            $
                            36.18
                            
                            
                            $
                            -Total
      Return
                            
                            
                            (35.68
                            )
      %
                            
                            
                            (27.64
                            )
      %
                            
                            
                            -
                            %Ratios
      to Average Net AssetsTotal
      loss
                            
                            
                            (66.25
                            )
      %
                            
                            
                            (5.59
                            )
      %
                            
                            
                            -
                            %Expenses
      excluding management fees
                            
                            
                            0.36
                            %
                            
                            
                            0.39
                            %*
                            
                            
                            -
                            %Management
      fees
                            
                            
                            0.60
                            %
                            
                            
                            0.60
                            %*
                            
                            
                            -
                            %Net loss
                            
                            
                            (67.21
                            )
      %
                            
                            
                            (6.58
                            )
      %
                            
                            
                            -
                            %*Annualized
  Total
returns are calculated based on the change in value during the period. An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from USNG.
  NOTE
7 - QUARTERLY FINANCIAL DATA (Unaudited)
 
 The
following summarized (unaudited) quarterly financial information presents the
results of operations and other data for three-month periods ended March 31,
June 30, September 30 and December 31, 2008 and 2007.
  First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  Quarter2008
                
                
                2008
                
                
                2008
                
                
                2008Tot  Total
      Income (Loss)
                
                $
                156,689,207
                
                
                $
                176,316,721
                
                
                $
                (531,720,749
                )
                
                $
                (286,461,005
                )Total
      Expenses
                
                
                1,365,216
                
                
                
                1,495,927
                
                
                
                2,059,176
                
                
                
                2,108,493Net
      Income (Loss)
                
                $
                155,323,991
                
                
                $
                174,820,794
                
                
                $
                (533,779,925
                )
                
                $
                (288,569,498
                )Net
      Income (Loss) per Unit
                
                $
                12.61
                
                
                $
                13.87
                
                
                $
                (29.59
                )
                
                $
                (9.80
                )
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 First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  Quarter2007
                
                
                2007
                
                
                2007
                
                
                2007Total
      Income (Loss)
                
                $
                -
                
                
                $
                (7,658,968
                )
                
                $
                8,655,926
                
                
                $
                (12,543,664
                )Total
      Expenses
                
                
                -
                
                
                
                79,457
                
                
                
                621,505
                
                
                
                1,344,359Net
      Income (Loss)
                
                $
                -
                
                
                $
                (7,738,425
                )
                
                $
                8,034,421
                
                
                $
                (13,888,023
                )Net
      Income (Loss) per Unit
                
                $
                -
                
                
                $
                (6.51
                )
                
                $
                (5.28
                )
                
                $
                (2.03
                )
 
 NOTE
8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Effective
January 1, 2008, USNG adopted FAS 157 - Fair Value Measurements (“FAS 157” or
the “Statement”). FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (“GAAP”), and
expands disclosures about fair value measurement. The changes to current
practice resulting from the application of the Statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurement. The Statement establishes a
fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from sources independent of
USNG (observable inputs) and (2) USNG’s own assumptions about market participant
assumptions developed based on the best information available under the
circumstances (unobservable inputs). The three levels defined by the FAS 157
hierarchy are as follows:
 
 Level I
– Quoted prices
(unadjusted) in active markets for identicalassets or liabilities that
the reporting entity has the ability to access at the measurement
date.
 
 Level II
– Inputs other than
quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. Level II assets include the following:
quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).
 
 Level III
– Unobservable pricing
input at the measurement date for the asset or liability. Unobservable inputs
shall be used to measure fair value to the extent that observable inputs are not
available.
 
 In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based on
the lowest input level that is significant to the fair value measurement in its
entirety.
 
