UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 000-50394
Rio Vista Energy Partners L.P.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-0153267
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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1313 E. Alton Gloor Blvd., Suite J, Brownsville, Texas
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78526
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants Telephone Number, Including Area Code:
(956) 831-0886
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of
accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large Accelerated Filer
o
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller Reporting Company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
Yes
o
No
þ
The number of common units outstanding on November 7, 2008 was 2,762,463.
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
2
Part I FINANCIAL INFORMATION
Item 1.
Report of Independent Registered Public Accounting Firm
To the Board of Managers of Rio Vista GP LLC,
General Partner of Rio Vista Energy Partners L.P.
We have reviewed the consolidated balance sheet of Rio Vista Energy Partners L.P. and subsidiaries
(Rio Vista) as of September 30, 2008, the consolidated statements of operations for the three
months and nine months ended September 30, 2007 and 2008 and the consolidated statements of cash
flows for the nine months ended September 30, 2007 and 2008 and the consolidated statement of
partners capital for the nine months ended September 30, 2008. These interim consolidated
financial statements are the responsibility of Rio Vistas management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying interim consolidated financial statements for them to be in conformity with United
States generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Rio Vista Energy Partners L.P.
and subsidiaries as of December 31, 2007 and the related consolidated statements of operations,
partners capital and cash flows for the year ended December 31, 2007 (not presented herein); and
in our report dated April 4, 2008, we expressed an unqualified opinion on those consolidated
financial statements.
Our auditors report on Rio Vistas financial statements as of December 31, 2007 included an
explanatory paragraph referring to the matters discussed in Note O of those consolidated financial
statements which raised substantial doubt about Rio Vistas ability to continue as a going concern.
As indicated in Note N to the accompanying unaudited interim consolidated financial statements,
conditions continue to exist which raise substantial doubt about Rio Vistas ability to continue as
a going concern.
/s/ BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
November 14, 2008
3
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
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December, 31
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September 30,
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2007
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2008
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(Unaudited)
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Current Assets
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Cash
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$
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3,450,000
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$
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963,000
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Restricted cash
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26,000
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27,000
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Trade accounts receivable (less allowance
for doubtful accounts of $0 at December
31, 2007 and September 30, 2008)
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1,446,000
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2,136,000
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Prepaid expenses and other current assets
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453,000
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408,000
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Total current assets
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5,375,000
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3,534,000
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Oil and gas properties and related
equipment (successful efforts method)
net
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26,197,000
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28,256,000
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Property, plant and equipment net
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12,762,000
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12,566,000
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Other non-current assets
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15,000
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Goodwill
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5,121,000
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5,121,000
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Total assets
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$
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49,455,000
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$
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49,492,000
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The accompanying notes and accountants report are an integral part of these statements.
4
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND PARTNERS CAPITAL
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December, 31
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September 30,
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2007
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2008
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(Unaudited)
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Current Liabilities
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Current maturities of long-term debt
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$
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3,361,000
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$
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5,738,000
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Short-term debt
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5,493,000
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5,875,000
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Due to Penn Octane Corporation, net
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347,000
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852,000
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Accounts payable
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2,101,000
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2,637,000
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Taxes payable
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618,000
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811,000
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Accrued liabilities
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1,476,000
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2,584,000
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Total current liabilities
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13,396,000
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18,497,000
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Commitments and contingencies
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Long-term debt, less current maturities
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21,250,000
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19,688,000
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Deferred income taxes
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3,238,000
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2,924,000
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Partners Capital
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Common units
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11,340,000
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8,215,000
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General Partners equity
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231,000
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168,000
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Total partners capital
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11,571,000
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8,383,000
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Total liabilities and partners capital
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$
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49,455,000
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$
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49,492,000
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The accompanying notes and accountants report are an integral part of these statements.
5
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
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Nine months ended
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September 30,
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September 30,
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September 30,
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September 30,
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2007
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2008
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2007
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2008
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Revenues
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$
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1,650,000
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$
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4,698,000
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$
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2,765,000
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$
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11,803,000
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Cost of goods sold
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1,271,000
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3,702,000
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2,067,000
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9,387,000
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Gross profit
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379,000
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996,000
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698,000
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2,416,000
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Selling, general and administrative expenses and other
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Legal and professional fees
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467,000
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225,000
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989,000
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1,396,000
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Salaries and payroll related expenses
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414,000
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365,000
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706,000
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1,229,000
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Other
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413,000
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461,000
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1,010,000
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1,503,000
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1,294,000
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1,051,000
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2,705,000
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4,128,000
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Operating loss from operations
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(915,000
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)
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(55,000
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)
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(2,007,000
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)
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(1,712,000
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)
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Other income (expense)
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Interest expense
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(205,000
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)
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(978,000
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)
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(256,000
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)
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(2,694,000
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)
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Interest income
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5,000
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2,000
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6,000
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8,000
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|
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Loss from operations before taxes
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(1,115,000
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)
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|
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(1,031,000
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)
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(2,257,000
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)
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(4,398,000
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)
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Provision (benefit) for income taxes
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|
44,000
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|
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7,000
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69,000
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(91,000
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)
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|
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|
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|
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Net loss from continuing operations
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|
$
|
(1,159,000
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)
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|
$
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(1,038,000
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)
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$
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(2,326,000
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)
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|
$
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(4,307,000
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)
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Loss on sale of discontinued operations
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|
|
|
|
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|
|
|
|
|
|
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(343,000
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)
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|
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|
|
|
|
|
|
|
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Net loss
|
|
$
|
(1,159,000
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)
|
|
$
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(1,038,000
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)
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|
$
|
(2,326,000
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)
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|
$
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(4,650,000
|
)
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|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
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Net loss allocable to the partners
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|
$
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(1,159,000
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)
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$
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(1,038,000
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)
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$
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(2,326,000
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)
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$
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(4,650,000
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)
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Less General Partners interest in net loss
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23,000
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|
21,000
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46,000
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|
|
93,000
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|
|
|
|
|
|
|
|
|
|
|
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Net loss allocable to the common units
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|
$
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(1,136,000
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)
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$
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(1,017,000
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)
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$
|
(2,280,000
|
)
|
|
$
|
(4,557,000
|
)
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss from continuing operations per common unit
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|
$
|
(0.59
|
)
|
|
$
|
(0.38
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)
|
|
$
|
(1,19
|
)
|
|
$
|
(1.66
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)
|
Net loss from discontinued operations per common unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss per common unit
|
|
$
|
(0.59
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)
|
|
$
|
(0.38
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)
|
|
$
|
(1,19
|
)
|
|
$
|
(1.79
|
)
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average common units outstanding
|
|
|
1,935,656
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|
|
|
2,670,740
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|
|
|
1,919,264
|
|
|
|
2,546,846
|
|
|
|
|
|
|
|
|
|
|
|
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The accompanying notes and accountants report are an integral part of these statements.
