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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 March 31, 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


12b-2




|                           |                      |                         
|-------------------------- | -------------------- | ------------------------
|Large accelerated filer  o | Accelerated filer  þ | Non-accelerated filer  o

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
    March 31, 2006 and December 31, 2005                                            |  |      | 3  | 
|                                                |  | Unaudited Consolidated Statements of
    Operations for the Three Months Ended March 31, 2006 and
    2005                      |  |      | 4  | 
|                                                |  | Unaudited Consolidated Statements of Cash
    Flows for the Three Months Ended March 31, 2006 and 2005                          |  |      | 5  | 
|                                                |  | Unaudited Consolidated Statement of
    Members Capital and Comprehensive Income for the Three
    Months Ended March 31, 2006 |  |      | 6  | 
|                                                |  | Notes to Unaudited Consolidated Financial
    Statements                                                                        |  |      | 7  | 
|Item 2.                                         |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                       |  |      | 24 | 
|Item 3.                                         |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                                  |  |      | 40 | 
|Item 4.                                         |  | Controls and Procedures                                                                                                         |  |      | 44 | 
|                                               
|PART II  OTHER
    INFORMATION                
|Item 1.                                         |  | Legal Proceedings                                                                                                               |  |      | 45 | 
|Item 1A.                                        |  | Risk Factors                                                                                                                    |  |      | 45 | 
|Item 2.                                         |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                                                                 |  |      | 45 | 
|Item 6.                                         |  | Exhibits                                                                                                                        |  |      | 45 | 
|Amended and Restated Gas Processing Contract   
|First Amendment to Credit Agreement            
|Section 302 Certification of John R. Eckel, Jr.
|Section 302 Certification of Matthew J. Assiff 
|Section 906 Certification of John R. Eckel, Jr.
|Section 906 Certification of Matthew J. Assiff 



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##### Table of Contents








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

COPANO ENERGY, L.L.C. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(Unaudited)


|                                                 |                                                                                                                                                     |                                        |         |         |              |  |         |         |         | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------- | ------- | ------------ |  | ------- | ------- | ------- | 
|                                                 |                                                                                                                                                     | March 31,                              |         |         | December 31, | 
|                                                 |                                                                                                                                                     | 2006                                   |         |         | 2005         | 
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                 |                                                                                                                                                     | (In thousands, except                  |        
|                                                 |                                                                                                                                                     | unit information)                      |        
|ASSETS                                          
|Current assets:                                  |                                                                                                                                                     |                                        |         |         |              |  |         |        
|                                                 | Cash and cash equivalents                                                                                                                           |                                        | $       | 26,465  |              |  | $       | 25,297  |        
|                                                 | Accounts receivable, net                                                                                                                            |                                        |         | 59,539  |              |  |         | 83,297  |        
|                                                 | Accounts receivable from affiliate                                                                                                                  |                                        |         | 977     |              |  |         |        |        
|                                                 | Risk management assets                                                                                                                              |                                        |         | 11,456  |              |  |         | 10,067  |        
|                                                 | Prepayments and other current assets                                                                                                                |                                        |         | 1,812   |              |  |         | 2,474   |        
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                 |                                                                                                                                                     | Total current assets                   |         |         | 100,249      |  |         |         | 121,135 | 
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|Property, plant and equipment, net               |                                                                                                                                                     |                                        | 534,859 |         |              |  | 532,320 |        
|Intangible assets, net                           |                                                                                                                                                     |                                        | 96,329  |         |              |  | 97,551  |        
|Investment in unconsolidated affiliates          |                                                                                                                                                     |                                        | 14,878  |         |              |  | 7,901   |        
|Risk management assets                           |                                                                                                                                                     |                                        | 18,180  |         |              |  | 24,778  |        
|Other assets, net                                |                                                                                                                                                     |                                        | 14,285  |         |              |  | 9,065   |        
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                 |                                                                                                                                                     | Total assets                           |         | $       | 778,780      |  |         | $       | 792,750 | 
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                
|LIABILITIES AND MEMBERS CAPITAL                
|Current liabilities:                             |                                                                                                                                                     |                                        |         |         |              |  |         |        
|                                                 | Accounts payable                                                                                                                                    |                                        | $       | 76,029  |              |  | $       | 96,001  |        
|                                                 | Accounts payable to affiliates                                                                                                                      |                                        |         | 213     |              |  |         | 189     |        
|                                                 | Notes payable                                                                                                                                       |                                        |         | 516     |              |  |         | 1,272   |        
|                                                 | Other current liabilities                                                                                                                           |                                        |         | 9,557   |              |  |         | 10,970  |        
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                 |                                                                                                                                                     | Total current liabilities              |         |         | 86,315       |  |         |         | 108,432 | 
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|Long-term debt                                   |                                                                                                                                                     |                                        | 385,000 |         |              |  | 398,000 |        
|Risk management and other noncurrent liabilities |                                                                                                                                                     |                                        | 5,089   |         |              |  | 4,515   |        
|                                                
|Commitments and contingencies (Note 9)           |                                                                                                                                                     |                                        |         |         |              |  |         |        
|                                                
|Members capital:                                |                                                                                                                                                     |                                        |         |         |              |  |         |        
|                                                 | Common units, no par value, 14,675,667 and 14,100,508 units
    issued and outstanding as of March 31, 2006 and
    December 31, 2005, respectively |                                        |         | 318,644 |              |  |         | 297,592 |        
|                                                 | Subordinated units, no par value, 3,519,126 units
    outstanding as of March 31, 2006 and December 31,
    2005, respectively                      |                                        |         | 10,379  |              |  |         | 10,379  |        
|                                                 | Paid-in capital                                                                                                                                     |                                        |         | 5,769   |              |  |         | 4,068   |        
|                                                 | Accumulated deficit                                                                                                                                 |                                        |         | (17,609 | )            |  |         | (14,941 | )      
|                                                 | Deferred compensation                                                                                                                               |                                        |         |        |              |  |         | (3,949  | )      
|                                                 | Other comprehensive loss                                                                                                                            |                                        |         | (14,807 | )            |  |         | (11,346 | )      
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                 |                                                                                                                                                     |                                        | 302,376 |         |              |  | 281,803 |        
|                                                 |                                                                                                                                                     |                                        |         |         |              | 
|                                                 |                                                                                                                                                     | Total liabilities and members capital |         | $       | 778,780      |  |         | $       | 792,750 | 
|                                                 |                                                                                                                                                     |                                        |         |         |              | 



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


|                                                                                  |                                                                  |                          |        |         |         |   |        |         |         | 
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                                  |                                                                  | Three Months Ended       |       
|                                                                                  |                                                                  | March 31,                |       
|                                                                                  |                                                                  |                          |       
|                                                                                  |                                                                  | 2006                     |        |         | 2005    |  
|                                                                                  |                                                                  |                          |        |         |         |  
|                                                                                  |                                                                  | (In thousands, except    |       
|                                                                                  |                                                                  | unit information)        |       
|Revenue:                                                                          |                                                                  |                          |        |         |         |   |        |        
|                                                                                  | Natural gas sales(1)                                             |                          | $      | 127,464 |         |   | $      | 78,141  |        
|                                                                                  | Natural gas sales  affiliates                                   |                          |        | 516     |         |   |        |        |        
|                                                                                  | Natural gas liquids sales                                        |                          |        | 75,326  |         |   |        | 45,076  |        
|                                                                                  | Transportation, compression and processing fees                  |                          |        | 3,810   |         |   |        | 2,686   |        
|                                                                                  | Transportation, compression and processing fees 
    affiliates |                          |        | 10      |         |   |        | 11      |        
|                                                                                  | Other                                                            |                          |        | 6,834   |         |   |        | 936     |        
|                                                                                  |                                                                  |                          |        |         |         |  
|                                                                                  |                                                                  | Total revenue            |        |         | 213,960 |   |        |         | 126,850 | 
|                                                                                  |                                                                  |                          |        |         |         |  
|Costs and expenses:                                                               |                                                                  |                          |        |         |         |   |        |        
|                                                                                  | Cost of natural gas and natural gas liquids(2)                   |                          |        | 176,572 |         |   |        | 111,271 |        
|                                                                                  | Cost of natural gas and natural gas liquids 
    affiliates     |                          |        | 140     |         |   |        | 430     |        
|                                                                                  | Transportation                                                   |                          |        | 679     |         |   |        | 463     |        
|                                                                                  | Transportation  affiliates                                      |                          |        | 90      |         |   |        | 135     |        
|                                                                                  | Operations and maintenance                                       |                          |        | 7,184   |         |   |        | 2,971   |        
|                                                                                  | Depreciation and amortization                                    |                          |        | 7,625   |         |   |        | 1,792   |        
|                                                                                  | General and administrative                                       |                          |        | 6,075   |         |   |        | 3,435   |        
|                                                                                  | Taxes other than income                                          |                          |        | 444     |         |   |        | 197     |        
|                                                                                  | Equity in earnings from unconsolidated affiliates                |                          |        | (196    | )       |   |        | (225    | )      
|                                                                                  |                                                                  |                          |        |         |         |  
|                                                                                  |                                                                  | Total costs and expenses |        |         | 198,613 |   |        |         | 120,469 | 
|                                                                                  |                                                                  |                          |        |         |         |  
|Operating income                                                                  |                                                                  |                          | 15,347 |         |         |   | 6,381  |        
|Other income (expense):                                                           |                                                                  |                          |        |         |         |   |        |        
|                                                                                  | Interest and other income                                        |                          |        | 249     |         |   |        | 67      |        
|                                                                                  | Interest and other financing costs                               |                          |        | (8,183  | )       |   |        | (1,023  | )      
|                                                                                  |                                                                  |                          |        |         |         |  
|Net income                                                                        |                                                                  | $                        | 7,413  |         |         | $ | 5,425  |        
|                                                                                  |                                                                  |                          |        |         |         |  
|Basic net income per unit:                                                        |                                                                  |                          |        |         |         |   |        |        
|                                                                                  | Net income per unit                                              |                          | $      | 0.41    |         |   | $      | 0.51    |        
|                                                                                  | Weighted average number of units                                 |                          |        | 14,657  |         |   |        | 7,061   |        
|Diluted net income per unit:                                                      |                                                                  |                          |        |         |         |   |        |        
|                                                                                  | Net income per unit                                              |                          | $      | 0.40    |         |   | $      | 0.51    |        
|                                                                                  | Weighted average number of units                                 |                          |        | 18,326  |         |   |        | 10,639  |        
|                                                                                  |                                                                  |                          |        |         |         |  
|(1) Includes sales related to purchases/sales with the same
    counterparty:     |                                                                  | $                        |       |         |         | $ | 20,408 |        
|(2) Includes purchases related to purchases/sales with the
    same counterparty: |                                                                  | $                        |       |         |         | $ | 20,453 |        



