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,
  2009.


or





 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 for the transition period from
                          
      to
                          .





Commission
file number: 001-33096




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)
522-9600


(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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈Yes     ̈ No





Indicate
by check mark 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.    ̈





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, 2009 was: $3,742,126,000.




The
registrant had 409,400,000 outstanding units as of February 26,
2010.




DOCUMENTS
INCORPORATED BY REFERENCE:


None.





UNITED
STATES NATURAL GAS FUND, LP





Table
of Contents





PagePart
      I.Item
      1. Business.
                                                                      
                                                                      1Item
      1A. Risk Factors.
                                                                      
                                                                      53Item
      1B. Unresolved Staff Comments.
                                                                      
                                                                      70Item
      2. Properties.
                                                                      
                                                                      70Item
      3. Legal Proceedings.
                                                                      
                                                                      70Item
      4. Reserved.
                                                                      
                                                                      70Part
      II.Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities.
                                                                      
                                                                      70Item
      6. Selected Financial Data.
                                                                      
                                                                      71Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                                                                      
                                                                      71Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk.
                                                                      
                                                                      92Item
      8. Financial Statements and Supplementary Data.
                                                                      
                                                                      95Item
      9. Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure.
                                                                      
                                                                      115Item
      9A. Controls and Procedures.
                                                                      
                                                                      115Item
      9B. Other Information.
                                                                      
                                                                      116Part
      III.Item
      10. Directors, Executive Officers and Corporate
      Governance.
                                                                      
                                                                      116Item
      11. Executive Compensation.
                                                                      
                                                                      122Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters.
                                                                      
                                                                      122Item
      13. Certain Relationships and Related Transactions, and Director
      Independence.
                                                                      
                                                                      122Item
      14. Principal Accountant Fees and Services.
                                                                      
                                                                      123Part
      IV.Item
      15. Exhibits and Financial Statement Schedules.
                                                                      
                                                                      123Exhibit
      Index.
                                                                      
                                                                      124Signatures
                                                                      
                                                                      125





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 October 13, 2008 (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
spot 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”), less USNG’s expenses. USNG’s units
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.  Wainwright previously owned an
insurance company organized under Bermuda law, which has been liquidated, and a
registered investment adviser firm named Ameristock Corporation which has been
distributed to the Wainwright shareholders. The General Partner is a member of
the National Futures Association (the “NFA”) and registered as a commodity pool
operator (“CPO”) with the Commodity Futures Trading Commission (the “CFTC”) 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’s units 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 spot 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. 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’s units began trading on February 26, 2008. The
General Partner is the general partner of UGA and is responsible for the
management of UGA.


1





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 spot 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’s units began trading on April 9, 2008. The General Partner
is the general partner of USHO and is responsible for the management of
USHO.





On June
30, 2008, the General Partner formed the United States Short Oil Fund, LP
(“USSO”), also a limited partnership that is a commodity pool and issues units
traded on the NYSE Arca.  The investment objective of USSO is for the
changes in percentage terms of its units’ NAV to inversely 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 USSO’s
expenses.  USSO’s units began trading on September 24,
2009.  The General Partner is the general partner of USSO and is
responsible for the management of USSO.





On June
27, 2007, the General Partner formed the United States 12 Month Natural Gas
Fund, LP (“US12NG”), also a limited partnership that is a commodity pool and
issues units traded on the NYSE Arca. The investment objective of US12NG is for
the changes in percentage terms of its units’ NAV to 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 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.
US12NG’s units began trading on November 18, 2009.  The General
Partner is the general partner of US12NG and is responsible for the management
of US12NG.





USOF,
US12OF, UGA, USHO, USSO and US12NG 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 Brent Oil Fund, LP (“USBO”) and the United
States Commodity Index Funds Trust (“USCI”). The investment objective of USBO
will be for the daily changes in percentage terms of its units’ NAV to reflect
the daily changes in percentage terms of the spot price of Brent crude oil, as
measured by the changes in the price of the futures contract on Brent crude oil
traded on the ICE Futures, less USBO’s expenses.  The investment
objective of USCI will be for the daily changes in percentage terms of its
units’ NAV to reflect the daily changes in percentage terms of the SummerHaven
Dynamic Commodity Index (“SDCI”) Total Return, less USCI’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., which acts as the marketing agent
for USNG (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 Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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.


2





How
Does USNG Operate?




The net assets of USNG consist primarily of investments in
futures contracts for natural gas, but may also consist of investment contracts
for 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, cleared swap contracts, 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.





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 for the changes in percentage terms of its
units’ NAV to 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 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 the futures contract will be 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 NYMEX Futures Contract
for natural gas delivered to Henry Hub Louisiana (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 NYSE Arca 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 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 NYSE Arca 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, 2009 and during the last thirty valuation days ended December 31,
2009.


3











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS


4











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.





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.





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








5





The
General Partner employs a “neutral” investment strategy intended 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.





From
inception to March 2009, the Benchmark Futures Contract of USNG was changed from
the near month contract to expire to the next month contract to expire, starting
on the date two weeks prior to the expiration of the near month
contract.  The change in the Benchmark Futures Contract occurred in
its entirety from one day until the next day.





Since
March 2009, the Benchmark Futures Contract has changed each month from the near
month contract to the next month contract over a four-day period.  The
Benchmark Futures Contract changes 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 is based on a combination of the near month contract and the
next month contract as follows: (1) day 1 consists of 75% of the then near month
contract’s price plus 25% of the price of the next month contract, divided by
75% of the near month contract’s prior day’s price plus 25% of the price of the
next month contract,  (2) day 2 consists of 50% of the then near month
contract’s price plus 50% of the price of the next month contract, divided by
50% of the near month contract’s prior day’s price plus 50% of the price of the
next month contract,  and (3) day 3 consists of 25% of the then near
month contract’s price plus 75% of the price of the next month contract, divided
by 25% of the near month contract’s prior day’s price plus 75% of the price of
the next month contract.  On day 4, the Benchmark Futures Contract is
the next month contract to expire at that time and that contract remains the
Benchmark Futures Contract until the beginning of the 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 “rolls” USNG’s positions in
Natural Gas Interests by closing, or selling, a percentage of 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 2010
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 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 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.





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 purchase price for
Creation Baskets, and the redemption price for Redemption Baskets is the actual
NAV of the units purchased or redeemed calculated at the end of the business day
when notice for a purchase or redemption is received by USNG. In addition,
Authorized Purchasers pay USNG a $1,000 fee for each order placed to create
one or more Creation Baskets or redeem one or more Redemption Baskets. The NYSE
Arca publishes an approximate NAV intra-day 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.


6





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 depends 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 position limits on the NYMEX, or for other reasons, it
may invest in Futures Contracts traded on other exchanges or may invest in Other
Natural Gas-Related Investments such as cleared swap contracts and other
contracts in the “over-the-counter” market.




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




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 Benchmark Futures Contract. 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 natural gas.  Based on these expected interrelationships, the
General Partner believes that the changes in the price of USNG’s units as traded
on the NYSE Arca have closely tracked and 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” in this annual report on Form 10-K.





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, natural gas Futures Contracts on the NYMEX
trade in units of 10,000 million British Thermal Units (“mmBtu”). The 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.


7





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. Currently, the ICE Futures
imposes position and accountability limits that are similar to those imposed by
the NYMEX but does not limit the maximum daily price fluctuation.





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 any one month in the
Benchmark Futures Contract) is 6,000 net 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 the futures contract 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 and the Related Public Funds to reduce their aggregate position back
to the accountability level. As of December 31, 2009, USNG and the Related
Public Funds held a net of 14,590 NYMEX Natural Gas Futures NG contracts and
35,858 NYMEX Natural Gas Futures NN contracts. As of December 31, 2009, USNG
held 62,455 natural gas cleared-swap contracts traded on the ICE
Futures.





If the
NYMEX or the ICE Futures orders USNG to reduce its position back to the
accountability level, or to an accountability level that the NYMEX or the ICE
Futures 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. If the NYMEX were to
impose limits at the $1 billion level (or another level), USNG anticipates that
it would invest the majority of its assets above that level in a mix of other
Futures Contracts or Other Natural Gas-Related Investments in order to meet its
investment objectives.  U.S. futures exchanges, including the NYMEX,
currently do not implement fixed position limits for Futures Contracts held
outside of the last few days of trading in the near month contract to
expire.  See “Risk
Factors—Risks Associated With Investing Directly or Indirectly in Natural
Gas—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.”




In
addition to accountability levels, the NYMEX and the ICE Futures impose 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.


8





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 natural gas Futures
Contracts. This limit is initially based off the previous trading day’s
settlement price. If any natural gas 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.





U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire.  However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Henry Hub
natural gas futures contract, NYMEX Light Sweet crude oil futures contract,
NYMEX New York Harbor No. 2 heating oil futures contract, and NYMEX New York
Harbor gasoline blendstock (“RBOB”) gasoline futures contract, along with any
contract based upon these contracts.  The proposed position limits
would be set as a percentage of the open interest in these contracts for the
spot month, any single month, and all months combined.  Additionally,
the proposed rule would aggregate positions in the enumerated contracts and
those based upon such contracts, including contracts listed on separate
exchanges.  This proposal is currently undergoing a 90-day public
comment period.




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: 6,000 net futures / 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.ICE
      Natural Gas (cleared swaps)
                  
                  Any
      one month: 6,000 net futures / all months: 12,000 net futures, but not to
      exceed 1,000 contracts in the last three days of trading in the spot
      month
                  
                  There
      is no maximum daily price fluctuation limit.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.


9





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.ICE
      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 limit.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: 5,000 net futures / 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: 5,000 net futures / 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 additional variation
margin to cover this decline. Alternatively, if USNG’s futures positions have
increased in value, this increase will be credited to USNG’s
account.


10





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
via pipelines.





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 about 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 trading center. The price of heating oil has historically
been volatile.




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.




11





Why
Does USNG Purchase and Sell Futures Contracts?




USNG’s
investment objective is for the changes in percentage terms of its units’ NAV to
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 and Other Natural Gas-Related Investments it
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 10% to 30% 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 would separately 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 million (assuming a 10%
margin).





As a
result of the foregoing, typically between 10% and 30% of USNG’s assets are held
as margin in segregated accounts with a 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 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 makes investments that are
consistent with its investment objective.


12


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.


13





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.





Leverage




While USNG’s historical ratio of
initial margin to total assets has generally ranged from 10% to 30%, the General
Partner endeavors to have the value of USNG’s Treasuries, cash and cash
equivalents, whether held by USNG or posted as margin or collateral, at all
times approximate the aggregate market value of its obligations under USNG’s
Futures Contracts and Other Natural Gas-Related Investments. While the General Partner does not
intend to leverage USNG’s assets, it is not prohibited from doing so under the
LP Agreement.





Borrowings





Borrowings
are not used by USNG, unless USNG is required to borrow money in the event of
physical delivery, USNG trades in cash commodities, or for short-term needs
created by unexpected redemptions. USNG maintains the value of its Treasuries,
cash and cash equivalents whether held by USNG or posted as margin or
collateral, to 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.





Over-the-Counter
Derivatives (Including Spreads and Straddles)





In
addition to Futures Contracts, there are also a number of listed options on the
Futures Contracts on the principal futures exchanges. These contracts offer
investors and hedgers another set of financial vehicles to use in managing
exposure to the natural gas market. Consequently, USNG may purchase options on
natural gas Futures Contracts on these exchanges in pursuing its investment
objective.





In
addition to the Futures Contracts and options on the Futures Contracts, there
also exists an active non-exchange-traded market in derivatives tied to natural
gas. These derivatives transactions (also known as over-the-counter contracts)
are usually entered into between two parties. Unlike most of the exchange-traded
Futures Contracts or exchange-traded options on the Futures Contracts, each
party to such 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 natural gas spot price, forward natural gas price, the Benchmark Futures
Contract price, or other natural gas futures contract price. For example, USNG
may enter into over-the-counter derivative contracts whose value will be tied to
changes in the difference between the natural gas spot price, the Benchmark
Futures Contract price, or some other futures contract price traded on the NYMEX
or ICE Futures and the price 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 its 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.


14





The
General Partner assesses or reviews, as appropriate, the creditworthiness of
each potential or existing counterparty to an over-the-counter contract pursuant
to guidelines approved by the General Partner’s Board of Directors. Furthermore,
the General Partner, on behalf of USNG, only enters into over-the-counter
contracts with counterparties who are, or are affiliates of, (a) banks regulated
by a United States federal bank regulator, (b) broker-dealers regulated by the
U.S. Securities and Exchange Commission (the “SEC”), (c) insurance companies
domiciled in the United States, or (d) producers, users or traders of energy,
whether or not regulated by the CFTC. Any entity acting as a counterparty shall
be regulated in either the United States or the United Kingdom unless otherwise
approved by the General Partner’s Board of Directors after consultation with its
legal counsel. Existing counterparties are also reviewed periodically by the
General Partner.





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.





USNG has
employed hedging methods to the extent it invested in fully-collateralized
over-the-counter swap transactions designed to track percentage changes in the
price of the Benchmark Futures Contract.  USNG has been exposed to
counterparty risk on these fully-collateralized over-the-counter swap
transactions.





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 SEC
and CFTC reports on behalf of USNG. The General Partner pays BBH&Co.’s fees
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 plus an incentive 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.


15


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.





UBS
Securities LLC (“UBS Securities”) is USNG’s futures commission
merchant.  USNG and 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 the fees of UBS Securities.




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 of
various U.S. futures and securities exchanges.





UBS
Securities is the defendant in two purported securities class actions pending in
District Court of the Northern District of Alabama, brought by holders of stocks
and bonds of HealthSouth, captioned In re HealthSouth
Corporation Stockholder, No. CV-03-BE-1501-S and In re HealthSouth
Corporation Bondholder Litigation, No. CV-03-BE-1502-S. Both complaints
assert liability under the Exchange Act.





On June
27, 2007, the Securities Division of the Secretary of the Commonwealth of
Massachusetts (“Massachusetts Securities Division”) filed an administrative
complaint (the “Complaint”) and notice of adjudicatory proceeding against UBS
Securities LLC, captioned In The Matter of UBS Securities, LLC, Docket No.
E-2007-0049, which alleges, in sum and substance, that UBS Securities has been
violating the Massachusetts Uniform Securities Act (the “Act”) and related
regulations by providing the advisers for certain hedge funds with gifts and
gratuities in the form of below market office rents, personal loans with below
market interest rates, event tickets, and other perks, in order to induce those
hedge fund advisers to increase or retain their level of prime brokerage fees
paid to UBS Securities. The Complaint seeks a cease and desist order from
conduct that violates the Act and regulations, to censure UBS Securities, to
require UBS Securities to pay an administrative fine of an unspecified amount,
and to find as fact the allegations of the Complaint.





On June
26, 2008, the Massachusetts Securities Division filed an administrative
complaint and notice of adjudicatory proceeding against UBS Securities and UBS
Financial Services, Inc. (“UBS Financial”), captioned In the Matter of UBS
Securities, LLC and UBS Financial Services, Inc., Docket No. 2008-0045, which
alleged that UBS Securities and UBS Financial violated the Act in connection
with the marketing and sale of auction rate securities.





On July
22, 2008, the Texas State Securities board filed an administrative proceeding
against UBS Securities and UBS Financial captioned the Matter of the Dealer
Registrations of UBS Financial Services, Inc. and UBS Securities LLC, SOAH
Docket No. ###-##-####, SSB Docket No. 08-IC04, alleging violations of
the anti-fraud provision of the Texas Securities Act in connection with the
marketing and sale of auction rate securities.





On July
24, 2008 the New York Attorney General (“NYAG”) filed a complaint in Supreme
Court of the State of New York against UBS Securities and UBS Financial
captioned State of New York v. UBS Securities LLC and UBS Financial Services,
Inc., No. 650262/2008, in connection with UBS’s marketing and sale of auction
rate securities. The complaint alleges violations of the anti-fraud provisions
of New York state statutes and seeks a judgment ordering that the firm buy back
auction rate securities from investors at par, disgorgement, restitution and
other remedies.





On August
8, 2008, UBS Securities and UBS Financial reached agreements in principle with
the SEC, the NYAG, the Massachusetts Securities Division and other state
regulatory agencies represented by the North American Securities Administrators
Association (“NASAA”) to restore liquidity to all remaining client’s holdings of
auction rate securities by June 30, 2012. On August 20, 2008, the Texas
proceeding was dismissed and withdrawn. On October 2, 2008, UBS Securities and
UBS Financial entered into a final consent agreement with the Massachusetts
Securities Division settling all allegations in the Massachusetts Securities
Division’s administrative proceeding against UBS Securities and UBS Financial
with regards to the auction rate securities matter. On December 11, 2008, UBS
Securities and UBS Financial executed an Assurance of Discontinuance in the
auction rate securities settlement with the NYAG. On the same day, UBS
Securities and UBS Financial finalized settlements with the
SEC.


16


On August
14, 2008, the New Hampshire Bureau of Securities Regulation filed an
administrative action against UBS Securities relating to a student loan issuer,
the New Hampshire Higher Education Loan Corp. (“NHHELCO”). The complaint alleges
fraudulent and unethical conduct in violation of New Hampshire state statues.
The complaint seeks an administrative fine, a cease and desist order, and
restitution to NHHELCO. The claim does not impact the global settlement with the
SEC, NYAG and NASAA relating to the marketing and sale of auction rate
securities to investors.





Further,
UBS Securities, like most full service investment banks and broker-dealers,
receives inquiries and is sometimes involved in investigations by the SEC,
FINRA, the New York Stock Exchange (the “NYSE”) and various other regulatory
organizations, exchanges and government agencies. UBS Securities fully
cooperates with the authorities in all such requests. UBS Securities regularly
discloses to the FINRA arbitration awards, disciplinary action and regulatory
events. These disclosures are publicly available on the FINRA’s website at www.finra.org. Actions with
respect to UBS Securities’ futures commission merchant business are publicly
available on the website of the National Futures Association (http://www.nfa.futures.org/).





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.





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.





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.


17




*
            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 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. NAV is calculated by taking the
current market value of USOF’s total assets and subtracting any
liabilities.





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
      0.21 % of
assets




***
            USNG
      pays this compensation.





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.





Expenses
Paid by USNG through December 31, 2009 in dollar terms:





Expenses:
                                  
                                  Amount
      in Dollar TermsAmount
      Paid to General Partner:
                                  
                                  $19,802,761Amount
      Paid in Portfolio Brokerage Commissions:
                                  
                                  $12,603,078Other
      Amounts Paid*****:
                                  
                                  $8,074,997Total
      Expenses Paid or Accrued Including Expenses Waived:
                                  
                                  $40,480,836





*****
              Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.


18





Expenses
Paid by USNG through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                    
                    Amount
      as a Percentage
                      of
      AverageDaily
      Net AssetsAmount
      Paid to General Partner:
                    
                    0.55%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                    
                    0.35%
      annualizedOther
      Amounts Paid:
                    
                    0.23%
      annualizedTotal
      Expenses Paid:
                    
                    1.13%
      annualized





Other
Fees.  USNG also pays the fees and expenses associated with its
tax accounting and reporting requirements with the exception of certain initial
implementation service fees and base service fees which are paid by the General
Partner.  These fees are estimated to be $2.6 million for the fiscal
year ended December 31, 2009.  In addition, USNG is responsible for
the fees and expenses, which may include director and officers’ liability
insurance, of the independent directors of the General Partner in connection
with their activities with respect to USNG.  These director fees and
expenses may be shared with other funds managed by the General
Partner.  These fees and expenses for 2009 were $433,046, and USNG’s
portion of such fees was $159,942.





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 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.





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.


19




DTC has
advised USNG that it will take 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.





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 USNG;
      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.


20


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 NYSE Arca trading day. The NAV for a particular trading day is released
after 4:00 p.m. New York time. Trading during the core trading session on the
NYSE Arca typically closes at 4:00 p.m. New York time. The Administrator uses
the NYMEX closing price (determined at the earlier of the close of the NYMEX or
2:30 p.m. New York time) for the contracts traded on the NYMEX, but calculates
or determines the value of all other USNG investments as of the earlier of the
close of the NYSE Arca 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.




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 core trading session on each 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
active natural gas Futures Contracts on the NYMEX. The prices reported for those
Futures Contract months are adjusted based on the prior day’s spread
differential between settlement values for the relevant contract and the spot
month contract. In the event that the spot month contract is also the Benchmark
Futures Contract, the last sale price for that contract is not adjusted. The
indicative fund value unit basis disseminated during NYSE Arca core trading
session 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 based
upon the relevant end of day values of USNG’s investments.