6
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(UNAUDITED)
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|
|
|
|
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Total
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Common Units
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|
General
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|
Partners
|
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|
|
Units
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Amount
|
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|
Partner
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Capital
|
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|
Balance as of December 31, 2007
|
|
|
2,429,206
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|
|
$
|
11,340,000
|
|
|
$
|
231,000
|
|
|
$
|
11,571,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(4,557,000
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)
|
|
|
(93,000
|
)
|
|
|
(4,650,000
|
)
|
Exercise of options for cash
|
|
|
61,875
|
|
|
|
759,000
|
|
|
|
15,000
|
|
|
|
774,000
|
|
Exercise of options in exchange for
severance package
|
|
|
15,625
|
|
|
|
217,000
|
|
|
|
5,000
|
|
|
|
222,000
|
|
Units issued as bonus compensation
|
|
|
8,812
|
|
|
|
120,000
|
|
|
|
3,000
|
|
|
|
123,000
|
|
Registration costs
|
|
|
|
|
|
|
(308,000
|
)
|
|
|
(6,000
|
)
|
|
|
(314,000
|
)
|
Cash distribution to partners
|
|
|
|
|
|
|
(1,916,000
|
)
|
|
|
(39,000
|
)
|
|
|
(1,955,000
|
)
|
Contribution from the General Partner
|
|
|
|
|
|
|
116,000
|
|
|
|
2,000
|
|
|
|
118,000
|
|
Issuance of common units
|
|
|
197,628
|
|
|
|
1,960,000
|
|
|
|
40,000
|
|
|
|
2,000,000
|
|
Unit-based compensation
|
|
|
|
|
|
|
406,000
|
|
|
|
8,000
|
|
|
|
414,000
|
|
Units issued to consultant
|
|
|
6,378
|
|
|
|
78,000
|
|
|
|
2,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
2,719,524
|
|
|
$
|
8,215,000
|
|
|
$
|
168,000
|
|
|
$
|
8,383,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes and accountants report are an integral part of these statements.
7
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,326,000
|
)
|
|
$
|
(4,650,000
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
581,000
|
|
|
|
1,533,000
|
|
Unit-based compensation
|
|
|
259,000
|
|
|
|
414,000
|
|
Amortization of loan discount
|
|
|
10,000
|
|
|
|
54,000
|
|
Beneficial conversion amortization
|
|
|
|
|
|
|
18,000
|
|
Loss on sale of discontinued operations
|
|
|
|
|
|
|
343,000
|
|
Gain on sale of assets
|
|
|
|
|
|
|
(20,000
|
)
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(278,000
|
)
|
|
|
(690,000
|
)
|
Prepaid and other current assets
|
|
|
(248,000
|
)
|
|
|
45,000
|
|
Trade accounts payable
|
|
|
941,000
|
|
|
|
|
|
Due to Penn Octane Corporation, net
|
|
|
2,485,000
|
|
|
|
505,000
|
|
Accrued liabilities and other accounts payable
|
|
|
206,000
|
|
|
|
1,412,000
|
|
U.S. and foreign taxes payable
|
|
|
166,000
|
|
|
|
192,000
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,796,000
|
|
|
|
(844,000
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(6,000
|
)
|
|
|
(3,559,000
|
)
|
Other non-current assets
|
|
|
(5,000
|
)
|
|
|
(15,000
|
)
|
Costs to acquire Regional Enterprizes, Inc.
|
|
|
(7,982,000
|
)
|
|
|
|
|
Purchase price adjustments Oklahoma assets
|
|
|
|
|
|
|
83,000
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,993,000
|
)
|
|
|
(3,491,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
|
|
|
|
774,000
|
|
Registration costs
|
|
|
|
|
|
|
(314,000
|
)
|
Cash distributions to partners
|
|
|
(1,469,000
|
)
|
|
|
(1,955,000
|
)
|
Reduction of debt
|
|
|
|
|
|
|
(350,000
|
)
|
Issuance of debt
|
|
|
5,000,000
|
|
|
|
1,575,000
|
|
Refundable deposit
|
|
|
6,500,000
|
|
|
|
|
|
Capital contribution and issuance of common units
|
|
|
|
|
|
|
2,118,000
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
10,031,000
|
|
|
|
1,848,000
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
3,834,000
|
|
|
|
(2,487,000
|
)
|
Cash at beginning of period
|
|
|
3,896,000
|
|
|
|
3,450,000
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
7,730,000
|
|
|
$
|
963,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
124,000
|
|
|
$
|
3,138,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash transactions:
|
|
|
|
|
|
|
|
|
Units and warrants issued and other
|
|
$
|
|
|
|
$
|
424,000
|
|
|
|
|
|
|
|
|
Unit-based compensation
|
|
$
|
259,000
|
|
|
$
|
414,000
|
|
|
|
|
|
|
|
|
Exchange of assets for note reduction
|
|
$
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
Sellers note, net of discount
|
|
$
|
884,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The accompanying notes and accountants report are an integral part of these statements.