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


|                                             |                                                                                       |                                                   |                                      |                                           |       |         |         |        |       |       |        |  
|-------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------ | ----------------------------------------- | ----- | ------- | ------- | ------ | ----- | ----- | ------ | -
|                                             |                                                                                       | Three Months Ended                                |                                     
|                                             |                                                                                       | March 31,                                         |                                     
|                                             |                                                                                       |                                                   |                                     
|                                             |                                                                                       | 2006                                              |                                      |                                           | 2005  |        
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|                                             |                                                                                       | (In thousands)                                    |                                     
|Cash Flows From Operating Activities:        |                                                                                       |                                                   |                                      |                                           |       |         |         |       
|                                             | Net income                                                                            |                                                   | $                                    | 7,413                                     |       |         | $       | 5,425  |      
|                                             | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                   |                                      |                                           |       |         |         |        |      
|                                             |                                                                                       | Depreciation and amortization                     |                                      |                                           | 7,625 |         |         |        | 1,792 |      
|                                             |                                                                                       | Amortization of debt issue costs                  |                                      |                                           | 957   |         |         |        | 163   |      
|                                             |                                                                                       | Equity in earnings from unconsolidated affiliates |                                      |                                           | (196  | )       |         |        | (225  | )    
|                                             |                                                                                       | Equity-based compensation                         |                                      |                                           | 321   |         |         |        | 83    |      
|                                             |                                                                                       | Other noncash items                               |                                      |                                           | (2    | )       |         |        | (21   | )    
|                                             |                                                                                       | Changes in assets and liabilities:                |                                      |                                           |       |         |         |        |       |      
|                                             |                                                                                       |                                                   | Accounts receivable                  |                                           |       | 23,758  |         |        |       | 2,234 |       
|                                             |                                                                                       |                                                   | Accounts receivable from affiliate   |                                           |       | (947    | )       |        |       | (105  | )     
|                                             |                                                                                       |                                                   | Prepayments and other current assets |                                           |       | 662     |         |        |       | 258   |       
|                                             |                                                                                       |                                                   | Risk management assets               |                                           |       | 2,338   |         |        |       |      |       
|                                             |                                                                                       |                                                   | Accounts payable                     |                                           |       | (18,031 | )       |        |       | 286   |       
|                                             |                                                                                       |                                                   | Accounts payable to affiliates       |                                           |       | 24      |         |        |       | 24    |       
|                                             |                                                                                       |                                                   | Other current liabilities            |                                           |       | (1,067  | )       |        |       | 977   |       
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|                                             |                                                                                       |                                                   |                                      | Net cash provided by operating activities |       |         | 22,855  |        |       |       | 10,891 |  
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|Cash Flows From Investing Activities:        |                                                                                       |                                                   |                                      |                                           |       |         |         |       
|                                             | Additions to property, plant and equipment and intangible assets                      |                                                   |                                      | (10,557                                   | )     |         |         | (1,073 | )    
|                                             | Investment in unconsolidated affiliate                                                |                                                   |                                      | (6,811                                    | )     |         |         |       |      
|                                             | Escrow cash                                                                           |                                                   |                                      |                                          |       |         |         | (5     | )    
|                                             | Other                                                                                 |                                                   |                                      | (97                                       | )     |         |         |       |      
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|                                             |                                                                                       |                                                   |                                      | Net cash used in investing activities     |       |         | (17,465 | )      |       |       | (1,078 | )
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|Cash Flows From Financing Activities:        |                                                                                       |                                                   |                                      |                                           |       |         |         |       
|                                             | Repayments of long-term debt                                                          |                                                   |                                      | (258,000                                  | )     |         |         | (4,000 | )    
|                                             | Proceeds from long-term debt                                                          |                                                   |                                      | 245,000                                   |       |         |         |       |      
|                                             | Repayments of short-term notes payable                                                |                                                   |                                      | (756                                      | )     |         |         |       |      
|                                             | Deferred financing costs                                                              |                                                   |                                      | (6,239                                    | )     |         |         | (67    | )    
|                                             | Distributions to unitholders                                                          |                                                   |                                      | (10,081                                   | )     |         |         | (2,115 | )    
|                                             | Proceeds from private placement of common units                                       |                                                   |                                      | 25,000                                    |       |         |         |       |      
|                                             | Capital contributions from Pre-Offering Investors                                     |                                                   |                                      | 1,380                                     |       |         |         |       |      
|                                             | Proceeds from option exercises                                                        |                                                   |                                      | 58                                        |       |         |         |       |      
|                                             | Equity offering costs                                                                 |                                                   |                                      | (584                                      | )     |         |         |       |      
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|                                             |                                                                                       |                                                   |                                      | Net cash used in financing activities     |       |         | (4,222  | )      |       |       | (6,182 | )
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|Net increase in cash and cash equivalents    |                                                                                       |                                                   | 1,168                                |                                           |       |         | 3,631   |       
|Cash and cash equivalents, beginning of year |                                                                                       |                                                   | 25,297                               |                                           |       |         | 7,015   |       
|                                             |                                                                                       |                                                   |                                      |                                           |       |        
|Cash and cash equivalents, end of period     |                                                                                       | $                                                 | 26,465                               |                                           |       | $       | 10,646  |       
|                                             |                                                                                       |                                                   |                                      |                                           |       |        



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF MEMBERS CAPITAL AND
COMPREHENSIVE INCOME


(Unaudited)


|                                                                                                     |  |                |        |   |              |   |         |          |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |               |        |   |         |   |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ------------ | - | ------- | -------- |  |  | ------------ |  |  | ------- | ------ |  | ----------- | - | ----- | ------------ |  | - | ------------- | - |  | ----- | ------ | ------------- | ------ | - | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                                     |  | Common         |        |   | Subordinated |   |         |          |  |  |              |  |  |         |        |  |             |  
|                                                                                                     |  |                |        |   |              |   |         |          |  |  |              |  |  | Other   |        |  |             |   | Total |             
|                                                                                                     |  | Number of      |        |   | Common       |   |         | Number   |  |  | Subordinated |  |  | Paid-in |        |  | Accumulated |   |       | Deferred     |  |   | Comprehensive |   |  |       |        | Comprehensive |       
|                                                                                                     |  | Units          |        |   | Units        |   |         | of 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                                                    |  |                |       |   |              |   |        |          |  |  |             |  |  |         |       |  |             |   | 1,380 |              |  |   |              |   |  |       |       |               |        |   |        |   |  |   | 1,380   |   |  |   |       |  
|Private placement of units                                                                           |  |                | 709    |   |              |   | 25,000  |          |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |               |        |   |        |   |  |   | 25,000  |   |  |   |       |  
|Offering costs                                                                                       |  |                |       |   |              |   | (57     | )        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |               |        |   |        |   |  |   | (57     | ) |  |   |       |  
|Distributions to unitholders                                                                         |  |                |       |   |              |   |        |          |  |  |             |  |  |         |       |  |             |   |      |              |  |   | (10,081       | ) |  |       |       |               |        |   |        |   |  |   | (10,081 | ) |  |   |       |  
|Option exercises                                                                                     |  |                | 3      |   |              |   | 58      |          |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |               |        |   |        |   |  |   | 58      |   |  |   |       |  
|Adoption of SFAS No. 123(R)-reversal of deferred
    compensation related to restricted common units |  |                | (137   | ) |              |   | (3,949  | )        |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       | 3,949  |               |        |   |        |   |  |   |        |   |  |   |       |  
|Equity-based compensation                                                                            |  |                |       |   |              |   |        |          |  |  |             |  |  |         |       |  |             |   | 321   |              |  |   |              |   |  |       |       |               |        |   |        |   |  |   | 321     |   |  |   |       |  
|Net income                                                                                           |  |                |       |   |              |   |        |          |  |  |             |  |  |         |       |  |             |   |      |              |  |   | 7,413         |   |  |       |       |               |        |   |        |   |  |   | 7,413   |   |  |   | 7,413  |  
|Derivative settlements reclassified to income                                                        |  |                |       |   |              |   |        |          |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |               |        |   | 768     |   |  |   | 768     |   |  |   | 768    |  
|Unrealized loss-change in fair value of derivatives                                                  |  |                |       |   |              |   |        |          |  |  |             |  |  |         |       |  |             |   |      |              |  |   |              |   |  |       |       |               |        |   | (4,229  | ) |  |   | (4,229  | ) |  |   | (4,229 | )
|                                                                                                     |  |                |        |   |              |   |         |          |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |               |        |  
|Comprehensive income                                                                                 |  |                |        |   |              |   |         |          |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |               |        |   |         |   |  |   |         |   |  | $ | 3,952  |  
|                                                                                                     |  |                |        |   |              |   |         |          |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |               |        |  
|Balance, March 31, 2006                                                                              |  |                | 14,676 |   |              | $ | 318,644 |          |  |  | 3,519        |  |  | $       | 10,379 |  |             | $ | 5,769 |              |  | $ | (17,609       | ) |  | $     |       |               |        | $ | (14,807 | ) |  | $ | 302,376 |   |  |   |        |  
|                                                                                                     |  |                |        |   |              |   |         |          |  |  |              |  |  |         |        |  |             |   |       |              |  |   |               |   |  |       |        |               |        |  



