##### Table of Contents









UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION


Washington, D.C.
    20549










Form 10-Q




|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | Quarterly report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 
|   |  |                                                                                             
|   |  |                                                                                             
|   |  | For the quarterly period ended
    September 30, 2006                                       
|OR
|   |  |                                                                                             
|   |  |                                                                                             
|o  |  | Transition report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934
|   |  |                                                                                             





Commission file number: 001-32329










Copano Energy, L.L.C.


(Exact Name of Registrant as
    Specified in Its Charter)




|                                                                                                        |  |                                         
|------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                                |  | 51-0411678                              
|(State or Other Jurisdiction
    of
    Incorporation or Organization)                                  |  | (I.R.S. Employer
    Identification No.)
|                                                                                                        |  |                                         
|                                                                                                       
|2727 Allen Parkway,
    Suite 1200
    Houston, Texas 77019(Address of Principal
    Executive Offices)
|                                                                                                       
|(713) 621-9547(Registrants
    Telephone Number, Including Area Code)                                 





þ o




Rule 12b-2


o þ o




Rule 12b-2 o þ












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##### 










TABLE OF
    CONTENTS




|                                             |          |  |  |                                                                                                                                        |  |  |    | 
|-------------------------------------------- | -------- |  |  | -------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                             |          |  |  | Page                                                                                                                                  
|                                            
|PART I 
    FINANCIAL INFORMATION          
|                                             | Item 1.  |  |  | Financial
    Statements                                                                                                               |  |  | 3  | 
|                                             |          |  |  | Unaudited
    Consolidated Balance Sheets as of September 30, 2006 and
    December 31, 2005                                           |  |  | 3  | 
|                                             |          |  |  | Unaudited
    Consolidated Statements of Operations for the Three and Nine
    Months Ended September 30, 2006 and 2005                |  |  | 4  | 
|                                             |          |  |  | Unaudited
    Consolidated Statements of Cash Flows for the Nine Months Ended
    September 30, 2006 and 2005                          |  |  | 5  | 
|                                             |          |  |  | Unaudited
    Consolidated Statement of Members Capital and
    Comprehensive Income for the Nine Months Ended
    September 30, 2006 |  |  | 6  | 
|                                             |          |  |  | Notes to Unaudited
    Consolidated Financial Statements                                                                               |  |  | 7  | 
|                                             | Item 2.  |  |  | Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                                          |  |  | 29 | 
|                                             | Item 3.  |  |  | Quantitative and
    Qualitative Disclosures about Market Risk                                                                         |  |  | 48 | 
|                                             | Item 4.  |  |  | Controls and
    Procedures                                                                                                            |  |  | 52 | 
|                                            
|PART II 
    OTHER INFORMATION             
|                                             | Item 1.  |  |  | Legal
    Proceedings                                                                                                                  |  |  | 53 | 
|                                             | Item 1A. |  |  | Risk
    Factors                                                                                                                       |  |  | 53 | 
|                                             | Item 6.  |  |  | Exhibits                                                                                                                               |  |  | 53 | 
|Second Amendment to Credit Agreement        
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906





2



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##### Table of Contents



|        |                          
|------- | -------------------------
|Item 1. | Financial
    Statements.



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(Unaudited)




|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                            |  | September 30,    |         |   | December 31, |  
|                                                                                                                                                            |  | 2006             |         |   | 2005         |  
|                                                                                                                                                            |  | ($ in thousands) |        
|                                                                                                                                                           
|ASSETS                                                                                                                                                     
|Current assets:                                                                                                                                             |  |                  |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                   |  | $                | 34,635  |   |              | $ | 25,297  |  
|Accounts receivable, net                                                                                                                                    |  |                  | 63,065  |   |              |   | 83,297  |  
|Accounts receivable from affiliates                                                                                                                         |  |                  | 556     |   |              |   |        |  
|Risk management assets                                                                                                                                      |  |                  | 12,957  |   |              |   | 10,067  |  
|Prepayments and other current
    assets                                                                                                                    |  |                  | 2,877   |   |              |   | 2,474   |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total current assets                                                                                                                                        |  |                  | 114,090 |   |              |   | 121,135 |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Property, plant and equipment, net                                                                                                                          |  |                  | 555,615 |   |              |   | 532,320 |  
|Intangible assets, net                                                                                                                                      |  |                  | 93,814  |   |              |   | 97,551  |  
|Investment in unconsolidated
    affiliates                                                                                                                 |  |                  | 19,508  |   |              |   | 7,901   |  
|Risk management assets                                                                                                                                      |  |                  | 11,342  |   |              |   | 24,778  |  
|Other assets, net                                                                                                                                           |  |                  | 12,794  |   |              |   | 9,065   |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total assets                                                                                                                                                |  | $                | 807,163 |   |              | $ | 792,750 |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|                                                                                                                                                           
|LIABILITIES AND MEMBERS
    CAPITAL                                                                                                                       
|Current liabilities:                                                                                                                                        |  |                  |         |   |              |   |         |  
|Accounts payable                                                                                                                                            |  | $                | 89,898  |   |              | $ | 96,001  |  
|Accounts payable to affiliates                                                                                                                              |  |                  | 191     |   |              |   | 189     |  
|Notes payable                                                                                                                                               |  |                  | 1,860   |   |              |   | 1,272   |  
|Other current liabilities                                                                                                                                   |  |                  | 11,821  |   |              |   | 10,970  |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total current liabilities                                                                                                                                   |  |                  | 103,770 |   |              |   | 108,432 |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Long-term debt                                                                                                                                              |  |                  | 375,000 |   |              |   | 398,000 |  
|Risk management and other
    noncurrent liabilities                                                                                                        |  |                  | 6,260   |   |              |   | 4,515   |  
|Commitments and contingencies
    (Note 9)                                                                                                                  |  |                  |         |   |              |   |         |  
|Members capital:                                                                                                                                           |  |                  |         |   |              |   |         |  
|Common units, no par value,
    14,704,108 and 14,100,508 units issued and outstanding as
    of September 30, 2006 and December 31, 2005,
    respectively |  |                  | 318,776 |   |              |   | 297,592 |  
|Subordinated units, no par value,
    3,519,126 units outstanding as of September 30, 2006
    and December 31, 2005, respectively                          |  |                  | 10,379  |   |              |   | 10,379  |  
|Paid-in capital                                                                                                                                             |  |                  | 9,389   |   |              |   | 4,068   |  
|Accumulated earnings (deficit)                                                                                                                              |  |                  | 172     |   |              |   | (14,941 | )
|Deferred compensation                                                                                                                                       |  |                  |        |   |              |   | (3,949  | )
|Other comprehensive loss                                                                                                                                    |  |                  | (16,583 | ) |              |   | (11,346 | )
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|                                                                                                                                                            |  |                  | 322,133 |   |              |   | 281,803 |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total liabilities and
    members capital                                                                                                                  |  | $                | 807,163 |   |              | $ | 792,750 |  
|                                                                                                                                                            |  |                  |         |   |              |   |         |  







3



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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ----------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                 |  | Three Months Ended                      |         |   | Nine Months Ended |  
|                                                                 |  | September 30,                           |         |   | September 30,     |  
|                                                                 |  | 2006                                    |         |   | 2005              |   |         | 2006 |  |   | 2005    |  
|                                                                 |  | (In thousands, except unit information) |        
|                                                                
|Revenue:                                                         |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Natural gas sales                                                |  | $                                       | 114,589 |   |                   | $ | 155,023 |      |  | $ | 345,742 |   |  | $ | 292,036 |  
|Natural gas sales 
    affiliates                               |  |                                         | 35      |   |                   |   |        |      |  |   | 688     |   |  |   | 38      |  
|Natural gas liquids sales                                        |  |                                         | 106,534 |   |                   |   | 54,327  |      |  |   | 277,536 |   |  |   | 146,177 |  
|Transportation, compression and
    processing fees              |  |                                         | 3,910   |   |                   |   | 4,383   |      |  |   | 11,148  |   |  |   | 9,892   |  
|Transportation, compression and
    processing fees  affiliates |  |                                         | 9       |   |                   |   | 7       |      |  |   | 26      |   |  |   | 23      |  
|Other                                                            |  |                                         | 6,234   |   |                   |   | 2,927   |      |  |   | 19,758  |   |  |   | 4,473   |  
|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Total revenue                                                    |  |                                         | 231,311 |   |                   |   | 216,667 |      |  |   | 654,898 |   |  |   | 452,639 |  
|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Costs and expenses:                                              |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Cost of natural gas and natural
    gas liquids                  |  |                                         | 172,777 |   |                   |   | 184,365 |      |  |   | 509,248 |   |  |   | 389,489 |  
|Cost of natural gas and natural
    gas liquids  affiliates     |  |                                         | 1,748   |   |                   |   | 2,330   |      |  |   | 2,755   |   |  |   | 3,097   |  
|Transportation                                                   |  |                                         | 722     |   |                   |   | 336     |      |  |   | 1,960   |   |  |   | 1,297   |  
|Transportation 
    affiliates                                  |  |                                         | 92      |   |                   |   | 113     |      |  |   | 281     |   |  |   | 375     |  
|Operations and maintenance                                       |  |                                         | 8,519   |   |                   |   | 5,325   |      |  |   | 23,527  |   |  |   | 11,302  |  
|Depreciation and amortization                                    |  |                                         | 8,182   |   |                   |   | 5,706   |      |  |   | 23,657  |   |  |   | 9,371   |  
|General and administrative                                       |  |                                         | 8,108   |   |                   |   | 4,878   |      |  |   | 19,919  |   |  |   | 11,408  |  
|Taxes other than income                                          |  |                                         | 622     |   |                   |   | 321     |      |  |   | 1,610   |   |  |   | 713     |  
|Equity in earnings from
    unconsolidated affiliates            |  |                                         | (549    | ) |                   |   | (240    | )    |  |   | (644    | ) |  |   | (726    | )
|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Total costs and expenses                                         |  |                                         | 200,221 |   |                   |   | 203,134 |      |  |   | 582,313 |   |  |   | 426,326 |  
|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Operating income                                                 |  |                                         | 31,090  |   |                   |   | 13,533  |      |  |   | 72,585  |   |  |   | 26,313  |  
|Other income (expense):                                          |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income                                        |  |                                         | 718     |   |                   |   | 168     |      |  |   | 1,310   |   |  |   | 319     |  
|Interest and other financing costs                               |  |                                         | (9,525  | ) |                   |   | (8,542  | )    |  |   | (25,312 | ) |  |   | (10,532 | )
|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                       |  | $                                       | 22,283  |   |                   | $ | 5,159   |      |  | $ | 48,583  |   |  | $ | 16,100  |  
|                                                                 |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Basic net income per unit:                                       |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Net income per unit                                              |  | $                                       | 1.22    |   |                   | $ | 0.35    |      |  | $ | 2.67    |   |  | $ | 1.35    |  
|Weighted average number of units                                 |  |                                         | 14,696  |   |                   |   | 11,037  |      |  |   | 14,678  |   |  |   | 8,424   |  
|Diluted net income per unit:                                     |  |                                         |         |   |                   |   |         |      |  |   |         |   |  |   |         |  
|Net income per unit                                              |  | $                                       | 1.21    |   |                   | $ | 0.35    |      |  | $ | 2.64    |   |  | $ | 1.34    |  
|Weighted average number of units                                 |  |                                         | 18,431  |   |                   |   | 14,676  |      |  |   | 18,383  |   |  |   | 12,026  |  