8
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A ORGANIZATION
Rio Vista Energy Partners L.P. (Rio Vista), a Delaware limited partnership, was formed by Penn
Octane Corporation (Penn Octane) on July 10, 2003 and was a wholly owned subsidiary of Penn
Octane until September 30, 2004, the date that Penn Octane completed a series of transactions
that (i) transferred substantially all of its owned pipeline and terminal assets in Brownsville,
Texas and Matamoros, Mexico and certain immaterial liabilities to Rio Vista Operating Partnership
L.P. (RVOP), (ii) transferred Penn Octanes 99.9% interest in RVOP to Rio Vista and (iii)
distributed all of its limited partnership interests (Common Units) in Rio Vista to its common
stockholders (Spin-Off), resulting in Rio Vista becoming a separate public company. The Common
Units represented 98% of Rio Vistas outstanding capital and 100% of Rio Vistas limited
partnership interests. The remaining 2% represented the General Partner interest. The General
Partner is Rio Vista GP LLC (General Partner) and is 75% owned by Penn Octane and Penn Octane has
100% voting control over the General Partner pursuant to a voting agreement with the other owner
of the General Partner. Common unitholders do not participate in the management of Rio Vista.
The General Partner is entitled to receive distributions from Rio Vista on its General Partner
interest and additional incentive distributions (see note H) as provided in Rio Vistas
partnership agreement. The General Partner has sole responsibility for conducting Rio Vistas
business and for managing Rio Vistas operations in accordance with the partnership agreement.
The General Partner does not receive a management fee in connection with its management of Rio
Vistas business, but is entitled to be reimbursed for all direct and indirect expenses incurred
on Rio Vistas behalf.
Until December 31, 2007, Rio Vista was focused on the operation of the LPG terminal facility and
pipelines. After August 2006, Rio Vista operated this system exclusively on behalf of
TransMontaigne Partners L.P. and its affiliates, or TransMontaigne, to transport their LPG on a
fee for services basis.
In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets
to TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank
farm, together with associated improvements, leases, easements, licenses and permits; an LPG
sales agreement; and all LPG inventory (Rio Vista Restated PSA). In December 2007, Rio Vista
completed the disposition of its remaining LPG assets to TransMontaigne, including the U.S.
portion of the two pipelines from a Brownsville, Texas terminal owned by TransMontaigne to the
U.S. border, along with all associated rights-of-way and easements; all of the outstanding equity
interests in entities owning interests in the portion of the two pipelines that extend from the
U.S. border to Matamoros, Mexico; and all of the rights for indirect control of an entity that
owns a terminal site in Matamoros, Mexico. As a result, effective January 1, 2008, Rio Vista no
longer operates the assets associated with the LPG business it had historically conducted.
During the nine months ended September 30, 2008, Rio Vista recorded a loss from discontinued
operations of $343,000 related to additional expense of its Mexican subsidiaries in excess of
initial estimates and in excess of the amount of purchase price retained by TransMontaigne for
such contingencies.
In July 2007, Rio Vista acquired Regional Enterprises, Inc. (Regional) and in November 2007, Rio
Vista acquired certain oil and natural gas producing properties and related assets (Oklahoma
assets) in the State of Oklahoma formerly owned by GM Oil Properties, Inc., Penny Petroleum
Corporation and GO LLC (GO). As a result of these acquisitions in 2007, Rio Vista is now focused
on the acquisition, development and production of oil and natural gas properties and related
midstream assets, and the operation and development of Regionals business. Beginning March 1,
2008, Rio Vista Operating LLC (Operating) became the operator of the Oklahoma assets.
The above acquisitions were funded by a combination of debt (new and assumed), private placements
of Rio Vista common units and proceeds from the sale of Rio Vistas LPG related assets. During
November 2007, Rio Vista completed a private placement of common units raising gross proceeds of
$4,000,000 (see note H).
9
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A ORGANIZATION Continued
Basis of Presentation
The accompanying unaudited consolidated financial statements include Rio Vista and its United
States subsidiaries including RVOP, Rio Vista Operating GP LLC, Rio Vista Penny LLC, GO, MV
Pipeline Company (MV), Operating, Regional, and Penn Octane International, L.L.C., and its
Mexican subsidiaries, Penn Octane de Mexico, S. de R.L. de C.V. (PennMex) and Termatsal, S. de
R.L. de C.V. (Termatsal) and its consolidated affiliate, Tergas, S. de R.L. de C.V. (Tergas),
collectively Rio Vista. The Mexican subsidiaries were sold on December 31, 2007. All
significant intercompany accounts and transactions are eliminated.
The unaudited consolidated balance sheet as of September 30, 2008, the unaudited consolidated
statements of operations for the three months and nine months ended September 30, 2007 and 2008
and the unaudited consolidated statements of cash flows for the nine months ended September 30,
2007 and 2008, have been prepared by Rio Vista without audit. In the opinion of management, the
unaudited consolidated financial statements include all adjustments (which include only normal
recurring adjustments) necessary to present fairly the unaudited consolidated financial position
of Rio Vista as of September 30, 2008, the unaudited consolidated results of operations for the
three months and nine months ended September 30, 2007 and 2008 and the unaudited consolidated
statements of cash flows for the nine months ended September 30, 2007 and 2008.
Certain information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been omitted pursuant to the rules and regulations of the Securities
Exchange Commission, although Rio Vista believes that the disclosures made are adequate to make
the information not misleading. These unaudited consolidated financial statements should be read
in conjunction with Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2007
filed with the Securities and Exchange Commission.