 The
following table summarizes the valuation of USNG’s securities at December 31,
2008 using the fair value hierarchy:
 
 At December
      31, 2008
                Total
                
                Level
      I
                
                Level
      II
                
                Level
      IIIInvestments
                
                $
                298,603,373
                
                
                $
                298,603,373
                
                
                $
                -
                
                
                $
                -Derivative
      assets
                
                
                (7,704,870
                )
                
                
                (7,704,870
                )
                
                
                -
                
                
                
                -
  NOTE
9 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
 In March
2008, Statement of Financial Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), was issued and became effective
for fiscal years that began after November 15, 2008.  SFAS 161
requires enhanced disclosures to provide information about the reasons USNG
invests in derivative instruments, the accounting treatment of derivative
instruments and the effect derivatives have on USNG’s financial performance. The
General Partner is currently evaluating the impact the adoption of SFAS 161 will
have on USNG’s financial statement disclosures.
  - 91
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 Table of Contents
  Item 9.    Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.
  Not
applicable.
  Item 9A.    Controls and Procedures.
 
 Disclosure
Controls and Procedures
  USNG
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in USNG’s periodic reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SEC’s rules and
forms.
 
 The duly
appointed officers of the General Partner, including its chief executive officer
and chief financial officer, who perform functions equivalent to those
of a principal executive officer and principal financial officer of USNG if
USNG had any officers, have evaluated the effectiveness of USNG’s
disclosure controls and procedures and have concluded that the
disclosure controls and procedures of USNG have been effective as of the end of
the period covered by this annual report on Form 10-K.
 
 Management’s
Annual Report on Internal Control Over Financial Reporting
  USNG is
responsible for establishing and maintaining adequate internal control over
financial reporting. USNG’s internal control system is designed to provide
reasonable assurance to its management and the board of directors of the General
Partner regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Management’s report on internal control over
financial reporting is set forth above under the heading, “Management’s Annual
Report on Internal Control Over Financial Reporting” in Item 8.
 
 Change
in Internal Control Over Financial Reporting
  There
were no changes in USNG’s internal control over financial reporting during
USNG’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, USNG’s internal control over financial
reporting.
 
 Item 9B.    Other Information.
  Monthly
Account Statements
  Pursuant
to the requirement under Rule 4.22(h) under the CEA, each month USNG publishes
an account statement for its unitholders, which includes a Statement of Income
(Loss) and a Statement of Changes in NAV. The account statement is filed
with the SEC on a current report on Form 8-K pursuant to Section 13 or
15(d) of the Exchange Act and posted each month on USNG’s website at
www.unitedstatesnaturalgasfund.com.
 
 Part III
 
 Item 10.    Directors, Executive Officers and
Corporate Governance.
  Mr.
Nicholas Gerber and Mr. Howard Mah serve as executive officers of the General
Partner. USNG has no executive officers. Its affairs are generally managed by
the General Partner. The following individuals serve as Management &
Directors of the General Partner.
 