4



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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




|                                                                                      |  |                   |          |   |      |   |          |  
|------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---- | - | -------- | -
|                                                                                      |  | Nine Months Ended |         
|                                                                                      |  | September 30,     |         
|                                                                                      |  | 2006              |          |   | 2005 |  
|                                                                                      |  | (In thousands)    |         
|                                                                                     
|Cash Flows From Operating
    Activities:                                             |  |                   |          |   |      |   |          |  
|Net income                                                                            |  | $                 | 48,583   |   |      | $ | 16,100   |  
|Adjustments to reconcile net
    income to net cash provided by operating activities: |  |                   |          |   |      |   |          |  
|Depreciation and amortization                                                         |  |                   | 23,657   |   |      |   | 9,371    |  
|Amortization of debt issue costs                                                      |  |                   | 3,524    |   |      |   | 3,715    |  
|Equity in earnings from
    unconsolidated affiliates                                 |  |                   | (644     | ) |      |   | (726     | )
|Equity-based compensation                                                             |  |                   | 1,315    |   |      |   | 684      |  
|Other noncash items                                                                   |  |                   | 94       |   |      |   | (48      | )
|Changes in assets and liabilities,
    net of acquisitions:                           |  |                   |          |   |      |   |          |  
|Accounts receivable                                                                   |  |                   | 20,231   |   |      |   | (26,100  | )
|Accounts receivable from affiliates                                                   |  |                   | (466     | ) |      |   | 1,231    |  
|Prepayments and other current
    assets                                              |  |                   | 1,661    |   |      |   | 848      |  
|Risk management assets                                                                |  |                   | 6,914    |   |      |   | (3,452   | )
|Accounts payable                                                                      |  |                   | (7,449   | ) |      |   | 26,139   |  
|Accounts payable to affiliates                                                        |  |                   | 2        |   |      |   | 442      |  
|Other current liabilities                                                             |  |                   | (795     | ) |      |   | (16,133  | )
|                                                                                      |  |                   |          |   |      |   |          |  
|Net cash provided by operating
    activities                                         |  |                   | 96,627   |   |      |   | 12,071   |  
|                                                                                      |  |                   |          |   |      |   |          |  
|Cash Flows From Investing
    Activities:                                             |  |                   |          |   |      |   |          |  
|Additions to property, plant and
    equipment and intangible assets                  |  |                   | (30,456  | ) |      |   | (6,377   | )
|Acquisitions, net of cash acquired                                                    |  |                   | (9,074   | ) |      |   | (480,725 | )
|Investment in unconsolidated
    affiliate                                            |  |                   | (11,053  | ) |      |   | (197     | )
|Escrow cash                                                                           |  |                   |         |   |      |   | 1,001    |  
|Other                                                                                 |  |                   | (504     | ) |      |   | (160     | )
|                                                                                      |  |                   |          |   |      |   |          |  
|Net cash used in investing
    activities                                             |  |                   | (51,087  | ) |      |   | (486,458 | )
|                                                                                      |  |                   |          |   |      |   |          |  
|Cash Flows From Financing
    Activities:                                             |  |                   |          |   |      |   |          |  
|Repayments of long-term debt                                                          |  |                   | (376,500 | ) |      |   | (57,000  | )
|Proceeds from long-term debt                                                          |  |                   | 353,500  |   |      |   | 402,000  |  
|Repayments of short-term notes
    payable                                            |  |                   | (1,477   | ) |      |   |         |  
|Deferred financing costs                                                              |  |                   | (7,013   | ) |      |   | (9,465   | )
|Distributions to unitholders                                                          |  |                   | (33,277  | ) |      |   | (14,917  | )
|Proceeds from private placement of
    common units                                   |  |                   | 25,000   |   |      |   | 39,499   |  
|Proceeds from private placement of
    Class B units                                  |  |                   |         |   |      |   | 135,503  |  
|Capital contributions from
    Pre-Offering Investors                                 |  |                   | 4,006    |   |      |   | 2,574    |  
|Proceeds from option exercises                                                        |  |                   | 199      |   |      |   |         |  
|Equity offering costs                                                                 |  |                   | (640     | ) |      |   | (1,009   | )
|                                                                                      |  |                   |          |   |      |   |          |  
|Net cash (used in) provided by
    financing activities                               |  |                   | (36,202  | ) |      |   | 497,185  |  
|                                                                                      |  |                   |          |   |      |   |          |  
|Net increase in cash and cash
    equivalents                                         |  |                   | 9,338    |   |      |   | 22,798   |  
|Cash and cash equivalents,
    beginning of year                                      |  |                   | 25,297   |   |      |   | 7,015    |  
|                                                                                      |  |                   |          |   |      |   |          |  
|Cash and cash equivalents, end of
    period                                          |  | $                 | 34,635   |   |      | $ | 29,813   |  
|                                                                                      |  |                   |          |   |      |   |          |  







5



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##### Table of Contents





COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF MEMBERS CAPITAL AND
    COMPREHENSIVE INCOME


(Unaudited)




|                                                                                                           |  |                |        |   |              |   |         |        |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |   |               |   |         |   |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ------------ | - | ------- | ------ |  |  | ------------ |  |  | ------- | ------ |  | ----------- | - | ----- | ------------ |  | - | ------------- | - |  | ----- | ------ | - | ------------- | - | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                                           |  | Common         |        |   | Subordinated |   |         |        |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |  
|                                                                                                           |  | Number         |        |   |              |   |         | Number |  |  |              |  |  |         |        |  | Accumulated |   |       |              |  |   | Other         |   |  |       |        |   | Total         |  
|                                                                                                           |  | of             |        |   | Common       |   |         | of     |  |  | Subordinated |  |  | Paid-in |        |  | Earnings    |   |       | Deferred     |  |   | Comprehensive |   |  |       |        |   | Comprehensive |  
|                                                                                                           |  | Units          |        |   | Units        |   |         | Units  |  |  | Units        |  |  | Capital |        |  | (Deficit)   |   |       | Compensation |  |   | Loss          |   |  | Total |        |   | Income        |  
|                                                                                                           |  | (In thousands) |       
|                                                                                                          
|Balance, December 31,
    2005                                                                             |  |                | 14,101 |   |              | $ | 297,592 |        |  |  | 3,519        |  |  | $       | 10,379 |  |             | $ | 4,068 |              |  | $ | (14,941       | ) |  | $     | (3,949 | ) |               | $ | (11,346 | ) |  | $ | 281,803 |   |  | $ |       |  
|Capital contributions from
    Pre-Offering Investors                                                      |  |                |       |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   | 4,006 |              |  |   |              |   |  |       |       |   |               |   |        |   |  |   | 4,006   |   |  |   |       |  
|Private placement of units                                                                                 |  |                | 709    |   |              |   | 25,000  |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |   |               |   |        |   |  |   | 25,000  |   |  |   |       |  
|Offering costs                                                                                             |  |                |       |   |              |   | (66     | )      |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |   |               |   |        |   |  |   | (66     | ) |  |   |       |  
|Distributions to unitholders                                                                               |  |                |       |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   | (33,470       | ) |  |       |       |   |               |   |        |   |  |   | (33,470 | ) |  |   |       |  
|Option exercises                                                                                           |  |                | 7      |   |              |   | 199     |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |   |               |   |        |   |  |   | 199     |   |  |   |       |  
|Adoption of
    SFAS No. 123(R)  reversal of deferred
    compensation related to restricted common units |  |                | (139   | ) |              |   | (3,949  | )      |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       | 3,949  |   |               |   |        |   |  |   |        |   |  |   |       |  
|Equity-based compensation                                                                                  |  |                |       |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   | 1,315 |              |  |   |              |   |  |       |       |   |               |   |        |   |  |   | 1,315   |   |  |   |       |  
|Vested restricted units                                                                                    |  |                | 26     |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |   |               |   |        |   |  |   |        |   |  |   |       |  
|Net income                                                                                                 |  |                |       |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   | 48,583        |   |  |       |       |   |               |   |        |   |  |   | 48,583  |   |  |   | 48,583 |  
|Derivative settlements reclassified
    to income                                                          |  |                |       |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |   |               |   | 616     |   |  |   | 616     |   |  |   | 616    |  
|Unrealized loss-change in fair
    value of derivatives                                                    |  |                |       |   |              |   |        |        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |   |               |   | (5,853  | ) |  |   | (5,853  | ) |  |   | (5,853 | )
|                                                                                                           |  |                |        |   |              |   |         |        |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |   |               |   |         |   |  |   |         |   |  |   |        |  
|Comprehensive income                                                                                       |  |                |        |   |              |   |         |        |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |   |               |   |         |   |  |   |         |   |  | $ | 43,346 |  
|                                                                                                           |  |                |        |   |              |   |         |        |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |   |               |   |         |   |  |   |         |   |  |   |        |  
|Balance, September 30,
    2006                                                                            |  |                | 14,704 |   |              | $ | 318,776 |        |  |  | 3,519        |  |  | $       | 10,379 |  |             | $ | 9,389 |              |  | $ | 172           |   |  | $     |       |   |               | $ | (16,583 | ) |  | $ | 322,133 |   |  |   |        |  
|                                                                                                           |  |                |        |   |              |   |         |        |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |   |               |   |         |   |  |   |         |   |  |   |        |  







6



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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS




Note 1 
    Organization and Basis of Presentation




Organization




Unless the context requires otherwise,
    references to Copano, we,
    our, us or like terms refer to Copano
    Energy, L.L.C. and its subsidiaries.