In accordance with the guidance of the SEC Staff Accounting Bulletin No. 108 which Rio Vista adopted in September 2006, Rio Vista corrected an immaterial misstatement in its
December 31, 2007 financial statements and quarterly financial statements for the quarters ended March 31, 2008 and June 30, 2008 related to an error in the over accrual of interest
expense in the amount of $109,000, $63,000 and $63,000, respectively and overstatement of accrued liabilities in the amount of $109,000, $172,000 and $235,000, respectively.
Certain reclassifications have been made to prior period balances to conform in the current
presentation. All reclassifications have been consistently applied to the periods presented.
NOTE B UNIT-BASED PAYMENT
Rio Vista may issue warrants to purchase common units to non-employees for goods and services
and to acquire or extend debt. Rio Vista applies the provisions of Statement of Financial
Accounting Standards No. 123R Share-Based Payment (SFAS 123R) and Accounting Principles Board
Opinion No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
(APB 14) to account for such transactions. SFAS 123R requires that such transactions be
accounted for at fair value. If the fair value of the goods and services or debt related
transactions are not readily measurable, the fair value of the warrants is used to account for
such transactions.
10
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B UNIT-BASED PAYMENT Continued
Rio Vista utilizes unit-based awards as a form of compensation for employees, officers, managers
and consultants of the General Partner. During the quarter ended March 31, 2006, Rio Vista
adopted the provisions of SFAS 123R for unit-based payments to employees using the modified
prospective application transition method. Under this method, previously reported amounts
should not be restated to reflect the provisions of SFAS 123R. SFAS 123R requires measurement
of all employee unit-based payment awards using a fair-value method and recording of such
expense in the consolidated financial statements over the requisite service period. The fair
value concepts have not changed significantly in SFAS 123R; however, in adopting this standard,
companies must choose among alternative valuation models and amortization assumptions. After
assessing alternative valuation models and amortization assumptions, Rio Vista will continue
using both the Black-Scholes valuation model and straight-line amortization of compensation
expense over the requisite service period for each separately vesting portion of the grant. Rio
Vista will reconsider use of this model if additional information becomes available in the
future that indicates another model would be more appropriate, or if grants issued in future
periods have characteristics that cannot be reasonably estimated using this model. Previously,
Rio Vista had applied the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations and elected to utilize the
disclosure option of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Rio Vista recorded unit-based payment expense for
employees and non-employees of $90,000 ($0.05 per common unit) and $48,000 ($0.02 per common
unit) for the three months ended September 30, 2007 and 2008, respectively and $166,000 ($0.09
per common unit) and $414,000 ($0.17 per common unit) for the nine months ended September 30,
2007 and 2008, respectively, under the fair-value provisions of SFAS 123R.
NOTE C LOSS PER COMMON UNIT
The following tables present reconciliations from net loss from continuing operations per common
unit to loss from continuing operations per common unit assuming dilution (see note I for the
warrants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(1,136,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(1,136,000
|
)
|
|
|
1,935,656
|
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
11
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C LOSS PER COMMON UNIT Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(1,017,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(1,017,000
|
)
|
|
|
2,670,740
|
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(2,280,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
( 2,280,000
|
)
|
|
|
1,919,264
|
|
|
$
|
(1.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(4,221,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(4,221,000
|
)
|
|
|
2,546,846
|
|
|
$
|
(1.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
12
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D A FORMER OFFICER OF PENN OCTANE NOTE
On April 15, 2008, Mr. Jerome B. Richter, a former officer of Penn Octane, agreed to loan Rio
Vista $575,000 in exchange for a promissory note issued by Rio Vista, guaranteed by Penn Octane
(Richter Note Payable) and collateralized by the assets of Rio Vista, subject to the consent of
RZB and TCW (see note G). Under the terms of the Richter Note Payable, Rio Vista is required
to repay the Richter Note Payable on the earlier of (1) the six (6) month anniversary of the
Richter Note Payable, which date was extended to November 15, 2008 or (ii) the sale of all or
substantially all of the assets of Rio Vista. The Richter Note Payable was not paid on November 15, 2008. Rio Vista and Mr. Richter are negotiating an extension of the due date. The Richter Note Payable accrues interest at an
annual rate of 8 percent (8%). Proceeds from the Richter Note Payable were used for working
capital.
NOTE E PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
Oklahoma:
|
|
|
|
|
|
|
|
|
Pipelines and equipment
|
|
$
|
6,756,000
|
|
|
$
|
7,507,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional:
|
|
|
|
|
|
|
|
|
Land
|
|
|
237,000
|
|
|
|
237,000
|
|
Terminal and improvements
|
|
|
3,825,000
|
|
|
|
4,041,000
|
|
Automotive equipment
|
|
|
2,438,000
|
|
|
|
2,438,000
|
|
|
|
|
|
|
|
|
|
|
|
6,500,000
|
|
|
|
6,716,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,256,000
|
|
|
|
14,223,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(494,000
|
)
|
|
|
(1,657,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
12,762,000
|
|
|
$
|
12,566,000
|
|
|
|
|
|
|
|
|
On June 26, 2008, MV Pipeline and Concorde Resources Corporation (Concorde) entered into a
pipeline construction and transportation agreement whereby MV granted the right to Concorde to
construct gathering lines to connect Concorde wells to the MV transportation system. In
connection with the agreement, MV has agreed to waive any transportation fees with respect to
any gas which flows through the MV transportation system from these newly constructed gathering
systems until such time that Concorde has received 200% of the costs associated with the
construction of the gathering lines based on the usual rate charged by MV for transportation of
product through its system.
Depreciation expense of property, plant and equipment from operations totaled $293,000 and
$443,000 for the three months ended September 30, 2007 and 2008, respectively, and $581,000 and
$1,179,000 for the nine months ended September 30, 2007 and 2008, respectively.