 Nicholas
Gerber has been the President and CEO of the General Partner since June
9, 2005 and a Management Director of the General Partner since May 10, 2005. He
maintains his main business office at 1320 Harbor Bay Parkway, Suite 145,
Alameda, California 94502. Mr. Gerber has acted as a portfolio manager for USNG
since it commenced operations in April 2007 and the Related Public Funds since
April 2006. Mr. Gerber will act as a portfolio manager for USSO and US12NG. He
has been listed with the CFTC as a Principal of the General Partner since
November 29, 2005, and registered with the CFTC as an Associated Person of the
General Partner on December 1, 2005. Currently, Mr. Gerber manages USNG and the
Related Public Funds. He will also manage USSO and US12NG. Mr. Gerber has also
served as Vice President/Chief Investment Officer of Lyon’s Gate Reinsurance
Company, Ltd. since June of 2003. Mr. Gerber has an extensive background in
securities portfolio management and in developing investment funds that make use
of indexing and futures contracts. He is also the founder of Ameristock
Corporation, a California-based investment adviser registered under the
Investment Advisers Act of 1940, that has been sponsoring and providing
portfolio management services to mutual funds since March 1995. Since August
1995, Mr. Gerber has been the portfolio manager of the Ameristock Mutual Fund,
Inc. a mutual fund registered under the Investment Company Act of 1940, focused
on large cap U.S. equities that, as of December 31, 2008, had approximately $188
million in assets. He has also been a Trustee for the Ameristock ETF Trust since
June 2006, and served as a portfolio manager for the Ameristock/Ryan 1Year, 2
Year, 5 Year, 10 Year and 20 Year Treasury ETF from June 2007 to June 2008 when
such funds were liquidated. In these roles, Mr. Gerber has gained extensive
experience in evaluating and retaining third-party service providers, including
custodians, accountants, transfer agents, and distributors. Mr. Gerber has
passed the Series 3 examination for associated persons. He holds an MBA in
finance from the University of San Francisco and a BA from Skidmore College. Mr.
Gerber is 46 years old.
  - 92
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 Howard Mah
has been a Management Director of the General Partner since May 10, 2005,
Secretary of the General Partner since June 9, 2005, and Chief Financial Officer
of the General Partner since May 23, 2006. He has been listed with the CFTC as a
Principal of the General Partner since November 29, 2005. In these roles, Mr.
Mah is currently involved in the management of USNG and the Related Public Funds
and will be involved in the management of USSO and US12NG. Mr. Mah also serves
as the General Partner’s Chief Compliance Officer. He received a Bachelor of
Education from the University of Alberta, in 1986 and an MBA from the University
of San Francisco in 1988. He has been Secretary and Chief Compliance Officer of
the Ameristock ETF Trust since February 2007, Chief Compliance Officer of
Ameristock Corporation since January 2001; a tax & finance consultant in
private practice since January 1995, Secretary of Ameristock Mutual Fund since
June 1995 and Ameristock Focused Value Fund from December 2000 to January 2005;
Chief Compliance Officer of Ameristock Mutual Fund since August 2004 and the
Co-Portfolio Manager of the Ameristock Focused Value Fund from December 2000 to
January 2005. Mr. Mah is 44 years old.
 
 Andrew F.
Ngim has been a Management Director of the General Partner since May 10,
2005 and Treasurer of the General Partner since June 9, 2005. He has been listed
with the CFTC as a Principal of the General Partner since November 29, 2005. As
Treasurer of the General Partner, Mr. Ngim is currently involved in the
management of USNG and the Related Public Funds and will be involved in the
management of USSO and US12NG. He received a Bachelor of Arts from the
University of California at Berkeley in 1983. Mr. Ngim has been Ameristock
Corporation’s Managing Director since January 1999 and co-portfolio manager of
Ameristock Corporation since January 2000, Trustee of the Ameristock ETF Trust
since February 2007, and served as a portfolio manager for the Ameristock/Ryan 1
Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury ETF from June 2007 to June
2008 when such funds were liquidated. Mr. Ngim is 48 years old.
 
 Robert L.
Nguyen has been a Management Director of the General Partner since May
10, 2005. He has been listed with the CFTC as a Principal of the General Partner
since November 29, 2005 and registered with the CFTC as an Associated Person on
November 9, 2007. As a Management Director of the General Partner, Mr. Nguyen is
currently involved in the management of USNG and the Related Public Funds and
will be involved in the management of USSO and US12NG. He received a Bachelor of
Science from California State University Sacramento in 1981. Mr. Nguyen has been
the Managing Principal of Ameristock Corporation since January 2000. Mr. Nguyen
is 49 years old.
 
 The
following individuals provide significant services to USNG but are employed by
the entities noted below.
 