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES





NOTES 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



10-K


Note 2  New Accounting Pronouncements




| |                    
| | -------------------
| | Share-Based Payment

Share-Based
Payment,


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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting
for Stock Issued to Employees,








| |                                         
| | ----------------------------------------
| | Accounting Changes and Error Corrections

Accounting Changes and Error Corrections.




| |                                                                               
| | ------------------------------------------------------------------------------
| | Accounting for Purchases and Sales of Inventory with the
    Same Counterparty

04-13, Accounting for Purchases


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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


and Sales of Inventory with the Same Counterparty 04-13). 04-13, 04-13




|         |                  
|-------- | -----------------
|Note 3  | Intangible Assets

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


|                                     |                        |           |        |        |              |   |        |        | 
|------------------------------------ | ---------------------- | --------- | ------ | ------ | ------------ | - | ------ | ------ | 
|                                     |                        | March 31, |        |        | December 31, |  
|                                     |                        | 2006      |        |        | 2005         |  
|                                     |                        |           |        |        |              |  
|Rights-of-way and easements, at cost |                        | $         | 59,823 |        |              | $ | 59,693 |       
|Contracts                            |                        |           | 42,444 |        |              |   | 42,444 |       
|Customer relationship                |                        |           | 725    |        |              |   | 725    |       
|Less accumulated amortization        |                        |           | (6,663 | )      |              |   | (5,311 | )     
|                                     |                        |           |        |        |              |  
|                                     | Intangible assets, net |           | $      | 96,329 |              |   | $      | 97,551 | 
|                                     |                        |           |        |        |              |  



|         |             
|-------- | ------------
|Note 4  | Acquisitions



| |                                       
| | --------------------------------------
| | Acquisition of ScissorTail Energy, LLC



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                             |                                                |                              |   |         |                |  |   |         | 
|---------------------------- | ---------------------------------------------- | ---------------------------- | - | ------- | -------------- |  | - | ------- | 
|                             |                                                | Three Months Ended March 31, |  
|                             |                                                |                              |  
|                             |                                                | Actual 2006                  |   |         | Pro Forma 2005 | 
|                             |                                                |                              |   |         |                | 
|                             |                                                | (In thousands,               |  
|                             |                                                | except per unit information) |  
|Pro Forma Earnings Data:     |                                                |                              |   |         |                |  |   |        
|                             | Revenue                                        |                              | $ | 213,960 |                |  | $ | 199,369 | 
|                             | Costs and expenses                             |                              | $ | 198,616 |                |  | $ | 187,492 | 
|                             | Operating income                               |                              | $ | 15,347  |                |  | $ | 11,877  | 
|                             | Income before extraordinary items              |                              | $ | 7,413   |                |  | $ | 2,885   | 
|                             | Net income                                     |                              | $ | 7,413   |                |  | $ | 2,885   | 
|Basic net income per unit:   |                                                |                              |   |         |                |  |   |        
|                             | As reported weighted average units outstanding |                              |   | 14,657  |                |  |   | 7,061   | 
|                             | Pro forma units outstanding                    |                              |   |         |                |  |   | 13,241  | 
|                             | As reported net income per unit                |                              | $ | 0.41    |                |  | $ | 0.51    | 
|                             | Pro forma net income per unit                  |                              |   |         |                |  | $ | 0.17    | 
|Diluted net income per unit: |                                                |                              |   |         |                |  |   |        
|                             | As reported weighted average units outstanding |                              |   | 18,326  |                |  |   | 10,639  | 
|                             | Pro forma units outstanding                    |                              |   |         |                |  |   | 16,910  | 
|                             | As reported net income per unit                |                              | $ | 0.40    |                |  | $ | 0.51    | 
|                             | Pro forma net income per unit                  |                              |   |         |                |  | $ | 0.17    | 



|         |               
|-------- | --------------
|Note 5  | Long-Term Debt



|                |                    |           |   |         |              |  |   |         |         | 
|--------------- | ------------------ | --------- | - | ------- | ------------ |  | - | ------- | ------- | 
|                |                    | March 31, |   |         | December 31, | 
|                |                    | 2006      |   |         | 2005         | 
|                |                    |           |   |         |              | 
|Long-term debt: |                    |           |   |         |              |  |   |        
|                | Credit Facility    |           | $ | 160,000 |              |  | $ | 228,000 |        
|                | Senior Notes       |           |   | 225,000 |              |  |   |        |        
|                | Term Loan Facility |           |   |        |              |  |   | 170,000 |        
|                |                    |           |   |         |              | 
|                |                    | Total     |   | $       | 385,000      |  |   | $       | 398,000 | 
|                |                    |           |   |         |              | 



| |                
| | ---------------
| | Credit Facility



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                      
| | ---------------------
| | Senior Notes Offering









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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


CONDENSED CONSOLIDATING BALANCE SHEET


MARCH 31, 2006


|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |          |          |         |   |         |         |         | 
|------------------------------------------------ | ------------------------------------ | ------------------------- | ------- | ------- | --------- | --------- | - | ------------ | - | - | ------------ | ------- | ------- | ----- | -------- | -------- | ------- | - | ------- | ------- | ------- | 
|                                                 |                                      |                           |         |         |           | Guarantor |   |              |   |   |             
|                                                 |                                      | Parent                    |         |         | Co-Issuer |           |   | Subsidiaries |   |   | Eliminations |         |         | Total |         
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|                                                 |                                      | (In thousands)            |        
|ASSETS                                          
|Current assets:                                  |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |          |          |         |   |         |        
|                                                 | Cash and cash equivalents            |                           | $       | 2,085   |           |           | $ | 1            |   |   | $            | 24,379  |         |       | $        |         |         |   | $       | 26,465  |        
|                                                 | Accounts receivable, net             |                           |         | 27      |           |           |   |             |   |   |              | 59,512  |         |       |          |         |         |   |         | 59,539  |        
|                                                 | Accounts receivable from affiliates  |                           |         |        |           |           |   |             |   |   |              | 30,907  |         |       |          | (29,930  | )       |   |         | 977     |        
|                                                 | Intercompany receivable              |                           |         | 34,346  |           |           |   |             |   |   |              | (36,536 | )       |       |          | 2,190    |         |   |         |        |        
|                                                 | Risk management assets               |                           |         |        |           |           |   |             |   |   |              | 11,456  |         |       |          |         |         |   |         | 11,456  |        
|                                                 | Prepayments and other current assets |                           |         | 25      |           |           |   |             |   |   |              | 1,787   |         |       |          |         |         |   |         | 1,812   |        
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|                                                 |                                      | Total current assets      |         |         | 36,483    |           |   |              | 1 |   |              |         | 91,505  |       |          |          | (27,740 | ) |         |         | 100,249 | 
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|Property, plant and equipment, net               |                                      |                           | 348     |         |           |           |  |              |   |   | 534,511      |         |         |       |         |          |         |   | 534,859 |        
|Intangible assets, net                           |                                      |                           |        |         |           |           |  |              |   |   | 96,329       |         |         |       |         |          |         |   | 96,329  |        
|Investment in unconsolidated affiliates          |                                      |                           |        |         |           |           |  |              |   |   | 14,878       |         |         |       |         |          |         |   | 14,878  |        
|Investment in consolidated subsidiaries          |                                      |                           | 594,371 |         |           |           |  |              |   |   |             |         |         |       | (594,371 | )        |         |   |        |        
|Risk management assets                           |                                      |                           |        |         |           |           |  |              |   |   | 18,180       |         |         |       |         |          |         |   | 18,180  |        
|Other assets, net                                |                                      |                           | 11,286  |         |           |           |  |              |   |   | 2,999        |         |         |       |         |          |         |   | 14,285  |        
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|                                                 | Total assets                         |                           | $       | 642,488 |           |           | $ | 1            |   |   | $            | 758,402 |         |       | $        | (622,111 | )       |   | $       | 778,780 |        
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|                                                
|LIABILITIES AND MEMBERS CAPITAL                
|Current liabilities:                             |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |          |          |         |   |         |        
|                                                 | Accounts payable                     |                           | $       | 62      |           |           | $ |             |   |   | $            | 75,967  |         |       | $        |         |         |   | $       | 76,029  |        
|                                                 | Accounts payable to affiliates       |                           |         |        |           |           |   |             |   |   |              | 19,078  |         |       |          | (18,865  | )       |   |         | 213     |        
|                                                 | Intercompany payable                 |                           |         | 3,677   |           |           |   |             |   |   |              | 5,198   |         |       |          | (8,875   | )       |   |         |        |        
|                                                 | Notes payable                        |                           |         |        |           |           |   |             |   |   |              | 516     |         |       |          |         |         |   |         | 516     |        
|                                                 | Other current liabilities            |                           |         | 4,799   |           |           |   |             |   |   |              | 4,758   |         |       |          |         |         |   |         | 9,557   |        
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|                                                 |                                      | Total current liabilities |         |         | 8,538     |           |   |              |  |   |              |         | 105,517 |       |          |          | (27,740 | ) |         |         | 86,315  | 
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|Long-term debt                                   |                                      |                           | 385,000 |         |           |           |  |              |   |   |             |         |         |       |         |          |         |   | 385,000 |        
|Risk management and other noncurrent liabilities |                                      |                           | 248     |         |           |           |  |              |   |   | 4,841        |         |         |       |         |          |         |   | 5,089   |        
|Members/Partners capital:                      |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |          |          |         |   |         |        
|                                                 | Common units                         |                           |         | 318,644 |           |           |   |             |   |   |              |        |         |       |          |         |         |   |         | 318,644 |        
|                                                 | Subordinated units                   |                           |         | 10,379  |           |           |   |             |   |   |              |        |         |       |          |         |         |   |         | 10,379  |        
|                                                 | Paid-in capital                      |                           |         | 5,769   |           |           |   | 1            |   |   |              | 574,301 |         |       |          | (574,302 | )       |   |         | 5,769   |        
|                                                 | Accumulated deficit                  |                           |         | (86,090 | )         |           |   |             |   |   |              | 88,550  |         |       |          | (20,069  | )       |   |         | (17,609 | )      
|                                                 | Other comprehensive loss             |                           |         |        |           |           |   |             |   |   |              | (14,807 | )       |       |          |         |         |   |         | (14,807 | )      
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|                                                 |                                      |                           | 248,702 |         |           |           | 1 |              |   |   | 648,044      |         |         |       | (594,371 | )        |         |   | 302,376 |        
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         
|Total liabilities and members/partners capital |                                      | $                         | 642,488 |         |           | $         | 1 |              |   | $ | 758,402      |         |         | $     | (622,111 | )        |         | $ | 778,780 |        
|                                                 |                                      |                           |         |         |           |           |   |              |   |   |              |         |         |       |         