13
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F OIL AND GAS PROPERTIES AND RELATED EQUIPMENT, NET
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
Costs incurred in oil and gas property development for the nine months ended September 30,
2008 are presented below:
|
|
|
|
|
Development costs of leased properties:
|
|
$
|
2,265,000
|
|
Capitalized pipeline infrastructure costs:
|
|
$
|
700,000
|
|
Development costs include costs incurred to gain access to and prepare development well locations
for drilling, to drill and equip development wells and to provide facilities to extract, treat and
gather oil and gas.
Rio Vista capitalizes costs related to drilling and development of oil and gas properties for
specific activities related to drilling its wells, which includes site preparation, drilling labor,
meter installation, pipeline connection and site reclamation.
NOTE G DEBT OBLIGATIONS
Short-term debt obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
RZB Note
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Moores Note
|
|
|
493,000
|
|
|
|
300,000
|
|
Richter Note Payable (see note D)
|
|
|
|
|
|
|
575,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,493,000
|
|
|
$
|
5,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations were as follows:
|
|
|
|
|
|
|
|
|
TCW Credit Facility
|
|
$
|
23,689,000
|
|
|
$
|
24,700,000
|
|
Sellers Note Regional
|
|
|
922,000
|
|
|
|
726,000
|
|
|
|
|
|
|
|
|
|
|
|
24,611,000
|
|
|
|
25,426,000
|
|
Less current portion
|
|
|
3,361,000
|
|
|
|
5,738,000
|
|
|
|
|
|
|
|
|
|
|
$
|
21,250,000
|
|
|
$
|
19,688,000
|
|
|
|
|
|
|
|
|
RZB Amendment
In connection with the acquisition of Regional during July 2007, Rio Vista funded a portion of
the acquisition through a loan of $5,000,000 (RZB Note) from RZB Finance LLC (RZB) dated July 26,
2007. The RZB Note was due on demand and if no demand, with a one-year maturity. The RZB Note
carries a variable annual rate of interest equal to the higher of (a) the rate of interest
established from time to time by JPMorgan Chase Bank, N.A. as its base rate or its prime
rate, or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%,
in each case plus a margin of 4.75%. On July 27, 2008, the RZB Note was amended whereby the
maturity date was extended until August 29, 2008 (see note J). The RZB Note was not paid on
August 29, 2008. Rio Vista and RZB are currently negotiating an additional extension of the
maturity date to February 28, 2009. In connection therewith, Penn Octane has provided $1,000,000
in cash as collateral on the RZB Note. RZB currently holds Penn Octanes $1,000,000 which Penn
Octane classifies as restricted cash in the accompanying balance sheet.
14
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G DEBT OBLIGATIONS Continued
RZB Amendment Continued
In addition, RZB will require Rio Vista to establish a lockbox collection system with respect to
all of Regionals cash collection as additional collateral for the RZB Note. The collected cash
will be held as restricted cash. At RZBs discretion, the restricted cash can be released to
Regional and Rio Vista to pay normal operating expenses.
Moores Note
In connection with the purchase of the Penny Assets, Rio Vista issued a promissory note with the
principal amount of $500,000 bearing interest at 7% per annum (Moores Note) payable to Gary
Moores on May 19, 2008. Under the terms of the Moores Note, beginning February 19, 2008, Gary
Moores had the option to convert the outstanding principal and interest of the Moores Note into
common units of Rio Vista at a conversion price equal to 90% of the 10-day average closing price
of such common units as reported by the NASDAQ Stock Market at the time of conversion. The
conversion option could have been exercised on only one occasion and expired on May 19, 2008. On
June 27, 2008, in connection with an amendment of the Moores Note, Rio Vista made a principal
payment of $100,000, plus accrued interest through that date and the maturity date of the
remaining principal balance was extended to November 19, 2008. In addition, the interest rate on
the remaining balance of the Moores Note was increased to 10% per annum. Simultaneously with the
amendment of the Moores Note, Penny agreed to the sale and transfer of certain goods and chattels
to Gary Moores in exchange for $100,000 which was paid through a credit against the outstanding
principal balance due under the Moores Note and Penny also received from a company owned by Gary
Moores, a used vehicle with nominal value, to be used by Penny for general operations.
Sellers Note Regional
In connection with the Regional acquisition, Regional issued a promissory note in the amount of
$1,000,000 to be paid in four equal semiannual installments of $250,000 beginning January 27,
2008. Rio Vista has recorded a discount of $116,000 (10% effective rate), representing the
portion of interest associated with the note, which shall be amortized over the term of the note.
During January 2008, the first installment was paid. On July 27, 2008, the second installment
was due to be paid. Regional did not make the second installment payment as it believes that
there exists offsets in connection with the acquisition of Regional in excess of the payment.
For the three months and nine months ended September 30, 2008, $17,000 and $52,000, respectively,
of the discount was amortized.
15
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G DEBT OBLIGATIONS Continued
TCW Credit Facility
The TCW Credit Facility is a $30,000,000 senior secured credit facility available to Rio Vista
Penny LLC with a maturity date of August 29, 2010. The amount of the initial draw under the
facility was $21,700,000, consisting of $16,750,000 in assumption of the existing indebtedness in
the principal amount of $16,500,000 plus accrued but unpaid interest in the amount of $250,000
owed by GM Oil to TCW, $1,950,000 in consideration for TCW to enter into the TCW Credit Facility
with Rio Vista Penny and for Rio Vista Penny to purchase an overriding royalty interest (ORRI)
held by an affiliate of TCW, and $3,000,000 to fund the acquisition of the membership interests
of GO by Rio Vista GO. TCW has also approved a plan of development (APOD) for the Oklahoma assets
totaling approximately $2,000,000, increased to $3,000,000 (see below), which was funded during
December 2007. The TCW Credit Facility is secured by a first lien on all of the Oklahoma assets
and associated production proceeds pursuant to the Note Purchase Agreement, Security Agreement
and related agreements, including mortgages of the Oklahoma assets in favor of TCW. The interest
rate is 10.5%, increasing an additional 2% if there is an event of default (see below). Payments
under the TCW Credit Facility are interest-only until December 29, 2008. The TCW Credit Facility
carries no prepayment penalty. Rio Vista ECO LLC (an indirect,
wholly-owned
subsidiary of Rio
Vista and the direct parent of Rio Vista Penny and Rio Vista GO), Rio Vista GO, GO and MV have
each agreed to guarantee payment of the Notes payable to the lenders under the TCW Credit
Facility.
