Quarterly Report – June 30, 2007

July 17, 2007

It now appears that with oil currently trading at almost $73 a barrel, $80 a barrel is becoming a distinct possibility. Hot weather, hurricane activity, and international problems could be the triggers that drive the price to historic highs. Also, non-OPEC countries have not increased their production, as anticipated, and prospects have been diminishing.

Similar to the first quarter, the Fund’s positive performance benefited from the incremental value of the “energy chain” which provides the opportunities and diversification that is largely missing in a narrowly focused natural resources type portfolio. Our approach continues to be based on our belief that energy supply, (coal excluded) i.e. oil, natural gas, and electric power are in a tightening trend that will result in firmer commodity prices and higher profits for most industry sub-sectors over the foreseeable future.

On July 9^th 2007, The Wall Street Journal noted that the Paris based International Energy Agency (IEA) has warned of an impending crunch in the supply of oil and natural gas. IEA, the energy overseer of the 26 most advanced world economies, issued its annual five-year outlook, 2007 - 2012 projecting tighter oil supply conditions than it had previously forecast. While global demand is projected to increase 12.6 million barrels a day by 2012, non-OPEC supply is expected to expand only 2.6 million barrels a day. OPEC’s spare capacity (the global safety cushion) is estimated to remain constrained until 2010, and then decline to minimum levels by 2012. Shrinking of OPEC’s spare capacity has taken place over the past ten years, the major reason for the oil market’s volatility, nervousness, and higher prices.

Our performance was aided by our holdings of infrastructure investments with most stock prices reaching 52-week highs and regulated electric utility shorts (some hitting 52 week lows). In terms of our MLP holdings, the month of June could mark a major positive political inflection point. Specifically, some non-infrastructure financial companies formed MLPs to avoid paying corporate taxes. Last month, in both Senate and House energy bills, a provision was inserted that would disallow such restructurings. We believe that this could be bullish for energy MLPs, who not only would maintain their tax-advantaged status, but also reduce the probability of negative legislation and preclude other industries from employing it.

In terms of specific MLP stocks, one of our themes continues to work. XTO, one of our holdings just announced plans to form a MLP. In addition, Spectra Corporation’s recent MLP IPO has performed very well, up around 30%, reflecting investors continuing strong appetite for this asset class. More importantly, our pipeline holdings; i.e. El Paso, Williams Companies, and Southern Union are particularly undervalued if the new Spectra MLP valuation is applied. Both El Paso and Southern Union have announced plans to form MLPs, while Williams already has one. They stand out because of their valuable asset drop down potential into the new entity.

We also believe the Fund is well positioned to take advantage of the growing tightening of power supply in certain U.S. regions. Our investments in FPL, Dynegy, Excelon, NRG, AES, Pennsylvania Power and Light, and Edison International are examples of utilities that should benefit from reduced generation availability and resulting rising power prices. With state and local governments making it difficult to get permits for either coal or nuclear plants, we believe that selected utility valuations will continue to rise. Companies such as those just mentioned with non-regulated electric generation, we believe, should be the “winners”. Also, the cost of electric generation plant construction is increasing significantly which has raised the value of existing power generation assets and equity values.

As we move into the third quarter of 2007, we are maintaining our net long bias of about 70%. In our opinion, a decline in oil prices much below $60 a barrel is unlikely, while $80 a barrel over the near term is becoming more of a possibility. Despite high gasoline and distillate prices, demand remains healthy while incremental non-OPEC supply has failed to materialize. In terms of natural gas, prices continue to trade in narrow ranges and are volatile. Storage is historically high, but any sustained heat wave or hurricane activity would positively impact prices. More importantly, long-term demand/supply dynamics continue to be positive.

In conclusion, we remain bullish on the long-term energy outlook and as value investors, we view shorter-term consolidations as opportunities.

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. This report is not a recommendation to either buy or sell any securities mentioned.

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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.