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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS


FOR THE THREE MONTHS ENDED MARCH 31, 2006


|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |   |   |   |   |       |         |         | 
|----------------------- | ------------------------------------------------- | ------------------------ | ------ | ------ | --------- | --------- | ------------ | - | - | ------------ | ------ | ------- | ------- | - | - | - | - | - | ----- | ------- | ------- | 
|                        |                                                   |                          |        |        |           | Guarantor |              |   |   |              |       
|                        |                                                   | Parent                   |        |        | Co-Issuer |           | Subsidiaries |   |   | Eliminations |        | Total   |        
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |        
|                        |                                                   | (In thousands)           |       
|Revenue:                |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |   |   |   |   |       |        
|                        | Natural gas sales                                 |                          | $      |       |           |           | $            |  |   |              | $      | 127,980 |         |   | $ |  |   |   | $     | 127,980 |        
|                        | Natural gas liquids sales                         |                          |        |       |           |           |              |  |   |              |        | 75,326  |         |   |   |  |   |   |       | 75,326  |        
|                        | Transportation, compression and processing fees   |                          |        |       |           |           |              |  |   |              |        | 3,820   |         |   |   |  |   |   |       | 3,820   |        
|                        | Other                                             |                          |        |       |           |           |              |  |   |              |        | 6,834   |         |   |   |  |   |   |       | 6,834   |        
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |  
|                        |                                                   | Total revenue            |        |        |          |           |              |   |  |              |        |         | 213,960 |   |   |   |  |   |       |         | 213,960 | 
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |  
|Costs and expenses:     |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |   |   |   |   |       |        
|                        | Cost of natural gas and natural gas liquids       |                          |        |       |           |           |              |  |   |              |        | 176,712 |         |   |   |  |   |   |       | 176,712 |        
|                        | Transportation                                    |                          |        |       |           |           |              |  |   |              |        | 769     |         |   |   |  |   |   |       | 769     |        
|                        | Operations and maintenance                        |                          |        |       |           |           |              |  |   |              |        | 7,184   |         |   |   |  |   |   |       | 7,184   |        
|                        | Depreciation and amortization                     |                          |        | 17     |           |           |              |  |   |              |        | 7,608   |         |   |   |  |   |   |       | 7,625   |        
|                        | General and administrative                        |                          |        | 318    |           |           |              |  |   |              |        | 5,757   |         |   |   |  |   |   |       | 6,075   |        
|                        | Taxes other than income                           |                          |        |       |           |           |              |  |   |              |        | 444     |         |   |   |  |   |   |       | 444     |        
|                        | Equity in earnings from unconsolidated affiliates |                          |        |       |           |           |              |  |   |              |        | (196    | )       |   |   |  |   |   |       | (196    | )      
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |  
|                        |                                                   | Total costs and expenses |        |        | 335       |           |              |   |  |              |        |         | 198,278 |   |   |   |  |   |       |         | 198,613 | 
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |  
|                        |                                                   | Operating (loss) income  |        |        | (335      | )         |              |   |  |              |        |         | 15,682  |   |   |   |  |   |       |         | 15,347  | 
|Other income (expense): |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |   |   |   |   |       |        
|                        | Interest and other income                         |                          |        |       |           |           |              |  |   |              |        | 249     |         |   |   |  |   |   |       | 249     |        
|                        | Interest and other financing costs                |                          |        | (8,145 | )         |           |              |  |   |              |        | (38     | )       |   |   |  |   |   |       | (8,183  | )      
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |  
|Net (loss) income       |                                                   | $                        | (8,480 | )      |           | $         |             |   |   | $            | 15,893 |         |         | $ |  |   |   | $ | 7,413 |        
|                        |                                                   |                          |        |        |           |           |              |   |   |              |        |         |         |   |  

13



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


FOR THE THREE MONTHS ENDED MARCH 31, 2006


|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |   |         |         |   |        |          |         |  
|-------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------- | ----- | -------- | --------- | --------- | - | ------------ | - | - | ------------ | ------- | ------- | ----- | - | ------- | ------- | - | ------ | -------- | ------- | -
|                                             |                                                                  |                                                     |       |          |           | Guarantor |   |              |   |   |             
|                                             |                                                                  | Parent                                              |       |          | Co-Issuer |           |   | Subsidiaries |   |   | Eliminations |         |         | Total |  
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|                                             |                                                                  | (In thousands)                                      |      
|Cash Flows From Operating Activities:        |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |   |         |         |   |        |         
|                                             |                                                                  | Net cash (used in) provided by operating activities |       | $        | (7,117    | )         |   | $            |  |   |              | $       | 29,972  |       |   | $       |        |   |        | $        | 22,855  |  
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|Cash Flows From Investing Activities:        |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |   |         |         |   |        |         
|                                             | Additions to property, plant and equipment and intangible assets |                                                     |       | (1       | )         |           |   |             |   |   |              | (10,556 | )       |       |   |        |         |   |        | (10,557  | )      
|                                             | Investment in unconsolidated affiliates                          |                                                     |       |         |           |           |   |             |   |   |              | (6,811  | )       |       |   |        |         |   |        | (6,811   | )      
|                                             | Distributions from consolidated subsidiaries                     |                                                     |       | 11,500   |           |           |   |             |   |   |              |        |         |       |   | (11,500 | )       |   |        |         |        
|                                             | Other                                                            |                                                     |       |         |           |           |   |             |   |   |              | (97     | )       |       |   |        |         |   |        | (97      | )      
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|                                             |                                                                  | Net cash provided by (used in) investing activities |       |          | 11,499    |           |   |              |  |   |              |         | (17,464 | )     |   |         | (11,500 | ) |        |          | (17,465 | )
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|Cash Flows From Financing Activities:        |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |   |         |         |   |        |         
|                                             | Repayments of long-term debt                                     |                                                     |       | (258,000 | )         |           |   |             |   |   |              |        |         |       |   |        |         |   |        | (258,000 | )      
|                                             | Proceeds from long-term debt                                     |                                                     |       | 245,000  |           |           |   |             |   |   |              |        |         |       |   |        |         |   |        | 245,000  |        
|                                             | Deferred financing costs                                         |                                                     |       | (6,239   | )         |           |   |             |   |   |              |        |         |       |   |        |         |   |        | (6,239   | )      
|                                             | Repayment of short-term notes payable                            |                                                     |       |         |           |           |   |             |   |   |              | (756    | )       |       |   |        |         |   |        | (756     | )      
|                                             | Distributions to unitholders                                     |                                                     |       | (10,081  | )         |           |   |             |   |   |              |        |         |       |   |        |         |   |        | (10,081  | )      
|                                             | Proceeds from private placement of common units                  |                                                     |       | 25,000   |           |           |   |             |   |   |              |        |         |       |   |        |         |   |        | 25,000   |        
|                                             | Capital contributions from Pre-Offering Investors                |                                                     |       | 1,380    |           |           |   |             |   |   |              |        |         |       |   |        |         |   |        | 1,380    |        
|                                             | Equity offering costs                                            |                                                     |       | (584     | )         |           |   |             |   |   |              |        |         |       |   |        |         |   |        | (584     | )      
|                                             | Proceeds from option exercises                                   |                                                     |       | 58       |           |           |   |             |   |   |              |        |         |       |   |        |         |   |        | 58       |        
|                                             | Distributions to parent                                          |                                                     |       |         |           |           |   |             |   |   |              | (11,500 | )       |       |   | 11,500  |         |   |        |         |        
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|                                             |                                                                  | Net cash (used in) provided by financing activities |       |          | (3,466    | )         |   |              |  |   |              |         | (12,256 | )     |   |         | 11,500  |   |        |          | (4,222  | )
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|Net increase in cash and cash equivalents    |                                                                  |                                                     | 916   |          |           |           |  |              |   |   | 252          |         |         |       |  |         |         |   | 1,168  |         
|Cash and cash equivalents, beginning of year |                                                                  |                                                     | 1,167 |          |           |           | 1 |              |   |   | 24,129       |         |         |       |  |         |         |   | 25,297 |         
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  
|Cash and cash equivalents, end of period     |                                                                  | $                                                   | 2,083 |          |           | $         | 1 |              |   | $ | 24,381       |         |         | $     |  |         |         | $ | 26,465 |         
|                                             |                                                                  |                                                     |       |          |           |           |   |              |   |   |              |         |         |       |  



| |                   
| | ------------------
| | Term Loan Facility

Senior
Notes Offering


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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



S-3,






| |                        
| | -----------------------
| | Restricted Common Units





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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |              
| | -------------
| | Distributions









| |             
| | ------------
| | Unit Options







| |                                         
| | ----------------------------------------
| | Accounting for Equity-Based Compensation

Accounting for
Stock-Based Compensation. Restricted Common Units Unit
Options


Unit Options.