Under the terms of the Note Purchase Agreement, at any time during the period from May 19, 2008
through November 19, 2009, TCW had the right to demand payment of $2,200,000 of debt (Demand
Loan). Beginning May 19, 2008, TCW also has the right to convert the outstanding principal amount
of the Demand Loan into common units of Rio Vista at a price equal to the lesser of $13.33 per
unit or 90% of the 20-day average trading price of such units preceding the election to convert.
Beginning November 19, 2008, TCW has the right to convert the balance of the debt under the TCW
Credit Facility into common units of Rio Vista at a price equal to 90% of the 20-day average
trading price of such units preceding the election to convert. Rio Vista has agreed to file with
the Securities and Exchange Commission (SEC) a registration statement on Form S-3 covering the
common units issued pursuant to the conversion feature within 90 days following the first
exercise of the conversion feature.
Rio Vista Penny and Rio Vista GO, which hold the Oklahoma assets, are prohibited from making
upstream distributions to Rio Vista until December 2008. Thereafter, upstream distributions to
Rio Vista not in excess of 75% of quarterly cash flow are permitted subject to certain
conditions. In addition, the TCW Credit Facility requires semi-annual reserve reports by an
independent engineer which is used in determining the allowable borrowing base.
16
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G DEBT OBLIGATIONS Continued
TCW Credit Facility Continued
On September 29, 2008, Rio Vista Penny entered into a First Amendment to the Note Purchase
Agreement (First TCW Amendment) with TCW. Under the terms of the First TCW Amendment, TCW
agreed to fund Rio Vista Penny an additional $1,000,000 under the TCW Credit Facility for certain
APOD costs as described in the First TCW Amendment. In addition, under the terms of the First TCW
Amendment, the interest rate under the TCW Credit Facility increased from 10.5% per annum to
12.5% per annum beginning July 1, 2008. The interest rate will revert back to 10.5% per annum
beginning January 1, 2009, provided that Rio Vista Penny delivers to TCW an Effective Rate
Certificate, as defined under the First TCW Amendment, which among other things certifies that no
default exists under the TCW Credit Facility and that the collateral coverage ratio, as defined
under the TCW Credit Facility, is at least 1.5 to 1.0 as of the applicable date based on the
results of an engineering report due December 1, 2008 with an effective date of November 1, 2008.
Under the terms of the First TCW Amendment, TCW agreed to change the period for which a notice to
demand repayment from Rio Vista Penny of up to $2,200,000 of indebtedness under the TCW Credit
Facility from May 19, 2008 to January 1, 2009 and Rio Vista Penny also agreed to extend the
demand repayment option on the $2,200,000 through the date of maturity of the TCW Credit
Facility. In addition, under the terms of the First TCW Amendment, TCW has agreed to waive other
defaults identified in the First TCW Amendment which either occurred and/or were existing prior
to the date of the First TCW Amendment.
In addition, on September 29, 2008, in connection with the TCW Credit Facility, Rio Vista Penny,
Rio Vista, Operating and TCW entered into an Amended and Restated Management Services Agreement
(Amended MSA). Under the terms of the Amended MSA, Operating was named as manager of the
Oklahoma properties, replacing Northport Production Company, an Oklahoma corporation, which was
previously named as manager under the original management services agreement.
Beneficial Conversion Features
In connection with the issuance of the Moores Note and TCW Credit Facility, Rio Vista recorded a
beneficial conversion feature as interest expense and debt discount for the difference between
the carrying amount of the debt obligations and the estimated fair value of the common units to
be issued upon conversion in the amount of $25,000. The amortization of the debt discount
totaled approximately $18,000 for the nine months ended September 30, 2008.
NOTE H PARTNERS CAPITAL
Common Units
On September 29, 2007, the Board of Managers of the General Partner of Rio Vista approved the
grant of a restricted unit bonus of 25,000 common units under Rio Vistas 2005 Equity Incentive
Plan to an executive officer of the General Partner. The restricted unit bonus vested as to
8,334 units on July 1, 2007, 8,333 units on January 1, 2008, and 8,333 units on July 1, 2008. In
connection with the grant of restricted units, the Board of Managers also approved the payment to
the executive officer of one or more cash bonuses in amounts sufficient, on an after-tax basis,
to cover all taxes payable by the executive officer with respect to the award of restricted units
to him. Total compensation recorded under the aforementioned grant of units as they vested
totaled $280,000.
17
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H PARTNERS CAPITAL Continued
Common Units Continued
During June 2008, the Board of Managers of the General Partner of Rio Vista approved an
employment agreement with an officer of the General Partner. Under the terms of the employment
agreement, the officer is entitled to receive a grant of 30,000 restricted common units under Rio
Vistas 2005 Equity Incentive Plan in accordance with the following vesting schedule: 5,000
common units after the officer has been employed for six months, another 5,000 common units after
one year of employment, another 10,000 common units after two years of employment and another
10,000 common units after three years of employment. The common units were granted on October
17, 2008. Prepaid compensation cost to be recorded under the aforementioned grant of
approximately $205,000 will be recorded in the fourth quarter of 2008 and will be expensed as the
common units vest.