21


The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular NYSE Arca core trading session hours of 9:30 a.m. New York time
to 4:00 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 solely according to changes in the Benchmark Futures Contract
for natural gas traded on the NYMEX.





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
after 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. Through December 31, 2009, 14 Authorized Purchasers had
entered into agreements with USNG. As of December 31, 2009, USNG issued 5,821
Creation Baskets and redeemed 1,326 Redemption Baskets.





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.


22


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 Marketing Agent will
publish such requirements at the beginning of each business day. 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.





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 is borne solely by the Authorized
Purchaser.


23





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 after 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.





Determination
of Redemption Distribution





The
redemption distribution from USNG consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and 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. The Marketing Agent will publish such requirements as of 4:00
p.m. New York time on the redemption order date.


24





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.





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.


25


Secondary
Market Transactions




As noted,
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 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 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 during
the core trading session on the NYSE Arca until 4:00 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, 2009, the total amount of money raised by
USNG from Authorized Purchasers was $10,435,093,775; the total number of
Authorized Purchasers was 14; the number of baskets purchased by Authorized
Purchasers was 5,821; the number of baskets redeemed by Authorized Purchasers
was 1,326; and the aggregate amount of units purchased was 582,100,000. 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 four subsequent
offerings of its units: 50,000,000 units which were registered with the SEC
on November 21, 2007, 100,000,000 units which were registered with the SEC on
August 28, 2008, 300,000,000 units which were registered with the SEC on May 6,
2009 and an additional 1,000,000,000 units which were registered with the SEC on
August 12, 2009. 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, 2009, USNG had issued 584,800,000 units, 449,500,000 of
which were outstanding.  As of December 31, 2009, there were
897,900,000 units registered but not yet issued.


26





Since the
offering of USNG units to the public on April 18, 2007 to December 31, 2009, the
simple average daily change in its Benchmark Futures Contract was -0.181%, while
the simple average daily change in the NAV of USNG over the same time period was
-0.179%. 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
0.392%, meaning that over this time period USNG’s tracking error was within the
plus or minus 10% range established as its benchmark tracking goal.





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




Dollar
      Amount Offered*:
                  
                  $
                  24,056,500,000Dollar
      Amount Raised:
                  
                  $
                  10,435,093,775Organizational
      and Offering Expenses**:SEC
      registration fee:
                  
                  $
                  1,361,084FINRA
      registration fee:
                  
                  $
                  377,500Listing
      fee:
                  
                  $
                  5,000Auditor’s
      fees and expenses:
                  
                  $
                  274,350Legal
      fees and expenses:
                  
                  $
                  1,614,956Printing
      expenses:
                  
                  $
                  73,270Length
      of USNG 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.


**
            Through
      April 18, 2007, these expenses were paid for by the General Partner.
      Following April 18, 2007, USNG has recorded these
  expenses.




Compensation
to the General Partner and Other Compensation USNG:





Expenses
paid by USNG through December 31, 2009 in dollar terms:





Expenses:
                            
                            Amount in Dollar TermsAmount
      Paid to General Partner:
                            
                            $
                            19,802,761Amount
      Paid in Portfolio Brokerage Commissions:
                            
                            $
                            12,603,078Other
      Amounts Paid *:
                            
                            $
                            8,074,997Total
      Expenses Paid:
                            
                            $
                            40,480,836





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.





Expenses:
                      
                      Amount as a Percentage
                        of Average Daily Net AssetsAmount
      Paid to General Partner in USNG Offering:
                      
                      0.55%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions in USNG Offering:
                      
                      0.35%
      annualizedOther
      Amounts Paid:
                      
                      0.23%
      annualizedTotal
      Expenses Paid:
                      
                      1.13%
      annualized


27





USNG Performance:Name
      of Commodity Pool:
                    
                    USNGType
      of Commodity Pool:
                    
                    Exchange
      traded securityInception
      of Trading:
                    
                    April
      18, 2007Aggregate
      Subscriptions(from
      inception throughDecember 31, 2009):
                    
                    $
                    10,435,093,775Total
      Net Assets as of December 31, 2009:
                    
                    $
                    4,525,107,163Initial
      NAV Per Unit as of Inception:
                    
                    $
                    50.00NAV
      per Unit as of December 31, 2009:
                    
                    $
                    10.07Worst
      Monthly Percentage Draw-down:
                    
                    July
      2008 (32.13)%Worst
      Peak-to-Valley Draw-down:
                    
                    June
      2008-November 2009 (85.89)%Number
      of Unitholders (as of December 31, 2009)
                    
                    
                    203,277





COMPOSITE
PERFORMANCE DATA FOR USNG





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                              
                              2007
                              
                              
                              
                              2008
                              
                              
                              
                              2009January
                              
                              _
                              
                              
                              
                              
                              8.87
                              
                              %
                              
                              
                              (21.49
                              )
                              %February
                              
                              _
                              
                              
                              
                              
                              15.87
                              
                              %
                              
                              
                              (5.47
                              )
                              %March
                              
                              _
                              
                              
                              
                              
                              6.90
                              
                              %
                              
                              
                              (11.81
                              )
                              %April
                              
                              
                              4.30
                              
                              %**
                              
                              
                              6.42
                              
                              %
                              
                              
                              (13.92
                              )
                              %May
                              
                              
                              (0.84
                              )
                              %
                              
                              
                              6.53
                              
                              %
                              
                              
                              10.37
                              
                              %June
                              
                              
                              (15.90
                              )
                              %
                              
                              
                              13.29
                              
                              %
                              
                              
                              (4.63
                              )
                              %July
                              
                              
                              (9.68
                              )
                              %
                              
                              
                              (32.13
                              )
                              %
                              
                              
                              (8.70
                              )
                              %August
                              
                              
                              (13.37
                              )
                              %
                              
                              
                              (13.92
                              )
                              %
                              
                              
                              (27.14
                              )
                              %September
                              
                              
                              12.28
                              
                              %
                              
                              
                              (9.67
                              )
                              %
                              
                              
                              26.03
                              
                              %October
                              
                              
                              12.09
                              
                              %
                              
                              
                              (12.34
                              )
                              %
                              
                              
                              (13.31
                              )
                              %November
                              
                              
                              (16.16
                              )
                              %
                              
                              
                              (6.31
                              )
                              %
                              
                              
                              (11.86
                              )
                              %December
                              
                              
                              0.75
                              
                              %
                              
                              
                              (14.32
                              )
                              %
                              
                              
                              13.91
                              
                              %Annual
      Rate of Return
                              
                              
                              (27.64
                              )
                              %**
                              
                              
                              (35.68
                              )
                              %
                              
                              
                              (56.73
                              )
                              %







*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.





**
            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.


28





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 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 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 may invest in a mixture of listed crude oil futures
contracts, other non-listed oil related investments, Treasuries, cash and cash
equivalents. As of December 31, 2009, the total amount of money raised by USOF
from its authorized purchasers was $24,257,292,570; the total number of
authorized purchasers of USOF was 17; the number of baskets purchased by
authorized purchasers of USOF was 4,752; the number of baskets redeemed by
authorized purchasers of USOF was 4,121; and the aggregate amount of units
purchased was 475,200,000. 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.





Since the
offering of USOF units to the public on April 10, 2006 to December 31, 2009, the
simple average daily change in its benchmark oil futures contract was -0.027%,
while the simple average daily change in the NAV of USOF over the same time
period was -0.022%. 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 oil futures contract, the average error in daily
tracking by the NAV was 1.56%, 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 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 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, 2009, the total amount of money raised
by US12OF from its authorized purchasers was $224,069,813; the total number of
authorized purchasers of US12OF was 4; the number of baskets purchased by
authorized purchasers of US12OF was 75; the number of baskets redeemed by
authorized purchasers of US12OF was 34; and the aggregate amount of units
purchased was 7,500,000. 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, 2009,
the simple average daily change in its Benchmark Futures Contracts was -0.004%,
while the simple average daily change in the NAV of US12OF over the same time
period was -0.003%. The average daily difference was 0.001% (or 0.1 basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement of the Benchmark Futures Contracts, the average error in daily tracking
by the NAV was -0.107%, meaning that over this time period US12OF’s tracking
error was within the plus or minus 10% range established as its benchmark
tracking goal.


29


UGA 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 in the spot 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, 2009, the total amount of money raised by UGA
from its authorized purchasers was $126,263,653; the total number of authorized
purchasers of UGA was 6; the number of baskets purchased by authorized
purchasers of UGA was 42; the number of baskets redeemed by authorized
purchasers of UGA was 23; and the aggregate amount of units purchased was
4,200,000. 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, 2009,
the simple average daily change in its benchmark futures contract was -0.011%,
while the simple average daily change in the NAV of UGA over the same time
period was -0.012%. The average daily difference was -0.001% (or -0.1 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 -0.674%, 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 for the changes in percentage terms of its units’ NAV to
reflect the changes in percentage terms of the spot 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, 2009, the total amount of money raised by
USHO from its authorized purchasers was $27,750,399; the total number of
authorized purchasers of USHO was 6; the number of baskets purchased by
authorized purchasers of USHO was 8; the number of baskets redeemed by
authorized purchasers of USHO was 2; and the aggregate amount of units purchased
was 800,000. 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.





Since the
offering of USHO units to the public on April 9, 2008 to December 31, 2009, the
simple average daily change in its benchmark futures contract was -0.093%, while
the simple average daily change in the NAV of USHO over the same time period was
-0.093%. The average daily difference was 0%. As a percentage of the daily
movement of the benchmark futures contract, the average error in daily tracking
by the NAV was -0.696%, meaning that over this time period USHO’s tracking error
was within the plus or minus 10% range established as its benchmark tracking
goal.





USSO is a
commodity pool and issues units traded on the NYSE Arca. The investment
objective of USSO is for the changes in percentage terms of its units’ NAV to
inversely 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 for light, sweet crude oil traded on the NYMEX, less
USSO’s expenses.  USSO’s units began trading on September 24, 2009 and
are offered on a continuous basis. USSO invests in short positions in listed
crude oil futures contracts, other non-listed oil related investments,
Treasuries, cash and cash equivalents. As of December 31, 2009, the total amount
of money raised by USSO from its authorized purchasers was $14,290,534; the
total number of authorized purchasers of USSO was 7; the number of baskets
purchased by authorized purchasers of USSO was 3; no baskets were redeemed by
authorized purchasers of USSO; and the aggregate amount of units purchased was
300,000. USSO employs an investment strategy in its operations that is similar
to the investment strategy of USNG, except that its benchmark is the inverse of
the near month contract for light, sweet crude oil delivered to Cushing,
Oklahoma.





Since the
offering of USSO units to the public on September 24, 2009 to December 31, 2009,
the inverse of the simple average daily change in its benchmark futures contract
was -0.164%, while the simple average daily change in the NAV of USSO over the
same time period was -0.167%. 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
inverse of the daily movement of the benchmark futures contract, the average
error in daily tracking by the NAV was -0.179%, meaning that over this time
period USSO’s tracking error was within the plus or minus 10% range established
as its benchmark tracking goal.





30




US12NG is
a commodity pool and issues units traded on the NYSE Arca. The investment
objective of US12NG for have the changes in percentage terms of its units’ 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 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.
US12NG’s units began trading on November 18, 2009 and are offered on a
continuous basis. US12NG invests in a mixture of listed natural gas futures
contracts, other non-listed natural gas related investments, Treasuries, cash
and cash equivalents. As of December 31, 2009, the total amount of money raised
by US12NG from its authorized purchasers was $40,652,355; the total number of
authorized purchasers of US12NG was 8; the number of baskets purchased by
authorized purchasers of US12NG was 2; the number of baskets redeemed by
authorized purchasers of US12NG was 1; and the aggregate amount of units
purchased was 800,000. US12NG 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 natural gas delivered at the Henry Hub,
Louisiana.





Since the
offering of US12NG units to the public on November 18, 2009 to December 31,
2009, the simple average daily change in its benchmark futures contract was
0.291%, while the simple average daily change in the NAV of US12NG over the same
time period was 0.287%. The average daily difference was -0.004 % (or -0.4 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 0.089%, meaning that over this time period US12NG’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, USBO and USCI. The investment objective of USBO would
be to have the daily changes in percentage terms of its units’ NAV
reflect the daily changes in percentage terms of the spot price of Brent crude
oil, as measured by the changes in the price of the futures contract on Brent
crude oil traded on the ICE Futures, less USBO’s expenses. The investment
objective of USCI will be for the changes in percentage terms of its units’ NAV
to reflect the changes in percentage terms of the SDCI Total Return, less USCI’s
expenses.





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, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                  
                  $
                  71,257,630,000Dollar
      Amount Raised:
                  
                  $
                  24,257,292,570Organizational
      and Offering Expenses**:SEC
      registration fee:
                  
                  $
                  2,480,174FINRA
      registration fee:
                  
                  $
                  603,500Listing
      fee:
                  
                  $
                  5,000Auditor’s
      fees and expenses:
                  
                  $
                  495,850Legal
      fees and expenses:
                  
                  $
                  2,040,875Printing
      expenses:
                  
                  $
                  285,230Length
      of USOF Offering:
                  
                  Continuous


31





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


**
            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 recorded these
  expenses.





Compensation
to the General Partner and Other Compensation USOF:





Expenses
Paid by USOF through December 31, 2009 in dollar terms:





Expenses:
                      
                      Amount in Dollar TermsAmount
      Paid to General Partner:
                      
                      $
                      20,842,027Amount
      Paid in Portfolio Brokerage Commissions:
                      
                      $
                      7,159,498Other
      Amounts Paid*:
                      
                      $
                      8,770,873Total
      Expenses Paid:
                      
                      $
                      36,772,398





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.





Expenses
Paid by USOF through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                                
                                Amount as a Percentage
                                  of AverageDaily Net AssetsAmount
      Paid to General Partner:
                                
                                0.46%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                                
                                0.16%
      annualizedOther
      Amounts Paid:
                                
                                0.19%
      annualizedTotal
      Expenses Paid:
                                
                                0.81%
      annualized




USOF Performance:Name
      of Commodity Pool:
                          
                          USOFType
      of Commodity Pool:
                          
                          Exchange
      traded securityInception
      of Trading:
                          
                          April
      10, 2006Aggregate
      Subscriptions (from inceptionthrough
      December 31, 2009):
                          
                          $
                          24,257,292,570Total
      Net Assets as of December 31, 2009:
                          
                          $
                          2,471,252,817Initial
      NAV Per Unit as of Inception:
                          
                          $
                          67.39NAV
      per Unit as of December 31, 2009:
                          
                          $
                          39.16Worst
      Monthly Percentage Draw-down:
                          
                          October
      2008 (31.57)%Worst
      Peak-to-Valley Draw-down:
                          
                          June
      2008 – February 2009 (75.84)%Number
      of Unitholders (as of December 31, 2009)
                          
                          
                          84,835


32





COMPOSITE
PERFORMANCE DATA FOR USOF





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2009January
                  
                  
                  –
                  
                  
                  
                  (6.55
                  )%
                  
                  
                  (4.00
                  )%
                  
                  
                  (14.60
                  )%February
                  
                  
                  –
                  
                  
                  
                  5.63
                  %
                  
                  
                  11.03
                  %
                  
                  
                  (6.55
                  )%March
                  
                  
                  –
                  
                  
                  
                  4.61
                  %
                  
                  
                  0.63
                  %
                  
                  
                  7.23
                  %April
                  
                  
                  3.47
                  %**
                  
                  
                  (4.26
                  )%
                  
                  
                  12.38
                  %
                  
                  
                  (2.38
                  )%May
                  
                  
                  (2.91
                  )%
                  
                  
                  (4.91
                  )%
                  
                  
                  12.80
                  %
                  
                  
                  26.69
                  %June
                  
                  
                  3.16
                  %
                  
                  
                  9.06
                  %
                  
                  
                  9.90
                  %
                  
                  
                  4.16
                  %July
                  
                  
                  (0.50
                  )%
                  
                  
                  10.57
                  %
                  
                  
                  (11.72
                  )%
                  
                  
                  (2.30
                  )%August
                  
                  
                  (6.97
                  )%
                  
                  
                  (4.95
                  )%
                  
                  
                  (6.75
                  )%
                  
                  
                  (1.98
                  )%September
                  
                  
                  (11.72
                  )%
                  
                  
                  12.11
                  %
                  
                  
                  (12.97
                  )%
                  
                  
                  0.25
                  %October
                  
                  
                  (8.45
                  )%
                  
                  
                  16.98
                  %
                  
                  
                  (31.57
                  )%
                  
                  
                  8.43
                  %November
                  
                  
                  4.73
                  %
                  
                  
                  (4.82
                  )%
                  
                  
                  (20.65
                  )%
                  
                  
                  (0.51
                  )%December
                  
                  
                  (5.21
                  )%
                  
                  
                  8.67
                  %
                  
                  
                  (22.16
                  )%
                  
                  
                  (0.03
                  )%Annual
      Rate of Return
                  
                  
                  (23.03
                  )%**
                  
                  
                  46.17
                  %
                  
                  
                  (54.75
                  )%
                  
                  
                  14.14
                  %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.





**
            Partial
      from April 10, 2006.





For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.





US12OF:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                    
                    $
                    3,718,000,000Dollar
      Amount Raised:
                    
                    $
                    224,069,815Organizational
      and Offering Expenses**:SEC registration
    fee:
                    
                    $
                    129,248FINRA registration
      fee:
                    
                    $
                    151,000Listing fee:
                    
                    $
                    5,000Auditor’s fees and
      expenses:
                    
                    $
                    60,700Legal fees and
      expenses:
                    
                    $
                    301,279Printing
expenses:
                    
                    $
                    44,402Length
      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.




33






**
            Through
      March 31, 2009, a portion of these expenses were paid for by an affiliate
      of the General Partner in connection with the initial public offering.
      Following March 31, 2009, US12OF has recorded these
    expenses.





Compensation
to the General Partner and Other Compensation US12OF:





Expenses
paid by US12OF through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  922,534Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  52,790Other
      Amounts Paid*:
                  
                  $
                  798,777Total
      Expenses Paid or Accrued:
                  
                  $
                  1,774,101Expenses
      Waived**:
                  
                  $
                  (108,246
                  )Net
      Expenses Paid or Accrued Including Expenses Waived:
                  
                  $
                  1,665,855





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.


**
            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 March 31,
      2009, after which date such payments were no longer necessary. The General
      Partner has no obligation to pay such expenses in subsequent
      periods.





Expenses
paid by US12OF through December 31, 2009 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:
                                
                                0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                                
                                0.03%
      annualizedOther
      Amounts Paid:
                                
                                0.52%
      annualizedTotal
      Expenses Paid or Accrued:
                                
                                1.15%
      annualizedExpenses
      Waived:
                                
                                (0.07)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                                
                                1.08%
      annualized





US12OF Performance:Name
      of Commodity Pool:
                  
                  US12OFType
      of Commodity Pool:
                  
                  Exchange
      traded securityInception
      of Trading:
                  
                  December
      6, 2007Aggregate
      Subscriptions (from inception through December 31, 2009):
                  
                  $
                  224,069,815Total
      Net Assets as of December 31, 2009:
                  
                  $
                  165,523,309Initial
      NAV per Unit as of Inception:
                  
                  $
                  50.00NAV
      per Unit as of December 31, 2009:
                  
                  $
                  40.37Worst
      Monthly Percentage Draw-down:
                  
                  October
      2008 (29.59)%Worst
      Peak-to-Valley Draw-down:
                  
                  June
      2008–February 2009 (66.97)%Number
      of Unitholders (as of December 31, 2009)
                  
                  
                  6,875


34





COMPOSITE
PERFORMANCE DATA FOR US12OF





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                            
                            2007
                            
                            
                            
                            2008
                            
                            
                            2009January
                            
                            
                            –
                            
                            
                            
                            
                            (2.03
                            )
                            %
                            
                            (7.11
                            )
                            %February
                            
                            
                            –
                            
                            
                            
                            
                            10.48
                            
                            %
                            
                            (4.34
                            )
                            %March
                            
                            
                            –
                            
                            
                            
                            
                            (0.66
                            )
                            %
                            
                            9.22
                            
                            %April
                            
                            
                            –
                            
                            
                            
                            
                            11.87
                            
                            %
                            
                            (1.06
                            )
                            %May
                            
                            
                            –
                            
                            
                            
                            
                            15.47
                            
                            %
                            
                            20.40
                            
                            %June
                            
                            
                            –
                            
                            
                            
                            
                            11.59
                            
                            %
                            
                            4.51
                            
                            %July
                            
                            
                            –
                            
                            
                            
                            
                            (11.39
                            )
                            %
                            
                            1.22
                            
                            %August
                            
                            
                            –
                            
                            
                            
                            
                            (6.35
                            )
                            %
                            
                            (2.85
                            )
                            %September
                            
                            
                            –
                            
                            
                            
                            
                            (13.12
                            )
                            %
                            
                            (0.92
                            )
                            %October
                            
                            
                            –
                            
                            
                            
                            
                            (29.59
                            )
                            %
                            
                            8.48
                            
                            %November
                            
                            
                            –
                            
                            
                            
                            
                            (16.17
                            )
                            %
                            
                            2.31
                            
                            %December
                            
                            
                            8.46
                            
                            %**
                            
                            
                            (12.66
                            )
                            %
                            
                            (1.10
                            )
                            %Annual
      Rate of Return
                            
                            
                            8.46
                            
                            %**
                            
                            
                            (42.39
                            )
                            %
                            
                            29.23
                            
                            %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.