 John P.
Love has acted as the Portfolio Operations Manager for USNG since it
commenced operations in April 2007 and the Related Public Funds since January
2006 and is expected to be the Portfolio Operations Manager for USSO and US12NG.
Mr. Love is also employed by the General Partner. He has been listed with the
CFTC as a Principal of the General Partner since January 17, 2006. Mr. Love also
served as the operations manager of Ameristock Corporation from October 2002 to
January 2007, where he was responsible for back office and marketing activities
for the Ameristock Mutual Fund and Ameristock Focused Value Fund and for the
firm in general. Mr. Love holds a Series 3 license and registered with the CFTC
as an Associated Person of the General Partner on December 1, 2005. He holds a
BFA in cinema-television from the University of Southern California. Mr. Love is
37 years old.
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 John T. Hyland,
CFA acts as a Portfolio Manager and as the Chief Investment Officer for
the General Partner. Mr. Hyland is employed by the General Partner. He
registered with the CFTC as an Associated Person of the General Partner on
December 1, 2005, and has been listed as a Principal of the General Partner
since January 17, 2006. Mr. Hyland became the Portfolio Manager for USNG, USOF,
US12OF, UGA and USHO in April 2007, April 2006, December 2007, February 2008 and
April 2008, respectively, and as Chief Investment Officer of the General Partner
since January 2008, acts in such capacity on behalf of USNG and the Related
Public Funds. He is also expected to become the Portfolio Manager for USSO and
US12NG. As part of his responsibilities for USNG and the Related Public Funds,
Mr. Hyland handles day-to-day trading, helps set investment policies, and
oversees USNG’s and the Related Public Funds’ activities with their futures
commission brokers, custodian-administrator, and marketing agent. Mr. Hyland has
an extensive background in portfolio management and research with both equity
and fixed income securities, as well as in the development of new types of
complex investment funds. In July 2001, Mr. Hyland founded Towerhouse Capital
Management, LLC, a firm that provides portfolio management and new fund
development expertise to non-U.S. institutional investors. Mr. Hyland has been,
and remains, a Principal and Portfolio Manager for Towerhouse. From July 2001 to
January 2002, Mr. Hyland was the Director of Global Property Securities Research
for Roulac International, where he worked on the development of a hedge fund
focused on global real estate stocks. Mr. Hyland received his Chartered
Financial Analyst (“CFA”) designation in 1994. From 1993 until 2003, Mr. Hyland
was on the Board of Directors of the Security Analysts of San Francisco
(“SASF”), a not-for-profit organization of investment management professionals.
He served as the president of the SASF from 2001-2002. Mr. Hyland is a member of
the CFA Institute (formerly AIMR). He is also a member of the National
Association of Petroleum Investment Analysts, a not-for-profit organization of
investment professionals focused on the oil industry. He serves as an arbitrator
for FINRA, as part of their dispute resolution program. He is a graduate of the
University of California, Berkeley and received a BA in political
science/international relations in 1982. Mr. Hyland is 49 years
old.
 
 The
following individuals serve as independent directors of the General
Partner.
 
 Peter M.
Robinson has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of USNG, and the Related Public Funds and will
serve on behalf of USSO and US12NG, if such funds commence operations. Mr.
Robinson has been employed as a Research Fellow with the Hoover Institution
since 1993. Mr. Robinson graduated from Dartmouth College in 1979 and Oxford
University in 1982. Mr. Robinson spent six years in the White House, serving
from 1982 to 1983 as chief speechwriter to Vice President George Bush and from
1983 to 1988 as special assistant and speechwriter to President Ronald Reagan.
After the White House, Mr. Robinson received an MBA from the Stanford University
Graduate School of Business. Mr. Robinson then spent a year in New York City
with Fox Television. He spent a second year in Washington, D.C., with the
Securities and Exchange Commission, where he served as the director of the
Office of Public Affairs, Policy Evaluation, and Research. Mr. Robinson has also
written three books and has been published in the New York Times, Red Herring,
and Forbes ASAP and he
is the editor of Can Congress
Be Fixed?: Five Essays on Congressional Reform (Hoover Institution Press,
1995). Mr. Robinson is 51 years old.
 
