Quarterly Report – September 30, 2006

November 1, 2006

ELCO’s portfolio approach is based on our long held belief that the current energy cycle will be of long duration and more demand driven than in past years. However, we recognize that over the shorter term, investment performance can be impacted by many changes both fundamental and psychological. Therefore, our focus is on the entire “energy chain” thereby enhancing diversification and reducing volatility. For example, in the third quarter 2006, the cessation of interest rate boosts, after 17 consecutive increases, aided the MLP (Master Limited Partnership) performance which acted to offset the more commodity related sub sectors in the “energy space.” (a reprint of an interview with Dan Tulis in the Oil and Gas Investor magazine on how the “energy chain” investing strategy has been used to improve the Funds’ record since inception in 2003 was sent in a recent mailing). Specifically, ELCO Select covers eight energy related sub sectors that encompass roughly 300 companies.

Overall, we remain very positive on the outlook for energy investments. An important reason for this view is our belief that past periods of excess capacity in oil and gas and electric power continue to narrow, while demand growth accelerates. With respect to the latter, on October 16, 2006, the North American Electric Reliability Council (NERC) issued its annual Long-Term Reliability Assessment. The report forecasted that California, the Northeast, and Texas are regions with capacity reserve margins declining below minimum threshold levels over the next 2-3 years. Construction of new transmission lines is slow and continues to be confronted with obstacles. Accordingly, we believe companies that have non-regulated power plants in the tightest regions are positioned to benefit. The Fund’s increasing investments in electric power generators such as Dynegy, Edison International, NRG Energy and TXU Corp reflect this narrowing of the U.S. excess reserve position over the coming years. Another sub sector that plays into this theme is the electrical contractors and service companies, such as: Chicago Bridge & Iron, General Electric, Quanta Corporation and Shaw Group. These companies have a solid position in the Select portfolio and we continue to seek out opportunities in these businesses and have added to holdings in the third quarter.

With respect to the petroleum outlook, it comes down to the fact that relatively modest revisions in global supply and demand assumptions can make the difference between over supply or shortages. Projections of oil prices are wrought with uncertainty, but a consensus of the “experts” is that the range of $50-$60 a barrel is reasonable over the next few years, although geopolitical tensions in the Middle East, Africa and other parts of the world can cause significant supply interruptions that would result in quick price spikes. Also, most economists are currently predicting a growing GDP in the fourth quarter of 2006, and 2007, which will impact demand. China is projected by the U.S. Department of Energy to consume 7.5 million barrels a day in 2006, an increase of 500,000 barrels a day over last year, which equates to roughly 38 percent of the increase in the world’s oil. Given China’s unbelievable appetite for oil, it is hard to envision a material decline in the price over the foreseeable future. Nevertheless, given the many global uncertainties and volatility, we continue to focus more on companies that are located in North America and drill primarily for natural gas. As such, we have recently added to positions in Anadarko Petroleum, Devon, and Southwestern Energy.

The portfolio benefited from our holdings in energy Master Limited Partnerships (MLPs) and Canadian Royalty Trusts. On average, approximately 40% of the Fund is invested in these high yield asset classes. MLPs have an excellent record of increasing dividends. The Royalty Trusts also offer excellent returns, particularly during periods when oil and gas prices rise. Therefore, our constructive outlook for commodity prices over the longer term bodes well for these sub sectors, which are growing in popularity in the U. S., as more companies list their shares on the New York Stock Exchange.

In summary, we are optimistic about the balance of 2006, and increasingly 2007, and 2008. In our opinion, the present period is different from any others in the past in that demand growth is outstripping incremental supply across all energy chain sectors. Cash flow is at record levels and many company managements are announcing significant share buy back programs, a trend that we anticipate will continue over the foreseeable future. Given the liquidity of the futures market, oil and gas companies can hedge an expanding portion of their production, which translates into improved earnings visibility and higher equity valuations.

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.