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What's this stuff in our hot water heater flue?

Our hot water heater vents through a 6" flue that was previously used for a wood stove. The previous owners of our house had the heater installed that way. There is a piece of metal pipe, approx. 18" long, that transtitions between the smaller diameter heater flue and the 6" stove flue. Yesterday I was doing some work on the heater and I needed to remove the piece of transtion pipe. I expected the 6" flue to be completely open to the roof, but when I looked up into the 6" flue I noticed that there was some "stuff" that looked like insulation or something, loosely packed in the flue. The flue wasn't totally blocked and the heater seems to be venting fine. Has anyone ever seen this before? I didn't remove it. I touched it and all kinds of grit and crap fell off it, so I left it alone. I don't know how far up it goes. Any suggestions? Feedback is greatly appreciated.

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