Basis
    of Presentation and Principles of Consolidation








Form 10-K




Note 2 
    New Accounting Pronouncements




Share-Based
    Payment




Share-Based
    Payment, Accounting
    for Stock Issued to Employees,


7



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##### Table of Contents





COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




Note 2 
    New Accounting
    Pronouncements  (Continued)
















Accounting
    Changes and Error Corrections




Accounting Changes and Error Corrections.


8



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##### Table of Contents





COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




Note 2 
    New Accounting
    Pronouncements  (Continued)




Accounting
    for Purchases and Sales of Inventory with the Same
    Counterparty




No. 04-13, Accounting for Purchases and Sales of Inventory with
    the Same Counterparty (Issue 04-13). Issue 04-13, Issue 04-13




|                                                 |  |                    |         |  |                                 |   |         |      |  |   |         |  |  |   |         | 
|------------------------------------------------ |  | ------------------ | ------- |  | ------------------------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                 |  | Three Months Ended |         |  |                                 |  
|                                                 |  | September 30,      |         |  | Nine Months Ended September 30, |  
|                                                 |  | 2006               |         |  | 2005                            |   |         | 2006 |  |   | 2005    | 
|                                                 |  | (In thousands)     |        
|                                                
|Natural gas sales revenue:                       |  |                    |         |  |                                 |   |         |      |  |   |         |  |  |   |         | 
|As reported                                      |  | $                  | 114,589 |  |                                 | $ | 155,023 |      |  | $ | 345,742 |  |  | $ | 292,036 | 
|As if presented net
    under
    Issue 04-13  |  | $                  | 114,589 |  |                                 | $ | 153,075 |      |  | $ | 345,742 |  |  | $ | 263,066 | 
|Cost of natural gas and natural
    gas liquids: |  |                    |         |  |                                 |   |         |      |  |   |         |  |  |   |         | 
|As reported                                      |  | $                  | 172,777 |  |                                 | $ | 184,365 |      |  | $ | 509,248 |  |  | $ | 389,489 | 
|As if presented net
    under
    Issue 04-13  |  | $                  | 172,777 |  |                                 | $ | 182,417 |      |  | $ | 509,248 |  |  | $ | 360,519 | 





Fair
    Value Measurements




Fair Value Measurements.




Defined
    Benefit Pension and Other Postretirement Plans




Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an amendment of FASB
    Statements No. 87, 88, 106, and 132(R)




Quantifying
    Misstatements




Considering the Effects of
    Prior Year Misstatements When Quantifying Misstatements in
    Current Year Financial Statements,


9



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##### Table of Contents





COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




Note 2 
    New Accounting
    Pronouncements  (Continued)








Note 3 
    Intangible Assets




rights-of-way, rights-of-way 2006 2007 2008 2009 2010 thereafter




|                                         |  |               |        |   |              |   |        |  
|---------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | -
|                                         |  | September 30, |        |   | December 31, |  
|                                         |  | 2006          |        |   | 2005         |  
|                                        
|Rights-of-way
    and easements, at cost |  | $             | 60,002 |   |              | $ | 59,693 |  
|Contracts                                |  |               | 42,444 |   |              |   | 42,444 |  
|Customer relationship                    |  |               | 725    |   |              |   | 725    |  
|Less accumulated amortization            |  |               | (9,357 | ) |              |   | (5,311 | )
|                                         |  |               |        |   |              |   |        |  
|Intangible assets, net                   |  | $             | 93,814 |   |              | $ | 97,551 |  
|                                         |  |               |        |   |              |   |        |  







Note 4 
    Acquisitions




Acquisition
    of ScissorTail Energy, LLC






10



---



##### Table of Contents





COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




Note 5 
    Long-Term Debt








|                    |  |               |         |  |              |   |         | 
|------------------- |  | ------------- | ------- |  | ------------ | - | ------- | 
|                    |  | September 30, |         |  | December 31, |  
|                    |  | 2006          |         |  | 2005         |  
|                   
|Long-term debt:     |  |               |         |  |              |   |         | 
|Credit Facility     |  | $             | 50,000  |  |              | $ | 228,000 | 
|Senior Notes        |  |               | 225,000 |  |              |   |        | 
|Unsecured Term Loan |  |               | 100,000 |  |              |   |        | 
|Term Loan Facility  |  |               |        |  |              |   | 170,000 | 
|                    |  |               |         |  |              |   |         | 
|Total               |  | $             | 375,000 |  |              | $ | 398,000 | 
|                    |  |               |         |  |              |   |         | 





Credit
    Facility
















Senior
    Notes Offering






11



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##### Table of Contents





COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES




NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




Note 5 
    Long-Term Debt  (Continued)




















12



---



##### Table of Contents



COPANO ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5  Unsecured Term
    Loan  (Continued)
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
  September 30, 2006


December 31, 2005Investment in

















Investment inGuarantor


Non-Guarantor














Guarantor


Non-GuarantorParent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total


Parent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
637


$
1


$
33,997


$



$



$
34,635


$
1,167


$
1


$
24,129


$



$



$
25,297Accounts receivable, net










63,065











63,065











83,297











83,297Accounts receivable from affiliates










36,253







(35,697
)


556























Intercompany receivable


17,573







(33,548
)






15,975







35,040







12,525







(47,565
)


Risk management assets










12,957











12,957











10,067











10,067Prepayments and other current assets


62







2,815











2,877



44







2,430











2,474Total current assets


18,272



1



115,539







(19,722
)


114,090



36,251



1



132,448







(47,565
)


121,135Property, plant and equipment, net


263







555,300







52



555,615



309







531,957







54



532,320Intangible assets, net










93,814











93,814











97,551











97,551Investment in unconsolidated
    affiliates










19,508



19,508



(19,508
)


19,508











7,901



7,901



(7,901
)


7,901Investment in consolidated
    subsidiaries


683,553















(683,553
)






658,687















(658,687
)


Risk management assets










11,342











11,342











24,778











24,778Other assets, net


9,492







3,302











12,794



6,004







3,061











9,065Total assets

$
711,580


$
1


$
798,805


$
19,508


$
(722,731
)

$
807,163


$
701,251


$
1


$
797,696


$
7,901


$
(714,099
)

$
792,750LIABILITIES AND
    MEMBERS/PARTNERS CAPITALCurrent liabilities:Accounts payable

$
10


$



$
89,888


$



$



$
89,898


$
165


$



$
95,836


$



$



$
96,001Accounts payable to affiliates










23,395







(23,204
)


191











189











189Intercompany payable


(4,586
)






1,104







3,482







3,981







43,584







(47,565
)


Notes payable










1,860











1,860











1,272











1,272Other current liabilities


2,125







9,696











11,821



5,694







5,276











10,970Total current liabilities


(2,451
)






125,943







(19,722
)


103,770



9,840







146,157







(47,565
)


108,432Long-term debt


375,000



















375,000



398,000



















398,000Risk management and other
    noncurrent liabilities


315







5,945











6,260



262







4,253











4,515Members/Partners
    capital:Common units


318,776



















318,776



297,592



















297,592Subordinated units


10,379



















10,379



10,379



















10,379Paid-in capital


9,389



1



535,425



18,227



(553,653
)


9,389



4,068



1



585,800



7,265



(593,066
)


4,068Accumulated earnings (deficit)


172







148,075



1,281



(149,356
)


172



(14,941
)






72,832



636



(73,468
)


(14,941
)Deferred compensation


























(3,949
)


















(3,949
)Other comprehensive loss










(16,583
)










(16,583
)










(11,346
)










(11,346
)338,716



1



666,917



19,508



(703,009
)


322,133



293,149



1



647,286



7,901



(666,534
)


281,803Total liabilities and
    members/partners capital

$
711,580


$
1


$
798,805


$
19,508


$
(722,731
)

$
807,163


$
701,251


$
1


$
797,696


$
7,901


$
(714,099
)

$
792,750  13




---



##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5  Unsecured Term
    Loan  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Three Months Ended September 30, 2006


Three Months Ended September 30, 2005Investment in

















Investment inGuarantor


Non-Guarantor














Guarantor


Non-GuarantorParent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total


Parent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total(In thousands)Revenue:Natural gas sales

$



$



$
114,624


$



$



$
114,624


$



$



$
155,023


$



$



$
155,023Natural gas liquids sales










106,534











106,534











54,327











54,327Transportation, compression and
    processing fees










3,919











3,919











4,390











4,390Other










6,234











6,234











2,927











2,927Total revenue










231,311











231,311











216,667











216,667Costs and expenses:Cost of natural gas and natural gas
    liquids










174,525











174,525











186,695











186,695Transportation










814











814











449











449Operations and maintenance










8,519











8,519











5,325











5,325Depreciation and amortization


16







8,166











8,182



16







5,690











5,706General and administrative


562







7,546











8,108



575







4,303











4,878Taxes other than income










622











622











321











321Equity in earnings from
    unconsolidated affiliates










(549
)


(549
)


549



(549
)










(240
)


(240
)


240



(240
)Total costs and expenses


578







199,643



(549
)


549



200,221



591







202,543



(240
)


240



203,134Operating (loss) income


(578
)






31,668



549



(549
)


31,090



(591
)






14,124



240



(240
)


13,533Other income (expense):Interest and other income










718











718



2







222







(56
)


168Interest and other financing costs


(9,597
)






72











(9,525
)


(6,664
)






(1,934
)






56



(8,542
)(Loss) income before equity in
    earnings from consolidated subsidiaries


(10,175
)






32,458



549



(549
)


22,283



(7,253
)






12,412



240



(240
)


5,159Equity earnings (loss) from
    consolidated subsidiaries


32,458















(32,458
)






12,412















(12,412
)


Net income (loss)

$
22,283


$



$
32,458


$
549


$
(33,007
)

$
22,283


$
5,159


$



$
12,412


$
240


$
(12,652
)

$
5,159  14




---



##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5  Unsecured Term
    Loan  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Nine Months Ended September 30, 2006


Nine Months Ended September 30, 2005Investment in

















Investment inGuarantor


Non-Guarantor














Guarantor


Non-GuarantorParent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total


Parent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total(In thousands)Revenue:Natural gas sales