 Gordon L.
Ellis has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of USNG, and the Related Public Funds and will
serve on behalf of USSO and US12NG, if such funds commence operations. Mr. Ellis
has been Chairman of International Absorbents, Inc. since July 1988, President
and Chief Executive Officer since November 1996 and a Class I Director of the
company since July 1985. Mr. Ellis is also a director of Absorption Corp.,
International Absorbents, Inc.’s wholly-owned subsidiary. Mr. Ellis is a
director/trustee of Polymer Solutions, Inc., a former publicly-held company that
sold all of its assets effective as of February 3, 2004 and is currently winding
down its operations and liquidating following such sale. Mr. Ellis is a
Professional Engineer, a Certified Director, and holds an MBA in international
finance. Mr. Ellis is 62 years old.
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 Malcolm R. Fobes
III has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the General
Partner, which acts on behalf of USNG and the Related Public Funds and will
serve on behalf of USSO and US12NG, if such funds commence operations. Mr. Fobes
is the founder, Chairman and Chief Executive Officer of Berkshire Capital
Holdings, Inc., a California-based investment adviser registered under the
Investment Advisers Act of 1940, that has been sponsoring and providing
portfolio management services to mutual funds since 1997. Since 1997, Mr. Fobes
has been the Chairman and President of The Berkshire Funds, a mutual fund
investment company registered under the Investment Company Act of 1940. Mr.
Fobes also serves as portfolio manager of the Berkshire Focus Fund, a mutual
fund registered under the Investment Company Act of 1940, which concentrates its
investments in the electronic technology industry. From April 2000 to July 2006,
Mr. Fobes also served as co-portfolio manager of The Wireless Fund, a mutual
fund registered under the Investment Company Act of 1940, which concentrates its
investments in companies engaged in the development, production, or distribution
of wireless-related products or services. In these roles, Mr. Fobes has gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Mr. Fobes
was also contributing editor of Start a Successful Mutual Fund: The Step-by-Step
Reference Guide to Make It Happen (JV Books, 1995). Prior to forming Berkshire
Capital Holdings, Inc., Mr. Fobes was employed by various technology-related
companies, including Adobe Systems, Inc., a leading provider of digital
publishing and imaging software technologies. Mr. Fobes holds a B.S. degree in
Finance and Economics from San Jose State University in California. Mr. Fobes is
44 years old.
 
 The
following are individual Principals, as that term is defined in CFTC Rule 3.1,
for the General Partner: Melinda Gerber, the Gerber Family Trust, Howard Mah,
Andrew Ngim, Robert Nguyen, Peter Robinson, Gordon Ellis, Malcolm Fobes, John
Love, and John Hyland. These individuals are principals due to their positions,
however, Nicholas Gerber and Melinda Gerber are also principals due to their
controlling stake in Wainwright. None of the principals owns or has any other
beneficial interest in USNG. Nicholas Gerber and John Hyland make trading and
investment decisions for USNG. Nicholas Gerber, John Love and John Hyland
execute trades on behalf of USNG. In addition, Nicholas Gerber, John Love, John
Hyland, Robert Nguyen, Kathryn Rooney and Ray Allen are registered
with the CFTC as Associated Persons of the General Partner and are NFA Associate
Members.
 
 Audit
Committee
 
 The Board
of the General Partner has an audit committee which is made up of the three
independent directors (Peter M. Robinson, Gordon L. Ellis, and Malcolm R. Fobes
III). The audit committee is governed by an audit committee charter that is
posted on USNG’s website at www.unitedstatesnaturalgasfund.com. Any unitholder
of USNG may also obtain a printed copy of the audit committee charter, free of
charge, by calling 1-800-920-0259. The Board has determined that each member of
the audit committee meets the financial literacy requirements of the NYSE Arca
and the audit committee charter. The Board has further determined that each of
Messrs. Ellis and Fobes have accounting or related financial management
expertise, as required by the NYSE Arca, such that each of them is considered an
“Audit Committee Financial Expert” as such term is defined in Item 407(d)(5) of
Regulation S-K.
 
 Other
Committees
 
 Since the
individuals who perform work on behalf of USNG are not compensated by USNG, but
instead by the General Partner, Ameristock or ALPS Distributors, Inc., USNG does
not have a compensation committee. Similarly, since the Directors noted above
serve on the board of directors of the General Partner, there is no nominating
committee of the board of directors that acts on behalf of USNG.
 
