Quarterly Report – March 31, 2006

April 27, 2006

As we write this quarterly report, the crude oil price approximates $71 per barrel and natural gas $7.00 per mcf, and the twelve-month future strip price is trading around $10.00 per mcf. Worries about the global situation, particularly in the volatile Mideast, Nigeria and Venezuela, and the decline in oil inventories, are major factors behind the price strength. As, we have written in the past, our position is that this energy cycle is different; i.e., it will be long and influenced by more variables impacting the sector than in the past. Today, there is mounting concern that excess world oil capacity is shrinking while worldwide demand is increasing, particularly in China and India. Specifically, in the first quarter, China’s GDP increased over 10.2 percent year to year and vehicle sales, 50.9%. In North America, shrinkage in natural gas supply over the past decade was masked by years of mild winters and cool summers. For years gas prices did not incentify companies to drill aggressively. Production and reserve shortfalls were made up by imports from Canada. This has changed and today, notwithstanding one of the mildest winters on record and resulting high storage, gas prices remain at a level that encourages exploration. However, there does not appear to be any “quick fixes. The United States can no longer count on increased volumes imported from Canada. Liquefied Natural Gas (LNG), a source of future supply, is running into political opposition largely because of resistance to the construction of receiving terminals. Also, global competition for LNG from countries such as Japan, is becoming more of a concern. Coal and nuclear energy have their own issues that add to the premium value and importance of natural gas over the foreseeable future.

Worries about higher interest rates have negatively impacted electric utilities and Master Limited Partnerships (MLPs) during the quarter. While “Street” consensus anticipates another 25 basis point boost in interest rates at the Fed’s next meeting in May, it now appears that the economy might soon show signs of slowing in the second half of 2006, which is likely to result in an end to the Federal Reserve’s two-year tightening program. Accordingly, we have been selectively adding to the Fund’s MLP position. Our emphasis is placed on those MLPs that are able to increase their dividends at growth rates that exceed the peer group averages and the rise in interest rates.

We continue to be bullish about the overall outlook and utilize the “energy chain” investment approach to reduce volatility and enhance the Fund’s performance during different stages of the economic cycle. We see many positives unfolding including: (1) favorable earning surprises over the 2006-2008 period, (2) unprecedented E&P and oil service cash flow that can be used to broadly enhance shareholder value, (3) an increase in company consolidations, (4) greater emphasis placed on energy infrastrure, i.e., gas and oil pipelines, electric power transmissions and LNG facilities, etc.,  (5) further deleveraging (debt reduction) without the past pressure to sell good assets and or significant amounts of equity and (6) greater interest in alternative energy opportunities across many sectors of the economy.

In summary, as emphasized in the past, while the macro energy outlook remains very positive, individual stock selection continues to be the key to successful portfolio performance and, as value investors, we are taking advantage of equity pull backs and utilize all available tools and strategies to capitalize on the opportunities and to reduce volatility. Again, we appreciate all of our partners’ support.

Certain statements contained herein may contain "forward-looking statements" within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic factors.

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About ELCO Management, LLC
Established in 1995 and based in New York, ELCO Management (www.elcomanagement.com) offers investment solutions to high net worth individuals and institutions. ELCO also manages two highly specialized energy funds: the ELCO Energy Fund, L.P. and the ELCO Select Fund L.P.