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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                          |  |                              |            |   |      |   |            |  
|--------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                          |  | Three Months Ended March 31, |           
|                                                          |  |                              |           
|                                                          |  | 2006                         |            |   | 2005 |  
|                                                          |  |                              |            |   |      |  
|Weighted average exercise price                           |  | $                            | 41.16      |   |      | $ | 27.19      |  
|Expected volatility                                       |  |                              | 27.24      | % |      |   | 24.53      | %
|Distribution yield                                        |  |                              | 6.52       | % |      |   | 6.49       | %
|Risk-free interest rate                                   |  |                              | 4.33%-4.61 | % |      |   | 3.99%-4.19 | %
|Expected term (in years)                                  |  |                              | 7          |   |      |   | 7          |  
|Weighted average grant-date fair value of options granted |  | $                            | 6.10       |   |      | $ | 3.35       |  
|Total intrinsic value of options exercised                |  | $                            | 53,000     |   |      | $ |           |  



|                                   |           |            |         |        |          |          |       |             |  |  |           |  |  |   |           |  | 
|---------------------------------- | --------- | ---------- | ------- | ------ | -------- | -------- | ----- | ----------- |  |  | --------- |  |  | - | --------- |  | 
|                                   |           |            |         |        |          | Weighted |       |             | 
|                                   |           | Number of  |         |        | Weighted |          |       | Average     |  |  |          
|                                   |           | Units      |         |        | Average  |          |       | Remaining   |  |  | Aggregate | 
|                                   |           | Underlying |         |        | Exercise |          |       | Contractual |  |  | Intrinsic | 
|                                   |           | Options    |         |        | Price    |          |       | Term        |  |  | Value     | 
|                                   |           |            |         |        |          |          |       |             |  |  |           | 
|Outstanding at beginning of period |           |            | 491,110 |        |          | $        | 30.18 |             |  |  |           |  |  |   |           | 
|                                   | Granted   |            |         | 16,200 |          |          |       | 41.16       |  |  |           |  |  |   |           |  | 
|                                   | Exercised |            |         | (2,767 | )        |          |       | 21.90       |  |  |           |  |  |   |           |  | 
|                                   | Forfeited |            |         | (1,538 | )        |          |       | 29.84       |  |  |           |  |  |   |           |  | 
|                                   |           |            |         |        |          |          |       |             |  |  |           | 
|Outstanding at end of period       |           |            | 503,005 |        |          | $        | 30.58 |             |  |  | 9.0       |  |  | $ | 7,012,000 | 
|                                   |           |            |         |        |          |          |       |             |  |  |           | 
|Exercisable at end of period       |           |            | 39,921  |        |          | $        | 20.88 |             |  |  | 8.7       |  |  | $ | 944,000   | 
|                                   |           |            |         |        |          |          |       |             |  |  |           | 



Restricted Common Units.


|                                   |           |            |         |        |            |   |       |       | 
|---------------------------------- | --------- | ---------- | ------- | ------ | ---------- | - | ----- | ----- | 
|                                   |           | Number     |         |        | Weighted   |  
|                                   |           | of         |         |        | Average    |  
|                                   |           | Restricted |         |        | Grant-Date |  
|                                   |           | Units      |         |        | Fair Value |  
|                                   |           |            |         |        |            |  
|Outstanding at beginning of period |           |            | 139,118 |        |            | $ | 36.59 |      
|                                   | Granted   |            |         |       |            |   |       |      | 
|                                   | Vested    |            |         | (2,290 | )          |   |       | 27.05 | 
|                                   | Forfeited |            |         | (262   | )          |   |       | 40.50 | 
|                                   |           |            |         |        |            |  
|Outstanding at end of period       |           |            | 136,566 |        |            | $ | 36.74 |      
|                                   |           |            |         |        |            |  





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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                      |                       |   |       |      | 
|------------------------------------------------------------------------------------- | --------------------- | - | ----- | ---- | 
|Net income, as reported                                                               |                       | $ | 5,425 |     
|Add: Equity-based compensation included in net income                                 |                       |   | 83    |     
|Less: Equity-based employee compensation expense determined
    under SFAS No. 123(R) |                       |   | (61   | )   
|                                                                                      |                       |   |      
|Pro forma net income                                                                  |                       | $ | 5,447 |     
|                                                                                      |                       |   |      
|Net income per unit:                                                                  |                       |   |       |     
|                                                                                      | Basic  as reported   |   | $     | 0.51 | 
|                                                                                      |                       |   |      
|                                                                                      | Basic  pro forma     |   | $     | 0.52 | 
|                                                                                      |                       |   |      
|                                                                                      | Diluted  as reported |   | $     | 0.51 | 
|                                                                                      |                       |   |      
|                                                                                      | Diluted  pro forma   |   | $     | 0.51 | 
|                                                                                      |                       |   |      

Note 7  Net Income Per Unit






|                                                         |  |                    |        |   |      |   |        |  
|-------------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                         |  | Three Months Ended |       
|                                                         |  | March 31,          |       
|                                                         |  |                    |       
|                                                         |  | 2006               |        |   | 2005 |  
|                                                         |  |                    |        |   |      |  
|Net income available  basic                             |  | $                  | 7,413  |   |      | $ | 5,425  |  
|Less net income attributable to subordinated unitholders |  |                    | (1,435 | ) |      |   | (1,804 | )
|                                                         |  |                    |        |   |      |  
|Net income  basic                                       |  |                    | 5,978  |   |      |   | 3,621  |  
|Net income attributable to subordinated unitholders      |  |                    | 1,435  |   |      |   | 1,804  |  
|                                                         |  |                    |        |   |      |  
|Net income available  diluted*                          |  | $                  | 7,413  |   |      | $ | 5,425  |  
|                                                         |  |                    |        |   |      |  
|Basic weighted average units                             |  |                    | 14,657 |   |      |   | 7,061  |  
|Dilutive weighted average units*                         |  |                    | 18,326 |   |      |   | 10,639 |  
|Basic net income per unit                                |  | $                  | 0.41   |   |      | $ | 0.51   |  
|                                                         |  |                    |        |   |      |  
|Diluted net income per unit*                             |  | $                  | 0.40   |   |      | $ | 0.51   |  
|                                                         |  |                    |        |   |      |  






|  |                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Potentially dilutive restricted units and employee unit options
    totaled 54,011 and 95,438, respectively, during the three months
    ended March 31, 2006. Potentially dilutive restricted units
    and employee unit options totaled 0 and 58,722, respectively,
    during the three months ended March 31, 2005.

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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                           
|-------- | --------------------------
|Note 8  | Related Party Transactions



| |                    
| | -------------------
| | Operations Services







| |                         
| | ------------------------
| | Natural Gas Transactions







|         |                              
|-------- | -----------------------------
|Note 9  | Commitments and Contingencies



| |            
| | -----------
| | Commitments





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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |           
| | ----------
| | Guarantees

Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.




|                      |  |      |    |  |      |   |    |      |  |   |      |  |            |   |       |  |  |   |   |  |  |   |     | 
|--------------------- |  | ---- | -- |  | ---- | - | -- | ---- |  | - | ---- |  | ---------- | - | ----- |  |  | - | - |  |  | - | --- | 
|                      |  | 2006 |    |  | 2007 |   |    | 2008 |  |   | 2009 |  | Thereafter |   | Total | 
|                      |  |      |    |  |      |   |    |      |  |   |      |  |            |   |       | 
|Lease residual values |  | $    | 36 |  |      | $ | 55 |      |  | $ | 54   |  |            | $ |      |  |  | $ |  |  |  | $ | 145 | 







|                    |  |      |     |  |      |   |      |  |      |   |            |  |  |       |   |  |  |   |         |  |  |   |         | 
|------------------- |  | ---- | --- |  | ---- | - | ---- |  | ---- | - | ---------- |  |  | ----- | - |  |  | - | ------- |  |  | - | ------- | 
|                    |  | 2006 |     |  | 2007 |   | 2008 |  | 2009 |   | Thereafter |  |  | Total |  
|                    |  |      |     |  |      |   |      |  |      |   |            |  |  |       |  
|Long-term debt      |  | $    |    |  |      | $ |     |  |      | $ |           |  |  | $     |  |  |  | $ | 385,000 |  |  | $ | 385,000 | 
|Commodity purchases |  |      | 600 |  |      |   |     |  |      |   |           |  |  |       |  |  |  |   |        |  |  |   | 600     | 
|                    |  |      |     |  |      |   |      |  |      |   |            |  |  |       |   |  |  |  
|                    |  | $    | 600 |  |      | $ |     |  |      | $ |           |  |  | $     |  |  |  | $ | 385,000 |  |  | $ | 385,600 | 
|                    |  |      |     |  |      |   |      |  |      |   |            |  |  |       |   |  |  |  

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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Regulatory Compliance





| |           
| | ----------
| | Litigation



Note 10  Supplemental Disclosures to the
Statements of Cash Flows




| |                                                                  
| | -----------------------------------------------------------------
| | Cash paid during each of the periods presented (in
    thousands)

|                                        |  |                 |       |  |      |   |     | 
|--------------------------------------- |  | --------------- | ----- |  | ---- | - | --- | 
|                                        |  | Three Months    |      
|                                        |  | Ended March 31, |      
|                                        |  |                 |      
|                                        |  | 2006            |       |  | 2005 |  
|                                        |  |                 |       |  |      |  
|Interest, including amounts capitalized |  | $               | 7,625 |  |      | $ | 767 | 
|Taxes                                   |  |                 |      |  |      |   |    | 



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Supplemental disclosures of noncash investing and
    financing activities (in thousands)

|                                                             |  |                 |        |   |      |   |     |  
|------------------------------------------------------------ |  | --------------- | ------ | - | ---- | - | --- | -
|                                                             |  | Three Months    |       
|                                                             |  | Ended March 31, |       
|                                                             |  |                 |       
|                                                             |  | 2006            |        |   | 2005 |  
|                                                             |  |                 |        |   |      |  
|Decrease in equity in earnings from unconsolidated affiliate |  | $               | 30     |   |      | $ | 30  |  
|Decrease in accounts receivable from affiliates              |  |                 | (30    | ) |      |   | (30 | )
|Increase in property, plant and equipment                    |  |                 | (1,747 | ) |      |   |    |  
|Increase in other assets                                     |  |                 | (13    | ) |      |   |    |  
|Decrease in accounts payable                                 |  |                 | 1,940  |   |      |   |    |  
|Decrease in other current liabilities                        |  |                 | 346    |   |      |   |    |  
|Increase in equity offering costs                            |  |                 | (526   | ) |      |   |    |  