 Corporate
Governance Policy
 
 The Board
of the General Partner has adopted a Corporate Governance Policy that applies to
USNG, USOF, US12OF, UGA, USHO, USSO and US12NG. USNG has posted the text of the
Corporate Governance Policy on its website at
www.unitedstatesnaturalgasfund.com. Any unitholder of USNG may also obtain
a printed copy of the Corporate Governance Policy, free of charge, by calling
1-800-920-0259.
  - 95
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 Table of Contents
  Code
of Ethics
 
 The
General Partner of USNG has adopted a Code of Business Conduct and Ethics (the
“Code of Ethics”) that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions, and also to USNG. USNG has posted the text of
the Code of Ethics on its website at
www.unitedstatesnaturalgasfund.com. Any unitholder of USNG may also obtain
a printed copy of the Code of Ethics, free of charge, by calling 1-800-920-0259.
USNG intends to disclose any amendments or waivers to the Code of Ethics
applicable to the General Partner’s principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions, on its website. A copy of the Code of Ethics is
filed as an exhibit to this annual report on Form 10-K.
 
 Executive
Sessions of the Non-Management Directors
 
 In
accordance with the Corporate Governance Policy of the General Partner, the
non-management directors of the Board (who are the same as the independent
directors of the Board) meet separately from the other directors in regularly
scheduled executive sessions, without the presence of Management Directors or
executive officers of the General Partner. The non-management directors have
designated Malcolm R. Fobes III to preside over each such executive session.
Interested parties who wish to make their concerns known to the non-management
directors may communicate directly with Mr. Fobes by writing to 475 Milan Drive,
No. 103, San Jose, CA  95134-2453 or by e-mail at
uscf.director@gmail.com
 
 Other
Information
 
 In
addition to the certifications of the Chief Executive Officer and Chief
Financial Officer of the General Partner filed or furnished with this annual
report on Form 10-K regarding the quality of USNG’s public disclosure, USNG will
submit, within 30 days after filing this annual report on Form 10-K, to the NYSE
Arca a certification of the Chief Executive Officer of the General Partner
certifying that he is not aware of any violation by USNG of NYSE Arca corporate
governance listing standards.
  Item 11.    Executive Compensation.
  Compensation
to the General Partner and Other Compensation
  USNG does
not directly compensate any of the executive officers noted above. The
executive officers noted above are compensated by the General Partner for
the work they perform on behalf of USNG and other entities controlled by the
General Partner. USNG does not reimburse the General Partner for, nor does it
set the amount or form of any portion of, the compensation paid to the executive
officers by the General Partner. USNG pays fees to the General Partner pursuant
to the LP Agreement under which the fund is obligated to pay the General
Partner an annualized fee of 0.60% of average daily net assets of USNG for the
first $1,000,000,000 and 0.50% of average daily net assets of USNG for amounts
above $1,000,000,000. For 2008, USNG paid the General Partner aggregate fees of
$4,373,723.
  - 96
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  Director
Compensation
 
 The
following table sets forth compensation earned during the year ended
December 31, 2008, by the Directors of the General Partner. USNG’s
portion of the aggregate fees paid to the Directors for the calender year 2008
was $59,420.
  Name
                          
                          Fees
                            Earned
      or Paid in
                            Cash
                          
                          Stock
      Awards
                          
                          Option
      Awards
                          
                          Non-Equity
      Incentive Plan Compensation
                          
                          Change
      in Pension Value and Nonqualified Deferred Compensation
    Plan
                          
                          All
      Other Compensation(1)
                          
                          TotalManagement
      DirectorsNicholas
      Gerber
                          
                          $
                          0
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          0
                          
                          $
                          0Andrew
      F. Ngim
                          
                          $
                          0
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          0
                          
                          $
                          0Howard
      Mah
                          
                          $
                          0
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          0
                          
                          $
                          0Robert
      L. Nguyen
                          
                          $
                          0
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          0
                          
                          $
                          0Independent
      DirectorsPeter
      M. Robinson
                          
                          $
                          52,000
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          35,000
                          