**
            Partial
      from December 6, 2007.





For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”





UGA:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                  
                  $
                  1,500,000,000Dollar
      Amount Raised:
                  
                  $
                  126,263,653Organizational
      and Offering Expenses**:SEC
      registration fee:
                  
                  $
                  184,224FINRA
      registration fee:
                  
                  $
                  151,000Listing
      fee:
                  
                  $
                  5,000Auditor’s
      fees and expenses:
                  
                  $
                  27,500Legal
      fees and expenses:
                  
                  $
                  217,078Printing
      expenses:
                  
                  $
                  162,901Length
      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.


**
            Through
      August 31, 2009, initial offering costs and a portion of ongoing expenses
      were paid for by the General Partner. Following August 31, 2009, UGA has
      paid the full portion of expenses related to registration of new units and
      a portion of the expenses related to regular
  operations.


35





Compensation
to the General Partner and Other Compensation UGA:





Expenses paid by UGA through December 31, 2009 in dollar
terms:





Expenses:
                      
                      Amount in Dollar TermsAmount
      Paid to General Partner:
                      
                      $
                      474,543Amount
      Paid in Portfolio Brokerage Commissions:
                      
                      $
                      90,757Other
      Amounts Paid*:
                      
                      $
                      529,839Total
      Expenses Paid:
                      
                      $
                      1,095,139Expenses
      Waived**:
                      
                      $
                      (382,703
                      )Total
      Expenses Paid or Accrued Including Expenses Waived:
                      
                      $
                      712,436





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.


**
            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. The General Partner
      has no obligation to continue such payment into subsequent
      periods.





Expenses paid by UGA through December 31, 2009 as a
Percentage of Average Daily Net Assets:





Expenses:
                                
                                Amount as a Percentage
                                  of Average Daily Net AssetsAmount
      Paid to General Partner:
                                
                                0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                                
                                0.11%
      annualizedOther
      Amounts Paid:
                                
                                0.67%
      annualizedTotal
      Expenses Paid:
                                
                                1.38%
      annualizedExpenses
      Waived:
                                
                                (0.48)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                                
                                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, 2009):
                      
                      $
                      126,263,653Total
      Net Assets as of December 31, 2009:
                      
                      $
                      69,185,740Initial
      NAV per Unit as of Inception:
                      
                      $
                      50.00NAV
      per Unit as of December 31, 2009:
                      
                      $
                      36.41Worst
      Monthly Percentage Draw-down:
                      
                      October
      2008 (38.48%)Worst
      Peak-to-Valley Draw-down:
                      
                      June
      2008 – December 2008 (69.02%)Number
      of Unitholders (as of December 31, 2009)
                      
                      
                      5,131


36





COMPOSITE
PERFORMANCE DATA FOR UGA





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                              
                              2008
                              
                              
                              
                              2009January
                              
                              
                              –
                              
                              
                              
                              
                              16.23
                              
                              %February
                              
                              
                              (0.56
                              )
                              %**
                              
                              
                              0.26
                              
                              %March
                              
                              
                              (2.39
                              )
                              %
                              
                              
                              2.59
                              
                              %April
                              
                              
                              10.94
                              
                              %
                              
                              
                              2.07
                              
                              %May
                              
                              
                              15.60
                              
                              %
                              
                              
                              30.41
                              
                              %June
                              
                              
                              4.80
                              
                              %
                              
                              
                              1.65
                              
                              %July
                              
                              
                              (12.79
                              )
                              %
                              
                              
                              6.24
                              
                              %August
                              
                              
                              (3.88
                              )
                              %
                              
                              
                              (3.71
                              )
                              %September
                              
                              
                              (9.36
                              )
                              %
                              
                              
                              (3.38
                              )
                              %October
                              
                              
                              (38.48
                              )
                              %
                              
                              
                              10.96
                              
                              %November
                              
                              
                              (21.35
                              )
                              %
                              
                              
                              1.00
                              
                              %December
                              
                              
                              (15.72
                              )
                              %
                              
                              
                              0.55
                              
                              %Annual
      Rate of Return
                              
                              
                              (59.58
                              )
                              %**
                              
                              
                              80.16
                              
                              %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.




**
            Partial
      from February 26, 2008.





For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.





USHO:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                    
                    $
                    500,000,000Dollar
      Amount Raised:
                    
                    $
                    27,750,399Organizational
      and Offering Expenses**:SEC registration
    fee:
                    
                    $
                    142,234FINRA registration
      fee:
                    
                    $
                    151,000Listing fee:
                    
                    $
                    5,000Auditor’s fees and
      expenses:
                    
                    $
                    27,500Legal fees and
      expenses:
                    
                    $
                    121,321Printing
expenses:
                    
                    $
                    106,584Length
      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.


**
            Through
      August 31, 2009, initial offering costs and a portion of ongoing expenses
      were paid for by the General Partner. Following August 31, 2009, USHO has
      paid the full portion of expenses related to registration of new units and
      a portion of the expenses related to regular
  operations.


37





Compensation
to the General Partner and Other Compensation USHO:





Expenses
paid by USHO through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  109,681Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  18,418Other
      Amounts Paid*:
                  
                  $
                  333,904Total
      Expenses Paid:
                  
                  $
                  462,003Expenses
      Waived**:
                  
                  $
                  (299,225
                  )Total
      Expenses Paid or Accrued Including Expenses Waived:
                  
                  $
                  162,778





*
            Includes
      expenses relating to the registration of additional units, legal fees,
      auditing fees, printing expenses, licensing fees and tax reporting fees
      and fees paid to the independent directors of the General
      Partner.


**
            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. The General Partner
      has no obligation to continue such payment into subsequent
      periods.





Expenses
paid by USHO through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                          
                          Amount as a Percentage
                            of Average Daily Net AssetsAmount
      Paid to General Partner:
                          
                          0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                          
                          0.10%
      annualizedOther
      Amounts Paid:
                          
                          1.83%
      annualizedTotal
      Expenses Paid:
                          
                          2.53%
      annualizedExpenses
      Waived:
                          
                          (1.64)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                          
                          0.89%
      annualized





USHO Performance:Name
      of Commodity Pool:
                  
                  USHOType
      of Commodity Pool:
                  
                  Exchange
      traded securityInception
      of Trading:
                  
                  April
      9, 2008Aggregate
      Subscriptions (from inception through December 31, 2009):
                  
                  $
                  27,750,399Total
      Net Assets as of December 31, 2009:
                  
                  $
                  16,525,095Initial
      NAV per Unit as of Inception:
                  
                  $
                  50.00NAV
      per Unit as of December 31, 2009:
                  
                  $
                  27.54Worst
      Monthly Percentage Draw-down:
                  
                  October
      2008 (28.63)%Worst
      Peak-to-Valley Draw-down:
                  
                  June
      2008 – February 2009 (69.17)%Number
      of Unitholders (as of December 31, 2009)
                  
                  
                  1,154


38





COMPOSITE
PERFORMANCE DATA FOR USHO





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                        
                        2008
                        
                        
                        
                        2009January
                        
                        
                        –
                        
                        
                        
                        
                        0.05
                        
                        %February
                        
                        
                        –
                        
                        
                        
                        
                        (11.34
                        )
                        %March
                        
                        
                        –
                        
                        
                        
                        
                        6.73
                        
                        %April
                        
                        
                        2.84
                        
                        %**
                        
                        
                        (3.85
                        )
                        %May
                        
                        
                        15.93
                        
                        %
                        
                        
                        23.13
                        
                        %June
                        
                        
                        5.91
                        
                        %
                        
                        
                        4.55
                        
                        %July
                        
                        
                        (12.18
                        )
                        %
                        
                        
                        0.39
                        
                        %August
                        
                        
                        (8.41
                        )
                        %
                        
                        
                        (2.71
                        )
                        %September
                        
                        
                        (9.77
                        )
                        %
                        
                        
                        (0.48
                        )
                        %October
                        
                        
                        (28.63
                        )
                        %
                        
                        
                        7.60
                        
                        %November
                        
                        
                        (18.38
                        )
                        %
                        
                        
                        0.19
                        
                        %December
                        
                        
                        (17.80
                        )
                        %
                        
                        
                        2.23
                        
                        %Annual
      Rate of Return
                        
                        
                        (56.12
                        )
                        %**
                        
                        
                        25.52
                        
                        %





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.





**
            Partial
      from April 9, 2008.





For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.





USSO:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                            
                            $
                            1,500,000,000Dollar
      Amount Raised:
                            
                            $
                            14,290,534Organizational
      and Offering Expenses**:SEC
      registration fee:
                            
                            $
                            49,125FINRA
      registration fee:
                            
                            $
                            75,500Listing
      fee:
                            
                            $
                            5,000Auditor’s
      fees and expenses:
                            
                            $
                            0Legal
      fees and expenses:
                            
                            $
                            512,460Printing
      expenses:
                            
                            $
                            23,945Length
      of USSO 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.




39




Compensation
to the General Partner and Other Compensation USSO:





Expenses
paid by USSO through December 31, 2009 in dollar terms:





Expenses:
                    
                    Amount in Dollar TermsAmount
      Paid to General Partner:
                    
                    $
                    20,150Amount
      Paid in Portfolio Brokerage Commissions:
                    
                    $
                    4,695Other
      Amounts Paid*:
                    
                    $
                    212,443Total
      Expenses Paid:
                    
                    $
                    237,288Expenses
      Waived**:
                    
                    $
                    (206,444
                    )Total
      Expenses Paid or Accrued Including Expenses Waived:
                    
                    $
                    30,844





*
            Includes
      expenses relating to legal fees, auditing fees, printing expenses,
      licensing fees and tax reporting fees and fees paid to the independent
      directors of the General Partner.


**
            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 USSO’s NAV, on an annualized basis. The General Partner
      has no obligation to continue such payment into subsequent
      periods.





Expenses
paid by USSO through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                              
                              Amount as a Percentage
                                of Average Daily Net AssetsAmount
      Paid to General Partner:
                              
                              0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                              
                              0.14%
      annualizedOther
      Amounts Paid:
                              
                              6.33%
      annualizedTotal
      Expenses Paid:
                              
                              7.07%
      annualizedExpenses
      Waived:
                              
                              (6.15)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                              
                              0.92%
      annualized





USSO
      Performance:Name
      of Commodity Pool:
                            
                            USSOType
      of Commodity Pool:
                            
                            Exchange
      traded securityInception
      of Trading:
                            
                            September
      24, 2009Aggregate
      Subscriptions (from inception through December 31, 2009):
                            
                            $
                            14,290,534Total
      Net Assets as of December 31, 2009:
                            
                            $
                            13,196,305Initial
      NAV per Unit as of Inception:
                            
                            $
                            50.00NAV
      per Unit as of December 31, 2009:
                            
                            $
                            43.99Worst
      Monthly Percentage Draw-down:
                            
                            October
      2009 (8.65)%Worst
      Peak-to-Valley Draw-down:
                            
                            September
      2009-December 2009 (12.02)%Number
      of Unitholders (as of December 31, 2009)
                            
                            
                            185


40





COMPOSITE
PERFORMANCE DATA FOR USSO





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                  
                  2009January
                  
                  
                  –February
                  
                  
                  –March
                  
                  
                  –April
                  
                  
                  –May
                  
                  
                  –June
                  
                  
                  –July
                  
                  
                  –August
                  
                  
                  –September
                  
                  
                  (2.90
                  )%**October
                  
                  
                  (8.65
                  )%November
                  
                  
                  (0.25
                  )%December
                  
                  
                  (0.57
                  )%Annual
      Rate of Return
                  
                  
                  (12.02
                  )%**





*
              The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.


**
            Partial
      from September 24, 2009.





For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.





US12NG:





Experience
in Raising and Investing in Funds through December 31, 2009





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Dollar
      Amount Offered*:
                        
                        $
                        1,500,000,000Dollar
      Amount Raised:
                        
                        $
                        40,652,357Organizational
      and Offering Expenses**:SEC
      registration fee:
                        
                        $
                        82,445FINRA
      registration fee:
                        
                        $
                        75,500Listing
      fee:
                        
                        $
                        5,000Auditor’s
      fees and expenses:
                        
                        $
                        2,500Legal
      fees and expenses:
                        
                        $
                        202,252Printing
      expenses:
                        
                        $
                        31,588Length
      of US12NG 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.


41


Compensation to the General Partner and Other Compensation
US12NG:





Expenses
paid by US12NG through December 31, 2009 in dollar terms:





Expenses:
                  
                  Amount in Dollar TermsAmount
      Paid to General Partner:
                  
                  $
                  16,490Amount
      Paid in Portfolio Brokerage Commissions:
                  
                  $
                  9,284Other
      Amounts Paid*:
                  
                  $
                  141,553Total
      Expenses Paid:
                  
                  $
                  167,327Expenses
      Waived**:
                  
                  $
                  (136,678
                  )Total
      Expenses Paid or Accrued Including Expenses Waived:
                  
                  $
                  30,649





*
            Includes
      expenses relating to legal fees, auditing fees, printing expenses,
      licensing fees and tax reporting fees and fees paid to the independent
      directors of the General Partner.


**
            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 US12NG’s NAV, on an annualized basis. The General Partner
      has no obligation to continue such payment into subsequent
      periods.





Expenses
paid by US12NG through December 31, 2009 as a Percentage of Average Daily Net
Assets:





Expenses:
                          
                          Amount as a Percentage
                            of Average Daily Net AssetsAmount
      Paid to General Partner:
                          
                          0.60%
      annualizedAmount
      Paid in Portfolio Brokerage Commissions:
                          
                          0.34%
      annualizedOther
      Amounts Paid:
                          
                          5.15%
      annualizedTotal
      Expenses Paid:
                          
                          6.09%
      annualizedExpenses
      Waived:
                          
                          (4.97)%
      annualizedTotal
      Expenses Paid or Accrued Including Expenses Waived:
                          
                          1.12%
      annualized




US12NGPerformance:Name
      of Commodity Pool:
                  
                  US12NGType
      of Commodity Pool:
                  
                  Exchange
      traded securityInception
      of Trading:
                  
                  November
      18, 2009Aggregate
      Subscriptions (from inception through December 31, 2009):
                  
                  $
                  40,652,357Total
      Net Assets as of December 31, 2009:
                  
                  $
                  37,637,148Initial
      NAV per Unit as of Inception:
                  
                  $
                  50.00NAV
      per Unit as of December 31, 2009:
                  
                  $
                  53.77Worst
      Monthly Percentage Draw-down:
                  
                  
                  November
      2009Worst
      Peak-to-Valley Draw-down:
                  
                  
                  November
      2009Number
      of Unitholders (as of December 31, 2009)
                  
                  
                  November
      2009


42





COMPOSITE
PERFORMANCE DATA FOR US12NG





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Rates of return*Month
                      
                      2009January
                      
                      
                      -February
                      
                      
                      -March
                      
                      
                      -April
                      
                      
                      -May
                      
                      
                      -June
                      
                      
                      -July
                      
                      
                      -August
                      
                      
                      -September
                      
                      
                      -October
                      
                      
                      -November
                      
                      
                      (0.02
                      )
                      %**December
                      
                      
                      7.56
                      
                      %Annual
      Rate of Return
                      
                      
                      7.54
                      
                      %**





*
            The
      monthly rate of return is calculated by dividing the ending NAV of a given
      month by the ending NAV of the previous month, subtracting 1 and
      multiplying this number by 100 to arrive at a percentage increase or
      decrease.





**
            Partial
      from November 18, 2009.





For a
definition of draw-down, please see text below “Composite Performance Data for
USNG”.





Other
Related Commodity Trading and Investment Management Experience





Until
December 31, 2009, Ameristock Corporation was an affiliate of the General
Partner. Ameristock Corporation 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 $219,616,809 in assets as of December 31, 2009. Ameristock
Corporation was also the investment advisor to the Ameristock ETF Trust, an
open-end management investment company registered under the 1940 Act that
consisted of five separate investment portfolios, each of which sought
investment results, before fees and expenses, that corresponded 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 each of its investment portfolios and has wound 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.


43





The
General Partner deposits substantially all of USNG’s net assets with the
Custodian 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
10% to 30% 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.





USNG must
post both collateral and independent amounts to its swap
counterparties.  The amount of collateral USNG posts changes according
to the amounts owed by USNG to its counterparty on a given swap transaction,
while independent amounts are fixed amounts posted  by USNG at the
start of a swap transaction. Collateral and independent amounts posted to swap
counterparties are held by a third party custodian.





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.




Futures
Contracts




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.


44





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.




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 a 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.


45





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.




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.





Some swap
transactions are cleared through central counterparties.  These
transactions, known as cleared swaps, involve two counterparties first agreeing
to the terms of a swap transaction, then submitting the transaction to a
clearing house that acts as the central counterparty.  Once submitted
to the clearing house, the original swap transaction is novated and the central
counterparty becomes the counterparty to a trade with each of the original
parties based upon the trade terms determined in the original
transaction.  In this manner each individual swap counterparty reduces
its risk of loss due to counterparty nonperformance because the clearing house
acts as the counterparty to each transaction.


46





Participants




The two
broad classes of persons who trade commodities are hedgers and speculators.
Hedgers 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 hedger
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
hedger 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 it under the physical contract and close out his position by
making an offsetting sale of a futures contract.





The
commodity interest markets enable the hedger to shift the risk of price
fluctuations. The usual objective of the hedger 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 hedgers 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 hedger, 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 hedger
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 exchange 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.


47





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.





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.


48





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 hedger,
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
natural gas Futures Contracts (including investments in the Benchmark Futures
Contract) on the NYMEX is 12,000 contracts. The NYMEX also imposes position
limits on contracts held in the last few days of trading in the near month
contract to expire. The ICE Futures has recently adopted similar accountability
levels and position limits for certain of its Futures Contracts that are traded
on the ICE Futures and settled against the price of a contract listed for
trading on a U.S. designated contract market such as NYMEX.  In
particular, the Henry Hub natural gas contract on the ICE Futures is subjected
to the same accountability levels and positions limits as the NYMEX Henry Hub
natural gas contract upon which it settles as a result of the CFTC’s
determination in July 2009 that the ICE Futures Henry Hub contract was a
significant price discovery contract.  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.





On
January 26, 2010, the CFTC published a proposed rule that, if implemented, would
set fixed position limits on certain energy Futures Contracts including the
NYMEX Henry Hub natural gas futures contract, NYMEX Light Sweet crude oil
futures contract, NYMEX New York Harbor No. 2 heating oil futures contract, and
NYMEX RBOB gasoline futures contract, along with any contract based upon these
contracts.  The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined.  Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges.  This
proposal is currently undergoing a 90-day public comment
period.


49





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.




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.


50





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.




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. However, legislation
currently under consideration by the U.S. Congress would remove the exclusion
provided to these transactions and place them under federal
regulation.  The proposed legislation would subject these contracts to
new capital, margin, recordkeeping, and reporting requirements.


51





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.




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.  This extension of credit generally takes the
form of transfers of collateral and/or independent amounts. Collateral is
transferred between counterparties during the term of an over-the-counter
transaction based upon the changing value of the transaction, while independent
amounts are fixed amounts posted by one or both counterparties at the start of
an over-the-counter transaction.




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.


52





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.





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.





