Effective January 1, 2008, USG adopted FAS 157 - Fair Value Measurements (“FAS 157” or the “Statement”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurement. The changes to current practice resulting from the application of the Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. The Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of USG (observable inputs) and (2) USG’s own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the FAS 157 hierarchy are as follows:

 

12

---

 

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 1 that are observable for the asset or liability, either directly or indirectly. Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

 

Level III - Unobservable pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

In some instances, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.

 

The following table summarizes the valuation of USG’s securities at March 31, 2008 using the fair value hierarchy:

 

At March 31, 2008		Total		Level I		Level II		Level III
Derivative assets		$ 354,169		$ 354,169		$ -		$ -

 

13

---

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with the condensed financial statements and the notes thereto of the United States Gasoline Fund, LP (“USG”) included elsewhere in this quarterly report on Form 10-Q.

 

Forward-Looking Information

 

This quarterly report on Form 10-Q, 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 USG’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 USG’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 USG cannot assure investors that the projections included in these forward-looking statements will come to pass. USG’s actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

 

USG has based the forward-looking statements included in this quarterly report on Form 10-Q on information available to it on the date of this quarterly report on Form 10-Q, and USG assumes no obligation to update any such forward-looking statements. Although USG 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 USG may make directly to them or through reports that USG in the future files with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Introduction

USG, a Delaware limited partnership, is a commodity pool that issues units that may be purchased and sold on the American Stock Exchange (the “AMEX”). The investment objective of USG is for changes in percentage terms of its units’ net asset value (“NAV”) on a daily basis to reflect the changes in percentage terms in the spot price of gasoline, also known as reformulated gasoline blendstock for oxygen blending, or “RBOB”, for delivery to the New York harbor, also on a daily basis, as measured by the changes in the price of the futures contract on gasoline as traded on the New York Mercantile Exchange (the “NYMEX”) that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case the futures contract will be the next month contract to expire, less USG’s expenses.

USG seeks to achieve its investment objective by investing in a combination of gasoline futures contracts and other gasoline related investments such that changes in USG’s NAV, measured in percentage terms, will closely track the changes in the price of a specified gasoline futures contract (the “Benchmark Futures Contract”), also measured in percentage terms. USG’s General Partner believes the Benchmark Futures Contract historically has exhibited a close correlation with the spot price of gasoline. It is not the intent of USG to be operated in a fashion such that the NAV will equal, in dollar terms, the spot price of gasoline or any particular futures contract based on gasoline. Management believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in listed gasoline futures contracts.

On any valuation day, the Benchmark Futures Contract is the near month futures contract for gasoline 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 gasoline 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.

USG may also invest in futures contracts for other types of gasoline, crude oil, natural gas, heating oil 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 gasoline-related investments such as cash-settled options on Futures Contracts, forward contracts for gasoline and over-the-counter transactions that are based on the price of gasoline, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Gasoline Related Investments”). For convenience and unless otherwise specified, Futures Contracts and Other Gasoline Related Investments collectively are referred to as “Gasoline Interests” in this quarterly report on Form 10-Q.

 

14

---

 

The general partner of USG, Victoria Bay Asset Management, LLC (the “General Partner”), which is registered as a commodity pool operator (“CPO”) with the U.S. Commodity Futures Trading Commission (the “CFTC”), is authorized by the Amended and Restated Agreement of Limited Partnership of USG (the “LP Agreement”) to manage USG. The General Partner is authorized by USG in its sole judgment to employ and establish the terms of employment for, and termination of, commodity trading advisors or futures commission merchants.

Valuation of Futures Contracts and the Computation of the NAV

The NAV of USG units is calculated once each trading day as of the earlier of the close of the New York Stock Exchange (the “NYSE”) or  4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time. Trading on the AMEX typically closes at 4:15 p.m. New York time. USG 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 USG investments, including ICE Futures or other futures contracts, as of the earlier of the close of the NYSE or 4:00 p.m. New York time.

 

Management’s Discussion of Results of Operations and the Gasoline Market

Results of Operations.  On February 26, 2008, USG listed its units on the AMEX under the ticker symbol “UGA.” On that day USG established its initial offering price at $50.00 per unit and issued 300,000 units to the initial authorized purchaser, Kellogg Capital Group, LLC, in exchange for $15,001,000 in cash. As of March 31, 2008, USG had issued 400,000 units, all of which were outstanding.