$



$



$
346,430


$



$



$
346,430


$



$



$
292,074


$



$



$
292,074Natural gas liquids sales










277,536











277,536











146,177











146,177Transportation, compression and
    processing fees










11,174











11,174











9,915











9,915Other










19,758











19,758











4,473











4,473Total revenue










654,898











654,898











452,639











452,639Costs and expenses:Cost of natural gas and natural gas
    liquids










512,003











512,003











392,586











392,586Transportation










2,241











2,241











1,672











1,672Operations and maintenance










23,527











23,527











11,302











11,302Depreciation and amortization


49







23,608











23,657



49







9,322











9,371General and administrative


1,399







18,520











19,919



1,059







10,349











11,408Taxes other than income










1,610











1,610











713











713Equity in earnings from
    unconsolidated affiliates










(644
)


(644
)


644



(644
)










(726
)


(726
)


726



(726
)Total costs and expenses


1,448







580,865



(644
)


644



582,313



1,108







425,218



(726
)


726



426,326Operating (loss) income


(1,448
)






74,033



644



(644
)


72,585



(1,108
)






27,421



726



(726
)


26,313Other income (expense):Interest and other income










1,310











1,310



3







702







(386
)


319Interest and other financing costs


(25,384
)






72











(25,312
)


(6,994
)






(3,924
)






386



(10,532
)(Loss) income before equity in
    earnings from consolidated subsidiaries


(26,832
)

$




75,415



644



(644
)


48,583



(8,099
)






24,199



726



(726
)


16,100Equity earnings (loss) from
    consolidated subsidiaries


75,415















(75,415
)






24,199















(24,199
)


Net income (loss)

$
48,583


$



$
75,415


$
644


$
(76,059
)

$
48,583


$
16,100


$



$
24,199


$
726


$
(24,925
)

$
16,100  15




---



##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5  Unsecured Term
    Loan  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
  Nine Months Ended September 30, 2006


Nine Months Ended September 30, 2005Investment in

















Investment inGuarantor


Non-Guarantor














Guarantor


Non-GuarantorParent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total


Parent


Co-Issuer


Subsidiaries


Subsidiaries


Eliminations


Total(In thousands)Cash Flows From Operating
    Activities:Net cash (used in) provided by
    operating activities

$
(16,179
)

$



$
112,806


$



$



$
96,627


$
(6,099
)

$



$
18,170


$



$



$
12,071Cash Flows From Investing
    Activities:Additions to property, plant and
    equipment and intangible assets


(1
)






(30,455
)










(30,456
)










(6,377
)










(6,377
)Acquisitions, net of cash acquired










(9,074
)










(9,074
)










(480,725
)










(480,725
)Investment in unconsolidated
    affiliate










(11,053
)


(11,053
)


11,053



(11,053
)










(197
)


(197
)


197



(197
)Escrow cash


































1,001











1,001Investment in consolidated
    subsidiaries


(1,225
)














1,225







(544,542
)














544,542



Distributions from consolidated
    subsidiaries


51,600















(51,600
)






16,215















(16,215
)


Other










(504
)










(504
)










(160
)










(160
)Net cash provided by (used in)
    investing activities


50,374







(51,086
)


(11,053
)


(39,322
)


(51,087
)


(528,327
)






(486,458
)


(197
)


528,524



(486,458
)Cash Flows From Financing
    Activities:Repayments of long-term debt


(376,500
)


















(376,500
)










(57,000
)










(57,000
)Proceeds from long-term debt


353,500



















353,500



402,000



















402,000(Repayment of) proceeds from
    intercompany debt


























(19,011
)






19,011











Deferred financing costs


(7,013
)


















(7,013
)


(9,391
)






(74
)










(9,465
)Repayment of short-term notes
    payable










(1,477
)










(1,477
)






















Distributions to unitholders


(33,277
)


















(33,277
)


(14,917
)


















(14,917
)Proceeds from private placement of
    common units


25,000



















25,000



39,499



















39,499Proceeds from private placement of
    Class B Units


























135,503



















135,503Capital contributions from
    Pre-Offering Investors


4,006



















4,006



2,574



















2,574Equity offering costs


(640
)


















(640
)


(1,009
)


















(1,009
)Proceeds from option exercises


199



















199























Contributions from parent










1,225



11,053



(12,278
)










1



544,541



197



(544,739
)


Distributions to parent










(51,600
)






51,600















(16,215
)






16,215



Net cash (used in) provided by
    financing activities


(34,725
)






(51,852
)


11,053



39,322



(36,202
)


535,248



1



490,263



197



(528,524
)


497,185Net increase in cash and cash
    equivalents


(530
)






9,868











9,338



822



1



21,975











22,798Cash and cash equivalents,
    beginning of year


1,167



1



24,129











25,297



124







6,891











7,015Cash and cash equivalents, end of
    period

$
637


$
1


$
33,997


$



$



$
34,635


$
946


$
1


$
28,866


$



$



$
29,813  16




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##### Table of Contents



COPANO ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5  Unsecured Term
    Loan  (Continued)
  Unsecured
    Term Loan
            Term
    Loan Facility
  Senior Notes Offering
 17




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6 
    Members Capital and Distributions
  Common
    Units and Subordinated Units
    Form S-3,
    Restricted
    Common Units
     18




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6 
    Members Capital and
    Distributions  (Continued)
  Distributions
            Unit
    Options
      Accounting
    for Equity-Based Compensation
  Accounting for
    Stock-Based Compensation. Restricted Common Units Unit
    Options
 19




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6 
    Members Capital and
    Distributions  (Continued)
  Unit Options.
  Nine Months EndedSeptember 30,2006


2005Weighted average exercise price

$
46.26


$
36.39Expected volatility


22.04
%


26.03
%Distribution yield


5.99
%


6.35
%Risk-free interest rate


4.94
%


4.14
%Expected term (in years)


6.5



7Weighted average grant-date fair
    value of options granted

$
6.13


$
5.10Total intrinsic value of options
    exercised

$
162,000


$
     Weighted AverageNumber of





RemainingUnits Underlying


Weighted Average


Contractual


Aggregate IntrinsicOptions


Exercise Price


Term


ValueOutstanding at beginning of period


491,110


$
30.18Granted


148,745



46.26Exercised


(7,845
)


25.35Forfeited


(20,690
)


32.36Outstanding at end of period


611,320


$
34.08



8.8


$
12,049,000Exercisable at end of period


84,661


$
30.25



8.6


$
1,993,000     Restricted Common Units.
  Weighted AverageNumber of


Grant-Date FairRestricted Units


ValueOutstanding at beginning of period


139,118


$
36.59Granted


49,020



46.53Vested


(25,653
)


36.81Forfeited


(5,437
)


35.92Outstanding at end of period


157,048


$
39.68  20




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6 
    Members Capital and
    Distributions  (Continued)
      Three Months Ended


Nine Months EndedSeptember 30, 2005


September 30, 2005Net income, as reported

$
5,159


$
16,100Add: Equity-based compensation
    included in net income


459



684Less: Equity-based employee
    compensation expense determined under SFAS No. 123(R)


(322
)


(492
)Pro forma net income

$
5,296


$
16,292Net income per unit:Basic  as reported

$
0.35


$
1.35Basic  pro forma

$
0.36


$
1.36Diluted  as reported

$
0.35


$
1.34Diluted  pro forma

$
0.36


$
1.35    Note 7 
    Net Income Per Unit
   21




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 7 
    Net Income Per Unit  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Net income available 
    basic

$
22,283


$
5,159


$
48,583


$
16,100Less net income attributable to
    subordinated unitholders


(4,305
)


(1,247
)


(9,395
)


(4,744
)Net income  basic


17,978



3,912



39,188



11,356Net income attributable to
    subordinated unitholders


4,305



1,247



9,395



4,744Net income available 
    diluted*

$
22,283


$
5,159


$
48,583


$
16,100Basic weighted average units


14,696



11,037



14,678



8,424Dilutive weighted average units*


18,431



14,676



18,383



12,026Basic net income per unit

$
1.22


$
0.35


$
2.67


$
1.35Diluted net income per unit*

$
1.21


$
0.35


$
2.64


$
1.34     *
    
    Potentially dilutive restricted units and employee unit options
    totaled 51,000 and 165,000, respectively, during the three
    months ended September 30, 2006. Potentially dilutive
    restricted units and employee unit options totaled 0 and
    120,000, respectively, during the three months ended
    September 30, 2005. Potentially dilutive restricted units
    and employee unit options totaled 52,000 and 134,000,
    respectively, during the nine months ended September 30,
    2006. Potentially dilutive restricted units and employee unit
    options totaled 0 and 82,000, respectively, during the nine
    months ended September 30, 2005.  Note 8 
    Related Party Transactions
  Operations
    Services
     22




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 8 
    Related Party
    Transactions  (Continued)
  Natural
    Gas Transactions
        Note 9 
    Commitments and Contingencies
  Commitments
     23




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 9 
    Commitments and
    Contingencies  (Continued)
    Guarantees
  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others.
        2006


2007


2008


2009


Thereafter


TotalLong-term debt

$



$



$



$



$
150,000


$
150,000Commodity purchases


2,600



















2,600$
2,600


$



$



$



$
150,000


$
152,600   Regulatory
    Compliance
    Litigation
   24




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 10 
    Supplemental Disclosures to the Statements of Cash
    Flows
  Cash
    paid during each of the periods presented (in
    thousands)
  Nine MonthsEnded September 30,2006


2005Interest, including amounts
    capitalized

$
25,000


$
3,164Taxes






   Supplemental
    disclosures of noncash investing and financing activities (in
    thousands)
  Nine Months EndedSeptember 30,2006


2005Decrease in equity in earnings
    from unconsolidated affiliates


90



90Decrease in accounts receivable
    from affiliates


(90
)


(90
)Increase in property, plant and
    equipment


(3,396
)


(198
)Decrease (increase) in other assets


23



(51
)Decrease in accounts payable


1,347



168Decrease in other current
    liabilities


1,646



181Increase in equity offering costs


(574
)


(100
)Decrease in distributions to
    unitholders


193



Increase in notes payable


2,065



Increase in prepayments and other
    current assets


(2,065
)


    Note 11 
    Financial Instruments
    Commodity
    Risk Hedging Program
  fixed-for-floating
 25




