Quarterly Report – June 30, 2004

July 27, 2004

We continue to be positive on the outlook for energy related investments, especially the oil and gas exploration and production and oil service sectors. Supply and demand fundamentals for both remain very tight. Domestic natural gas production, despite a record number of rigs drilling, has declined over 5% from 1999 to 2003. The bottom line result is that both natural gas and oil prices continue to exceed consensus forecasts, which, in turn, translates into higher company cash flow, earnings and stock valuations.

Also supporting our positive outlook for investment in the sector is the growing confidence that the U.S. and world economies are improving. Also the insatiable demand for energy in Asia, particularly China , which is forecasted to represent about 50% of incremental worldwide oil consumption in 2004, and the volatile events in the Middle East , are major reasons for optimism that prices should not collapse. As a consequence, for over the past eighteen months, “Street” estimates of current and future oil and gas commodity prices keep rising, which in turn, favorably impacts net asset values earnings and individual company stock price targets.

However, as pointed out in all our prior communications, stock selectivity is most important. For example, we typically favor oil and gas exploration companies with growing reserves, production and cash flow. Also, the exploration and production industry's strengthened financial performance is expected to have a positive impact on the oil service sector with upstream capital spending expanding an estimated 10%-12% in 2004 over 2003, compared with projections of 7% - 9% earlier in the year.

The portfolio's performance has also been aided by the purchase of selected electric power merchants including AES Corp. and Williams Cos. Since bond rating agency downgrades have been so instrumental in the industry's collapse and financial meltdowns, it was encouraging that a recent credit agency (Fitch) report stated that the “U.S. energy merchant sector has exhibited further signs of stabilization as companies continue to build on their successes in the refinancing arena and begin to roll out more clearly defined strategies to reduce debt leverage on the coming years”.

Overall energy was one of the best market performers in the second quarter, which was followed by a significant net dollar inflow into energy mutual funds during the period. Since the sector accounts for only about 6.3% of the S&P 500 Index, versus 13% in 1990 and 28% in 1980, we believe there is ample opportunity for growth. Diversification across the entire energy chain aided the Fund's performance.

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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.