More units may have been issued by USG than are outstanding due to the redemption of units. Unlike funds that are registered under the Investment Company Act of 1940, as amended, units that have been redeemed by USG cannot be resold by USG without registration of the offering of such units with the SEC. As a result, USG contemplates that additional offerings of its units will be registered with the SEC in the future in anticipation of additional issuances and redemptions.

 

As of March 31, 2008, the total unrealized gain on gasoline Futures Contracts owned or held on that day was $354,169 and USG established cash deposits, including cash investments in money market funds, that were equal to $19,066,493. The majority of those cash assets were held in overnight deposits at USG’s custodian bank, while 10.43% of the cash balance was held as margin deposits with the futures commission merchant for the Futures Contracts purchased. The ending per unit NAV on March 31, 2008 was $48.53.

Portfolio Expenses. USG’s expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees and the fees and expenses of the independent directors of the General Partner. The management fee that USG pays to the General Partner is calculated as a percentage of the total net assets of USG. USG pays the General Partner a management fee of 0.60% of net assets.  The fee is accrued daily.

During the period from February 26, 2008 to March 31, 2008, the daily average total net assets of USG were $15,426,295. During the period from February 26, 2008 to March 31, 2008, the management fee paid by USG amounted to $8,851, and was accrued daily. Management fees as a percentage of average net assets averaged 0.60% over the course of this period.

 

USG pays for all brokerage fees, taxes and other expenses, including certain tax reporting costs, licensing fees for the use of intellectual property, ongoing registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”) and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith.  For the period from February 26, 2008 to March 31, 2008, USG did not incur any ongoing registration fees or other offering expenses. In addition, the General Partner, though under no obligation to do so, has agreed to pay certain costs for tax reporting and audit expenses normally borne by USG to the extent that such expenses exceed 0.15% (15 basis points) of its NAV, on an annualized basis, until December 31, 2008. The General Partner has no obligation to continue such payment into subsequent years. USG is responsible for paying the fees and expenses, including directors’ and officers’ liability insurance, of the independent directors of the General Partner who are also audit committee members. USG shares these fees with USOF, USNG, US12OF and USHO based on the relative assets of each fund computed on a daily basis. These fees for calendar year 2008 are estimated to be a total of $286,000 for all five funds. 

 

15

---

 

USG also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Gasoline Related Investments or short-term obligations of the United States of two years or less (“Treasuries”). During the period from February 26, 2008 to March 31, 2008, total commissions paid to brokers amounted to $1,748. Prior to the initial offering of its units, USG had estimated that its annual level of such commissions was expected to be 0.17% of total net assets. As an annualized percentage of average net assets, the figure for the period from February 26, 2008 to March 31, 2008 represented approximately 0.12% of average net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.

  

Interest Income. USG seeks to invest its assets such that it holds Futures Contracts and Other Gasoline Related Investments in an amount equal to the total net assets of the portfolio. Typically, such investments do not require USG to pay the full amount of the contract value at the time of purchase, but rather require USG to post an amount as a margin deposit against the eventual settlement of the contract. As a result, USG retains an amount that is approximately equal to its total net assets, which USG invests in Treasuries, cash and/or cash equivalents. This includes both the amount on deposit with the futures commission merchant as margin, as well as unrestricted cash held with USG’s custodian bank. The Treasuries, cash and/or cash equivalents earn interest that accrues on a daily basis. For the period from February 26, 2008 to March 31, 2008, USG earned $28,325 in interest income on such cash holdings. Based on USG’s average daily total net assets during this time period, this is equivalent to an annualized yield of 1.92%. USG did not purchase Treasuries during the period from February 26, 2008 to March 31, 2008 and held all of its funds in cash and/or cash equivalents during this time period.

 

Tracking USG’s Benchmark. USG seeks to manage its portfolio such that changes in its average daily NAV, on a percentage basis, closely track changes in the average of the daily price of the Benchmark Futures Contract, also on a percentage basis. Specifically, USG seeks to manage the portfolio such that over any rolling period of 30 valuation days, the average daily change in the NAV is within a range of 90% to 110% (0.9 to 1.1) of the average daily change of the Benchmark Futures Contract. As an example, if the average daily movement of the Benchmark Futures Contract for a particular 30-day time period was 0.5% per day, USG 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). USG’s portfolio management goals do not include trying to make the nominal price of USG’s NAV equal to the nominal price of the current Benchmark Futures Contract or the spot price for gasoline. Management believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in listed gasoline Futures Contracts.