Private Placement of Common Units
On November 29, 2007, Rio Vista and the General Partner, entered into a Unit Purchase Agreement
with Standard General Fund L.P., Credit Suisse Management LLC and Structured Finance Americas LLC
(collectively, Purchasers) dated effective as of November 29, 2007 (the Unit Purchase Agreement).
Pursuant to the terms of the Unit Purchase Agreement, Rio Vista agreed to sell, and the
Purchasers agreed to purchase, a total of 355,556 common units of Rio Vista (Common Units) at a
price of $11.25 per unit in a private placement exempt from the registration requirements of the
Securities Act of 1933, as amended (Securities Act). The total purchase price of the Common Units
was $4,000,000. Rio Vista agreed to pay expenses of counsel to the Purchasers in an amount not to
exceed $100,000. Rio Vista used the net proceeds from the sale of the Common Units for general
working capital purposes, including repayment of indebtedness. Rio Vista agreed not to offer or
sell any of its equity securities (including equity securities of subsidiaries) for a period of
12 months following the closing date without first offering such securities to the Purchasers,
which shall have the right to purchase up to 30% of such securities.
On December 3, 2007, Rio Vista and Standard General entered into a Registration Rights Agreement
(Registration Rights Agreement) pursuant to which Rio Vista agreed to provide to the Purchasers
registration rights with respect to the Common Units. Pursuant to the Registration Rights
Agreement, Rio Vista agreed to file, within 90 days after the closing date for the sale of the
Common Units, a shelf registration statement under the Securities Act to permit the public resale
of the Common Units from time to time, including resale on a delayed or continuous basis as
permitted by Rule 415 under the Securities Act. Rio Vista agreed to use its best efforts to cause
the registration statement to become effective on or before the date of filing of Rio Vistas
Annual Report on Form 10-K for the year ending December 31, 2007 but no later than April 14,
2008. On February 13, 2008, Rio Vista filed a Form S-3 with the SEC. On August 1, 2008, the Form
S-3 was declared effective. Rio Vista was required to pay liquidated damages to the holders of
the Common Units for the period of time that the registration statement was not declared
effective beginning April 14, 2008 as to all of the Common Units. In general, the amount of such
damages equals 1% of the purchase price of the unregistered Common Units for each period of
30 days for which such units remain unregistered. As of August 1, 2008, the total amount of
liquidated damages equaled approximately $144,000 and such amount is recorded in the accompanying
unaudited consolidated financial statements for the nine months ended September 30, 2008. In
lieu of a cash payment, Rio Vista agreed to issue additional common units, at a discount of 5% to
the average closing price for such units as reported by the Nasdaq Global Market for the 10
trading days immediately preceding each thirty day delay in the S-3 becoming effective. On
October 17, 2008, Rio Vista issued an aggregate of 12,939 Rio Vista common units in satisfaction
of all liquidated damages due.
18
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H PARTNERS CAPITAL Continued
Private Placement of Common Units Continued
On March 7, 2008, the Board of Managers of the General Partner approved the grant of a unit bonus
of 8,812 common units under Rio Vistas 2005 Equity Incentive Plan to an executive officer of the
General Partner. The amount of units granted was based on the average of the high and low sale
prices for Rio Vista common units as reported by the NASDAQ Stock Market on March 7, 2008.
On March 7, 2008, a total of 61,875 options to acquire common units of Rio Vista were exercised
by holders of such options. Total proceeds received from the exercises were $774,000. In
addition, on March 7, 2008, 15,625 options to acquire common units of Rio Vista were exercised by
a holder through the offset of a severance obligation in connection with that employees
termination.
On July 23, 2008, a total of 6,378 common units of Rio Vista were issued to CEOcast in connection
with a consulting agreement. Based on the closing price of Rio Vistas common units on July 22,
2008, the total amount recorded as an expense on the issuance date was $80,000.
On July 23, 2008, the board of managers authorized the issuance and sale by Rio Vista
of 197,628 of Rio Vistas common units to Penn Octane at $10.12 per unit, and Penn Octanes board
authorized its purchase of such Rio Vista units at that price, for an aggregate price of
approximately $2,000,000. The price per unit was the closing price for Rio Vista common units
on May 30, 2008 as reported by the Nasdaq Global Market (see note L).
The common units represent limited partner interests in Rio Vista. The holders of common units
are entitled to participate in Rio Vistas distributions and exercise the rights or privileges
available to limited partners under the partnership agreement. The holders of common units have
only limited voting rights on matters affecting Rio Vista. Holders of common units have no right
to elect the General Partner or its managers on an annual or other continuing basis. Penn Octane
elects the managers of the General Partner. Although the General Partner has a fiduciary duty to
manage Rio Vista in a manner beneficial to Rio Vista and its unitholders, the managers of the
General Partner also have a fiduciary duty to manage the General Partner in a manner beneficial
to Penn Octane and the other owners of the General Partner. The General Partner generally may
not be removed except upon the vote of the holders of at least 80% of the outstanding common
units; provided, however, if at any time any person or group, other than the General Partner and
its affiliates, or a direct or subsequently approved transferee of the General Partner or its
affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units
then outstanding, that person or group will lose voting rights on all of its units and the units
may not be voted on any matter and will not be considered to be outstanding when sending notices
of a meeting of unitholders, calculating required votes, determining the presence of a quorum or
for other similar purposes. In addition, the partnership agreement contains provisions limiting
the ability of holders of common units to call meetings or to acquire information about Rio
Vistas operations, as well as other provisions limiting the ability of holders of common units
to influence the manner or direction of management.
Distributions of Available Cash
All Rio Vista unitholders have the right to receive distributions from Rio Vista of available
cash (as defined in the partnership agreement) in an amount equal to at least the minimum
distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum
quarterly distribution on the units from prior quarters subject to any reserves determined by the
General Partner. The General Partner has a right to receive a distribution corresponding to its
2% General Partner interest and the incentive distribution rights described below. The
distributions are to be paid within 45 days after the end of each calendar quarter. However, Rio
Vista is prohibited from making any distributions to unitholders if it would cause an event of
default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has
guaranteed.