Note 11  Financial Instruments






| |                               
| | ------------------------------
| | Commodity Risk Hedging Program



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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


over-the


Accounting for Derivative
Instruments and Hedging Activities








| |                                   
| | ----------------------------------
| | Interest Rate Risk Hedging Program





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COPANO ENERGY, L.L.C. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|          |                    
|--------- | -------------------
|Note 12  | Segment Information





|                                                         |  |               |         |            |           |   |            |            |  |   |           |  |  |              |         |     |       |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ------------- | ------- | ---------- | --------- | - | ---------- | ---------- |  | - | --------- |  |  | ------------ | ------- | --- | ----- | - | ------- | - |  | - | ------- | -
|                                                         |  |               |         | Texas Gulf |           |   | Texas Gulf |            |  |   |           |  |  |             
|                                                         |  | Mid-Continent |         |            | Coast     |   |            | Coast      |  |   |           |  |  |              |        
|                                                         |  | Operations    |         |            | Pipelines |   |            | Processing |  |   | Corporate |  |  | Eliminations |         |     | Total |  
|                                                         |  |               |         |            |           |   |            |            |  |   |           |  |  |              |         |     |       |  
|Three Months Ended March 31, 2006:                       |  |               |         |            |           |   |            |            |  |   |           |  |  |              |         |     |       |   |         |   |  |   |         |  
|Sales to external customers                              |  | $             | 99,698  |            |           | $ | 68,665     |            |  | $ | 45,350    |  |  | $            | 247     | (a) |       | $ |        |   |  | $ | 213,960 |  
|Intersegment sales                                       |  |               |        |            |           |   | 49,543     |            |  |   | 14,812    |  |  |              |        |     |       |   | (64,355 | ) |  |   |        |  
|Interest expense and other financing costs               |  |               |        |            |           |   | 2          |            |  |   |          |  |  |              | 8,181   |     |       |   |        |   |  |   | 8,183   |  
|Depreciation and amortization                            |  |               | 5,594   |            |           |   | 1,347      |            |  |   | 600       |  |  |              | 84      |     |       |   |        |   |  |   | 7,625   |  
|Equity in loss (earnings) from unconsolidated affiliates |  |               | 28      |            |           |   | (224       | )          |  |   |          |  |  |              |        |     |       |   |        |   |  |   | (196    | )
|Segment profit (loss)                                    |  |               | 9,540   |            |           |   | 3,896      |            |  |   | 4,057     |  |  |              | (10,080 | )   |       |   |        |   |  |   | 7,413   |  
|Segment assets                                           |  |               | 562,198 |            |           |   | 128,234    |            |  |   | 70,211    |  |  |              | 45,876  |     |       |   | (27,739 | ) |  |   | 778,780 |  
|Capital expenditures                                     |  |               | 3,717   |            |           |   | 3,439      |            |  |   | 1,479     |  |  |              | 278     |     |       |   |        |   |  |   | 8,913   |  
|                                                        
|Three Months Ended March 31, 2005:                       |  |               |         |            |           |   |            |            |  |   |           |  |  |              |         |     |       |   |         |   |  |   |         |  
|Sales to external customers                              |  | $             |        |            |           | $ | 81,684     |            |  | $ | 45,166    |  |  | $            |        |     |       | $ |        |   |  | $ | 126,850 |  
|Intersegment sales                                       |  |               |        |            |           |   | 39,044     |            |  |   | 3,608     |  |  |              |        |     |       |   | (42,652 | ) |  |   |        |  
|Interest expense and other financing costs               |  |               |        |            |           |   | 886        |            |  |   | 137       |  |  |              | 164     |     |       |   | (164    | ) |  |   | 1,023   |  
|Depreciation and amortization                            |  |               |        |            |           |   | 1,245      |            |  |   | 528       |  |  |              | 19      |     |       |   |        |   |  |   | 1,792   |  
|Equity in earnings from unconsolidated affiliate         |  |               |        |            |           |   | (225       | )          |  |   |          |  |  |              |        |     |       |   |        |   |  |   | (225    | )
|Segment profit (loss)                                    |  |               |        |            |           |   | 3,460      |            |  |   | 3,758     |  |  |              | (1,793  | )   |       |   |        |   |  |   | 5,425   |  
|Capital expenditures                                     |  |               |        |            |           |   | 666        |            |  |   | 213       |  |  |              | 194     |     |       |   |        |   |  |   | 1,073   |  






|    |                                                                           
|--- | --------------------------------------------------------------------------
|(a) | Represents the results of our risk management activities. See
    Note 11.

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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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 day                                                                                                                             
|Btu:         |  | British thermal units                                                                                                                       
|MMBtu:       |  | One million British thermal units                                                                                                           
|MMBtu/d:     |  | One million British thermal units per day                                                                                                   
|Mcf/d:       |  | One thousand cubic feet per day                                                                                                             
|MMcf/d:      |  | One million cubic feet per day                                                                                                              
|NGLs:        |  | Natural gas liquids which consist primarily of ethane,
    propane, isobutane, normal butane, natural gasoline and
    stabilized condensate
|Residue gas: |  | The pipeline quality natural gas remaining after natural gas
    is processed                                                               
|Throughput:  |  | 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. For the three months ended
    March 31, 2006 and 2005, this segment generated
    approximately 56% and 0%, respectively, of our total gross
    margin. Our Mid-Continent Operations segment was established
    upon our acquisition of ScissorTail on August 1, 2005.                                                                                                                                             
|
| |  | 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
    March 31, 2006 and 2005, this segment generated
    approximately 24% and 55%, 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
    March 31, 2006 and 2005, this segment generated
    approximately 19% and 45%, respectively, of our total gross
    margin.
|
| |  | Corporateengages in risk management and other corporate
    activities. For the three months ended March 31, 2006 and
    2005, this segment generated approximately 1% and 0%,
    respectively, of our total gross margin.                                                                                                                                                                                                                                                                                                                                                                                                                            

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##### Table of Contents









How We Evaluate Our Operations




Throughput Volumes.


Segment Gross Margin.


25



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##### Table of Contents







Operations and Maintenance Expenses.


General and Administrative Expenses.




|     |  |                                                |                          | 
|---- |  | ---------------------------------------------- | ------------------------ | 
|Year |  | General and Administrative Expense Limitations
|     |  |                                               
|1    |  | $                                              | 1.50 million per quarter | 
|2    |  | $                                              | 1.65 million per quarter | 
|3    |  | $                                              | 1.80 million per quarter | 



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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.


27



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##### 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




28



---



##### 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;

29



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##### Table of Contents





| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to retain our key customers;                                                                                  
|
| |  | General economic conditions;                                                                                              
|
| |  | 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.

10-K


Items Impacting Comparability of Our Financial
Results




| |                 
| | ----------------
| | Our Acquisitions





| |                            
| | ---------------------------
| | Adoption of SFAS No. 123(R)



30



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##### Table of Contents



Our Results of Operations


|                                                  |                                                      |                                     |                       |         |         |        |        |         |         |        | 
|------------------------------------------------- | ---------------------------------------------------- | ----------------------------------- | --------------------- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | 
|                                                  |                                                      | Three Months Ended                  |                      
|                                                  |                                                      | March 31,                           |                      
|                                                  |                                                      |                                     |                      
|                                                  |                                                      | 2006                                |                       |         | 2005    |       
|                                                  |                                                      |                                     |                       |         |         |       
|                                                  |                                                      | ($ in thousands)                    |                      
|Total gross margin(1)                             |                                                      | $                                   | 36,479                |         |         | $      | 14,551 |        
|Operations and maintenance expenses               |                                                      |                                     | 7,184                 |         |         |        | 2,971  |        
|Depreciation and amortization                     |                                                      |                                     | 7,625                 |         |         |        | 1,792  |        
|General and administrative expenses               |                                                      |                                     | 6,075                 |         |         |        | 3,435  |        
|Taxes other than income                           |                                                      |                                     | 444                   |         |         |        | 197    |        
|Equity in earnings from unconsolidated affiliates |                                                      |                                     | (196                  | )       |         |        | (225   | )      
|                                                  |                                                      |                                     |                       |         |         |       
|Operating income                                  |                                                      |                                     | 15,347                |         |         |        | 6,381  |        
|Interest and other financing costs, net           |                                                      |                                     | (7,934                | )       |         |        | (956   | )      
|                                                  |                                                      |                                     |                       |         |         |       
|Net income                                        |                                                      | $                                   | 7,413                 |         |         | $      | 5,425  |        
|                                                  |                                                      |                                     |                       |         |         |       
|Segment gross margin:                             |                                                      |                                     |                       |         |         |        |        |        
|                                                  | Mid-Continent Operations(2)                          |                                     | $                     | 20,435  |         |        | $      |        |        
|                                                  | Texas Gulf Coast Pipelines(3)                        |                                     |                       | 8,650   |         |        |        | 7,939   |        
|                                                  | Texas Gulf Coast Processing                          |                                     |                       | 7,147   |         |        |        | 6,612   |        
|                                                  | Corporate                                            |                                     |                       | 247     |         |        |        |        |        
|                                                  |                                                      |                                     |                       |         |         |       
|                                                  |                                                      |                                     | Total gross margin(1) |         | $       | 36,479 |        |         | $       | 14,551 | 
|                                                  |                                                      |                                     |                       |         |         |       
|Segment gross margin per unit:                    |                                                      |                                     |                       |         |         |        |        |        
|                                                  | Mid-Continent Operations:(2)                         |                                     |                       |         |         |        |        |         |        
|                                                  |                                                      | Pipeline throughput ($/MMBtu)(2)    |                       | $       | 1.38    |        |        |         |        |       
|                                                  |                                                      | Plant Inlet throughput ($/MMBtu)(2) |                       | $       | 2.02    |        |        |         |        |       
|                                                  |                                                      | NGLs produced ($/Bbl)(2)            |                       | $       | 22.87   |        |        |         |        |       
|                                                  | Texas Gulf Coast Pipelines ($/MMBtu)(3)              |                                     | $                     | 0.42    |         |        | $      | 0.38    |        
|                                                  | Texas Gulf Coast Processing:                         |                                     |                       |         |         |        |        |         |        
|                                                  |                                                      | Inlet throughput ($/MMBtu)(4)       |                       | $       | 0.15    |        |        | $       | 0.13    |       
|                                                  |                                                      | NGLs produced ($/Bbl)(4)            |                       | $       | 5.84    |        |        | $       | 4.51    |       
|Volumes:                                          |                                                      |                                     |                       |         |         |        |        |        
|                                                  | Mid-Continent Operations(2)                          |                                     |                       |         |         |        |        |         |        
|                                                  |                                                      | Pipeline throughput (MMBtu/d)(2)    |                       |         | 164,502 |        |        |         |        |       
|                                                  |                                                      | Plant Inlet throughput (MMBtu/d)(2) |                       |         | 112,193 |        |        |         |        |       
|                                                  |                                                      | NGLs produced (Bbls/d)(2)           |                       |         | 9,926   |        |        |         |        |       
|                                                  | Texas Gulf Coast Pipelines  throughput (MMBtu/d)(3) |                                     |                       | 230,996 |         |        |        | 229,798 |        
|                                                  | Texas Gulf Coast Processing:                         |                                     |                       |         |         |        |        |         |        
|                                                  |                                                      | Inlet throughput (MMBtu/d)          |                       |         | 513,083 |        |        |         | 569,216 |       
|                                                  |                                                      | NGLs produced (Bbls/d)              |                       |         | 13,601  |        |        |         | 16,276  |       
|Capital Expenditures:                             |                                                      |                                     |                       |         |         |        |        |        
|                                                  | Maintenance capital expenditures                     |                                     | $                     | 1,850   |         |        | $      | 573     |        
|                                                  | Expansion capital expenditures                       |                                     |                       | 7,063   |         |        |        | 500     |        
|                                                  |                                                      |                                     |                       |         |         |       
|                                                  |                                                      | Total capital expenditures          |                       | $       | 8,913   |        |        | $       | 1,073   |       
|                                                  |                                                      |                                     |                       |         |         |       