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 11 
    Financial Instruments  (Continued)
  over-the-counter
  Accounting for Derivative Instruments and Hedging
    Activities
    Interest
    Rate Risk Hedging Program
     26




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 11 
    Financial Instruments  (Continued)
    Note 12 
    Segment Information
  (i) Mid-Continent
    27




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##### Table of Contents



COPANO
    ENERGY, L.L.C. AND SUBSIDIARIES
  NOTES TO
    UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 12 
    Segment Information  (Continued)
  Texas


TexasMid-Continent


Gulf Coast


Gulf CoastOperations


Pipelines


Processing


Corporate


Eliminations


TotalThree Months Ended
    September 30, 2006:Sales to external customers

$
112,746


$
56,708


$
62,191


$
(334
)(a)

$



$
231,311Intersegment sales






39,889



6,261







(46,150
)


Interest expense and other
    financing costs














9,525







9,525Depreciation and amortization


5,850



1,594



632



106







8,182Equity in earnings from
    unconsolidated affiliates


(56
)


(493
)














(549
)Segment profit (loss)(b)


16,857



6,256



13,031



(13,861
)






22,283Capital expenditures


7,167



11,048



4,242



169







22,626Three Months Ended
    September 30, 2005:Sales to external customers

$
70,889


$
106,867


$
39,203


$
(292
)(a)

$



$
216,667Intersegment sales






51,725



20,991







(72,716
)


Interest expense and other
    financing costs






1,750



184



6,664



(56
)


8,542Depreciation and amortization


3,784



1,346



535



41







5,706Equity in earnings from
    unconsolidated affiliate


5



(245
)














(240
)Segment profit (loss)(b)


8,142



2,225



3,794



(9,002
)






5,159Capital expenditures


482,943



332



435



441







484,151Nine Months Ended
    September 30, 2006:Sales to external customers

$
310,896


$
178,637


$
165,040


$
325
(a)

$



$
654,898Intersegment sales






129,137



28,095







(157,232
)


Interest expense and other
    financing costs






1







25,311







25,312Depreciation and amortization


17,114



4,364



1,830



349







23,657Equity in loss (earnings) from
    unconsolidated affiliates


119



(763
)














(644
)Segment profit (loss)(b)


38,961



14,048



28,593



(33,019
)






48,583Segment assets


582,651



141,644



78,830



23,760



(19,722
)


807,163Capital expenditures


17,755



15,751



8,646



798







42,950Nine Months Ended
    September 30, 2005:Sales to external customers

$
70,889


$
250,714


$
131,328


$
(292
)(a)

$



$
452,639Intersegment sales






131,608



27,409







(159,017
)


Interest expense and other
    financing costs






3,468



456



6,994



(386
)


10,532Depreciation and amortization


3,784



3,905



1,597



85







9,371Equity in earnings from
    unconsolidated affiliate


5



(731
)














(726
)Segment profit (loss)(b)


8,142



8,605



11,477



(12,124
)






16,100Capital expenditures


482,944



2,593



775



1,356







487,668     (a)
    
    Represents the results of our risk management activities. See
    Note 11.(b)
    
    We define segment profit (loss) as the sum of the segments
    (a) revenue, (b) equity earnings from unconsolidated affiliates
    and (c) interest income less the sum of the segments (i)
    cost of sales, (ii) operating and maintenance expenses, (iii)
    depreciation and amortization, (iv) general and administrative
    expenses, (v) taxes other than income, (vi) equity in losses
    from unconsolidated affiliates and (vii) interest and other
    financing costs.  We allocate general and administrative costs
    directly associated with our operations to the respective
    segment.  We do not generally allocated interest and financing
    costs related to our credit facilities and term loans to the
    operating segments. 28




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  You should read the following discussion of our financial
    condition and results of operations in conjunction with the
    unaudited consolidated financial statements and notes thereto
    included elsewhere in this report.
  As generally used in the energy industry and in this report,
    the following terms have the following meanings:
  Bbls/d:

Barrels per dayBtu:

British thermal unitsMMBtu:

One million British thermal
    unitsMMBtu/d:

One million British thermal
    units per dayMcf/d:

One thousand cubic feet per
    dayMMcf/d:

One million cubic feet per
    dayNGLs:

Natural gas liquids which
    consist primarily of ethane, propane, isobutane, normal butane,
    natural gasoline and stabilized condensateResidue gas:

The pipeline quality natural
    gas remaining after natural gas is processedThroughput:

The volume of product
    transported or passing through a pipeline, plant, terminal or
    other facility   Overview
      
    Mid-Continent Operationsis a provider of natural gas
    midstream services in central and eastern Oklahoma, including
    natural gas gathering and related compression and dehydration
    services and natural gas processing and was established as a
    segment upon our acquisition of ScissorTail on August 1,
    2005. For the three months ended September 30, 2006 and
    2005, this segment generated approximately 50% and 50%,
    respectively, of our total gross margin. For the nine months
    ended September 30, 2006 and 2005, this segment generated
    approximately 51% and 25%, respectively, of our total gross
    margin.
    Texas Gulf Coast Pipelinesowns networks of natural gas
    gathering and intrastate pipelines in the Texas Gulf Coast
    region and is engaged in the gathering and intrastate
    transmission of natural gas in areas we sometimes refer to as
    the South Texas, Coastal Waters, Central Gulf Coast and Upper
    Gulf Coast regions. Within this segment, we also provide certain
    related services including compression, dehydration and
    marketing of natural gas. For the three months ended
    September 30, 2006 and 2005, this segment generated
    approximately 20% and 27%, respectively, of our total gross
    margin. For the nine months ended September 30, 2006 and
    2005, this segment generated approximately 21% and 40%,
    respectively, of our total gross margin.
    Texas Gulf Coast Processingis engaged in natural gas
    processing, conditioning and treating and NGL fractionation and
    transportation through our Houston Central Processing Plant,
    Sheridan NGL Pipeline and Brenham NGL Pipeline. Our natural gas
    processing plant is the second largest in the Texas Gulf Coast
    region and the third largest in Texas in terms of throughput
    capacity. Our plant is located approximately 100 miles
    southwest of Houston, Texas. For the three months ended
    September 30, 2006 and 2005, this segment generated
    approximately 30% and 24%, respectively, of our total gross
    margin. For the nine months ended September 30, 2006 and
    2005, this segment generated approximately 28% and 35%,
    respectively, of our total gross margin. 29




---



##### Table of Contents




    Corporateengages in risk management and other corporate
    activities. For the three months ended September 30, 2006
    and 2005, this segment generated approximately 0% and (1%),
    respectively, of our total gross margin. For the nine months
    ended September 30, 2006 and 2005, this segment generated a
    negligible portion of our total gross margin.        How We
    Evaluate Our Operations
    Throughput Volumes.
  Segment Gross Margin.
 30




---



##### Table of Contents



Operations and Maintenance
    Expenses.
  General and Administrative Expenses.
    General andAdministrative ExpenseYear

Limitations1


$1.50 million per quarter2


$1.65 million per quarter3


$1.80 million per quarter    31




---



##### Table of Contents



Pre-Offering Pre-Offering
  EBITDA.
  
    the financial performance of our assets without regard to
    financing methods, capital structure or historical cost basis;
    the ability of our assets to generate cash sufficient to pay
    interest costs and support our indebtedness;
    our operating performance and return on capital as compared to
    those of other companies in the midstream energy sector, without
    regard to financing or capital structure; and
    the viability of acquisitions and capital expenditure projects
    and the overall rates of return on alternative investment
    opportunities.    Distributable Cash Flow.
 32




---



##### Table of Contents



How We
    Manage Our Operations
    Our Economic Models. percentage-of-index percentage-of-proceeds
  Flow and Transaction Monitoring Systems.
  Producer Activity Evaluation and Reporting.
  Imbalance Monitoring and Control. month-to-month
  Our
    Growth Strategy
   33




---



##### Table of Contents



Acquisition Analysis.
  Capital Expenditure Analysis.
  Forward-Looking
    Statements
    
    Our ability to successfully integrate any acquired assets or
    operations;
    The volatility of prices and market demand for natural gas and
    natural gas liquids;
    Our ability to continue to obtain new sources of natural gas
    supply;
    The ability of key producers to continue to drill and
    successfully complete and attach new natural gas supplies;
    Our ability to retain our key customers;
    General economic conditions; 34




---



##### Table of Contents




    The effects of government regulations and policies; and
    Other financial, operational and legal risks and uncertainties
    detailed from time to time in our filings with the SEC.  Form 10-K Form 10-Q
  Items Impacting
    Comparability of Our Financial Results
  Our
    Acquisitions
    Adoption
    of SFAS No. 123(R)
   35




---



##### Table of Contents



Our
    Results of Operations
  Three Months EndedSeptember 30,


Nine Months Ended September 30,2006


2005


2006


2005($ in thousands)Total gross margin(1)

$
55,972


$
29,523


$
140,654


$
58,381Operations and maintenance expenses


8,519



5,325



23,527



11,302Depreciation and amortization


8,182



5,706



23,657



9,371General and administrative expenses


8,108



4,878



19,919



11,408Taxes other than income


622



321



1,610



713Equity in earnings from
    unconsolidated affiliates


(549
)


(240
)


(644
)


(726
)Operating income


31,090



13,533



72,585



26,313Interest and other financing
    costs, net


(8,807
)


(8,374
)


(24,002
)


(10,213
)Net income

$
22,283


$
5,159


$
48,583


$
16,100Segment gross margin:Mid-Continent Operations(2)

$
27,869


$
14,851


$
72,036


$
14,851Texas Gulf Coast Pipelines(3)


11,503



7,948



29,387



23,337Texas Gulf Coast Processing


16,934



7,016



38,906



20,485Corporate


(334
)


(292
)


325



(292
)Total gross margin(1)

$
55,972


$
29,523


$
140,654


$
58,381Segment gross margin per unit:Mid-Continent Operations:(2)Pipeline throughput ($/MMBtu)(2)

$
1.64


$
1.57


$
1.51


$
1.57Plant Inlet throughput ($/MMBtu)(2)

$
2.30


$
2.37


$
2.15


$
2.37NGLs produced ($/Bbl)(2)

$
23.82


$
28.13


$
22.99


$
28.13Texas Gulf Coast Pipelines
    ($/MMBtu)(3)