Intellectual
Property





The
General Partner owns trademark registrations for UNITED STATES NATURAL GAS FUND
(U.S. Reg. No. 3407494) for “fund investment services in the field of natural
gas futures contracts, cash-settled options on natural gas futures contracts,
forward contracts for natural gas, over-the-counter transactions based on the
price of natural gas, and indices based on the foregoing,” in use since April
18, 2007, and UNG UNITED STATES NATURAL GAS FUND, LP (and Flame Design) (U.S.
Reg. No. 3683574) for “fund investment services in the field of natural gas
futures contracts, cash-settled options on natural gas futures contracts,
forward contracts for natural gas, over-the-counter transactions based on the
price of natural gas, and indices based on the foregoing,” in use since April
18, 2007.  The General Partner also has filed a trademark application
to register USNG (U.S. App. Serial No. 77156040) based on an intent to use the
mark for “fund investment services in the field of natural gas futures
contracts, cash-settled options on natural gas futures contracts, forward
contracts for natural gas, over-the-counter transactions based on the price of
natural gas, and indices based on the foregoing.”  USNG relies upon
these trademarks through which it markets its services and strives to build and
maintain brand recognition in the market and among current and potential
investors.  So long as USNG continues to use these trademarks to
identify its services, without challenge from any third party, and properly
maintains and renews the trademark registrations under applicable laws, rules
and regulations, it will continue to have indefinite protection for these
trademarks under current laws, rules and 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:


53





·
            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.





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.


54





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 the 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 sell and 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.





·
            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.”


55





·
            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 Treasuries, cash and/or cash equivalents 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.





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.


56





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





The
changing nature of the hedgers 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 hedgers 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 some of 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.





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
design of USNG’s Benchmark Futures Contract is such that every month it begins
by using 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.


57





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.





In the
wake of the economic crisis of 2008 and 2009, the Administration, federal
regulators and Congress are revisiting the regulation of the financial sector,
including securities and commodities markets. These efforts are likely to result
in significant changes in the regulation of these markets.





Currently,
a number of proposals that would alter the regulation of Natural Gas Interests
are being considered by federal regulators and Congress. These proposals include
the imposition of fixed position limits on energy-based commodity futures
contracts, extension of position and accountability limits to futures contracts
on non-U.S. exchanges previously exempt from such limits, and the forced use of
clearinghouse mechanisms for all over-the-counter transactions. Certain
proposals would aggregate and limit all positions in energy futures held by a
single entity, whether such positions exist on U.S. futures exchanges, non-U.S.
futures exchanges, or in over-the-counter contracts. While it cannot be
predicted at this time what reforms will eventually be made or how they will
impact USNG, if any of the aforementioned proposals are implemented, USNG’s
ability to meet its investment objective may be negatively impacted and
investors could be adversely affected.





Additionally,
on January 26, 2010, the CFTC published a proposed rule that, if implemented,
would set fixed position limits on certain energy Futures Contracts including
the NYMEX Henry Hub natural gas futures contract, NYMEX Light Sweet crude oil
futures contract, NYMEX New York Harbor No. 2 heating oil futures contract, and
NYMEX RBOB gasoline futures contract, along with any contract based upon these
contracts.  The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined.  Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges.  This
proposal is currently undergoing a 90-day public comment period.





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 hedger’s opportunity to benefit from a favorable market movement. In
a hedging transaction, the hedger 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 hedger foregoes the opportunity to profit from favorable
price movements.


58





In
addition, if the hedge is not a perfect one, the hedger 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 hedger’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.


59





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. Howard Mah and John
Hyland.  If Messrs. Mah 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. Mah 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,
USBO and USCI. Mr. Mah is also employed by Ameristock Corporation, a registered
investment adviser that manages a public mutual fund. It is estimated that Mr.
Mah will spend approximately 90% of his time on USNG and Related Public Fund
matters.  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, Mah
and Hyland, as well as the other officers of the General Partner and its
Board of Directors.





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 natural gas futures
contracts (including investments 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 natural gas 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 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 natural gas futures contracts. This limit is initially
based off of the previous trading day’s settlement price. If any natural gas
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.





U.S.
futures exchanges, including the NYMEX, currently do not implement fixed
position limits for Futures Contracts held outside of the last few days of
trading in the near month contract to expire.  However, on January 26,
2010, the CFTC published a proposed rule that, if implemented, would set fixed
position limits on energy Futures Contracts, including the NYMEX Henry Hub
natural gas futures contract, NYMEX Light Sweet crude oil futures contract,
NYMEX New York Harbor No. 2 heating oil futures contract, and NYMEX RBOB
gasoline futures contract, along with any contract based upon these
contracts.  The proposed position limits would be set as a percentage
of the open interest in these contracts for the spot month, any single month,
and all months combined.  Additionally, the proposed rule would
aggregate positions in the enumerated contracts and those based upon such
contracts, including contracts listed on separate exchanges.  This
proposal is currently undergoing a 90-day public comment period.





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.


60





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 and Other
Natural Gas-Related Investments on the ICE Futures or other exchanges that trade
listed natural gas futures. The Futures Contracts available on the ICE Futures
are comparable to the contracts on the NYMEX, but they may have different
underlying commodities, sizes, deliveries, and prices. In addition, certain of
the Futures Contracts available on the ICE Futures are subject to accountability
levels and position limits.





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.





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.


61




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 USBO and the sponsor for
USCI, 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.




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
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 in 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.


62





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.




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.


63





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 0.43%, 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.




If
offerings of the units do 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 18, 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.





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 USNG
does not expect these conditions to improve in the near
future.





Currently
and throughout 2008 and 2009, the financial markets have experienced very
difficult conditions and volatility as well as significant adverse trends. The
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.


64





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.




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.


65





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, 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.





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.


66





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;





·
            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 high
of $13.577 on July 3, 2008 and dropped to a low of $2.508 on September 3,
2009.  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.


67





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.





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.  In addition, even if
collateral is used to reduce counterparty credit risk, sudden changes in the
value of over-the-counter transactions may leave a party open to financial risk
due to a counterparty default since the collateral held may not cover a party’s
exposure on the transaction in such situations.




Risk
of Trading in International Markets




Trading
in international markets could 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.


68





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.





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 itseconomic 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.


69





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.




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.
            Reserved.






Part
II





Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity 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 the AMEX and NYSE Arca, as
applicable, for the periods indicated below.




High
                    
                    
                    LowFiscal year 2009First
      quarter
                    
                    $
                    25.23
                    
                    
                    $
                    15.16Second
      quarter
                    
                    $
                    17.46
                    
                    
                    $
                    13.01Third
      quarter
                    
                    $
                    14.04
                    
                    
                    $
                    9.01Fourth
      quarter
                    
                    $
                    12.10
                    
                    
                    $
                    8.51





High
                    
                    
                    LowFiscal year 2008First
      quarter
                    
                    $
                    50.12
                    
                    
                    $
                    36.29Second
      quarter
                    
                    $
                    63.15
                    
                    
                    $
                    44.93Third
      quarter
                    
                    $
                    63.89
                    
                    
                    $
                    31.20Fourth
      quarter
                    
                    $
                    35.25
                    
                    
                    $
                    21.72


70




As of
December 31, 2009, USNG had 203,277 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 redeemed548 baskets (comprising
54,800,000 units) during the year ended December 31, 2009.





Item
      6.
            Selected
      Financial Data.





Financial
Highlights (for the years ended December 31, 2009, 2008 and 2007)





(Dollar
amounts in 000’s except for per unit information)





Year ended
                    December 31,
                    2009
                  
                  
                  Year ended
                    December 31,
                    2008
                  
                  
                  Year
      Ended
                    December 31,
                    2007Total
      assets
                  
                  $
                  4,549,283
                  
                  
                  $
                  706,337
                  
                  
                  $
                  594,010Net
      realized and unrealized gain (loss) on futurestransactions,
      inclusive of commissions
                  
                  $
                  (1,489,203
                  )
                  
                  $
                  (498,471
                  )
                  
                  $
                  (20,247
                  )Net
      realized and unrealized gain (loss) on swap contracts
                  
                  $
                  (78,423
                  )
                  
                  $
                  -
                  
                  
                  $
                  -Net
      income (loss)
                  
                  $
                  (1,584,776
                  )
                  
                  $
                  (492,205
                  )
                  
                  $
                  (13,592
                  )Weighted-average
      limited partnership units
                  
                  
                  229,963,288
                  
                  
                  
                  19,303,825
                  
                  
                  
                  7,644,574Net
      income (loss) per unit
                  
                  $
                  (13.20
                  )
                  
                  $
                  (12.91
                  )
                  
                  $
                  (13.82
                  )Net
      income (loss) per weighted average unit
                  
                  $
                  (6.89
                  )
                  
                  $
                  (25.50
                  )
                  
                  $
                  (1.78
                  )Cash
      and cash equivalents at end of year
                  
                  $
                  3,896,493
                  
                  
                  $
                  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.


71





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 for the
changes in percentage terms of its units’ NAV to 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 for
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 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 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. 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
and Other Natural Gas Related Investments.





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 is within two
weeks of expiration in which case the Benchmark Futures Contract becomes, over a
4-day period, 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
invests in Futures Contracts for 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 and Other Natural Gas-Related Investments. Due, in part,
to the increased size of USNG over the last several quarters and its obligation
to comply with regulatory limits, it is likely that it will invest in increased
numbers of Other Natural Gas-Related Investments in order to fulfill its
investment objective.





The
regulation of Natural Gas Interests in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental and judicial
action.  As stated under the heading “Risk Factors” in Item 1A of this
annual report on Form 10-K, regulation of the commodity interests and energy
markets is extensive and constantly changing; future regulatory developments in
the commodity interests and energy markets are impossible to predict but may
significantly and adversely affect USNG.





Currently,
a number of proposals to alter the regulation of Natural Gas Interests are being
considered by federal regulators and legislators.  These proposals
include the imposition of fixed position limits on energy-based commodity
futures contracts, the extension of position and accountability limits to
futures contracts on non-U.S. exchanges previously exempt from such limits, and
the forced use of clearinghouse mechanisms for all over-the-counter
transactions.  An additional proposal would aggregate and limit all
positions in energy futures held by a single entity, whether such positions
exist on U.S. futures exchanges, non-U.S. futures exchanges, or in
over-the-counter contracts. The CFTC has also recently published a proposed rule
that would impose fixed position limits on certain energy futures contracts
without the need for any new legislation to be passed. If any of the
aforementioned proposals is implemented, USNG’s ability to meet its investment
objective may be negatively impacted and investors could be adversely
affected.


72





In
addition, due to potential regulatory limitations, USNG may determine to hold
greater amounts of cash and cash equivalents and lesser amounts of Natural Gas
Interests, or greater amounts of Other Natural Gas-Related Investments if it
determines that will most appropriately satisfy USNG's investment
objective.  Holding more cash and cash equivalents and less Natural
Gas Interests, or more Other Natural Gas-Related Investments for some period of
time may result in increased tracking error. Increasing USNG’s investments in
Other Natural Gas-Related Investments, such as through increased investments in
over-the-counter swaps, may result in increased tracking error due to the fact
that transaction costs for over-the-counter swaps are significantly higher as
compared to those for exchange-traded Natural Gas Interests, which to date are
the principal investment of USNG.  In the event that USNG determines
that suitable Other Natural Gas-Related Investments are not obtainable, USNG
will need to consider other actions to protect its unitholders and to permit
USNG to achieve its investment objectives.





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 exhibited a general downtrend during the year ended
December 31, 2009. The price of the Benchmark Futures Contract started the year
at $5.622. It hit a peak on January 5, 2009 of $6.072 and then fell over the
course of the year. The low price of the year was on September 3, 2009 when
prices reached $2.508. The year ended with the Benchmark Futures Contract at
$5.572, down approximately -0.89% over the year. USNG’s NAV initially rose
during the year from a starting level of $23.27 per unit to a high on January 5,
2009 of $25.13 per unit. USNG’s NAV reached its low for the year on September 3,
2009 at $7.73 per unit. The NAV on December 31, 2009 was $10.07, down
approximately 56.73% over the year.





For the
first month of 2009, the natural gas futures market remained in a state of
backwardation, meaning that the price of the near month natural gas futures
contract was typically higher than the price of the next month natural gas
futures contract, or contracts further away from expiration. For the rest of the
first quarter and for the second and third and the majority of the fourth
quarters of 2009, the natural gas futures market moved into a contango
market.  The natural gas market finished the last few days of 2009 in
a mild state of backwardation.  A contango market is one in which the
price of the near month natural gas futures contract is less than the price of
the next month natural gas futures contract, or contracts further away from
expiration. As a result of contango or backwardation, as the case may be, the
return of approximately -0.89% on the Benchmark Futures Contract listed above is
a hypothetical return only and could not actually be achieved by an investor
holding futures contracts. 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’s units is calculated once each NYSE Arca trading day.  The
NAV for a particular trading day is released after 4:00 p.m. New York time.
Trading during the core trading session on the NYSE Arca typically closes at
4:00 p.m. New York time. The Administrator uses the NYMEX closing price
(determined at the earlier of the close of the NYMEX or 2:30 p.m. New York
time) for the contracts held on the NYMEX, but calculates or determines the
value of all other USNG investments, including cleared swaps, or other futures
contracts, as of the earlier of the close of the NYSE Area 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.


73





Since its
initial offering of 30,000,000 units, USNG has made four subsequent
offerings of its units: 50,000,000 units which were registered with the SEC
on November 21, 2007, 100,000,000 units which were registered with the SEC on
August 28, 2008, 300,000,000 units which were registered with the SEC on May 6,
2009 and an additional 1,000,000,000 units which were registered with the SEC on
August 12, 2009. On August 11, 2009, USNG’s management determined to suspend
offerings of USNG’s units since it could not invest the proceeds from such
offerings in investments that would permit it to meet its investment objective
due to current and anticipated new regulatory restrictions and limitations on
its investments in Futures Contracts. This suspension of creation activity
may have led to an increase in USNG’s tracking error and, at times, a greater
premium paid for transactions in its units on the NYSE Arca when compared to its
per unit NAV on the same day. On September 28, 2009, USNG resumed offerings
of units subject to certain limitations including that (1) USNG may require
Authorized Purchasers of its units to sell USNG specified investments, including
the arrangement of an over-the-counter swap contract between the Authorized
Purchaser and USNG, (2) USNG may limit its issuance of creation baskets to an
Authorized Purchaser to a specified minimum or maximum number of baskets, (3)
USNG’s management may vary the terms and conditions of investments to be
delivered or arranged by an Authorized Purchaser in order to purchase a creation
basket and (4) USNG’s management may decide to offer creation baskets only on
particular days. Units offered by USNG in the subsequent offerings were sold by
it for cash at the units’ NAV as described in the applicable
prospectus.  As of December 31, 2009, USNG had issued 584,800,000
units, 449,500,000 of which were outstanding. As of December 31, 2009, there
were 897,900,000 units registered but not yet issued.





More
units may have been issued by USNG than are outstanding due to the redemption of
units. Unlike 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
additional offerings of its units will be registered with the SEC in the
future in anticipation of additional issuances and redemptions.





For the Year Ended December
31, 2009 Compared to the Year Ended December 31, 2008 and the Period from April
18, 2007 to December 31, 2007





As of
December 31, 2009, the total unrealized loss on natural gas Futures
Contracts, cleared swap contracts and over-the-counter swap contracts owned or
held on that day was $81,185,953 and USNG established cash deposits,
including cash investments in money market funds, that were equal to
$4,630,186,857.  USNG held 84.15% of its cash assets in overnight
deposits and money market funds at the Custodian, while 15.85% of the cash
balance was held as margin deposits for the Futures Contracts purchased. The
ending per unit NAV on December 31, 2009 was $10.07.





By
comparison, 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. USNG held 58.85% of its cash assets in
overnight deposits and money market funds at the 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. The decrease in the per
unit NAV from December 31, 2008 to December 31, 2009 was primarily a result of
sharply lower prices for natural gas and the related decline in the value of the
Futures Contracts that USNG had invested in between the year ended December 31,
2008 and the year ended December 31, 2009.





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. USNG held 85.15% of its cash assets in
overnight deposits and money market funds at the Custodian, while 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 decrease
in the per unit NAV from December 31, 2007 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 between the
year ended December 31, 2007 and the year ended December 31, 2008.





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


74





During
the year ended December 31, 2009, the daily average total net assets
of USNG were $2,654,193,655. The management fee paid by USNG
during the year amounted to $14,189,176.





By
comparison, during the year ended December 31, 2008, the daily average total net
assets of USNG were $732,301,901.  The management fee paid
by USNG for the year ended December 31, 2008 amounted to $4,373,723, which was
calculated at the 0.60% rate on 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 year ended December 31, 2008. USNG’s management fees as a
percentage of total net assets were higher for the year ended December 31, 2008
compared to the year ended December 31, 2009 due to a combination of lower daily
total net assets.





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.  The
management fee paid by USNG during the period ended December 31, 2007 amounted
to $1,239,862, which was calculated at the 0.60% rate on 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 fees as a percentage of total net assets
averaged 0.60% over the course of the period. USNG’s management fees 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 all brokerage fees, transaction
costs for over-the-counter swaps 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 and expenses for the
year ended December 31, 2009 was $17,217,527, as compared to $2,655,089 for the
year ended December 31, 2008 and $805,459 for the period ended December 31,
2007. The increase in expenses during the year ended December 31, 2009 was
primarily due to the relative size of USNG and activity that resulted from its
increased size, including the registration and the offering of additional units,
increased brokerage fees, increased transaction costs for over-the-counter
swaps, increased licensing fees and increased tax reporting costs due to the
greater number of unitholders during each year.  For the year ended
December 31, 2009, USNG incurred $1,223,978 in ongoing registration fees and
other expenses relating to the registration and offering of additional
units.  By comparison, for the year ended December 31, 2008 and the
period April 18, 2007 to December 31, 2007, USNG incurred $348,874 and $41,980,
respectively, in ongoing registration fees and other expenses relating to the
registration and offering of additional units.





USNG is
responsible for paying its portion of the directors’ and officers’
liability insurance of the General Partner and the fees and expenses of the
independent directors of the General Partner who are also the General Partner’s
audit committee members.  USNG shares these fees and expenses with
the Related Public Funds based on the relative assets of each fund computed
on a daily basis. These fees and expenses for the calendar year 2009 amounted to
a total of $433,046 for all funds, and USNG’s portion of such fees and expenses
was $159,942.





By
comparison, for the year ended December 31, 2008, these fees and expenses
amounted to $282,000 and USNG’s portion of such fees and expenses was
$130,107.  The increase in directors’ expenses incurred by USNG from
the year ended December 31, 2008 compared to the year ended December 31, 2009
was primarily due to payment for directors’ and officers’ liability insurance
and an increase in the compensation awarded to the independent directors of the
General Partner.  Effective as of March 3, 2009, the General Partner
obtained directors’ and officers’ liability insurance covering all of the
directors and officers of the General Partner.  Previously, the
General Partner did not have liability insurance for its directors and officers;
instead, the independent directors received a payment in lieu of directors’ and
officers’ liability insurance coverage.





By
comparison, for the year ended December 31, 2007, these fees and expenses
amounted to a total of $286,000 for all funds, and USNG’s portion of such fees
and expenses was $58,380.  The increase in directors’ expenses
incurred by USNG from the year ended December 31, 2007 compared to the year
ended December 31, 2008 was due to the proportionate sharing of these fees and
expenses with the Related Public Funds.


75





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, 2009, total commissions paid to brokers amounted to $11,384,593. By
comparison, during the year ended December 31, 2008 and the period April 18,
2007 to December 31, 2007, total commissions paid to brokers amounted to
$867,175 and $351,310, respectively. The increase in the total commissions paid
to brokers was primarily a function of increased brokerage fees due to a higher
number if Natural Gas Interests being held and traded as a result of the
increase in USNG’s average total net assets and the increase in redemptions and
creations of units during each year.  The increase in assets required
USNG to purchase a greater number of Natural Gas Interests and incur a larger
amount of commissions. As an annualized percentage of total net assets,
the figure for the year ended December 31, 2009 represents approximately
0.43% of total net assets. By comparison, the figure for the year ended December
31, 2008 represented approximately 0.12% of total net assets and the figure for
the year ended December 31, 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.





USNG’s
transaction fees also increased during the year ended December 31, 2009, due to
the increased investment in Other Natural Gas-Related Investments, including
over-the-counter swaps, during the period.  In particular, the
transaction costs for over-the-counter swaps, including up front fees and
spreads charged by counterparties, are significantly higher as compared to those
for exchange-traded Natural Gas Interests, which, through December 31, 2009, are
the principal investments of USNG.  USNG incurred 3,752,890 in
transaction costs during the year ended December 31, 2009 as compared to no
transaction costs for the year ended December 31, 2008.




The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements are paid by USNG. These costs are estimated to be
$1.2 million for the year ended December 31, 2009.