                          $
                          87,000Gordon
      L. Ellis
                          
                          $
                          52,000
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          35,000
                          
                          $
                          87,000Malcolm
      R. Fobes III
                          
                          $
                          73,000
                          
                          
                          NA
                          
                          
                          NA
                          
                          
                          NA
                          
                          $
                          0
                          
                          $
                          35,000
                          
                          $
                          108,000
 
 (1)
              Payments
      made under this column represent cash payments made in lieu of directors’
      and officers’ insurance coverage. Such payments were made only to the
      Independent Directors of the General Partner for their service on the
      Board of the General Partner on behalf of USNG and the Related Public
      Funds.
 
 Item 12.    Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
 
 None of
the directors or executive officers of the General Partner, nor the employees of
USNG own any units of USNG. In addition, USNG is not aware of any 5% holder of
its units.
  Item 13.    Certain Relationships and Related
Transactions, and Director Independence.
  Certain
Relationships and Related Transactions
 
 USNG has
and will continue to have certain relationships with the General Partner and its
affiliates. However, there have been no direct financial transactions
between USNG and the directors or officers of the General Partner that have not
been disclosed herein. See “Item 11. Executive Compensation” and “Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.” Any transaction with a related person that must be
disclosed in accordance with SEC Regulation S-K item 404(a), including financial
transactions by USNG with directors or executive officers of the General Partner
or holders of beneficial interests in the General Partner or USNG of more than
5%, will be subject to the provisions regarding “Resolutions of Conflicts of
Interest; Standard of Care” as set forth in Section 7.7 of the LP Agreement and
will be reviewed and approved by the audit committee of the Board of the General
Partner.
 
 Director
Independence
 
 In March
2008, the Board undertook a review of the independence of the directors of the
General Partner and considered whether any director has a material relationship
or other arrangement with the General Partner, USNG or the Related Public
Funds that could compromise his ability to exercise independent judgment in
carrying out his responsibilities. As a result of this review, the Board
determined that each of Messrs. Fobes, Ellis and Robinson is an “independent
director,” as defined under the rules of NYSE Arca.
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 Item 14.    Principal Accountant Fees and
Services.
  The fees
for services billed to the USNG by its independent auditors for the last two
fiscal years are as follows:
  2008
                  
                  
                  2007Audit
      fees
                  
                  $
                  160,000
                  *
                  
                  $
                  75,000Audit-related
      fees
                  
                  -
                  
                  
                  
                  -Tax
      fees
                  
                  -
                  
                  
                  
                  -All
      other fees
                  
                  -
                  
                  
                  
                  -$
                  160,000
                  
                  
                  $
                  75,000
 * Amount
expected to be billed for 2008 services.
 
 Audit
fees consist of fees paid to Spicer Jeffries LLP for (i) the audit of
USNG’s annual financial statements included in the annual report on Form 10-K,
and review of financial statements included in the quarterly reports on
Form 10-Q and filed on USNG’s current reports on Form 8-K; (ii) the audit of
USNG’s internal control over financial reporting included in the annual report
on Form 10-K; and (iii) services that are normally provided by the
Independent Registered Public Accountants in connection with statutory and
regulatory filings of registration statements.
  Tax fees
consist of fees paid to Spicer Jeffries LLP for professional services rendered
in connection with tax compliance and partnership income tax return
filings.
  The audit
committee has established policies and procedures which are intended to control
the services provided by USNG’s independent auditors and to monitor their
continuing independence.  Under these policies and procedures, no
audit or permitted non-audit services (including fees and terms thereof), except
for the de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of the
Exchange Act, may be undertaken by USNG’s independent auditors unless the
engagement is specifically pre-approved by the audit committee.  The
audit committee may form and delegate authority to subcommittees consisting of
one or more members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services, provided that decisions
of such subcommittee to grant pre-approvals must be presented to the full audit
committee at its next scheduled meeting.
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  Part
IV
 
 Item 15.    Exhibits and Financial Statement
Schedules.
 