$
0.48


$
0.36


$
0.44


$
0.37Texas Gulf Coast Processing:Inlet throughput ($/MMBtu)(4)

$
0.35


$
0.14


$
0.28


$
0.13NGLs produced ($/Bbl)(4)

$
12.54


$
8.09


$
9.86


$
5.48Volumes:Mid-Continent Operations(2)Pipeline throughput (MMBtu/d)(2)


184,247



155,153



174,772



155,153Plant Inlet throughput (MMBtu/d)(2)


131,501



102,706



122,628



102,706NGLs produced (Bbls/d)(2)


12,717



8,656



11,475



8,656Texas Gulf Coast
    Pipelines  throughput (MMBtu/d)(3)


262,986



236,915



246,212



230,150Texas Gulf Coast Processing:Inlet throughput (MMBtu/d)


531,069



555,610



513,567



561,609NGLs produced (Bbls/d)


14,673



9,422



14,446



13,661Capital Expenditures:Maintenance capital expenditures

$
3,394


$
1,400


$
7,320


$
2,795Expansion capital expenditures


19,232



482,751



35,630



484,873Total capital expenditures

$
22,626


$
484,151


$
42,950


$
487,668Operations and maintenance
    expenses:Mid-Continent Operations

$
4,466


$
2,061


$
12,382


$
2,061Texas Gulf Coast Pipelines


1,634



1,354



5,163



3,988Texas Gulf Coast Processing


2,419



1,910



5,982



5,253Total operations and maintenance
    expenses

$
8,519


$
5,325


$
23,527


$
11,302     (1)
    
    Total gross margin is a non-GAAP financial measure. For a
    reconciliation of total gross margin to its most directly
    comparable GAAP measure, please read
     Non-GAAP Financial Measures. 36




---



##### Table of Contents



(2)
    
    Segment gross margin per unit amounts for the Mid-Continent
    Operations are calculated as the segment gross margin divided by
    the pipeline throughput, inlet throughput or NGLs produced, as
    appropriate. Plant inlet throughput and NGLs produced represents
    total volumes processed and produced by the Mid-Continent
    Operations segment at all plants, including plants owned by the
    Mid-Continent Operations segment and plants owned by third
    parties. For the three months ended September 30, 2006,
    plant inlet throughput averaged 86,848 MMBtu/d and NGLs
    produced averaged 8,672 barrels per day for plants owned by the
    Mid-Continent Operations segment. For the nine months ended
    September 30, 2006, plant inlet throughput averaged
    80,140 MMBtu/d and NGLs produced averaged
    7,746 barrels per day for plants owned by the Mid-Continent
    Operations segment. Plant inlet throughput averaged 63,059
    MMBtu/d and NGLs produced averaged 4,959 barrels per day for the
    period from August 1, 2005 through September 30, 2005
    for plants owned by the Mid-Continent Operations segment.(3)
    
    Excludes results and volumes associated with our interest in
    Webb Duval. Gross volumes transported by Webb Duval were
    118,765 MMBtu/d and 116,848 MMBtu/d, net of
    intercompany volumes, for the three months ended
    September 30, 2006 and 2005, respectively. Gross volumes
    transported by Webb Duval were 116,429 MMBtu/d and
    123,645 MMBtu/d, net of intercompany volumes, for the nine
    months ended September 30, 2006 and 2005, respectively.(4)
    
    Represents the total processing segment gross margin divided by
    the total inlet throughput or NGLs produced, as appropriate.  Three
    Months Ended September 30, 2006 Compared with Three Months
    Ended September 30, 2005
  Mid-Continent Operations Gross Margin.
  Texas Gulf Coast Pipelines Segment Gross
    Margin.
  Texas Gulf Coast Processing Segment Gross
    Margin.
  Corporate Segment Gross Margin.
 37




---



##### Table of Contents



Operations and Maintenance
    Expenses.
  Depreciation and Amortization. Mid-Continent
  General and Administrative Expenses.
  Interest Expense.
  Nine
    Months Ended September 30, 2006 Compared with Nine Months
    Ended September 30, 2005
  Mid-Continent Operations Gross Margin.
  Texas Gulf Coast Pipelines Segment Gross
    Margin.
 38




---



##### Table of Contents



Texas Gulf Coast Processing Segment Gross
    Margin.
  Corporate Segment Gross Margin.
  Operations and Maintenance
    Expenses.
  Depreciation and Amortization. Mid-Continent
  General and Administrative Expenses.
  Interest Expense.
 39




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##### Table of Contents



Impact of
    Inflation
    Liquidity
    and Capital Resources
      Off-Balance Sheet Arrangements.
  Capital Requirements. capital-intensive,
  
    maintenance capital expenditures, which are capital expenditures
    employed to replace partially or fully depreciated assets to
    maintain the existing operating capacity of our assets and to
    extend their useful lives, or other capital expenditures that
    are incurred in maintaining existing system volumes and related
    cash flows; and
    expansion capital expenditures such as those to acquire
    additional assets to grow our business, to expand and upgrade
    gathering systems, transmission capacity, processing plants and
    to construct or acquire new pipelines or processing plants.     40




---



##### Table of Contents







Total Contractual Cash Obligations.




|                                   |  |                |         |  |                       |   |       |           |  |   |           |  |  |            |         |  |  |   |         | 
|---------------------------------- |  | -------------- | ------- |  | --------------------- | - | ----- | --------- |  | - | --------- |  |  | ---------- | ------- |  |  | - | ------- | 
|                                   |  |                |         |  | Payment Due by Period |  
|                                   |  | Total          |         |  | Remainder             |   |       |           |  |   |           |  |  |            |        
|Type of Obligation                 |  | Obligation     |         |  | of 2006               |   |       | 2007/2008 |  |   | 2009/2010 |  |  | Thereafter |        
|                                   |  | (In thousands) |        
|                                  
|Long-term debt                     |  | $              | 375,000 |  |                       | $ |      |           |  | $ |          |  |  | $          | 150,000 |  |  | $ | 225,000 | 
|Interest                           |  |                | 219,853 |  |                       |   | 7,610 |           |  |   | 60,382    |  |  |            | 57,500  |  |  |   | 94,361  | 
|Operating leases                   |  |                | 8,399   |  |                       |   | 671   |           |  |   | 4,409     |  |  |            | 2,319   |  |  |   | 1,000   | 
|                                   |  |                |         |  |                       |   |       |           |  |   |           |  |  |            |         |  |  |   |         | 
|Total contractual cash obligations |  | $              | 603,252 |  |                       | $ | 8,281 |           |  | $ | 64,791    |  |  | $          | 209,819 |  |  | $ | 320,361 | 
|                                   |  |                |         |  |                       |   |       |           |  |   |           |  |  |            |         |  |  |   |         | 









Cash Flows.




|                                                        |  |                   |         |   |      |   |          |  
|------------------------------------------------------- |  | ----------------- | ------- | - | ---- | - | -------- | -
|                                                        |  | Nine Months Ended |        
|                                                        |  | September 30,     |        
|                                                        |  | 2006              |         |   | 2005 |  
|                                                        |  | (In thousands)    |        
|                                                       
|Net cash provided by operating
    activities           |  | $                 | 96,627  |   |      | $ | 12,071   |  
|Net cash used in investing
    activities               |  |                   | (51,087 | ) |      |   | (486,458 | )
|Net cash (used in) provided by
    financing activities |  |                   | (36,202 | ) |      |   | 497,185  |  
|                                                        |  |                   |         |   |      |   |          |  
|Net increase in cash and cash
    equivalents           |  |                   | 9,338   |   |      |   | 22,798   |  
|Cash and cash equivalents at
    beginning of year      |  |                   | 25,297  |   |      |   | 7,015    |  
|                                                        |  |                   |         |   |      |   |          |  
|Cash and cash equivalents at end
    of period          |  | $                 | 34,635  |   |      | $ | 29,813   |  
|                                                        |  |                   |         |   |      |   |          |  



41



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##### Table of Contents



Operating:




|                                                                                       |  |                                 |        |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                       |  | Nine Months Ended September 30, |       
|                                                                                       |  | 2006                            |        |   | 2005 |  
|                                                                                       |  | (In thousands)                  |       
|                                                                                      
|Net income                                                                             |  | $                               | 48,583 |   |      | $ | 16,100  |  
|Depreciation and amortization                                                          |  |                                 | 27,181 |   |      |   | 13,086  |  
|Equity in earnings from
    unconsolidated affiliates                                  |  |                                 | (644   | ) |      |   | (726    | )
|Equity-based compensation and other                                                    |  |                                 | 1,409  |   |      |   | 636     |  
|Cash provided by (used in) working
    capital, net of acquired assets and liabilities |  |                                 | 20,098 |   |      |   | (17,025 | )
|                                                                                       |  |                                 |        |   |      |   |         |  
|Net cash provided by operating
    activities                                          |  | $                               | 96,627 |   |      | $ | 12,071  |  
|                                                                                       |  |                                 |        |   |      |   |         |  













Investing: 11-mile 8-mile




Financing:


42



---



##### Table of Contents



Cash Distributions and Reserves:
































|                   |  |             |        |  |               |   |        | 
|------------------ |  | ----------- | ------ |  | ------------- | - | ------ | 
|                   |  | One Quarter |        |  | Four Quarters |  
|                  
|Common units(1)    |  | $           | 11,146 |  |               | $ | 44,581 | 
|Subordinated units |  |             | 2,639  |  |               |   | 10,557 | 
|                   |  |             |        |  |               |   |        | 
|Total              |  | $           | 13,785 |  |               | $ | 55,138 | 
|                   |  |             |        |  |               |   |        | 









|    |  |                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Includes restricted common units
    issued under our long-term incentive plan. Distributions made on
    restricted units issued to date are subject to the same vesting
    provisions as the restricted units. As of November 1, 2006,
    we had 155,718 outstanding restricted units. Annual
    distributions related to these restricted units are
    approximately $0.5 million.