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 its
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 the year ended December 31, 2009,
USNG earned $2,687,716 in interest income on such cash holdings. Based on USNG’s
average daily total net assets, this is equivalent to an annualized yield of
0.10%. USNG did purchase Treasuries during 2009 and held cash and/or cash
equivalents during this time period.  By comparison, during the years
ended December 31, 2008 and December 31, 2007, USNG earned $12,225,534 and
$8,242,264, respectively, in interest income on such cash holdings. Based on
USNG’s average daily total net assets, this was equivalent to an annualized
yield of 1.67% and 3.99%, respectively. Interest rates on short-term investments
in the United States, including cash, cash equivalents and short-term Treasuries
were sharply lower in 2009 compared to the same time periods in 2008 and 2007.
As a result, the amount of interest earned by USNG as a percentage of total net
assets was lower during the year ended December 31, 2009 compared to the years
ended December 31, 2008 and 2007.





For the Three Months Ended
December 31, 2009 Compared to the Three Months Ended December 31, 2008 and
2007




During
the three months ended December 31, 2009, the daily average total net assets
of USNG were $3,978,328,152.  The management fee paid by USNG
during the period amounted to $5,265,838. Management fees as a percentage of
total net assets averaged 0.53% over the three months ended December 31,
2009.





By
comparison, 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, the total net assets of USNG exceeded $1
billion.  The management fee paid by USNG for the three months ended
December 31, 2008 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 average net assets over $1 billion, and accrued daily. Management fees as a
percentage of total net assets averaged 0.60% over the course of the three
months ended December 31, 2008.  USNG’s management fees as a
percentage for total net assets were lower for the three months ended December
31, 2009 compared to the three months ended December 31, 2008 due to USNG’s
having had a limited number of days in which total net assets exceeded $1
billion.


76





By
comparison, during the three months ended December 31, 2007, the daily average
total net assets of USNG were $525,339,178.  The management fee
paid by USNG for the three months ended December 31, 2007 amounted to $794,486,
which was calculated at the 0.60% rate, and accrued daily. Management fees as a
percentage of total net assets averaged 0.60% over the course of the three
months ended December 31, 2007.  USNG’s management fees in dollar
terms were lower during the three months ended December 31, 2007 compared to the
three months ended December 31, 2008 due primarily to lower daily total net
assets compared to the three months ended December 31, 2008.





In
addition to the management fee, USNG pays all brokerage fees, transaction
costs for over-the-counter swaps, 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 and expenses for
the three months ended December 31, 2009 was $3,357,523 as compared to $912,384
for the three months ended December 31, 2008 and $549,874 for the three months
ended December 31, 2007.  The increase in expenses during the three
months ended December 31, 2009 to the three months ended December 31, 2008 and
December 31, 2007 was primarily due to the relative size of USNG and activity
that resulted from its increased size, including the registration and the
offering of additional units, increased brokerage fees, increased transaction
costs for over-the-counter swaps, increased licensing fees and increased tax
reporting costs due to the greater number of unitholders during the
period.  For the three months ended December 31, 2009, USNG incurred
$137,500 in ongoing registration fees and other expenses relating to the
registration and offering of additional units.  By comparison, for
the three months ended December 31, 2008 and December 31, 2007,
USNG incurred $132,175 and $41,980, respectively in ongoing registration
fees and other expenses relating to the registration and offering of additional
units.





USNG is
responsible for paying its portion of the directors’ and officers’
liability insurance of the General Partner and the fees and expenses of the
independent directors of the General Partner who are also the General Partner’s
audit committee members.  USNG shares these fees and expenses with
the Related Public Funds based on the relative assets of each fund computed
on a daily basis.  These fees and expenses for the three months ended
December 31, 2009 amounted to a total of $119,250 for all funds, and USNG’s
portion of such fees and expenses was $49,278.





By
comparison, for the three months ended December 31, 2008, these fees and
expenses amounted to a total of $68,750 for all funds, and USNG’s portion of
such fees and expenses was $29,210. The increase in directors’ expenses incurred
by USNG from the three months ended December 31, 2008 compared to the three
months ended December 31, 2009 was primarily due to payment for directors’ and
officers’ liability insurance and an increase in the compensation awarded to the
independent directors of the General Partner.  Effective as of March
3, 2009, the General Partner obtained directors’ and officers’ liability
insurance covering all of the directors and officers of the General
Partner.  Previously, the General Partner did not have liability
insurance for its directors and officers, instead, the independent directors
received a payment in lieu of directors’ and officers’ liability insurance
coverage.





By
comparison, for the three months ended December 31, 2007, these fees and
expenses amounted to a total of $68,750 for all funds and USNG’s portion of such
fees and expenses was $37,184.  The increase in directors’ fees and
expenses incurred by USNG from the three months ended December 31, 2007 to the
three months ended December 31, 2008 was due to the proportionate sharing of
these fees and expense with the Related Public Funds.


77





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, 2009, total commissions paid to brokers amounted to
$1,680,131.  By comparison, during the three months ended December 31,
2008 and December 31, 2007, total commissions paid to brokers amounted to
$262,441 and $192,776, respectively.  The increase in total
commissions paid to brokers was primarily a function of increased brokerage fees
due to a higher number of Natural Gas Interests being held and traded as a
result of the increase in USNG’s average total net assets and the decrease in
the price of Natural Gas Interests and the increase in redemptions and creations
of units during each period. The increase in assets required USNG to purchase a
greater number of Natural Gas Interest and incur a larger amount of
commissions.  As an annualized percentage of total net assets, the
figure for the three months ended December 31, 2009 represents approximately
0.17% of total net assets.  By comparison, the figure for the
three months ended December 31, 2008 represented approximately 0.13% of total
net assets and the figure for the three months ended December 31, 2007
represented approximately 0.15% 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.





USNG’s
transaction fees also increased during the three months ended December 31, 2009
due to the increased investment in Other Natural Gas-Related Investments,
including over-the-counter swaps, during that period. In particular, the
transaction costs for over-the-counter swaps, including up front fees and
spreads charged by counterparties, are significantly higher as compared to those
for exchange-traded Natural Gas Interests, which, through December 31, 2009,
date are the principal investment of USNG. USNG incurred $2,400,873 in
transaction costs during the three months ended December 31, 2009 as compared to
no transaction costs during the three months ended December 31,
2008.




The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements are paid by USNG. No amounts were required to be
paid for audit expenses and tax accounting and reporting requirements for the
three months ended December 31, 2009.





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 its
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 the three months ended December 31,
2009, USNG earned $446,184 in interest income on such cash holdings. Based on
USNG’s average daily total net assets, this was equivalent to an annualized
yield of 0.04%. USNG did purchase Treasuries during the three months ended
December 31, 2009 and held cash and/or cash equivalents during this time
period.  By comparison, for the three months ended December 31, 2008
and 2007 USNG earned $1,845,515 and $4,955,246, respectively, in interest income
on such cash holdings.  Based on USNG’s average daily total net
assets, this was equivalent to an annualized yield of 0.92% and 3.74%,
respectively. USNG did not purchase Treasuries during the three months
ended December 31, 2008 or 2007 and held all of its funds in cash and/or cash
equivalents during these time periods. 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, 2009 compared to the
same time periods during 2008 and 2007. As a result, the amount of interest
earned by USNG as a percentage of total net assets was lower during the three
months ended December 31, 2009 compared to the three months ended December 31,
2008 and 2007.





Tracking USNG’s Benchmark.
USNG seeks to manage its portfolio such that changes in its average daily NAV,
on a percentage basis, closely track the 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 in the price 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 and Other Natural Gas-Related Investments.


78





For the
30 valuation days ended December 31, 2009, the simple average daily change in
the Benchmark Futures Contract was 0.473%, while the simple average daily change
in the NAV of USNG over the same time period was 0.469%. The average daily
difference was -0.004% (or -0.4 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 0.092%, 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 ended December 31, 2009.











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS


79











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Since the
offering of USNG units to the public on April 18, 2007 to December 31, 2009, the
simple average daily change in its Benchmark Futures Contract was -0.181%, while
the simple average daily change in the NAV of USNG over the same time period was
-0.179%. 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
0.392%, 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.





For the
year ended December 31, 2009, the actual total return of USNG as measured
by changes in its NAV was -56.73%. This is based on an initial NAV of
$23.27 on December 31, 2008 and an ending NAV as of December 31,
2009 of $10.07. 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 2009 with an estimated NAV of $10.19, for a total return over
the relevant time period of    -56.19%. The difference
between the actual NAV total return of USNG of -56.73% and the expected total
return based on the Benchmark Futures Contract of -56.19% was an error over the
time period of -0.54%, which is to say that USNG’s actual total return trailed
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 net impact of the expenses and the interest that
USNG collects on its cash and cash equivalent holdings.  During the
year ended December 31, 2009, USNG received interest income of $2,687,716,
which is equivalent to a weighted average interest rate of 0.10% for 2009. In
addition, during the year ended December 31, 2009, USNG also collected $185,000
from its Authorized Purchasers creating or redeeming baskets of units. This
income also contributed to USNG’s actual return. 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.  During the year ended December 31, 2009, USNG
incurred total expenses of $31,406,703. Income from interest and Authorized
Purchaser collections net of expenses was $(28,533,987) which is equivalent to a
weighted average net interest rate of -1.08% for the year ended December 31,
2009.


80





By
comparison, 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 collected on
its cash and cash equivalent holdings.  During the year ended December
31, 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 its Authorized
Purchasers creating or redeeming baskets of units. During the year ended
December 31, 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 year ended 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 its Authorized Purchasers creating or redeeming baskets of units.
This income also contributed to USNG’s actual return.  During 2007,
USNG incurred total expenses of $2,045,312.  Income from interest and
Authorized Purchaser collections net of expenses was $6,303,943, which is
equivalent to a weighted average net interest rate of 3.05% for
2007.





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
during 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 2009, management
attempted to minimize the effect of these transactions by seeking to execute its
purchase or sale 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.


81





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 distributions to unitholders in 2009. 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 2009, USNG
earned, on an annualized basis, approximately 0.10% on its cash holdings. It
also incurred cash expenses on an annualized basis of 0.53% for management fees
and approximately 0.43% in brokerage commission costs related to the purchase
and sale of futures contracts, and 0.22% for other expenses. The foregoing fees
and expenses resulted in a net yield on an annualized basis of approximately
-1.08% 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 decrease. Conversely, if short-term interest rates were to
decline, the amount of error created by the yield would increase. When
short-term yields drop to a level lower than the combined expenses of the
management fee and the brokerage commissions, then the tracking error becomes a
negative number and would tend to cause the daily returns of the NAV to
underperform the daily returns of the Benchmark Futures Contract.





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
the year ended December 31, 2009, USNG held Other Natural Gas-Related
Investments. These holdings included a financially settled natural gas futures
contract traded on NYMEX whose settlement price tracks the settlement price of
the Benchmark Futures Contract. USNG also held investments in cleared swaps
traded on the ICE Futures whose settlement price also tracks the settlement
price of the Benchmark Futures Contract and fully-collateralized
over-the-counter swaps designed to track the settlement price of the Benchmark
Futures Contract.  Due, in part, to the increased size of USNG over
the last several quarters and its obligations to comply with regulatory limits,
USNG has invested in Other Natural Gas-Related Investments, such as
over-the-counter swaps, which have increased transaction-related expenses and
may result in increased tracking error. Over-the-counter swaps increase
transaction-related expenses due to the fact that USNG must pay to the swap
counterparty certain fees that USNG does not have to pay for transactions
executed on an exchange. Finally, due to potential regulatory limitations, USNG
may determine to hold greater amounts of cash and cash equivalents and lesser
amounts of Natural Gas Interests, if it determines that will most appropriately
satisfy USNG’s investment objective. Holding more cash and cash equivalents and
less Natural Gas Interests for some period of time may result in increased
tracking error.  There are additional Other Natural Gas-Related
Investments that USNG is permitted to invest in whose price movements may not
track the settlement price of the Benchmark Futures Contract.




On August
12, 2009, USNG’s management determined to suspend offerings of USNG’s units
since it could not invest the proceeds from such offerings in investments that
would permit it to meet USNG’s investment objective due to current and
anticipated new regulatory restrictions and limitations. As a result of this
suspension of creation activity, USNG’s shares may have been trading at a
premium during a portion of the period from August 12, 2009 to September 28,
2009, when creation activity resumed subject to certain
limitations.  These limitations included the following: (1) USNG may
require Authorized Purchasers of its units to sell USNG specified investments,
including the arrangement of an over-the-counter swap contract between the
Authorized Purchaser and USNG, (2) USNG may limit its issuance of Creation
Baskets to an Authorized Purchaser to a specified minimum or maximum number of
baskets, (3) USNG’s management may vary the terms and conditions of investments
to be delivered or arranged by an Authorized Purchaser in order to purchase a
Creation Basket and (4) USNG’s management may decide to offer Creation Baskets
only on particular days. The trading of USNG’s units at a premium may have
caused an increase in tracking error.





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 next
month contract. 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.


82





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 position in a near month contract 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.





The chart
below compares the price of the near month contract to the average price of
the near 12 month over the last 10 years (2000-2009) for natural
gas. When the price of the near month contract is higher than the average price
of the near 12 month contracts, the market would be described as being in
backwardation. When the price of the near month contract is lower than the
average price of the near 12 month contracts, the market would be described as
being in contango. Although the prices of the near month contract and the
average price of the near 12 month contracts do tend to move up or down
together, it can be seen that at times the near month prices are clearly higher
than the average price of the near 12 month contracts (backwardation), and other
times they are below the average price of the near 12 month contracts
(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.


83











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





An
alternative 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 near 12 month natural gas Futures Contracts. If the resulting
number is a positive number, then the near month price is higher than the
average price of the near 12 months and the market could be described as being
in backwardation. If the resulting number is a negative number, then the near
month price is lower than the average price of the near 12 months and the market
could be described as being in contango. The chart below shows the results from
subtracting the average dollar price of the near 12 month contracts from the
near month price for the 10 year period between 2000 and 2009. 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 average price of the near 12 month contracts is
higher than the near 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 near month, when that month is just
before the
onset of winter, does not rise as far or as fast as the average price of the
near 12 month contracts whose delivery falls during the winter
season.




84











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




An
investment in a portfolio that involved owning only the near month contract
would likely produce a different result than an investment in a portfolio that
owned an equal number of each of the near 12 months’ worth of contracts.
Generally speaking, when the natural gas futures market is in backwardation, the
near month only portfolio would tend to have a higher total return than the 12
month portfolio. Conversely, if the natural gas futures market was in contango,
the portfolio containing 12 months’ worth of contracts would tend to outperform
the near month only portfolio. The chart below shows the results of owning a
portfolio consisting of the near month contract versus a portfolio containing
the near 12 months’ worth of contracts. In this example, each month, the near
month only portfolio would sell the near month contract at expiration and buy
the next month out contract. The portfolio holding an equal number of the near
12 months’ worth of the contracts would sell the near month contract at
expiration and replace it with the contract that becomes the new twelfth month
contract.


85











*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





As seen
in the chart above, there have been periods of both positive and negative annual
total returns for both hypothetical portfolios over the last 10 years. In
addition, there have been periods during which the near month only approach had
higher returns, and periods where the 12 month approach had higher total
returns. The above chart does not represent the performance history of US12NG or
any affiliated funds.





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 impacted the total return on
an investment in USNG units during the year ended December 31, 2009 relative
to a hypothetical direct investment in natural gas. For example, an
investment in USNG units made on December 31, 2008 and held to December 31, 2009
decreased, based upon the changes in the NAV for USNG units on those days, by
approximately 56.73%, while the spot price of natural gas for immediate delivery
during the same period decreased by approximately 80.16% (note: this comparison
ignores the potential costs associated with physically owning and storing
natural gas, which could be substantial). By comparison, during the year
ended December 31, 2008 and the period from April 18, 2007 to December 31, 2007,
contango 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).


86





Periods
of contango or backwardation do not materially impact USNG’s investment
objective of having the  percentage changes in its per unit NAV track
the 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, 2009, natural gas prices in the United States were
impacted by several factors.  At the beginning of the first quarter of
2009, the amount of natural gas in storage was at higher than average levels
versus the previous five years. During all of 2009, the seasonally adjusted
inventory levels of stored natural gas remained above five-year averages. 
In addition, a combination of slowing U.S. economic growth and increased natural
gas production all contributed to a very significant decline in natural gas
prices during most of 2009, with prices reaching a low of $2.508 near the end of
the third quarter before finally ending the year with a price of
$5.572.





By
comparison, 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.




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.


87





For the
ten year time period between 2000 and 2009, the chart below compares the monthly
movements of natural gas prices versus the monthly movements of the prices of
several other energy commodities, such as 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, but weak, correlation to
movements in heating oil. Finally, natural gas had a positive, but very weak,
correlation with crude oil was not strongly correlated, either positively or
negatively with and unleaded gasoline.





10 Year Correlation
                        Matrix 2000-2009
                      
                      Large
                        Cap
                        U.S.
                        Equities
                        (S&P
                        500)
                      
                      
                      U.S. Govt.
                        Bonds
                        (EFFAS
                        U.S.
                        Government
                        Bond Index)
                      
                      
                      Global
                        Equities
                        (FTSE
                        World
                        Index)
                      
                      
                      Crude
                        Oil
                      
                      
                      Heating
                        Oil
                      
                      
                      Unleaded
                        Gasoline
                      
                      
                      Natural
                        GasLarge
      Cap U.S. Equities (S&P 500)
                      
                      
                      1.000
                      
                      
                      
                      -0.259
                      
                      
                      
                      0.966
                      
                      
                      
                      0.152
                      
                      
                      
                      0.087
                      
                      
                      
                      0.135
                      
                      
                      
                      0.023U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
                      
                      
                      
                      
                      
                      
                      1.000
                      
                      
                      
                      -0.237
                      
                      
                      
                      -0.127
                      
                      
                      
                      -0.078
                      
                      
                      
                      0.214
                      
                      
                      
                      -0.128Global
      Equities (FTSE World Index)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.000
                      
                      
                      
                      0.246
                      
                      
                      
                      0.165
                      
                      
                      
                      0.196
                      
                      
                      
                      0.084Crude
      Oil
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.000
                      
                      
                      
                      0.783
                      
                      
                      
                      0.724
                      
                      
                      
                      0.334Heating
      Oil
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.000
                      
                      
                      
                      0.613
                      
                      
                      
                      0.446Unleaded
      Gasoline
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.000
                      
                      
                      
                      0.257Natural
      Gas
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.000Source:
      Bloomberg, NYMEX





PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS





The chart
below covers a more recent, but much shorter, range of dates than the above
chart. 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, global equities, or the other three energy commodities of crude oil,
gasoline or heating oil.




Correlation Matrix
                      2009
                    
                    Large
                      Cap
                      U.S.
                      Equities
                      (S&P
                      500)
                    
                    
                    U.S.
                      Govt.
                      Bonds
                      (EFFAS
                      U.S.
                      GovernmentBondIndex)
                    
                    
                    Global
                      Equities
                      (FTSE
                      World
                      Index)
                    
                    
                    Crude
                      Oil
                    
                    
                    Heating
                      Oil
                    
                    
                    Unleaded
                      Gasoline
                    
                    
                    Natural
                      GasLarge
      Cap U.S. Equities (S&P 500)
                    
                    
                    1.000
                    
                    
                    
                    0.303
                    
                    
                    
                    0.974
                    
                    
                    
                    0.182
                    
                    
                    
                    0.325
                    
                    
                    
                    0.083
                    
                    
                    
                    0.139U.S.
      Govt. Bonds (EFFAS U.S. Government Bond Index)
                    
                    
                    
                    
                    
                    
                    1.000
                    
                    
                    
                    -0.284
                    
                    
                    
                    -0.264
                    
                    
                    
                    -0.347
                    
                    
                    
                    0.544
                    
                    
                    
                    -0.016Global
      Equities (FTSE World Index)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.000
                    
                    
                    
                    0.216
                    
                    
                    
                    0.320
                    
                    
                    
                    0.043
                    
                    
                    
                    0.149Crude
      Oil
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.000
                    
                    
                    
                    0.769
                    
                    
                    
                    0.576
                    
                    
                    
                    0.255Heating
      Oil
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.000
                    
                    
                    
                    0.714
                    
                    
                    
                    0.253Unleaded
      Gasoline
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.000
                    
                    
                    
                    0.267Natural
      Gas
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.000source:
      Bloomberg, NYMEX




PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS





88




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 Oil 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.




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.”


