Investment Solutions

Quarterly Report – December 31, 2013

January 23, 2014

As noted in our third quarter of 2013 report, we believe that “there has rarely been a more attractive time to invest in energy.” The idea that the United States is actually positioned to become energy independent because of new supplies of oil and gas was totally unexpected and is an extraordinary industry “game changer”. While there are many hurdles that will probably arise, especially, in our judgment, related to regulatory and political issues, the investment opportunities are expected to be huge covering all sectors of the Fund’s portfolio. For example, significant increases in U.S. gas production have resulted in lower prices that has improved its competitive position versus other fuels such as coal, oil, and nuclear power for electricity generation. Also, new export businesses are developing for natural gas liquids (NGLs) and liquid petroleum (LPG). For the first time in decades, companies that benefit from the increased domestic gas supply are locating or expanding plants in the United States. Prime examples are the chemical and railroad industries. Increased supplies of ethane, which is a byproduct of natural gas processing is a major factor behind the expansion of new manufacturing capacity, while the dramatic rise in oil production from such plays as the Bakken in North Dakota, has resulted in railroads becoming important transporters of the fuel because of the lack of adequate pipeline capacity. Tax advantaged Master Limited Partnerships (MLPs), are among the major beneficiaries of the boom in energy infrastructure. Pipeline transportation (both gas and oil), gathering and processing, storage, and terminals, continue to significantly attract new investment, a trend that has accelerated over the past few years and is likely to continue in 2014. Therefore, we believe that the outlook remains positive for this high yield, asset class group. While MLPs remain the Fund’s largest holding, we have placed more emphasis on the MLPs’ General Partners (GP’s) that offer above average distribution (dividend) growth. These companies offer asset dropdown potential and visible organic growth opportunities. In 2013, MLPs raised a record $31 Billion and we expect another active financing year in 2014.

We continued to be generally bearish on the electric utility group last year, and added a number of power companies to the portfolio’s short position. In 2013, utilities underperformed the S&P 500 Index by over 20%, and we do not anticipate much improvement in 2014. Nevertheless, there are special situations that stand out such as NextEra Energy, which was a winner in 2013, and should deliver above average earnings and dividend growth through at least 2016. It also owns the largest renewable energy portfolio in the industry and is studying ways of monetizing its holdings. Last year, some Green energy companies recovered after periods of significant losses. While the outlook has improved for wind and solar power generation, this is a high beta group and most companies still remain dependent on government subsidies. Nevertheless, opportunities do occasionally arise, such as NextEra Energy, and, as such, the stock is suitable for the portfolio.

In conclusion, we remain enthusiastic about the outlook for diversified energy and repeat our position that “the time is right” for this important and transforming part of the economy and appreciate your continued support. Our energy value chain approach to asset allocation should continue to drive performance and provide portfolio diversification.

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 ( 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.