43



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##### Table of Contents



Our
    Indebtedness




Senior Secured Credit Facility.
















| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EBITDA to interest expense of not less than 2.5 to 1.0 through
    September 30, 2005, 2.75 to 1.0 from December 31, 2005
    through June 30, 2006 and 3.0 to 1.0 thereafter;
|
| |  | EBITDA minus maintenance capital expenditures to consolidated
    fixed charges of not less than 1.5 to 1.0 through
    September 30, 2005 and 1.75 to 1.0 thereafter;        
|
| |  | total debt to EBITDA of not more than 5.5 to 1.0 through
    September 30, 2005, 5.0 to 1.0 from December 31, 2005
    through June 30, 2006 and 4.75 to 1.0 thereafter; and  
|
| |  | total senior debt to EBITDA of not more than 3.75 to 1.0 through
    September 30, 2005 and 3.5 to 1.0 thereafter.                                                            





44



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##### Table of Contents




    failure to pay any principal when due or any interest, fees or
    other amount within certain grace periods;
    failure to perform or otherwise comply with the covenants in the
    credit agreement or other loan documents, subject, in certain
    instances, to certain grace periods;
    default by us on the payment of any other indebtedness in excess
    of $5.0 million, or any default in the performance of any
    obligation or condition with respect to such indebtedness beyond
    the applicable grace period if the effect of the default is to
    permit or cause the acceleration of the indebtedness;
    bankruptcy or insolvency events involving us or our subsidiaries;
    the entry of, and failure to pay, one or more adverse judgments
    in excess of $5.0 million against which enforcement
    proceedings are brought or that are not stayed pending
    appeal; and
    a change of control (as defined in the Credit Facility).    Senior Notes.
   45




---



##### Table of Contents



Year

Percentage2011


104.0625
%2012


102.7083
%2013


101.3542
%2014 and thereafter


100.0000
%       
    sell assets;
    pay distributions on, redeem or repurchase our units or redeem
    or repurchase our subordinated debt;
    make investments;
    incur or guarantee additional indebtedness or issue preferred
    units;
    create or incur certain liens;
    enter into agreements that restrict distributions or other
    payments from our restricted subsidiaries to us;
    consolidate, merge or transfer all or substantially all of our
    assets;
    engage in transactions with affiliates;
    create unrestricted subsidiaries; and
    enter into sale and leaseback transactions.    Unsecured Term Loan.
 46




---



##### Table of Contents



Term Loan Facility.
  Recent
    Accounting Pronouncements
    Critical
    Accounting Policies
  Form 10-K
 47




---



##### Table of Contents



Non-GAAP Financial
    Measures
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Reconciliation of total gross
    margin to operating income:Operating income

$
31,090


$
13,533


$
72,585


$
26,313Add: Operations and maintenance
    expenses


8,519



5,325



23,527



11,302Depreciation and amortization


8,182



5,706



23,657



9,371General and administrative expenses


8,108



4,878



19,919



11,408Taxes other than income


622



321



1,610



713Equity in earnings from
    unconsolidated affiliates


(549
)


(240
)


(644
)


(726
)Total gross margin

$
55,972


$
29,523


$
140,654


$
58,381Reconciliation of EBITDA to net
    income:Net income

$
22,283


$
5,159


$
48,583


$
16,100Add: Depreciation and amortization


8,182



5,706



23,657



9,371Interest and other financing costs


9,525



8,542



25,312



10,532EBITDA

$
39,990


$
19,407


$
97,552


$
36,003Reconciliation of EBITDA to cash
    flows from operating activities:Cash flow provided by operating
    activities

$
36,690


$
(3,922
)

$
96,627


$
12,071Add: Cash paid for interest and
    other financing costs


7,389



5,156



21,788



6,817Equity in earnings of
    unconsolidated affiliates


549



240



644



726Risk management assets


(4,054
)


3,452



(6,914
)


3,452(Increase) decrease in working
    capital and other


(584
)


14,481



(14,593
)


12,937EBITDA

$
39,990


$
19,407


$
97,552


$
36,003   Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk.    Commodity
    Prices
  Commodity Price Risk.
  percentage-of-proceeds
 48




---



##### Table of Contents



fee-for-service percentage-of-index
  process condition processing spread processing
    margin. processing margin conditioning mode
    Hedging Activities.
  
    purchase put options or put spreads (purchase of a
    put and a sale of a put at a lower strike price) on West Texas
    Intermediate (WTI) crude oil;
    purchase put or call options, enter into collars (purchase of a
    put together with the sale of a call) or call or put
    spreads ((i) purchase of a call and a sale of a call at a
    higher strike price or (ii) purchase of a put and a sale of
    a put at a lower strike price)
    and/or sell
    fixed for floating swaps on natural gas at Henry Hub, HSC or
    other highly liquid points relevant to our operations or to the
    operations of an entity to be acquired by us;
    purchase put options, enter into collars or put
    spreads (purchase of a put and a sale of a put at a lower
    strike price)
    and/or sell
    fixed for floating swaps on natural gas liquids to which we, or
    an entity to be acquired by us, has direct price exposure,
    priced at Mt. Belvieu or Conway; and 49




---



##### Table of Contents




    purchase put options and collars
    and/or sell
    fixed for floating swaps on the fractionation spread
    or the processing margin spread for any processing
    plant relevant to our operations or to the operations of an
    entity to be acquired by us.    
    maturities with respect to the purchase of any crude oil,
    natural gas, natural gas liquids, fractionation spread or
    processing margin spread hedge instruments must be limited to
    five years from the date of the transaction;
    notional volume must not exceed 80% of the projected
    requirements or output, as applicable, for the hedged period
    with respect to (i) the purchase of crude oil or natural
    gas liquids put options, (ii) the purchase of natural gas
    put or call options, (iii) the purchase of fractionation
    spread or processing margin spread put options or (iv) the
    entry into any crude oil, natural gas or natural gas liquids
    spread options; and
    The aggregate volumetric exposure associated with swaps, collars
    and written calls relating to any product must not exceed 50% of
    the aggregate hedged position with respect to such product.    over-the-counter
    Mid-Continent Operations Segment.
  Texas Gulf Coast Pipelines and Processing
    Segments.
 50




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##### Table of Contents



Purchased
    CenterPoint East Natural Gas Puts
  Put Strike


Put Volumes(Per MMBtu)


MMBtu/d2006

$
9.90



7,7502007

$
8.75



9,7502008

$
7.75



5,0002009

$
6.95



5,000   Purchased
    Purity Ethane Puts and entered into swaps as listed
    below:
  Put Strike


Put Volumes


Swap price


Swap Volumes(Per Gallon)


Bbls/d


(Per Gallon)


Bbls/d2006

$
0.7125



568


$
0.7315



5682007

$
0.6365



599


$
0.6525



5992008

$
0.5700



607


$
0.5650



607   Purchased
    TET Propane Puts and entered into swaps as listed
    below:
  Put Strike


Put Volumes


Swap price


Swap Volumes(Per Gallon)


Bbls/d


(Per Gallon)


Bbls/d2006

$
0.9525



2,508


$
1.0000



6592007

$
0.8930



2,575


$
0.9375



7262008

$
0.8360



2,594


$
0.8700



745   Purchased
    Non-TET Isobutane Puts and entered into swaps as listed
    below:
  Put Strike


Put Volumes


Swap price


Swap Volumes(Per Gallon)


Bbls/d


(Per Gallon)


Bbls/d2006

$
1.1425



613


$
1.2050



832007

$
1.0675



620


$
1.1250



902008

$
0.9900



622


$
1.0450



92   Purchased
    Non-TET Normal-Butane Puts and entered into swaps as listed
    below:
  Put Strike


Put Volumes


Swap price


Swap Volumes(Per Gallon)


Bbls/d


(Per Gallon)


Bbls/d2006

$
1.1400



780


$
1.2000



2412007

$
1.0650



803


$
1.1200



2642008

$
0.9875



810


$
1.0400



271   Purchased
    WTI Crude Oil Puts as listed below: (1)
  Put Strike


Put Volumes(Per Barrel)


Bbls/d2006

$
48.00



2,0002007

$
48.00



2,000     (1)
    
    WTI Crude Oil Puts were purchased in July 2005. Volumes are
    based on a
    30-day month.  Interest Rates.
 51




---



##### Table of Contents



Risk Management Oversight.
  Credit Risk.
  Item 4.
    Controls
    and Procedures.    Rule 13(a)-15(f)
 52




---



##### Table of Contents



PART II  OTHER
    INFORMATION  Item 1.
    Legal
    Proceedings.    Item 1A.
    Risk
    Factors  Form 10-K Form 10-Q and/or Form 10-K Form 10-Q
  Item 6.
    Exhibits.    Number

Description3
.1

Certificate of Formation of Copano
    Energy Holdings, L.L.C. (now Copano Energy, L.L.C.)
    (incorporated by reference to Exhibit 3.1 to Registration
    Statement on
    Form S-1
    filed July 30, 2004).3
.2

Certificate of Amendment to
    Certificate of Formation of Copano Energy Holdings, L.L.C. (now
    Copano Energy, L.L.C.) (incorporated by reference to
    Exhibit 3.2 to Registration Statement on
    Form S-1
    filed July 30, 2004).3
.3

Second Amended and Restated
    Limited Liability Company Agreement of Copano Energy, L.L.C.
    (incorporated by reference to Exhibit 3.3 to Post-Effective
    Amendment No. 1 to Registration Statement on
    Form S-1/A
    filed December 15, 2004).3
.4

Amendment No. 1 to Second
    Amended and Restated Limited Liability Company Agreement of
    Copano Energy, L.L.C. (incorporated by reference to
    Exhibit 3.4 to Quarterly Report on
    Form 10-Q
    filed August 15, 2005).3
.5

Amendment No. 2 to Second
    Amended and Restated Limited Liability Company Agreement of
    Copano Energy, L.L.C. (incorporated by reference to
    Exhibit 3.5 to Quarterly Report on
    Form 10-Q
    filed August 15, 2005)4
.1

Indenture dated as of
    February 7, 2006, among Copano Energy, L.L.C., Copano
    Energy Finance Corporation, the Guarantors parties thereto and
    U.S. Bank National Association, as trustee (incorporated by
    reference to Exhibit 4.1 to Current Report on
    Form 8-K
    filed February 8, 2006).4
.2

Rule 144A Global Note
    representing $224,500,000 principal amount of 8.125% Senior
    Notes due 2016 (incorporated by reference to Exhibit 4.2 to
    Current Report on
    Form 8-K
    filed February 8, 2006).4
.3

Regulation S Global Note
    representing $500,000 principal amount of 8.125% Senior Notes
    due 2016 (incorporated by reference to Exhibit 4.3 to
    Current Report on
    Form 8-K
    filed February 8, 2006).4
.4