89





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, during the
year ended December 31, 2009, USNG’s expenses exceeded the interest income USNG
earned and the cash earned from the sale of Creation Baskets.  To the
extent expenses have exceeded interest income, USNG’s NAV will be negatively
impacted.




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. In addition, USNG’s over-the-counter contracts have very limited
liquidity since they are negotiated agreements that are not transferable by USNG
except with the consent of its counterparty, and even if consent were granted,
there may not be an available transferee. Such market conditions or contractual
limits could prevent USNG from promptly liquidating its positions in Natural Gas
Interests. During the year ended December 31, 2009, 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) management fees, (ii) brokerage fees and commissions and fees associated
with its over-the-counter transactions, (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) 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 has
been 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.





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.
Drastic market occurrences could ultimately lead to the loss of all or
substantially all of an investor’s capital.


90





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, in addition to margin required to be
posted by the exchange or clearinghouse in connection with trades on the
exchange or though the clearing house, 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.




During
the year ended December 31, 2009, USNG has entered into fully-collateralized
over-the-counter transactions with six counterparties. Unlike most of the
exchange-traded Futures Contracts, cleared swaps 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. See “Item 7A. Quantitative and Qualitative Disclosures About Market
Risk” of this annual report on Form 10-K for a discussion of over-the-counter
contracts.





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 market
value 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 and, in some cases, to cleared swaps executed through
the Futures Commission Merchant.  Similarly, under its current
over-the-counter agreements, USNG requires that collateral it posts or receives
be posted with its custodian, and under agreements among the custodian, USNG and
its counterparties, such collateral is segregated.





If, in
the future, USNG purchases over-the-counter contracts, see “Item 7A.
Quantitative and Qualitative Disclosure About Market Risk” for a discussion of
over-the-counter contracts.





As of December 31, 2009, USNG had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amount of $4,630,186,857. This amount
is subject to loss should these institutions cease
operations.





Off
Balance Sheet Financing





As of
December 31, 2009, 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.


91





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 monthly
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, since 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. USNG also pays the fees and expenses
associated with its tax accounting and reporting requirements, with the
exception of certain initial implementation service fees and base service fees,
which are paid by the General Partner.




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.





On
December 31, 2009, USNG’s portfolio consisted of 13,949 Natural Gas NG Futures
Contracts traded on NYMEX, 35,858 Natural Gas NN Futures Contracts traded on the
NYMEX, 62,455 cleared swaps traded on the ICE Futures and total return swaps
with an aggregate market value of $(39,408,688).  For a list of USNG’s
current holdings, please see USNG’s website at
www.unitedstatesnaturalgasfund.com.





Item
7A.     Quantitative and Qualitative Disclosure About Market
Risk





Over-the-Counter Derivatives




During
the year ended December 31, 2009, USNG entered into fully-collateralized
over-the-counter swap transactions with six counterparties. Unlike most of the
exchange-traded Futures Contracts, cleared swaps 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.




92





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 in which USNG may
invest.





To
protect itself from the credit risk that arises in connection with such
contracts, USNG has entered 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 requires that the counterparty be highly rated and/or provide
collateral or other credit support to address USNG’s exposure to the
counterparty (i.e., the
amount the counterparty would have to pay to USNG if the transaction with the
counterparty were to terminate on that day).  USNG must, to the extent
its counterparty has exposure to it under the transaction, also post collateral.
In addition, it is also possible for USNG and its counterparty to agree to clear
their agreement through an established futures clearinghouse 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 and would be required to deposit margin to secure the
clearinghouse’s exposure to USNG.





The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, 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 counterparties who are, or are affiliates of,
(a) banks regulated by a United States federal bank regulator, (b)
broker-dealers regulated by the SEC, (c) insurance companies domiciled in the
United States, or (d) producers, users or traders of energy, whether or not
regulated by the CFTC. Any entity acting as a counterparty shall be regulated in
either the United States or the United Kingdom unless otherwise approved by the
Board after consultation with its legal counsel. 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. However, there can be no
assurance of this. Over-the-counter contracts may result in higher
transaction-related expenses than the brokerage commissions paid in connection
with the purchase of Futures Contracts, which may impact USNG’s ability to
successfully track the Benchmark Futures Contract.





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, 2009, USNG employed hedging methods such as those
described above to the extent it invested in fully-collateralized
over-the-counter swap transactions designed to track percentage changes in the
price of the Benchmark Futures Contract. During the year ended December 31,
2009, USNG was exposed to counterparty risk on its fully-collateralized
over-the-counter swap transactions with six counterparties.


93





The
counterparty credit ratings for the exposure on over-the-counter swap
transactions to which USNG was a party that would be owed to USNG due to a
default or early termination by USNG’s counterparties as of December 31, 2009
and December 31, 2008 were:





December 31, 2008Moody’s
                                            Credit
                                            Rating
                                          
                                          Number of
                                            Counterparties
                                          
                                          
                                          Notional
                                            Amount
                                          
                                          Credit
                                            Exposure
                                          
                                          Collateral
                                            Held
                                          
                                          Exposure,
                                            Net of
                                            CollateralAa1
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          $
                                          -
                                          
                                          $
                                          -
                                          
                                          $
                                          -A2
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          
                                          -Unrated
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          
                                          -Total
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          $
                                          -
                                          
                                          $
                                          -
                                          
                                          $
                                          -





December 31, 2009Moody’s
                                                                                                  Credit
                                                                                                  Rating
                                                                                                
                                                                                                Number of
                                                                                                  Counterparties
                                                                                                
                                                                                                
                                                                                                Notional
                                                                                                  Amount
                                                                                                
                                                                                                Credit
                                                                                                  Exposure
                                                                                                
                                                                                                Collateral
                                                                                                  Held
                                                                                                
                                                                                                Exposure,
                                                                                                  Net of
                                                                                                  Collateral*Aa1
                                                                                                
                                                                                                
                                                                                                1
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1,031,083,313
                                                                                                
                                                                                                $
                                                                                                0
                                                                                                
                                                                                                $
                                                                                                0
                                                                                                
                                                                                                $
                                                                                                0A2
                                                                                                
                                                                                                
                                                                                                1
                                                                                                
                                                                                                
                                                                                                
                                                                                                197,724,486
                                                                                                
                                                                                                
                                                                                                24,272,748
                                                                                                
                                                                                                
                                                                                                33,708,890
                                                                                                
                                                                                                
                                                                                                (9,436,142
                                                                                                )Aa3
                                                                                                
                                                                                                
                                                                                                1
                                                                                                
                                                                                                
                                                                                                
                                                                                                614,340,863
                                                                                                
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                0Unrated
                                                                                                
                                                                                                
                                                                                                3
                                                                                                
                                                                                                
                                                                                                
                                                                                                630,898,411
                                                                                                
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                0Total
                                                                                                
                                                                                                
                                                                                                6
                                                                                                
                                                                                                
                                                                                                $
                                                                                                2,474,070,073
                                                                                                
                                                                                                $
                                                                                                24,272,748
                                                                                                
                                                                                                $
                                                                                                33,708,890
                                                                                                
                                                                                                $
                                                                                                (9,436,142
                                                                                                )





* The
difference reflects minimum transfer amounts for collateral and potentially one
day’s movement in the underlying total return, which would be collateralized the
following business day.





The
aggregate notional amount of USNG’s over-the-counter derivative transactions,
all of which consisted of total return swaps, increased to $2,474,047,073 at
December 31, 2009, as compared with no swaps for the prior period. The aggregate
notional amount of these derivative transactions, which is not included in the
Condensed Schedule of Investments (Unaudited), is indicative of USNG’s
activities in derivative transactions, but is not an indicator of the level of
credit risk associated with these transactions.





At
December 31, 2009, USNG’s counterparties posted $14,450,000 in cash and
no securities as collateral with USNG’s custodian, as compared with the
prior period for which no collateral was posted since USNG had not yet entered
into any swaps. Under these over-the-counter swap agreements, USNG posted
collateral with respect to its obligations of $336,379,130 at December 31, 2009,
while no collateral was posted for the prior period.


94


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.
                
                96Reports
      of Independent Registered Public Accounting Firm.
                
                97Statements
      of Financial Condition at December 31, 2009 and 2008.
                
                99Schedule
      of Investments at December 31, 2009 and 2008.
                
                100Statements
      of Operations for the years ended December 31, 2009, 2008 and
      2007.
                
                103Statements
      of Changes in Partners’ Capital for the years ended December 31, 2009,
      2008 and 2007.
                
                104Statements
      of Cash Flows for the years ended December 31, 2009, 2008 and
      2007.
                
                105Notes
      to Financial Statements for the years ended December 31, 2009,
      2008 and 2007.
                
                106




95


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, 2009. 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’s management believes
that, as of December 31, 2009, its internal control over financial reporting is
effective.


96




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, 2009, 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, 2009, 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, 2009, of the Fund and our report dated February 26,
2010 expressed an unqualified opinion on those financial
statements.




/s/
Spicer Jeffries LLP


Greenwood
Village, Colorado


February26,
2010


97





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, 2009 and
2008, including the schedule of investments as of December 31, 2009 and
2008, and the related statements of operations, changes in partners’ capital and
cash flows for the years ended December 31, 2009, 2008 and 2007. 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, 2009 and 2008, and the results of its
operations and its cash flows for the years ended December 31, 2009, 2008
and 2007, 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, 2009, 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 26,
2010 expressed an unqualified opinion on the Fund’s internal control over
financial reporting.





/s/
Spicer Jeffries LLP


Greenwood
Village, Colorado


February26,
2010


98





United States Natural Gas Fund, LPStatements
      of Financial ConditionAt
      December 31, 2009 and 20082009
                                    
                                    
                                    2008AssetsCash
      and cash equivalents (Note 5)
                                    
                                    $
                                    3,896,493,193
                                    
                                    
                                    $
                                    419,929,831Equity
      in UBS Securities LLC trading accounts:Cash
                                    
                                    
                                    733,693,664
                                    
                                    
                                    
                                    293,619,554Unrealized
      loss on open commodity futures contracts
                                    
                                    
                                    (41,777,265
                                    )
                                    
                                    
                                    (7,704,870
                                    )Unrealized
      loss on open swap contracts
                                    
                                    
                                    (39,408,688
                                    )
                                    
                                    
                                    -Interest
      receivable
                                    
                                    
                                    110,235
                                    
                                    
                                    
                                    355,156Other
      assets
                                    
                                    
                                    192,758
                                    
                                    
                                    
                                    137,786Total
      assets
                                    
                                    $
                                    4,549,303,897
                                    
                                    
                                    $
                                    706,337,457Liabilities
      and Partners’ CapitalInvestment
      payable
                                    
                                    $
                                    19,112,096
                                    
                                    
                                    $
                                    -General
      Partner management fees (Note 3)
                                    
                                    
                                    1,918,167
                                    
                                    
                                    
                                    370,060Payable
      for units redeemed
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,307,208Interest
      payable
                                    
                                    
                                    20,751
                                    
                                    
                                    
                                    -Professional
      fees payable
                                    
                                    
                                    2,609,981
                                    
                                    
                                    
                                    817,073Brokerage
      commission fees payable
                                    
                                    
                                    256,250
                                    
                                    
                                    
                                    39,500License
      fees payable
                                    
                                    
                                    231,345
                                    
                                    
                                    
                                    61,226Directors’
      fees payable
                                    
                                    
                                    48,144
                                    
                                    
                                    
                                    27,880Total
      liabilities
                                    
                                    
                                    24,196,734
                                    
                                    
                                    
                                    10,622,947Commitments and Contingencies(Notes 3, 4 and 5)Partners’
      CapitalGeneral
      Partner
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Limited
      Partners
                                    
                                    
                                    4,525,107,163
                                    
                                    
                                    
                                    695,714,510Total
      Partners’ Capital
                                    
                                    
                                    4,525,107,163
                                    
                                    
                                    
                                    695,714,510Total
      liabilities and partners’ capital
                                    
                                    $
                                    4,549,303,897
                                    
                                    
                                    $
                                    706,337,457Limited
      Partners’ units outstanding
                                    
                                    
                                    449,500,000
                                    
                                    
                                    
                                    29,900,000Net
      asset value per unit
                                    
                                    $
                                    10.07
                                    
                                    
                                    $
                                    23.27Market
      value per unit
                                    
                                    $
                                    10.08
                                    
                                    
                                    $
                                    23.17





See
accompanying notes to financial statements.


99





United
      States Natural Gas Fund, LPSchedule
      of InvestmentsAt
      December 31, 2009Number
      of
                  
                  Loss on
      Open
                    Commodity
                  
                  %
      of Partners’Contracts
                  
                  Contracts
                  
                  CapitalOpen
      Cleared Swap ContractsForeign
      ContractsICE
      Natural Gas Cleared Swap ICE LOT contracts, expire February
      2010
                  
                  
                  62,455
                  
                  
                  $
                  (17,242,475
                  )
                  
                  
                  (0.38
                  )Open
      Futures ContractsUnited
      States ContractsNYMEX
      Natural Gas Futures NG contracts, expire February 2010
                  
                  
                  13,949
                  
                  
                  
                  (15,139,330
                  )
                  
                  
                  (0.33
                  )NYMEX
      Natural Gas Futures NN contracts, expire February 2010
                  
                  
                  35,858
                  
                  
                  
                  (9,395,460
                  )
                  
                  
                  (0.21
                  )49,807
                  
                  
                  
                  (24,534,790
                  )
                  
                  
                  (0.54
                  )Total Open
      Cleared Swap and Futures Contracts
                  
                  
                  112,262
                  
                  
                  $
                  (41,777,265
                  )
                  
                  
                  (0.92
                  )




Principal Amount
                    
                    
                    Market ValueCash
      EquivalentsUnited
      States Treasury ObligationU.S.
      Treasury Bill, 0.07%, 1/21/2010
                    
                    $
                    200,000,000
                    
                    
                    $
                    199,992,222
                    
                    
                    
                    4.42United
      States - Money Market FundsFidelity
      Institutional Government Portfolio – Class I
                    
                    $
                    1,025,996,967
                    
                    
                    $
                    1,025,996,967
                    
                    
                    
                    22.67Goldman
      Sachs Financial Square Funds - Government Fund – Class SL
                    
                    
                    975,213,417
                    
                    
                    
                    975,213,417
                    
                    
                    
                    21.55Morgan
      Stanley Institutional Liquidity Fund – Government
Portfolio
                    
                    
                    500,077,936
                    
                    
                    
                    500,077,936
                    
                    
                    
                    11.05Total
      Money Market Funds
                    
                    
                    
                    
                    
                    $
                    2,501,288,320
                    
                    
                    
                    55.27Total
      Cash Equivalents
                    
                    
                    
                    
                    
                    $
                    2,701,280,542
                    
                    
                    
                    59.69




See accompanying notes
to financial statements.





100




United
      States Natural Gas Fund, LPSchedule
      of InvestmentsAt
      December 31, 2008Number
      of
                            
                            
                            Loss on
      Open
                              Commodity
                            
                            
                            %
      of
                              Partners’Contracts
                            
                            
                            Contracts
                            
                            
                            CapitalOpen
      Futures ContractsUnited
      States ContractsNYMEX
      Natural Gas Futures NG contracts, expire February 2009
                            
                            
                            12,375
                            
                            
                            $
                            (7,704,870
                            )
                            
                            
                            (1.11
                            )Principal
                              Amount
                            
                            
                            MarketValueCash
      EquivalentsUnited
      States - Money Market FundGoldman
      Sachs Financial Square Funds - Government Fund – Class SL
                            
                            $
                            298,603,373
                            
                            
                            $
                            298,603,373
                            
                            
                            
                            42.92Total
      Cash Equivalents
                            
                            
                            
                            
                            
                            $
                            298,603,373
                            
                            
                            
                            42.92





See accompanying notes
to financial statements.


101





United
States Natural Gas Fund, LP


Schedule
of Investments (Continued)


At
December 31, 2009





Open
Over-the-Counter Total Return Swap Contracts





Notional
                                          Amount
                                        
                                        
                                        Market
                                          Value
                                        
                                        
                                        Unrealized
                                          Gain (Loss)
                                        
                                        Termination
                                          DateSwap
      agreement to receive return on the eXtra US1 Excess Return
      Index
                                        
                                        
                                        197,724,486
                                        
                                        
                                        $
                                        (76,034
                                        )
                                        
                                        $
                                        (76,034
                                        )
                                        1/29/2010Swap
      agreement to receive return on the Custom Natural Gas
Index(UNG)-
      Excess Return
                                        
                                        
                                        437,844,520
                                        
                                        
                                        
                                        (10,574,386
                                        )
                                        
                                        
                                        (10,574,386
                                        )
                                        4/21/2010Swap
      agreement to receive return on the Custom Natural Gas
Index(UNG)-
      Excess Return
                                        
                                        
                                        148,628,935
                                        
                                        
                                        
                                        (3,573,393
                                        )
                                        
                                        
                                        (3,573,393
                                        )
                                        6/2/2010Swap
      agreement to receive return on the Custom Natural Gas
Index(UNG)-
      Excess Return
                                        
                                        
                                        27,867,408
                                        
                                        
                                        
                                        (669,999
                                        )
                                        
                                        
                                        (669,999
                                        )
                                        6/9/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        231,241,867
                                        
                                        
                                        
                                        (6,697
                                        )
                                        
                                        
                                        (6,697
                                        )
                                        4/23/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        35,310,676
                                        
                                        
                                        
                                        (361
                                        )
                                        
                                        
                                        (361
                                        )
                                        4/26/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        37,327,808
                                        
                                        
                                        
                                        (381
                                        )
                                        
                                        
                                        (381
                                        )
                                        4/27/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        35,296,594
                                        
                                        
                                        
                                        (361
                                        )
                                        
                                        
                                        (361
                                        )
                                        5/6/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        60,218,214
                                        
                                        
                                        
                                        (2,764,029
                                        )
                                        
                                        
                                        (2,764,029
                                        )
                                        5/11/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        73,573,437
                                        
                                        
                                        
                                        (752
                                        )
                                        
                                        
                                        (752
                                        )
                                        5/18/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        47,363,229
                                        
                                        
                                        
                                        (484
                                        )
                                        
                                        
                                        (484
                                        )
                                        5/20/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        60,199,249
                                        
                                        
                                        
                                        (2,763,159
                                        )
                                        
                                        
                                        (2,763,159
                                        )
                                        5/22/2010Swap
      agreement to receive return on the NYMEX Henry Hub TRS
    Index
                                        
                                        
                                        50,367,337
                                        
                                        
                                        
                                        (515
                                        )
                                        
                                        
                                        (515
                                        )
                                        6/3/2010Swap
      agreement to receive return on the NYMEX Henry Hub Natural
      GasFutures
      Contract
                                        
                                        
                                        120,653,648
                                        
                                        
                                        
                                        (181,797
                                        )
                                        
                                        
                                        (181,797
                                        )
                                        1/14/2010Swap
      agreement to receive return on the NYMEX Henry Hub Natural
      GasFutures
      Contract
                                        
                                        
                                        120,765,626
                                        
                                        
                                        
                                        1,243,622
                                        
                                        
                                        
                                        1,243,622
                                        
                                        1/15/2010Swap
      agreement to receive return on the NYMEX Henry Hub Natural
      GasFutures
      Contract
                                        
                                        
                                        262,910,966
                                        
                                        
                                        
                                        (11,044,583
                                        )
                                        
                                        
                                        (11,044,583
                                        )
                                        1/19/2010Swap
      agreement to receive return on the NYMEX Henry Hub Natural
      GasFutures
      Contract
                                        
                                        
                                        337,775,877
                                        
                                        
                                        
                                        (5,680,051
                                        )
                                        
                                        
                                        (5,680,051
                                        )
                                        3/31/2010Swap
      agreement to receive return on the NYMEX Henry Hub Natural
      GasFutures
      Contract
                                        
                                        
                                        102,683,037
                                        
                                        
                                        
                                        (1,667,807
                                        )
                                        
                                        
                                        (1,667,807
                                        )
                                        5/25/2010Swap
      agreement to receive return on the NYMEX Henry Hub Natural
      GasFutures
      Contract
                                        
                                        
                                        86,294,159
                                        
                                        
                                        
                                        (1,647,521
                                        )
                                        
                                        
                                        (1,647,521
                                        )
                                        5/28/2010Total
      unrealized loss on open swap contracts
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        (39,408,688
                                        )





See
accompanying notes to financial statements.


