Quarterly Report – December 31, 2006

January 25, 2007

As noted in the past, ELCO’s portfolio approach is based on our position that the present energy cycle will extend over a longer period than in past periods largely because of increasing oil and gas demand and tightening supply across the “energy chain. This macro factor remains the key reason behind our positive stance on the industry. Oil supply growth has not matched demand increases over the past few years. Given this scenario, we remain very bullish about the Fund’s outlook relative to other sectors of the economy. Nevertheless, over the near term, investment performance is impacted by many variables, both fundamental and psychological. In order to navigate successfully through challenges posed by energy price volatility caused by adverse weather conditions, economic dislocations, and rising interest rates, we invest in as many as 8-10 industry sub-sectors to enhance diversification. As an example, in the fourth quarter of 2006, we were once again aided by a relatively higher percentage of MLPs (Master Limited Partnerships), which helped to offset the declines of the oil and gas sectors.

We began 2006, more heavily invested in the E&P and oil service sectors. Companies such as Chesapeake Energy Corporation, Transocean, Inc., Grant Prideco, Inc., Halliburton Co., and XTO Energy Inc. were major holdings. However with demand for both oil and gas slowing down, largely because of their high prices coupled with unfavorable weather, inventory levels rose significantly. Accordingly, early in the year, we started to decrease the portfolios exposure to commodity related companies (both oil, natural gas and oil service) and reinvested the funds in other sectors including MLPs, energy related engineering and construction infrastructure, and alternative energy as examples.

In our opinion, energy is one of the most attractive sectors relative to the other sectors that make up the S&P 500 Index. Positive fundamentals are likely to persist over the next several years and earnings and cash flow growth should continue to outstrip expectations, in terms of magnitude and duration. Currently energy’s weighting in the S&P 500 Index is only 9.8% compared with 30% in the 1970s, whereas it contributed 43.66% of the Index’s earnings in 2006. Importantly, we believe that energy companies included in the S&P 500 can increase their dividends over 10% annually and continue the trend of stock buybacks. In summary, there is a strong case to be made for taking a bullish position on energy and the related sub sectors. As value investors, we are taking advantage of stock weakness and utilizing all available tools and strategies to reduce volatility i.e. risk.

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.