Registration Rights Agreement
    dated as of February 7, 2006, among Copano Energy, L.L.C.,
    Copano Energy Finance Corporation, the Guarantors parties
    thereto and the Initial Purchasers named therein (incorporated
    by reference to Exhibit 4.4 to Current Report on
    Form 8-K
    filed February 8, 2006). 53




---



##### Table of Contents



Number

Description4
.5

Class B Unit and Common Unit
    Purchase Agreement dated as of September 17, 2005 by and
    among Copano Energy, L.L.C. and Kayne Anderson MLP Investment
    Company, RCH Energy MLP Fund LP, RCH Energy MLP Fund-A LP,
    Tortoise Energy Infrastructure Corporation, Tortoise Energy
    Capital Corporation, Goldman, Sachs & Co., Energy
    Income and Growth Fund, Fiduciary/Claymore MLP Opportunity Fund,
    Alerian Opportunity Partners LP, Alerian Capital Partners LP,
    Strome HedgeCap, LP, Strome Alpha, LP and Strome Family
    Foundation (incorporated by reference to Exhibit 10.27 to
    Quarterly Report on
    Form 10-Q
    filed August 15, 2005).4
.6

Registration Rights Agreement made
    and entered into as of August 1, 2005, by and among Copano
    Energy, L.L.C. and Kayne Anderson MLP Investment Company, RCH
    Energy MLP Fund LP, RCH Energy MLP Fund-A LP, Tortoise
    Energy Infrastructure Corporation, Tortoise Energy Capital
    Corporation, Goldman, Sachs & Co., Energy Income and
    Growth Fund, Fiduciary/Claymore MLP Opportunity Fund, Alerian
    Opportunity Partners LP, Alerian Capital Partners LP, Strome MLP
    Fund, L.P., Strome Alpha, LP and Strome Family Foundation
    (incorporated by reference to Exhibit 10.28 to Quarterly
    Report on
    Form 10-Q
    filed August 15, 2005).4
.7

Common Unit Purchase Agreement
    dated as of December 29, 2005, by and among Copano Energy,
    L.L.C. and ZLP Fund, L.P., Structured Finance Americas, LLC and
    Royal Bank of Canada (incorporated by reference to
    Exhibit 4.7 to Annual Report on
    Form 10-K
    filed March 16, 2006).4
.8

Registration Rights Agreement
    dated as of December 29, 2005, by and among Copano Energy,
    L.L.C. and ZLP Fund, L.P., Structured Finance Americas, LLC and
    Royal Bank of Canada (incorporated by reference to
    Exhibit 4.8 to Annual Report on
    Form 10-K
    filed March 16, 2006).10
.1*

Second Amendment to Credit
    Agreement dated as of September 20, 2006 among Copano
    Energy, L.L.C., as the Borrower, Bank of America, N.A., as
    Administrative Agent and the other Lenders party thereto.10
.2

Loan Agreement dated as of
    September 29, 2006, among Copano Energy, L.L.C., as the
    Borrower, Banc of America Bridge LLC, as Administrative Agent,
    and The Other Lenders Party thereto and Banc of America
    Securities LLC, as Sole Lead Arranger and Sole Book Manager
    (incorporated by reference to Exhibit 10.1 to Current
    Report on
    Form 8-K
    filed October 5, 2006).31
.1*

Sarbanes-Oxley Section 302
    certification of John R. Eckel, Jr. (Chief Executive Officer)
    for Copano Energy, L.L.C.31
.2*

Sarbanes-Oxley Section 302
    certification of Matthew J. Assiff (Chief Financial Officer) for
    Copano Energy, L.L.C.32
.1*

Sarbanes-Oxley Section 906
    certification of John R. Eckel, Jr. (Chief Executive Officer)
    for Copano Energy, L.L.C.32
.2*

Sarbanes-Oxley Section 906
    certification of Matthew J. Assiff (Chief Financial Officer) for
    Copano Energy, L.L.C.     *
    
    Filed herewith.
    
    Portions of this exhibit have been omitted pursuant to a request
    for confidential treatment. 54




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##### Table of Contents



SIGNATURES
      By:
    /s/  John
    R. Eckel, Jr      By:
    /s/  Matthew
    J. Assiff     55




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##### Table of Contents



EXHIBIT
    INDEX  Number

Description3
.1

Certificate of Formation of Copano
    Energy Holdings, L.L.C. (now Copano Energy, L.L.C.)
    (incorporated by reference to Exhibit 3.1 to Registration
    Statement on
    Form S-1
    filed July 30, 2004).3
.2

Certificate of Amendment to
    Certificate of Formation of Copano Energy Holdings, L.L.C. (now
    Copano Energy, L.L.C.) (incorporated by reference to
    Exhibit 3.2 to Registration Statement on
    Form S-1
    filed July 30, 2004).3
.3

Second Amended and Restated
    Limited Liability Company Agreement of Copano Energy, L.L.C.
    (incorporated by reference to Exhibit 3.3 to Post-Effective
    Amendment No. 1 to Registration Statement on
    Form S-1/A
    filed December 15, 2004).3
.4

Amendment No. 1 to Second
    Amended and Restated Limited Liability Company Agreement of
    Copano Energy, L.L.C. (incorporated by reference to
    Exhibit 3.4 to Quarterly Report on
    Form 10-Q
    filed August 15, 2005).3
.5

Amendment No. 2 to Second
    Amended and Restated Limited Liability Company Agreement of
    Copano Energy, L.L.C. (incorporated by reference to
    Exhibit 3.5 to Quarterly Report on
    Form 10-Q
    filed August 15, 2005)4
.1

Indenture dated as of
    February 7, 2006, among Copano Energy, L.L.C., Copano
    Energy Finance Corporation, the Guarantors parties thereto and
    U.S. Bank National Association, as trustee (incorporated by
    reference to Exhibit 4.1 to Current Report on
    Form 8-K
    filed February 8, 2006).4
.2

Rule 144A Global Note
    representing $224,500,000 principal amount of 8.125% Senior
    Notes due 2016 (incorporated by reference to Exhibit 4.2 to
    Current Report on
    Form 8-K
    filed February 8, 2006).4
.3

Regulation S Global Note
    representing $500,000 principal amount of 8.125% Senior Notes
    due 2016 (incorporated by reference to Exhibit 4.3 to
    Current Report on
    Form 8-K
    filed February 8, 2006).4
.4

Registration Rights Agreement
    dated as of February 7, 2006, among Copano Energy, L.L.C.,
    Copano Energy Finance Corporation, the Guarantors parties
    thereto and the Initial Purchasers named therein (incorporated
    by reference to Exhibit 4.4 to Current Report on
    Form 8-K
    filed February 8, 2006).4
.5

Class B Unit and Common Unit
    Purchase Agreement dated as of September 17, 2005 by and
    among Copano Energy, L.L.C. and Kayne Anderson MLP Investment
    Company, RCH Energy MLP Fund LP, RCH Energy MLP Fund-A LP,
    Tortoise Energy Infrastructure Corporation, Tortoise Energy
    Capital Corporation, Goldman, Sachs & Co., Energy
    Income and Growth Fund, Fiduciary/Claymore MLP Opportunity Fund,
    Alerian Opportunity Partners LP, Alerian Capital Partners LP,
    Strome HedgeCap, LP, Strome Alpha, LP and Strome Family
    Foundation (incorporated by reference to Exhibit 10.27 to
    Quarterly Report on
    Form 10-Q
    filed August 15, 2005).4
.6

Registration Rights Agreement made
    and entered into as of August 1, 2005, by and among Copano
    Energy, L.L.C. and Kayne Anderson MLP Investment Company, RCH
    Energy MLP Fund LP, RCH Energy MLP Fund-A LP, Tortoise
    Energy Infrastructure Corporation, Tortoise Energy Capital
    Corporation, Goldman, Sachs & Co., Energy Income and
    Growth Fund, Fiduciary/Claymore MLP Opportunity Fund, Alerian
    Opportunity Partners LP, Alerian Capital Partners LP, Strome MLP
    Fund, L.P., Strome Alpha, LP and Strome Family Foundation
    (incorporated by reference to Exhibit 10.28 to Quarterly
    Report on
    Form 10-Q
    filed August 15, 2005).4
.7

Common Unit Purchase Agreement
    dated as of December 29, 2005, by and among Copano Energy,
    L.L.C. and ZLP Fund, L.P., Structured Finance Americas, LLC and
    Royal Bank of Canada (incorporated by reference to
    Exhibit 4.7 to Annual Report on
    Form 10-K
    filed March 16, 2006).4
.8

Registration Rights Agreement
    dated as of December 29, 2005, by and among Copano Energy,
    L.L.C. and ZLP Fund, L.P., Structured Finance Americas, LLC and
    Royal Bank of Canada (incorporated by reference to
    Exhibit 4.8 to Annual Report on
    Form 10-K
    filed March 16, 2006).10
.1*

Second Amendment to Credit
    Agreement dated as of September 20, 2006 among Copano
    Energy, L.L.C., as the Borrower, Bank of America, N.A., as
    Administrative Agent and the other Lenders party thereto. 56




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##### Table of Contents



Number

Description10
.2

Loan Agreement dated as of
    September 29, 2006, among Copano Energy, L.L.C., as the
    Borrower, Banc of America Bridge LLC, as Administrative Agent,
    and The Other Lenders Party thereto and Banc of America
    Securities LLC, as Sole Lead Arranger and Sole Book Manager
    (incorporated by reference to Exhibit 10.1 to Current
    Report on
    Form 8-K
    filed October 5, 2006).31
.1*

Sarbanes-Oxley Section 302
    certification of John R. Eckel, Jr. (Chief Executive Officer)
    for Copano Energy, L.L.C.31
.2*

Sarbanes-Oxley Section 302
    certification of Matthew J. Assiff (Chief Financial Officer) for
    Copano Energy, L.L.C.32
.1*

Sarbanes-Oxley Section 906
    certification of John R. Eckel, Jr. (Chief Executive Officer)
    for Copano Energy, L.L.C.32
.2*

Sarbanes-Oxley Section 906
    certification of Matthew J. Assiff (Chief Financial Officer) for
    Copano Energy, L.L.C.     *
    
    Filed herewith.
    
    Portions of this exhibit have been omitted pursuant to a request
    for confidential treatment. 57