102


United States Natural Gas Fund,
LP


Statements
of Operations


For
the years ended December 31, 2009, 2008 and 2007





Year ended
                        
                        
                        Year ended
                        
                        
                        Year
      EndedDecember 31,
                          2009
                        
                        
                        December 31,
                          2008
                        
                        
                        December 31,
                          2007IncomeGains
      (losses) on trading of commodity contracts:Realized
      loss on closed futures contracts
                        
                        $
                        (1,443,746,373
                        )
                        
                        $
                        (469,854,610
                        )
                        
                        $
                        (39,939,850
                        )Realized
      loss on closed swap contracts
                        
                        
                        (39,014,082
                        )
                        
                        
                        -
                        
                        
                        
                        -Change
      in unrealized gain (loss) on open futures contracts
                        
                        
                        (34,072,395
                        )
                        
                        
                        (27,748,750
                        )
                        
                        
                        20,043,880Change
      in unrealized loss on open swap contracts
                        
                        
                        (39,408,688
                        )
                        
                        
                        -
                        
                        
                        
                        -Interest
      income
                        
                        
                        2,687,716
                        
                        
                        
                        12,225,534
                        
                        
                        
                        8,242,264Other
      income
                        
                        
                        185,000
                        
                        
                        
                        202,000
                        
                        
                        
                        107,000Total loss
                        
                        
                        (1,553,368,822
                        )
                        
                        
                        (485,175,826
                        )
                        
                        
                        (11,546,706
                        )ExpensesGeneral
      Partner management fees (Note 3)
                        
                        
                        14,189,176
                        
                        
                        
                        4,373,723
                        
                        
                        
                        1,239,862Brokerage
      commissions
                        
                        
                        11,384,593
                        
                        
                        
                        867,175
                        
                        
                        
                        351,310Professional
      fees
                        
                        
                        3,828,390
                        
                        
                        
                        1,022,269
                        
                        
                        
                        272,472Registration
      fees
                        
                        
                        1,223,978
                        
                        
                        
                        348,874
                        
                        
                        
                        41,980License
      fees
                        
                        
                        619,825
                        
                        
                        
                        236,664
                        
                        
                        
                        81,317Directors’
      fees
                        
                        
                        142,322
                        
                        
                        
                        130,107
                        
                        
                        
                        58,380Other
      expenses
                        
                        
                        18,419
                        
                        
                        
                        50,000
                        
                        
                        
                        -Total
      expenses
                        
                        
                        31,406,703
                        
                        
                        
                        7,028,812
                        
                        
                        
                        2,045,321Net loss
                        
                        $
                        (1,584,775,525
                        )
                        
                        $
                        (492,204,638
                        )
                        
                        $
                        (13,592,027
                        )Net loss
      per limited partnership unit
                        
                        $
                        (13.20
                        )
                        
                        $
                        (12.91
                        )
                        
                        $
                        (13.82
                        )Net loss
      per weighted average limited partnership unit
                        
                        $
                        (6.89
                        )
                        
                        $
                        (25.50
                        )
                        
                        $
                        (1.78
                        )Weighted
      average limited partnership units outstanding
                        
                        
                        229,963,288
                        
                        
                        
                        19,303,825
                        
                        
                        
                        7,644,574





See
accompanying notes to financial statements.


103





United States Natural Gas Fund, LP


Statements
of Changes in Partners’ Capital


For
the years ended December 31, 2009, 2008 and 2007





General
                  Partner
                
                
                Limited Partners
                
                TotalBalances,
      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 56,300,000 partnership 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
                
                
                
                695,714,510Addition
      of 474,400,000 partnership units
                
                
                -
                
                
                
                6,284,421,972
                
                
                
                6,284,421,972Redemption
      of 54,800,000 partnership units
                
                
                -
                
                
                
                (870,253,794
                )
                
                
                (870,253,794
                )Net
      loss
                
                
                -
                
                
                
                (1,584,775,525
                )
                
                
                (1,584,775,525
                )Balances,
      at December 31, 2009
                
                $
                -
                
                
                $
                4,525,107,163
                
                
                $
                4,525,107,163Net
      Asset Value Per UnitAt
      April 18, 2007 (commencement of operations)
                
                $
                50.00At
      December 31, 2007
                
                $
                36.18At
      December 31, 2008
                
                $
                23.27At
      December 31, 2009
                
                $
                10.07





See
accompanying notes to financial statements.


104


United States Natural
Gas Fund, LP


Statements
of Cash Flows


For
the years ended December 31, 2009, 2008 and 2007




Year
      ended
                        
                        
                        Year
      ended
                        
                        
                        Year
      endedDecember 31,
                          2009
                        
                        
                        December 31,
                          2008
                        
                        
                        December 31,
                          2007Cash
      Flows from Operating Activities:Net
      loss
                        
                        $
                        (1,584,775,525
                        )
                        
                        $
                        (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
                        
                        
                        (440,074,110
                        )
                        
                        
                        (208,503,665
                        )
                        
                        
                        (85,115,889
                        )Unrealized
      (gain) loss on open futures contracts
                        
                        
                        34,072,395
                        
                        
                        
                        27,748,750
                        
                        
                        
                        (20,043,880
                        )Unrealized
      loss on open swap contracts
                        
                        
                        39,408,688
                        
                        
                        
                        -
                        
                        
                        
                        -Decrease
      (increase) in interest receivable and other assets
                        
                        
                        189,949
                        
                        
                        
                        290,059
                        
                        
                        
                        (783,001
                        )Increase
      in management fees payable
                        
                        
                        1,548,107
                        
                        
                        
                        105,504
                        
                        
                        
                        264,556Increase
      in investment payable
                        
                        
                        19,112,096
                        
                        
                        
                        -
                        
                        
                        
                        -Increase
      in interest payable
                        
                        
                        20,751
                        
                        
                        
                        -
                        
                        
                        
                        -Increase
      in professional fees payable
                        
                        
                        1,792,908
                        
                        
                        
                        577,119
                        
                        
                        
                        239,954Increase
      in brokerage commission fees payable
                        
                        
                        216,750
                        
                        
                        
                        16,700
                        
                        
                        
                        22,800Increase
      in license fees payable
                        
                        
                        170,119
                        
                        
                        
                        9,666
                        
                        
                        
                        51,560Increase
      (decrease) in directors’ fees payable
                        
                        
                        20,264
                        
                        
                        
                        (8,238
                        )
                        
                        
                        36,118Net
      cash used in operating activities
                        
                        
                        (1,928,297,608
                        )
                        
                        
                        (671,968,743
                        )
                        
                        
                        (118,919,809
                        )Cash
      Flows from Financing Activities:Subscription
      of partnership units
                        
                        
                        6,284,421,972
                        
                        
                        
                        2,691,884,826
                        
                        
                        
                        1,458,786,977Redemption
      of partnership units
                        
                        
                        (879,561,002
                        )
                        
                        
                        (2,088,053,451
                        )
                        
                        
                        (851,800,969
                        )Net
      cash provided by financing activities
                        
                        
                        5,404,860,970
                        
                        
                        
                        603,831,375
                        
                        
                        
                        606,986,008Net
      Increase (Decrease) in Cash and Cash Equivalents
                        
                        
                        3,476,563,362
                        
                        
                        
                        (68,137,368
                        )
                        
                        
                        488,066,199Cash and Cash
      Equivalents, beginning of year
                        
                        
                        419,929,831
                        
                        
                        
                        488,067,199
                        
                        
                        
                        1,000Cash and Cash
      Equivalents, end of year
                        
                        $
                        3,896,493,193
                        
                        
                        $
                        419,929,831
                        
                        
                        $
                        488,067,199




See
accompanying notes to financial statements.


105


United
States Natural Gas Fund, LP


Notes
to Financial Statements


For
the years ended December 31, 2009, 2008 and 2007




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 limited partnership units (“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 units’ net asset value to 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 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 become, over a 4-day period,
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 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, cleared
swap contracts 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, 2009, USNG held 13,949 NG Futures
Contracts and 35,858 NN Financially Settled Futures Contracts traded on the
NYMEX and 62,455 cleared swap contracts traded on the ICE Futures and
over-the-counter swap transactions with six counterparties.




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 registered 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. The
General Partner is also the general partner of the United States Short Oil Fund,
LP (“USSO”) and the United States 12 Month Natural Gas Fund, LP which listed
their limited partnership units on the NYSE Arca on September 24, 2009 and
November 18, 2009, respectively. The General Partner has also filed registration
statements to register units of the United States Brent Oil Fund, LP (“USBO”)
and the United States Commodity Index Funds Trust (“USCI”).





USNG issues
units to certain authorized purchasers (“Authorized Purchasers”) by offering
baskets consisting of 100,000 units (“Creation Baskets”) through ALPS
Distributors, Inc. as the marketing agent (the “Marketing Agent”). The purchase
price for a Creation Basket is based upon the net asset value of a unit
calculated shortly after the close of the core trading session on the NYSE Arca
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 placed
to create one or more Creation Baskets or redeem one or more baskets consisting
of 100,000 units (“Redemption Baskets”). Units may be purchased or sold on
a nationally recognized securities exchange in smaller increments than a
Creation Basket or Redemption 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 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 of December 31, 2009,
USNG had registered a total of 1,480,000,000 units, 449,500,000 of which were
outstanding.  As of December 31, 2009, USNG issued 5,821 Creation
Baskets.


106


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.
 
 Investments
in over-the-counter swap contracts (see Note 5) are arrangements to exchange a
periodic payment for a market-linked return, each based on a notional
amount.  To the extent that the total return of the security or index
underlying the transaction exceeds or falls short of the offsetting periodic
payment obligation, USNG receives a payment from, or makes a payment to, the
swap counterparty.  The over-the-counter swap contracts are valued
daily based upon the appreciation or depreciation of the underlying securities
subsequent to the effective date of the contract.  Changes in the
value of the swaps are reported as unrealized gains and losses and periodic
payments are recorded as realized gains or losses in the accompanying condensed
statements of operations.
 
 Brokerage
Commissions
 
 Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
 
 Swap
Premiums
 
 Upfront
fees paid by USNG for over-the-counter swap contracts are reflected on the
Statements of Financial Condition and represent payments made upon entering into
a swap agreement to compensate for differences between the stated terms of the
agreement and prevailing market conditions.  The fees are amortized
daily over the term of the swap agreement.
 
 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 Redemption Baskets only in
blocks of 100,000 units equal to the net asset value of the units calculated
shortly after the close of the core trading session on the NYSE Arca on the day
the order is placed.
 
 USNG
receives or pays the proceeds from units sold or redeemed within three business
days 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.
  107
  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’s
net asset value is calculated on each NYSE Arca 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, 2009.
 
 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 with such offerings. 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
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, that is equal to 0.60% per annum
of average daily net assets of $1,000,000,000 or less and 0.50% per annum of
average daily net assets that are greater than
$1,000,000,000.
  108




Ongoing
Registration Fees and Other Offering Expenses
 
 USNG pays
all costs and expenses associated with the ongoing registration of its 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 years ended December 31, 2009, 2008 and 2007, USNG
incurred $1,223,978, $348,874 and $41,980, respectively, in registration
fees and other offering expenses.
  Directors’
Fees and Expenses
 
 USNG is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. USNG shares these fees and expenses with USOF, US12OF,
UGA, USHO, USSO and US12NG based on the relative assets of each fund, computed
on a daily basis. These fees and expenses for the calendar year 2009 amounted to
a total of $433,046 for all funds, and USNG’s portion of such fees and expenses
was $159,942.  For the calendar years 2008 and 2007, these fees and
expenses were $282,000 and $286,000, respectively, and USNG’s portion of such
fees was $130,107 and $58,380 respectively.
 
 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.
For the years ended December 31, 2009, 2008 and 2007, USNG incurred
$619,825, $236,664 and $81,317, respectively, under this
arrangement.
  Investor
Tax Reporting Cost
  The fees
and expenses associated with USNG’s audit expenses and tax accounting and
reporting requirements are paid by USOF. These costs are approximately
$2,450,000 as of December 31, 2009.
  Other
Expenses and Fees
  In
addition to the fees described above, USNG pays all brokerage fees,
transaction costs for over-the-counter swaps, 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 and the General Partner, whereby the Marketing Agent provides
certain marketing services for USNG as outlined in the agreement. The fees of
the Marketing Agent, which are borne by the General Partner, are 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.”) and the General Partner, 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.
  109
 
 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 USNG and each of
the affiliated funds managed by the General Partner, as well as a $20,000 annual
fee for its transfer agency services. In addition, the General Partner pays
BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of
USNG’s, USOF’s, US12OF’s, UGA’s, USHO’s, USSO’s and US12NG’s combined net
assets, (b) 0.0465% for USNG’s, USOF’s, US12OF’s, UGA’s, USHO’s, USSO’s and
US12NG’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, USHO’s, USSO’s and US12NG’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 licensing 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 licensing 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.
 
 NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
 
 USNG engages
in the trading of futures contracts, options on futures contracts,
cleared swaps and over-the-counter swaps (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.
 
 USNG may
enter into futures contracts, options on futures contracts, cleared swaps and
over-the-counter swaps to gain exposure to changes in the value of an underlying
commodity.  A futures contract obligates the seller to deliver (and
the purchaser to accept) the future delivery of a specified quantity and type of
a commodity at a specified time and place.  Some futures contracts may
call for physical delivery of the asset, while others are settled in cash. The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying 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.  Cleared swaps
are over-the-counter (“OTC”) agreements that are eligible to be cleared by a
clearinghouse,e.g.,
ICE Clear U.S., but which are not traded on an exchange.  A cleared
swap is created when the parties to an off-exchange OTC transaction agree to
extinguish their OTC contract and replace it with a cleared swap. Cleared swaps
are intended to provide the efficiencies and benefits that centralized clearing
on an exchange offers to traders of futures contracts, including credit risk
intermediation and the ability to offset positions initiated with different
counterparties.
 
 The
purchase and sale of futures contracts, options on futures contracts and cleared
swaps 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.
 
 Futures
contracts and cleared swaps involve, to varying degrees, elements of market risk
(specifically commodity price risk) and exposure to loss in excess of the amount
of variation margin. The face or contract amounts reflect the extent of the
total exposure USNG has in the particular classes of instruments. Additional
risks associated with the use of futures contracts are an imperfect correlation
between movements in the price of the futures contracts and the market value of
the underlying securities and the possibility of an illiquid market for a
futures contract.
  110
 
 All of
USNG’s investment contracts through December 31, 2009 have been exchange-traded
futures contracts, cleared swaps or fully-collateralized over-the-counter swaps.
The liquidity and credit risks associated with exchange-traded contracts and
cleared swaps 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. As of
December 31, 2009, USNG has entered into over-the-counter transactions with six
counterparties.  Over-the counter transactions subject USNG 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, on the transaction. USNG also has credit risk under its
futures contracts since the sole counterparty to all domestic and foreign
futures contracts is the exchange on which the relevant contracts are
traded.  However, as compared to its over-the-counter transactions, it
may more easily realize value by reselling its futures contracts.  In
addition, USNG bears the risk of financial failure by the clearing
broker.
 
 At
December 31, 2009, USNG’s counterparties posted $14,450,000 in cash and
$0  in securities as collateral with USNG’s custodian, as compared
with the prior period for which no collateral was posted since USNG had not yet
entered into any swaps. Under these agreements, USNG posted collateral with
respect to its obligations of $336,379,130 at December 31, 2009, while no
collateral was posted for the prior period.
 
 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
a portion of 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, 2009 and 2008, USNG
had deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amounts of $4,630,186,857 and
$713,549,385, 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.
  111
 
 NOTE 6
- FINANCIAL HIGHLIGHTS
 
 The
following table presents per unit performance data and other supplemental
financial data for the years ended December 31, 2009, 2008 and 2007. This
information has been derived from information presented in the financial
statements.
 
 Year ended
                          
                          
                          Year ended
                          
                          
                          Year endedDecember
                            31, 2009
                          
                          
                          December
                            31, 2008
                          
                          
                          December 31,
                            2007Per Unit Operating
    Performance:Net
      asset value, beginning of period
                          
                          $
                          23.27
                          
                          
                          $
                          36.18
                          
                          
                          $
                          50.00Total loss
                          
                          
                          (13.06
                          )
                          
                          
                          (12.55
                          )
                          
                          
                          (13.55
                          )Total
      expenses
                          
                          
                          (0.14
                          )
                          
                          
                          (0.36
                          )
                          
                          
                          (0.27
                          )Net
      decrease in net asset value
                          
                          
                          (13.20
                          )
                          
                          
                          (12.91
                          )
                          
                          
                          (13.82
                          )Net
      asset value, end of period
                          
                          $
                          10.07
                          
                          
                          $
                          23.27
                          
                          
                          $
                          36.18Total
      Return
                          
                          
                          (56.73
                          )%
                          
                          
                          (35.68
                          )%
                          
                          
                          (27.64
                          )%Ratios
      to Average Net AssetsTotal
      loss
                          
                          
                          (58.53
                          )%
                          
                          
                          (66.25
                          )%
                          
                          
                          (5.59
                          )%Expenses
      excluding management fees
                          
                          
                          0.65
                          %
                          
                          
                          0.36
                          %
                          
                          
                          0.39
                          %*Management
      fees
                          
                          
                          0.53
                          %
                          
                          
                          0.60
                          %
                          
                          
                          0.60
                          %*Net loss
                          
                          
                          (59.71
                          )%
                          
                          
                          (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, 2009 and 2008.
 
 First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter2009
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2009Tot  Total
      Loss
                  
                  $
                  (297,277,494
                  )
                  
                  $
                  (150,314,978
                  )
                  
                  $
                  (664,595,568
                  )
                  
                  $
                  (441,180,782
                  )Total
      Expenses
                  
                  
                  1,727,482
                  
                  
                  
                  7,784,505
                  
                  
                  
                  13,271,354
                  
                  
                  
                  8,623,362Net
      Loss
                  
                  $
                  (299,004,976
                  )
                  
                  $
                  (158,099,483
                  )
                  
                  $
                  (677,866,922
                  )
                  
                  $
                  (449,804,144
                  )Net
      Loss per Unit
                  
                  $
                  (8.04
                  )
                  
                  $
                  (1.43
                  )
                  
                  $
                  (2.23
                  )
                  
                  $
                  (1.50
                  )
  112
 
 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
                  )
  NOTE
8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Effective
January 1, 2008, USNG adopted Accounting Standards Codification 820 – Fair Value
Measurements and Disclosures (“ASC 820”).  ASC 820 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurement.  The changes to past practice resulting from the
application of ASC 820 relate to the definition of fair value, the methods used
to measure fair value, and the expanded disclosures about fair value
measurement. ASC 820 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 ASC 820 hierarchy are as
follows:
  Level I –
Quoted prices (unadjusted) in active markets for identical assets 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 I 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 tables summarize the valuation of USNG’s securities at December 31,
2009 and 2008 using the fair value hierarchy:
 
 At December
      31, 2009
                            
                            Total
                            
                            
                            Level I
                            
                            
                            Level II
                            
                            
                            Level IIIShort-Term
      Investments
                            
                            $
                            2,701,280,542
                            
                            
                            $
                            2,701,280,542
                            
                            
                            $
                            -
                            
                            
                            $
                            -Exchange-Traded
      Futures Contracts
                            
                            
                            (24,534,790
                            )
                            
                            
                            (24,534,790
                            )
                            
                            
                            -
                            
                            
                            
                            -Exchange-Traded
      Cleared Swap Contracts
                            
                            
                            (17,242,475
                            )
                            
                            
                            (17,242,475
                            )
                            
                            
                            -
                            
                            
                            
                            -Over-the-Counter
      Total Return Swap Contracts
                            
                            
                            (39,408,688
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (39,408,688
                            )
 At December
      31, 2008
                                                    
                                                    Total
                                                    
                                                    
                                                    Level I
                                                    
                                                    
                                                    Level II
                                                    
                                                    
                                                    Level IIIShort-Term
      Investments
                                                    
                                                    $
                                                    298,603,373
                                                    
                                                    
                                                    $
                                                    298,603,373
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -Exchange-Traded
      Futures Contracts
                                                    
                                                    
                                                    (7,704,870
                                                    )
                                                    
                                                    
                                                    (7,704,870
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
 113
  Following
is a reconciliation of assets in which significant observable inputs (Level 3)
were used in determining fair value:
 
 Total
      Return Swap ContractsBeginning
      balance as of 12/31/08
                          
                          $
                          -Realized
      gain(loss)*
                          
                          
                          -Change
      in unrealized gain(loss)
                          
                          
                          (39,408,688
                          )Ending
      balance as of 12/31/09
                          
                          $
                          (39,408,688
                          )
 
 *The
realized gain (loss) earned during the fiscal year ended December 31, 2009 for
total return swaps was $(39,014,082).
 