 1.
              See
      Index to Financial Statements on page 75.2.
              No
      financial statement schedules are filed herewith because (i) such
      schedules are not required or (ii) the information required has been
      presented in the aforementioned financial statements.3.
              Exhibits
      required to be filed by Item 601 of Regulation
  S-K.
 
 Exhibit
Index
  Listed
below are the exhibits which are filed or furnished as part of this annual
report on Form 10-K (according to the number assigned to them in Item 601 of
Regulation S-K):
  Exhibit
      Number
                    
                    Description
      of Document3.1*
                    
                    Second Amended and Restated Agreement of Limited
      Partnership.3.2**
                    
                    Certificate of Limited Partnership of the
      Registrant.10.1***
                    
                    Form of Initial Authorized Purchaser
      Agreement.10.2****
                    
                    Form of Marketing Agent
      Agreement.10.3*****
                    
                    License Agreement.10.4****
                    
                    Form of Custodian
  Agreement.10.5******
                    
                    Amendment Agreement to the Custodian
      Agreement.10.6****
                    
                    Form of Administrative Agency
      Agreement.10.7******
                    
                    Amendment Agreement to the Administrative Agency
      Agreement.14.1******
                    
                    Code of Ethics.23.1******
                    
                    Consent
      of Independent Registered Public Accounting
Firm.
  31.1******
              
              Certification
      of Principal Executive Officer Pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of
      1934.31.2******
              
              Certification
      of Principal Financial Officer Pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of
    1934.32.1******
              
              Certification
      of Principal Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U. S. C.
      1350).32.2******
              
              Certification
      of Principal Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U. S. C.
      1350).
 
 *
                Incorporated
      by reference to Registrant’s Current Report on Form 8-K filed on December
      7, 2007.**
                Incorporated
      by reference to Registrant’s Registration Statement on Form S-1 (File No.
      333- 137871) filed on October 6, 2006.***
                Incorporated
      by reference to Registrant’s Pre-Effective Amendment No. 2 to the
      Registration Statement on Form S-1 (File No. 333- 137871) filed on March
      9, 2007.****
                Incorporated
      by reference to Registrant’s Pre-Effective Amendment No. 1 to the
      Registration Statement on Form S-1 (File No. 333- 137871) filed on
      December 22, 2006.*****
                Incorporated
      by reference to Registrant’s Quarterly Report on Form 10-Q for the Quarter
      ended March 31, 2007, filed on June 1, 2007.******
                Filed
      herewith.
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  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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.
  United
States Natural Gas Fund, LP (Registrant)
 By: 
United States Commodity Funds LLC, its general partner
 (formerly
known as Victoria Bay Asset Management, LLC)
 
 
 By: 
/s/ Nicholas D. Gerber
 Nicholas
D. Gerber
 Chief
Executive Officer
 (Principal
executive officer)
 
 Date:  March
2, 2009
 
 By: 
/s/ Howard Mah
 Howard
Mah
 Chief
Financial Officer
 (Principal
financial and accounting officer)
 
 Date:  March
2, 2009
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 Table of Contents
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
  Signature
                  
                  Title
      (Capacity)
                  Date/s/
      Nicholas D. Gerber
                  
                  Management
      Director
                  March 2,
      2009Nicholas
      D. Gerber/s/
      Howard Mah
                  
                  Management
      Director
                  March 2,
      2009Howard
      Mah/s/
      Andrew Ngim
                  
                  Management
      Director
                  March 2,
      2009Andrew
      Ngim/s/
      Robert Nguyen
                  
                  Management
      Director
                  March 2,
      2009Robert
      Nguyen/s/
      Peter M. Robinson
                  
                  Independent
      Director
                  March 2,
      2009Peter
      M. Robinson/s/
      Gordon L. Ellis
                  
                  Independent
      Director
                  March 2,
      2009Gordon
      L. Ellis/s/
      Malcolm R. Fobes III
                  
                  Independent
      Director
                  March 2,
      2009Malcolm
      R. Fobes III
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