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|                                     |                             |                                           |   |       |       |  |   |       |       | 
|------------------------------------ | --------------------------- | ----------------------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                     |                             | Three Months Ended                        |  
|                                     |                             | March 31,                                 |  
|                                     |                             |                                           |  
|                                     |                             | 2006                                      |   |       | 2005  | 
|                                     |                             |                                           |   |       |       | 
|                                     |                             | ($ in thousands)                          |  
|Operations and maintenance expenses: |                             |                                           |   |       |       |  |   |      
|                                     | Mid-Continent Operations    |                                           | $ | 3,868 |       |  | $ |      |      
|                                     | Texas Gulf Coast Pipelines  |                                           |   | 1,628 |       |  |   | 1,312 |      
|                                     | Texas Gulf Coast Processing |                                           |   | 1,688 |       |  |   | 1,659 |      
|                                     |                             |                                           |   |       |       | 
|                                     |                             | Total operations and maintenance expenses |   | $     | 7,184 |  |   | $     | 2,971 | 
|                                     |                             |                                           |   |       |       | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(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. Plant inlet throughput averaged 72,049 MMBtu/d and
    NGLs produced averaged 6,566 barrels 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
    119,356 MMBtu/d and 128,861 MMBtu/d, net of
    intercompany volumes, for the three months ended March 31,
    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 March 31, 2006 Compared with Three
    Months Ended March 31, 2005

Mid-Continent Operations Gross Margin.


Texas Gulf Coast Pipelines Segment Gross Margin.


Texas Gulf Coast Processing Segment Gross Margin.


32



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##### Table of Contents



Corporate Segment Gross Margin.


Operations and Maintenance Expenses.


Depreciation and Amortization.


General and Administrative Expenses.


Interest Expense.


Impact of Inflation




Liquidity and Capital Resources




Off-Balance Sheet Arrangements.


33



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##### Table of Contents



Capital Requirements.




| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                





Total Contractual Cash Obligations.


|                   |                                    |                |         |                       |                   |   |        |           |  |   |           |        |  |            |         |         |  |   |         |         | 
|------------------ | ---------------------------------- | -------------- | ------- | --------------------- | ----------------- | - | ------ | --------- |  | - | --------- | ------ |  | ---------- | ------- | ------- |  | - | ------- | ------- | 
|                   |                                    |                |         | Payment Due by Period |                  
|                   |                                    | Total          |         |                       |                   |  
|Type of Obligation |                                    | Obligation     |         |                       | Remainder of 2006 |   |        | 2007/2008 |  |   | 2009/2010 |        |  | Thereafter |        
|                   |                                    |                |         |                       |                   |   |        |           |  |   |           |        |  |            |        
|                   |                                    | (In thousands) |        
|Debt               |                                    | $              | 385,000 |                       |                   | $ |       |           |  | $ |          |        |  | $          | 160,000 |         |  | $ | 225,000 |        
|Interest           |                                    |                | 250,575 |                       |                   |   | 21,403 |           |  |   | 56,815    |        |  |            | 56,815  |         |  |   | 115,542 |        
|Operating leases   |                                    |                | 6,633   |                       |                   |   | 1,578  |           |  |   | 2,395     |        |  |            | 1,685   |         |  |   | 975     |        
|                   |                                    |                |         |                       |                   |   |        |           |  |   |           |        |  |            |        
|                   | Total contractual cash obligations |                | $       | 642,208               |                   |   | $      | 22,981    |  |   | $         | 59,210 |  |            | $       | 218,500 |  |   | $       | 341,517 | 
|                   |                                    |                |         |                       |                   |   |        |           |  |   |           |        |  |            |        



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Cash Flows.


|                                               |  |                    |         |   |      |   |        |  
|---------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | -
|                                               |  | Three Months Ended |        
|                                               |  | March 31,          |        
|                                               |  |                    |        
|                                               |  | 2006               |         |   | 2005 |  
|                                               |  |                    |         |   |      |  
|                                               |  | (In thousands)     |        
|Net cash provided by operating activities      |  | $                  | 22,855  |   |      | $ | 10,891 |  
|Net cash used in investing activities          |  |                    | (17,465 | ) |      |   | (1,078 | )
|Net cash used in financing activities          |  |                    | (4,222  | ) |      |   | (6,182 | )
|                                               |  |                    |         |   |      |  
|Net increase in cash and cash equivalents      |  |                    | 1,168   |   |      |   | 3,631  |  
|Cash and cash equivalents at beginning of year |  |                    | 25,297  |   |      |   | 7,015  |  
|                                               |  |                    |         |   |      |  
|Cash and cash equivalents at end of period     |  | $                  | 26,465  |   |      | $ | 10,646 |  
|                                               |  |                    |         |   |      |  

Operating:


|                                                  |  |                    |        |   |      |   |        |  
|------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                  |  | Three Months Ended |       
|                                                  |  | March 31,          |       
|                                                  |  |                    |       
|                                                  |  | 2006               |        |   | 2005 |  
|                                                  |  |                    |        |   |      |  
|                                                  |  | (In thousands)     |       
|Net income                                        |  | $                  | 7,413  |   |      | $ | 5,425  |  
|Depreciation and amortization                     |  |                    | 8,582  |   |      |   | 1,955  |  
|Equity in earnings from unconsolidated affiliates |  |                    | (196   | ) |      |   | (225   | )
|Equity-based compensation and other               |  |                    | 319    |   |      |   | 62     |  
|Cash used in working capital                      |  |                    | 6,737  |   |      |   | 3,674  |  
|                                                  |  |                    |        |   |      |  
|Net cash provided by operating activities         |  | $                  | 22,855 |   |      | $ | 10,891 |  
|                                                  |  |                    |        |   |      |  





Investing:


35



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##### Table of Contents



Financing:


Cash Distributions and Reserves:












|                   |       |             |       |        |               |   |        |        | 
|------------------ | ----- | ----------- | ----- | ------ | ------------- | - | ------ | ------ | 
|                   |       | One Quarter |       |        | Four Quarters |  
|                   |       |             |       |        |               |  
|Common units(1)    |       | $           | 8,888 |        |               | $ | 35,550 |       
|Subordinated units |       |             | 2,112 |        |               |   | 8,446  |       
|                   |       |             |       |        |               |  
|                   | Total |             | $     | 11,000 |               |   | $      | 43,996 | 
|                   |       |             |       |        |               |  




|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 May 1, 2006, we had 132,184
    outstanding restricted units. Annual distributions related to
    these restricted units are approximately $0.3 million.

36



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##### Table of Contents





| |                 
| | ----------------
| | Our Indebtedness

$350 Million 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.                                                            





37



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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.








38



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##### Table of Contents







|                    |  |            |          |  
|------------------- |  | ---------- | -------- | -
|Year                |  | Percentage |         
|                    |  |            |         
|2011                |  |            | 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.                                                                    





Term Loan Facility.