 Effective
January 1, 2009, USNG adopted the provisions of Accounting Standards
Codification 815 -  Derivatives and Hedging (“ASC
815”), which require presentation of qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts and gains and losses on derivatives.
 
 Fair
Value of Derivative Instruments
 
 At
                                          
                                          AtDecember 31,
                                          
                                          December 31,2009
                                          
                                          2008Derivatives not
                                          
                                          Statement ofAccounted for as
                                          
                                          Financialfor as Hedging
                                          
                                          ConditionInstruments
                                          
                                          Location
                                          
                                          Fair Value
                                          
                                          Fair ValueFutures
      -Commodity
      Contracts
                                          
                                          Assets
                                          
                                          $
                                          (41,777,265
                                          )
                                          $
                                          (7,704,870
                                          )Swaps
      -Commodity
      Contracts
                                          
                                          Assets
      -
                                          
                                          $
                                          (39,408,688
                                          )
                                          $
                                          -UnrealizedAppreciation
 
 The
Effect of Derivative Instruments on the Statement of Operations
 
 For the year ended
                                
                                
                                For the year endedDecember 31,
                                
                                
                                December 31,Realized
                                
                                
                                Change in
                                
                                
                                Realized
                                
                                
                                Change inLocation of
                                
                                Gain or (Loss)
                                
                                
                                Unrealized
                                
                                
                                Gain or (Loss)
                                
                                
                                UnrealizedDerivatives not
                                
                                Gain or (Loss)
                                
                                on Derivatives
                                
                                
                                Gain or (Loss)
                                
                                
                                on Derivatives
                                
                                
                                Gain or (Loss)Accounted for as
                                
                                on Derivatives
                                
                                Recognized
                                
                                
                                Recognized
                                
                                
                                Recognized
                                
                                
                                Recognizedfor as Hedging
                                
                                Recognized
                                
                                in Income
                                
                                
                                in Income
                                
                                
                                in Income
                                
                                
                                in IncomeInstruments
                                
                                in Income
                                
                                2009
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                2008Futures
      -
                                
                                Realized gain (loss) on
                                
                                $
                                (1,443,746,373
                                )
                                
                                $
                                -
                                
                                
                                $
                                (469,854,610
                                )
                                
                                $
                                -Commodity
      Contracts
                                
                                closed futures contractsChange in unrealized
                                
                                $
                                -
                                
                                
                                $
                                (34,072,395
                                )
                                
                                $
                                -
                                
                                
                                $
                                (27,748,750
                                )gain (loss) on openfutures contracts
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Swaps
      -
                                
                                Realized gain (loss) on
                                
                                $
                                (39,014,082
                                )
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Commodity
      Contracts
                                
                                closed swap contractsChange in unrealized
                                
                                $
                                -
                                
                                
                                $
                                (39,408,688)
                                
                                
                                $
                                -
                                
                                
                                $
                                -gain (loss) on openswap contracts
  114
 
 NOTE
9 – RECENT ACCOUNTING PRONOUNCEMENTS
 
 In March
2008, the Financial Accounting Standards Board released ASC 815.  ASC
815 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of, and gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. USNG adopted ASC 815 on January 1,
2009.
 
 In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”) No.
2010-06 “Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06
clarifies existing disclosure andrequires additional
disclosures regarding fair value measurements. Effective for interim and annual
reporting periodsbeginning after December
15, 2009, entities will be required to disclose significant transfers into and
out of Level 1and 2
measurements in the fair value hierarchy and the reasons for those transfers.
Effective for fiscal years beginningafter December 15, 2010,
and for interim periods within those fiscal years, entities will need to
disclose informationabout purchases, sales,
issuances and settlements of Level 3 securities on a gross basis, rather than as
a net number ascurrently required. The
General Partner is currently evaluating the impact ASU No. 2010-06 will have on
the financial statementdisclosures.
  NOTE
10 – SUBSEQUENT EVENTS
 
 USNG has
performed an evaluation of subsequent events through February 26, 2010,
which is the date the financial statements were available to be issued. This
evaluation did not result in any subsequent events that necessitated disclosures
and/or adjustments.
 
 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 of this annual
report on Form 10-K.
  115
 
 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 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
furnished to 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 also acted as a portfolio manager for
USNG and the Related Public Funds. He has been listed with the CFTC as a
Principal of the General Partner since November 29, 2005, as Branch Manager of
the General Partner since May 15, 2009 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 USBO and
USCI. Mr. Gerber also served as Vice President/Chief Investment Officer of
Lyon’s Gate Reinsurance Company, Ltd. from June of 2003 to December 2009. 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,
2009, had $219,616,809 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 1 Year, 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 47 years old.
 
 In
concluding that Mr. Gerber should serve as Management Director of the General
Partner, the General Partner considered his broad business experiences in the
industry including: forming and managing investment companies and commodity
pools, raising capital for such entities and founding and  managing
non-finance related companies.
  116
  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 USBO and USCI. 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 served as Secretary and Chief Compliance Officer of
the Ameristock ETF Trust from February 2007 until June 2008 when the trust was
liquidated, 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 45 years
old.
 
 In
concluding that Mr. Mah should serve as Management Director of the General
Partner, the General Partner considered his background in accounting and
finance, as well as his experience as Chief Compliance Officer for the General
Partner and Ameristock Corporation.
 
 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 USBO and USCI. 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 49 years old.
 
 In
concluding that Mr. Ngim should serve as Management Director of the General
Partner, the General Partner considered his broad career in the financial
services industry as well as experience as co-Portfolio Manager of the
Ameristock Mutual Fund.
 
 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 USBO and USCI. 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 50 years old.
 
 In
concluding that Mr. Nguyen should serve as Management Director of the General
Partner, the General Partner considered his background in the financial services
industry as well as his experience in leading the marketing efforts for
Ameristock Corporation.
 
 The
following individuals provide significant services to USNG and are employed by
the General Partner.
 
 John P.
Love has acted as the Portfolio Operations Manager for USNG and the
Related Public Funds since January 2006 and,
effective March 1, 2010, is the Senior Portfolio Manager for USNG and the
Related Public Funds.  Heis expected to be Senior Portfolio
Manager for USBO and USCI. 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 was registered with the CFTC as an Associated Person of the General
Partner from December 1, 2005 through April 16, 2009. Mr. Love has passed the
Level 1 Chartered Financial Analyst examination and is currently a Level II
candidate in the CFA Program. He holds a BFA in cinema-television from the
University of Southern California. Mr. Love is 38 years old.
  117
 
 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, USHO, USSO and US12NG in April 2007, April 2006, December 2007,
February 2008, April 2008, September, 2009 and November, 2009 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 USBO and USCI. 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. Mr. Hyland
received his Chartered Financial Analyst (“CFA”) designation in 1994. 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. Mr. Hyland is 50 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 USBO and USCI, if such funds commence
operations.  He has been listed with the CFTC as a Principal of the
General Partner since December 2005.  Mr. Robinson has been employed
as a Research Fellow with the Hoover Institution since 1993. The Hoover
Institution is a public policy think tank located on the campus of Stanford
University. Mr. Robinson graduated from Dartmouth College in 1979 and Oxford
University in 1982. Mr. Robinson received an MBA from the Stanford University
Graduate School of Business. 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
52 years old.
 
 In
concluding that Mr. Robinson should serve as Independent Director of the General
Partner, the General Partner considered his broad experience in the United
States government, including his employment at the Securities and Exchange
Commission, and his knowledge of and insight into public policy.
 
 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 UNGF, and the Related Public Funds and will
serve on behalf of USBO and USCI, if such funds commence operations. He has been
listed with the CFTC as a Principal of the General Partner since
November 2005. Mr. Ellis has been Chairman of International Absorbents, Inc., a
holding company of Absorption Corp., 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 which is engaged in developing,
manufacturing and marketing a wide range of animal care and industrial absorbent
products. 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. Polymer Solutions previously manufactured paints, coatings, stains and
primers for wood furniture manufacturers. Mr. Ellis is a professional engineer
with an MBA in international finance. Mr. Ellis is 63 years old.
 
 In
concluding that Mr. Ellis should serve as Independent Director of the General
Partner, the General Partner considered his experience serving as the Chairman
and Chief Executive Officer of a former publicly-traded corporation as well as
his experience as an entrepreneur.
  118
  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 USBO and USCI, if such funds commence operations. He has been
listed with the CFTC as a Principal of the General Partner since November 2005.
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 June 1997. Since June 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). Mr.
Fobes holds a B.S. degree in Finance and Economics from San Jose State
University in California. Mr. Fobes is 45 years old.
 
 In
concluding that Mr. Fobes should serve as Independent Director of the General
Partner, the General Partner considered his background as founder, Chairman and
Chief Executive Officer of a registered investment adviser as well as Chairman,
President, Chief Financial Officer and Portfolio Manager of
a mutual fund investment company.
 
 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, the Nicholas
and Melinda Gerber Living Trust, Howard Mah, Andrew Ngim, Robert Nguyen, Peter
Robinson, Gordon Ellis, Malcolm Fobes, John Love, John Hyland, Ray Allen and
Wainwright Holdings Inc. 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. John Love, and John Hyland execute trades on
behalf of USNG. In addition, Nicholas Gerber, John Hyland, Robert Nguyen 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.unitedstatesnaturalgas.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, 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.  The General Partner believes that it is necessary for each
member of the Board of Directors to possess many qualities and skills. The
General Partner further believes that all directors should possess a
considerable amount of business management and educational
experience.  There have not been any vacancies on the General
Partner’s Board of Directors since the commencement of operations of USOF in
April 2006; however, if such a vacancy were to occur, the members of the Board
of Directors would consider a candidate’s management experience as well as
his/her background, stature, conflicts of interest, integrity and
ethics.  In connection with this, the Board of Directors would also
consider issues of diversity, such as diversity of gender, race and national
origin, education, professional experience and differences in viewpoints and
skills. The Board of Directors does not have a formal policy with respect to
diversity; however, the Board of Directors believes that it is essential that
the Board members represent diverse viewpoints.
  119
 
 Corporate
Governance Policy
 
 The Board
of the General Partner has adopted a Corporate Governance Policy that applies to
USNG, USOF, US12OF, UGA, USHO, USSO, US12NG, USBO, and USCI. 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.
 
 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.
 
 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.
 
 Board
Leadership Structure and Role in Risk Oversight
 
 The Board
of the General Partner is led by a Chairman, Nicholas Gerber, who is also the
President and CEO of the General Partner.  The Board’s
responsibilities include (i) the selection, evaluation, retention and succession
of the Chief Executive Officer and the oversight of the selection and
performance of other executive officers, (ii) understanding, reviewing and
monitoring the implementation of strategic plans, annual operating plans and
budgets, (iii) the selection and oversight of USNG’s independent auditors and
the oversight of USNG’s financial statements, (iv) advising management on
significant issues, (v) the review and approval of significant company actions
and certain other matters, (vi) nominating directors and committee members and
overseeing effective corporate governance and (vii) the consideration of other
constituencies, such as the General Partner’s and USNG’s customers, employees,
suppliers and the communities impacted by USNG. The non-management directors
have designated Malcolm R. Fobes III as the presiding independent
director.  Mr. Fobes’s role as the presiding independent director
includes presiding over each executive session of the non-management directors,
facilitating communications by shareholders and employees with the
non-management directors and may also include representing the non-management
directors with respect to certain matters as to which the views of the
non-management directors are sought pursuant to USNG’s Corporate Governance
Policy.
 
 The Board
believes that Mr. Gerber is best situated to serve as Chairman of the General
Partner because he is the director most familiar with the business of the
General Partner, including investing in the futures contracts and other
commodity interests in order to track the benchmark futures contracts of USNG
and the Related Public Funds.  Because of his background, he is most
capable of effectively leading the discussion and execution of new strategic
objectives.  The independent directors of the General Partner are
actively involved in the oversight of the General Partner and, because of their
varied backgrounds, provide different perspectives in connection with the
oversight of the General Partner, USNG and the Related Public Funds. The General
Partner’s independent directors bring expertise from outside the General Partner
and the commodities industry, while Mr. Gerber brings company-specific and
industry-specific experience and expertise. The Board of Directors believes that
the combined role of Chairman and Chief Executive Officer facilitates
information flow between management and the Board of Directors, including the
independent directors, which is essential to effective
governance.
  120
 
 Risk
Management
 
 The full
Board of Directors is actively involved in overseeing the management and
operation of the General Partner, including oversight of the risks that face
USNG and the Related Public Funds.  For example, the Board of
Directors has adopted an Investment Policy and a Policy for Use of
Derivatives.  The policies are intended to ensure that the General
Partner take prudent and careful action while entering into and managing
investments taken by USNG including Futures Contracts or Other Natural
Gas-Related Investments such as over-the-counter swap
contracts.  Additionally, the policies are intended to provide
assurance that there is sufficient flexibility in controlling risks and returns
associated with the use of investments by USNG.  The policies, among
other things, limit USNG’s ability to have too high of a concentration of its
assets in non-exchange traded futures contracts or cleared swap contracts or
concentrating its investments in too few counterparties, absent prior approval
from the Board of Directors.  Existing counterparties are reviewed
periodically by the Board of Directors to ensure that they continue to meet the
criteria outlined in the policies.  The Board of Directors tasks
management with assessing risks, including market risk, credit risk, liquidity
risk, cash flow risk, basis risk, legal and tax risk, settlement risk, and
operational risk.
 
 The Board
of Directors also determines compensation payable to employees of the General
Partner, including the portfolio managers of each of USNG and the Related Public
Funds.  The compensation of certain employees of the General Partner
is, in part, based on the amount of assets under management by USNG and the
Related Public Funds.  The Board of Directors feels that compensating
certain employees, in part, based on the amount of assets under management is
appropriate since having more assets in a fund generally reflects that investors
perceive the fund’s investment objective is being met.  There are
certain risks that may arise as a result of a growth in assets under
management.  For example, if position limits are imposed on USNG and
the assets under management continue to increase, then USNG may not be able to
invest solely in the Benchmark Futures Contract and may have to invest in
over-the-counter swap contracts or Other Natural Gas-Related Investments as it
seeks to track its benchmark.  Other Futures Contracts in which USNG
may invest may not track changes in the price of the Benchmark Futures
Contract.  Other Natural Gas-Related Investments, including
over-the-counter swap contracts, may also expose USNG to increased counterparty
credit risk and may be less liquid and more difficult to value than Futures
Contracts.  USNG and the Related Public Funds ameliorate the potential
credit, liquidity and valuation risks by fully collateralizing any
over-the-counter swap contracts or other investments.  The Board of
Directors in making compensation decisions consider whether a compensation
arrangement would expose USNG or the Related Public Funds to additional risks
and whether the risks posed by such arrangement are consistent with the best
interests of USNG’s investors.
 
 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.
 
 Section 16(a)
Beneficial Ownership Reporting Compliance
 
 Section 16(a)
of the Exchange Act requires directors and executive officers of the General
Partner and persons who are beneficial owners of at least 10% of USNG’s units to
file with the SEC an Initial Statement of Beneficial Ownership of Securities on
Form 3 within 10 calendar days of first becoming a director, executive officer
or beneficial owner of at least 10% of USNG’s units and a Statement of Changes
of Beneficial Ownership of Securities on Form 4 within 2 business days of a
subsequent acquisition or disposition of units of USNG.  To USNG’s
knowledge, based upon a review of copies of reports furnished to USNG with
respect to the fiscal year ended December 31, 2009 and upon the written
representations of the directors and executive officers of the General Partner,
all of such persons have filed all required reports. However, Mr.
John Hyland did not timely file an Initial Statement of Beneficial
Ownership of Securities on Form 3 upon becoming an executive officer of the
General Partner in compliance with the applicable reporting
deadline.  Mr. Hyland has since filed an Initial Statement of
Beneficial Ownership of Securities on Form 3.  As of the date of this
annual report on Form 10-K, Mr. Hyland does not own any units of
USNG.
  121
  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 it 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 2009, USNG paid the General Partner aggregate management
fees of $14,189,176.
  Director
Compensation.
 
 The
following table sets forth compensation earned during the year ended
December 31, 2009, by the directors of the General Partner. USNG’s
portion of the aggregate fees paid to the Directors for the calendar year 2009
was $142,322.
 
 Change inPensionFees
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            Value andEarned
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            Nonqualifiedor
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            Non-Equity
                                                            
                                                            DeferredPaid in
                                                            
                                                            Stock
                                                            
                                                            Option
                                                            
                                                            Incentive Plan
                                                            
                                                            Compensation
                                                            
                                                            
                                                            All OtherName
                                                            
                                                            Cash
                                                            
                                                            Awards
                                                            
                                                            Awards
                                                            
                                                            Compensation
                                                            
                                                            Plan
                                                            
                                                            
                                                            Compensation
                                                            
                                                            
                                                            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
                                                            
                                                            $
                                                            100,000
                                                            
                                                            NA
                                                            
                                                            NA
                                                            
                                                            NA
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            $
                                                            100,000Gordon L. Ellis
                                                            
                                                            $
                                                            101,000
                                                            
                                                            NA
                                                            
                                                            NA
                                                            
                                                            NA
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            $
                                                            101,000Malcolm R. Fobes III(1)
                                                            
                                                            $
                                                            121,000
                                                            
                                                            NA
                                                            
                                                            NA
                                                            
                                                            NA
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            $
                                                            0
                                                            
                                                            
                                                            $
                                                            121,000
  (1)
              Mr.
      Fobes serves as chairman of the audit committee of the General Partner and
      receives additional compensation in recognition of the additional
      responsibilities he has undertaken in this
role.
 
 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.
  122
 
 Director
Independence
 
 In
February 2010, 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.
 
 Item
      14.
              Principal
      Accountant Fees and Services.
  The fees
for services billed to USNG by its independent auditors for the last two fiscal
years are as follows:
 
 2009
                          
                          2008Audit
      fees
                          
                          $
                          160,000
                          
                          $
                          160,000Audit-related
      fees
                          
                          
                          0
                          
                          
                          -Tax
      fees
                          
                          
                          0
                          
                          
                          -All
      other fees
                          
                          
                          0
                          
                          
                          -$
                          160,000
                          
                          $
                          160,000*
      Amount expected to be billed for 2009 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 certain of 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.
 
 Part
IV
 
 Item
      15.
              Exhibits
      and Financial Statement Schedules.
 
 1.
                See
      Index to Financial Statements on page
95.
 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.
 
 123
 
 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.3.3*
                  
                  Fourth
      Amended and Restated Limited Liability Company Agreement of the General
      Partner.10.1***
                  
                  Form
      of Initial Authorized Purchaser Agreement.10.2*
                  
                  Marketing
      Agent Agreement.10.3****
                  
                  License
      Agreement.10.4*
                  
                  Custodian
      Agreement.10.5*
                  
                  Amendment
      Agreement to the Custodian Agreement.10.6*
                  
                  Administrative
      Agency Agreement.10.7*
                  
                  Amendment
      Agreement to the Administrative Agency Agreement.10.8*
                  
                  Amendment
      Agreement to the Marketing Agent 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 Quarterly Report on Form 10-Q for the Quarter
      ended September 30, 2009 filed on November 9, 2009.**
                  
                  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 Quarterly Report on Form 10-Q for the Quarter
      ended March 31, 2007, filed on June 1, 2007.*****
                  
                  Incorporated
      by reference to Registrant’s Annual Report on Form 10-K for the Year ended
      December 31, 2008 filed on March 2, 2009.******
                  
                  Filed
      herewith.
  124
  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. GerberNicholas
      D. GerberPresident
      and Chief Executive Officer(Principal
      executive officer)Date:
      March 1, 2010By:
                  /s/ Howard
      MahHoward
      MahChief
      Financial Officer(Principal
      financial and accounting officer)Date:
      March 1, 2010
  125
  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
      1, 2010Nicholas
      D. Gerber/s/ Howard
      Mah
                                
                                Management
      Director
                                March
      1, 2010Howard
      Mah/s/ Andrew
      Ngim
                                
                                Management
      Director
                                March
      1, 2010Andrew
      Ngim/s/
      Robert
      Nguyen
                                
                                Management
      Director
                                March
      1, 2010Robert
      Nguyen/s/
      Peter
      M. Robinson
                                
                                Independent
      Director
                                March
      1, 2010Peter
      M. Robinson/s/
      Gordon
      L. Ellis
                                
                                Independent
      Director
                                March
      1, 2010Gordon
      L. Ellis/s
      Malcolm R. Fobes III
                                
                                Independent
      Director
                                March
      1, 2010Malcolm
      R. Fobes III
  126