 

Since the offering of USG units to the public on February 26, 2008 to March 31, 2008, the simple average daily change in the Benchmark Futures Contract was (0.093)%, while the simple average daily change in the NAV of USG over the same time period was (0.087)%. The average daily difference was 0.006% (or 0.6 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 2.79%, meaning that over this time period USG’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.

 

 

16

---

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

 

An alternative tracking measurement of the return performance of USG versus the return of its Benchmark Futures Contract can be calculated by comparing the actual return of USG, measured by changes in its NAV, versus the expected changes in its NAV under the assumption that USG’s returns had been exactly the same as the daily changes in its Benchmark Futures Contract. 

For the period from February 26, 2008 to March 31, 2008, the actual total return of USG as measured by changes in its NAV was (2.94)%. This is based on an initial NAV of $50.00 on February 26, 2008 and an ending NAV as of March 31, 2008 of $48.53. During this time period, USG made no distributions to its unitholders. However, if USG’s daily changes in its NAV had instead exactly tracked the changes in the daily return of the Benchmark Futures Contract, USG would have ended the first quarter of 2008 with an estimated NAV of $48.45, for a total return over the relevant time period of (3.10)%. The difference between the actual NAV total return of USG of (2.94)% and the expected total return based on the Benchmark Futures Contract of (3.10)% was an error over the time period of 0.16%, which is to say that USG’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 USG collects on its cash and cash equivalent holdings. In addition, during the period from February 26, 2008 to March 31, 2008, USG also collected fees from brokerage firms creating or redeeming baskets of units. This income also contributed to USG’s actual return exceeding the benchmark results. However, if the total assets of USG 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.

There are currently three factors that have impacted, during the latest period, or are most likely to impact, USG’s ability to accurately track its Benchmark Futures Contract.

First, USG may buy or sell its holdings in the then current Benchmark Futures Contract at a price other than the closing settlement price of that contract on the day in which USG executes the trade. In that case, USG may get a price that is higher, or lower, than that of the Benchmark Futures Contract, which could cause the changes in the daily NAV of USG to either be too high or too low relative to the changes in the daily benchmark. During the period from February 26, 2008 to March 31, 2008, management attempted to minimize the effect of these transactions by seeking to execute its purchase or sales of the Benchmark Futures Contracts at, or as close as possible to, the end of the day settlement price. However, it may not always be possible for USG 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 USG’s attempt to track its benchmark over time.

 

17

---

 

Second, USG earns interest on its cash, cash equivalents and Treasury holdings. USG is not required to distribute any portion of its income to its unitholders and did not make any distributions to unitholders during the period from February 26, 2008 to March 31, 2008. Interest payments, and any other income, were retained within the portfolio and added to USG’s NAV. When this income exceeds the level of USG’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), USG will realize a net yield that will tend to cause daily changes in the NAV of USG to track slightly higher than daily changes in the Benchmark Futures Contract. During the period from February 26, 2008 to March 31, 2008, USG earned, on an annualized basis, approximately 1.92% on its cash holdings. It also incurred cash expenses on an annualized basis of 0.60% for management fees and approximately 0.12% in brokerage commission costs related to the purchase and sale of futures contracts, and 0.13% for other expenses. The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately 1.07% and affected USG’s ability to track its benchmark. If short-term interest rates rise above the current levels, the level of deviation created by the yield would increase. Conversely, if short-term interest rates were to decline, the amount of error created by the yield would decrease. If short-term yields drop to a level lower than the combined expenses of the management fee and the brokerage commissions, then the tracking error would become a negative number and would tend to cause the daily returns of the NAV to underperform the daily returns of the Benchmark Futures Contract.

 

Third, USG may hold Other Gasoline 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 could result in daily changes in the NAV of USG that are either too high, or too low, relative to the daily changes in the benchmark. During the period from February 26, 2008 to March 31, 2008, USG did not hold any Other Gasoline Related Investments. However, there can be no assurance that in future quarters USG will not make use of such Other Gasoline Related Investments.