Recent Accounting Pronouncements




39



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##### Table of Contents



Critical Accounting Policies


10-K


Non-GAAP Financial Measures




|                                                                  |                                                       |                    |   |        |      |  |   |        |  
|----------------------------------------------------------------- | ----------------------------------------------------- | ------------------ | - | ------ | ---- |  | - | ------ | -
|                                                                  |                                                       | Three Months Ended |  
|                                                                  |                                                       | March 31,          |  
|                                                                  |                                                       |                    |  
|                                                                  |                                                       | 2006               |   |        | 2005 | 
|                                                                  |                                                       |                    |   |        |      | 
|Reconciliation of total gross margin to operating income:         |                                                       |                    |   |        |      |  |   |       
|                                                                  | Operating income                                      |                    | $ | 15,347 |      |  | $ | 6,381  |  
|                                                                  | Add: Operations and maintenance expenses              |                    |   | 7,184  |      |  |   | 2,971  |  
|                                                                  | Depreciation and amortization                         |                    |   | 7,625  |      |  |   | 1,792  |  
|                                                                  | General and administrative
    expenses               |                    |   | 6,075  |      |  |   | 3,435  |  
|                                                                  | Taxes other than income                               |                    |   | 444    |      |  |   | 197    |  
|                                                                  | Equity in earnings from
    unconsolidated affiliates |                    |   | (196   | )    |  |   | (225   | )
|                                                                  |                                                       |                    |   |        |      | 
|                                                                  | Total gross margin                                    |                    | $ | 36,479 |      |  | $ | 14,551 |  
|                                                                  |                                                       |                    |   |        |      | 
|Reconciliation of EBITDA to net income:                           |                                                       |                    |   |        |      |  |   |       
|                                                                  | Net income                                            |                    | $ | 7,413  |      |  | $ | 5,425  |  
|                                                                  | Add: Depreciation and amortization                    |                    |   | 7,625  |      |  |   | 1,792  |  
|                                                                  | Interest expense and other
    financing costs        |                    |   | 8,183  |      |  |   | 1,023  |  
|                                                                  |                                                       |                    |   |        |      | 
|                                                                  | EBITDA                                                |                    | $ | 23,221 |      |  | $ | 8,240  |  
|                                                                  |                                                       |                    |   |        |      | 
|Reconciliation of EBITDA to cash flows from operating activities: |                                                       |                    |   |        |      |  |   |       
|                                                                  | Cash flow provided by operating activities            |                    | $ | 22,855 |      |  | $ | 10,891 |  
|                                                                  | Add: Cash paid for interest and other financing costs |                    |   | 7,226  |      |  |   | 860    |  
|                                                                  | Equity in earnings of
    unconsolidated affiliates   |                    |   | 196    |      |  |   | 225    |  
|                                                                  | Risk management assets                                |                    |   | (2,338 | )    |  |   |       |  
|                                                                  | Increase in working capital
    and other             |                    |   | (4,718 | )    |  |   | (3,736 | )
|                                                                  |                                                       |                    |   |        |      | 
|                                                                  | EBITDA                                                |                    | $ | 23,221 |      |  | $ | 8,240  |  
|                                                                  |                                                       |                    |   |        |      | 






|        |                                                                
|------- | ---------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures about Market
    Risk.



40



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##### Table of Contents



Commodity Prices


Commodity Price Risk.


percentage-of-proceeds


process condition processing spread processing margin. processing margin conditioning mode


1-cent


41



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##### Table of Contents



Hedging Activities.




| |   |                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | purchase put options on West Texas Intermediate
    (WTI) crude oil;                                                                                                                                                                                                   
|
| |  | purchase put or call options and collars (purchase of a put
    together with the sale of a call) and/or sell fixed for floating
    swaps on natural gas at Henry Hub, Houston Ship Channel or other
    highly liquid points relevant to our operations; and           
|
| |  | purchase put options and collars (purchase of a put together
    with the sale of a call) 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.





| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maturities with respect to the purchase of any crude oil or
    natural gas liquids hedge instruments must be limited to three
    years from the date of the transaction;                                                                                                                                                                                                            
|
| |  | maturities with respect to the purchase of any natural gas hedge
    instruments must be limited to four years from the date of
    the transaction;                                                                                                                                                                                                                                  
|
| |  | notional volume must not exceed (i) 60% of the projected
    requirements or output, as applicable, for the hedged period
    with respect to the purchase of crude oil or natural gas liquids
    put options and (ii) 80% of the projected requirements or
    output, as applicable, for the hedged period with respect to the
    purchase of natural gas put or call 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




Mid-Continent Operations Segment.


Texas Gulf Coast Pipelines and Processing Segments.


42



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##### Table of Contents





Purchased CenterPoint East Natural Gas Puts


|     |  |             |      |  |             |  |       |  |  |  |  |  |  |  |  | 
|---- |  | ----------- | ---- |  | ----------- |  | ----- |  |  |  |  |  |  |  |  | 
|     |  | Put Strike  |      |  | Put Volumes |  |       |  |  | 
|     |  | (Per MMBtu) |      |  | MMBtu/d     |  |       |  |  | 
|     |  |             |      |  |             |  |       |  |  | 
|2006 |  | $           | 9.90 |  |             |  | 7,750 |  |  |  |  |  |  |  |  | 
|2007 |  | $           | 8.75 |  |             |  | 9,750 |  |  |  |  |  |  |  |  | 
|2008 |  | $           | 7.75 |  |             |  | 5,000 |  |  |  |  |  |  |  |  | 
|2009 |  | $           | 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/d       | 
|     |  |              |        |  |             |  |     |              |  |   |              | 
|2006 |  | $            | 0.7125 |  |             |  | 568 |              |  | $ | 0.7315       |  |  |  | 568 | 
|2007 |  | $            | 0.6365 |  |             |  | 599 |              |  | $ | 0.6525       |  |  |  | 599 | 
|2008 |  | $            | 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/d       | 
|     |  |              |        |  |             |  |       |              |  |   |              | 
|2006 |  | $            | 0.9525 |  |             |  | 2,508 |              |  | $ | 1.0000       |  |  |  | 659 | 
|2007 |  | $            | 0.8930 |  |             |  | 2,575 |              |  | $ | 0.9375       |  |  |  | 726 | 
|2008 |  | $            | 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/d       | 
|     |  |              |        |  |             |  |     |              |  |   |              | 
|2006 |  | $            | 1.1425 |  |             |  | 613 |              |  | $ | 1.2050       |  |  |  | 83 | 
|2007 |  | $            | 1.0675 |  |             |  | 620 |              |  | $ | 1.1250       |  |  |  | 90 | 
|2008 |  | $            | 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/d       | 
|     |  |              |        |  |             |  |     |              |  |   |              | 
|2006 |  | $            | 1.1400 |  |             |  | 780 |              |  | $ | 1.2000       |  |  |  | 241 | 
|2007 |  | $            | 1.0650 |  |             |  | 803 |              |  | $ | 1.1200       |  |  |  | 264 | 
|2008 |  | $            | 0.9875 |  |             |  | 810 |              |  | $ | 1.0400       |  |  |  | 271 | 

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


|     |  |              |       |  |             |  |       |  |  |  |  |  |  |  |  | 
|---- |  | ------------ | ----- |  | ----------- |  | ----- |  |  |  |  |  |  |  |  | 
|     |  | Put Strike   |       |  | Put Volumes |  |       |  |  | 
|     |  | (Per Barrel) |       |  | Bbls/d      |  |       |  |  | 
|     |  |              |       |  |             |  |       |  |  | 
|2006 |  | $            | 48.00 |  |             |  | 2,000 |  |  |  |  |  |  |  |  | 
|2007 |  | $            | 48.00 |  |             |  | 2,000 |  |  |  |  |  |  |  |  | 






|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | WTI Crude Oil Puts were purchased in July 2005. Volumes are
    based on a 30-day month.

Interest Rates.


43



---



##### Table of Contents





Risk Management Oversight.


Credit Risk.







|        |                         
|------- | ------------------------
|Item 4. | Controls and Procedures.



13(a)-15(f)


44



---



##### Table of Contents






PART II  OTHER INFORMATION







|        |                   
|------- | ------------------
|Item 1. | Legal Proceedings.






Item 1A.Risk
Factors


10-K 10-K 10-K.







|        |                                                                 
|------- | ----------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds.










|        |          
|------- | ---------
|Item 6. | Exhibits.



|       |   |             |  |                                                                                                                                                                                                                                                                                                           
|------ | - | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |   | Description
|       |   |            
|       | 3 | .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).                                                                                              

45



---



##### Table of Contents



|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------ | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 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
    June 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*        |  | Amended and Restated Gas Processing Contract entered into as of
    February 1, 2006, between Kinder Morgan Texas Pipeline,
    L.P. and Copano Processing, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .2*         |  | First Amendment to Credit Agreement dated as of January 26,
    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 | .3          |  | Purchase Agreement dated as of January 31, 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 10.1 to
    Current Report on Form 8-K filed February 8, 2006).                                                                                                                                                                                                                                                                                                                                                               
|       | 10 | .4          |  | 2006 Administrative Guidelines for the Copano Energy, L.L.C.
    Management Incentive Compensation Plan (incorporated by
    reference to Exhibit 10.1 to Current Report on
    Form 8-K filed February 21, 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.

46



---



##### Table of Contents



SIGNATURES






| |                      
| | ---------------------
| | Copano Energy, L.L.C.



| |     |                       
| | --- | ----------------------
| | By: | /s/ John R. Eckel, Jr.

| |                                                  
| | -------------------------------------------------
| |                                                  
| | John R. Eckel, Jr.                               
| | Chairman of the Board and Chief Executive Officer



| |     |                      
| | --- | ---------------------
| | By: | /s/ Matthew J. Assiff

| |                                                  
| | -------------------------------------------------
| |                                                  
| | Matthew J. Assiff                                
| | Senior Vice President and Chief Financial Officer

47



---



##### Table of Contents



INDEX TO EXHIBITS


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------ | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 3  | .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
    June 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*        |  | Amended and Restated Gas Processing Contract entered into as of
    February 1, 2006, between Kinder Morgan Texas Pipeline,
    L.P. and Copano Processing, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .2*         |  | First Amendment to Credit Agreement dated as of January 26,
    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 | .3          |  | Purchase Agreement dated as of January 31, 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 10.1 to
    Current Report on Form 8-K filed February 8, 2006).                                                                                                                                                                                                                                                                                                                                                               



---



##### Table of Contents



|       |    |             |  |                                                                                                                                                                                                                   
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .4          |  | 2006 Administrative Guidelines for the Copano Energy, L.L.C.
    Management Incentive Compensation Plan (incorporated by
    reference to Exhibit 10.1 to Current Report on
    Form 8-K filed February 21, 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.