19
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H PARTNERS CAPITAL Continued
Distributions of Available Cash Continued
In addition to its 2% General Partner interest, the General Partner is currently the holder of
incentive distribution rights which entitles the holder to an increasing portion of cash
distributions as described in the partnership agreement. As a result, cash distributions from
Rio Vista are shared by the holders of the common units and the General Partner interest based on
a formula whereby the General Partner receives disproportionately more distributions per
percentage interest than the holders of the common units as annual cash distributions exceed
certain milestones.
During July 2008, Penn Octane approved the loan of approximately $700,000 to Rio Vista which
amount is included in the due to Penn Octane Corporation in the accompanying balance sheet for
the specific purpose of funding Rio Vistas June 2008 quarterly distribution. Rio Vista made the
following distributions subsequent to December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
Quarter
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
|
December 2007
|
|
|
02/14/08
|
|
|
$
|
0.25
|
|
|
$
|
607,000
|
|
|
$
|
12,000
|
|
March 2008
|
|
|
05/16/08
|
|
|
$
|
0.25
|
|
|
$
|
629,000
|
|
|
$
|
13,000
|
|
June 2008
|
|
|
08/14/08
|
|
|
$
|
0.25
|
|
|
$
|
679,000
|
|
|
$
|
14,000
|
|
Rio Vista has not declared a distribution for the quarter ended September 30, 2008.
NOTE I UNIT WARRANTS
Options and Warrants
Rio Vista has no U.S. employees and is managed by its General Partner. Rio Vista applies SFAS
123R for warrants granted to employees and managers of the General Partner and for warrants
issued to acquire goods and services from
non-employees.
Equity Incentive Plan
On January 23, 2008, the board of managers of the General Partner approved the grant of options
to purchase a total of 16,250 common units under Rio Vistas 2005 Equity Incentive Plan to
certain outside members of the board of managers of the General Partner. The exercise price for
the options is $14.42 per unit, which was the average of the high and low sale prices for Rio
Vista common units as reported by the NASDAQ Stock Market on January 23, 2008. Options granted
to outside managers are fully vested on the date of grant and expire five years from the date of
grant. These issuances were exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof because the issuances do not involve any public offering of securities.
Total cost recorded at grant date was $100,000.
On May 28, 2008, Rio Vista and Strategic Growth International (SGI), entered into a one year
consulting agreement whereby SGI has agreed to provide public relations consulting services.
The agreement could be cancelled after 6 months and was cancelled on October 29, 2008 with an
effective date of December 1, 2008. In connection with the agreement, Rio Vista granted SGI
50,000 warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common
unit. The warrants cannot be exercised for one year from the date of issuance and the warrants
will expire three years from the date of issuance. Total cost recorded at the grant date was
$161,000. As a result of the aforementioned cancellation, the number of warrants granted was
reduced to 25,000.
20
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I UNIT WARRANTS Continued
Equity Incentive Plan Continued
For warrants granted to non-employees of the General Partner, Rio Vista applies the
provisions of SFAS 123R to determine the fair value of the warrants issued. No warrants
were granted to non-employees of the General Partner for the three months and nine months
ended September 30, 2007 and 2008.
NOTE J COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Penn Octane, Rio Vista and/or Rio Vistas subsidiaries were named as defendants in two
lawsuits filed in connection with an accident in the town of Lucio Blanco, Mexico on August
11, 2005, involving a tanker truck carrying LPG which was struck by a train resulting in an
explosion. None of Penn Octane, Rio Vista or any of Rio Vistas subsidiaries owned or
operated the tanker truck or employed or controlled the driver of the tanker truck.
Furthermore, none of Penn Octane, Rio Vista or any of Rio Vistas subsidiaries owned or had
custody of the LPG on the tanker truck at the time and location of the accident.
The tanker truck reportedly took delivery of LPG at the Matamoros Terminal Facility operated
under agreement with Rio Vistas Mexican subsidiaries. According to the lawsuits, after
leaving the Matamoros Terminal Facility, the tanker truck was involved in a collision with a
train in Lucio Blanco, Mexico, resulting in a tragic explosion that killed and injured several
persons and caused significant property damage. Published reports indicate that the truck
used a road not approved for large trucks and failed to stop at an unprotected rail crossing,
resulting in the collision and explosion. The insurance carrier for the owner of the tanker
truck has settled certain claims in Mexico with victims of the accident.
Even though the accident took place in Mexico, these lawsuits were filed in Texas. The first
case is captioned
Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn
Octane International LLC, et al
and was filed in the 404
th
Judicial District Court
for Cameron County, Texas on September 26, 2005. The plaintiffs seek unspecified monetary
damages. On August 16, 2006 with the consent of the parties, the Court issued an amended
order for temporary injunction for the purpose of preserving relevant evidence. The amended
injunction required a subsidiary of Rio Vista to make available for inspection by plaintiffs
Rio Vistas terminal facilities in Brownsville, Texas and Matamoros, Mexico and associated
equipment and records. The order also required Rio Vista to give 30 days advance notice to
plaintiffs before conducting any alteration, repair, service, work or changes to the
facilities or equipment. In addition, the order required Rio Vista to make available its
employees for deposition by the plaintiffs and to secure and preserve certain physical
evidence believed to be located in Mexico. The Brownsville, Texas terminal facility was sold
to TransMontaigne Product Services Inc. on August 22, 2006. In January 2007, this case was
removed to the U.S. District Court for the Southern District of Texas, Brownsville Division.
In July 2007, the case was remanded to the state court in Cameron County, Texas. In August
2007, plaintiffs filed an amended petition alleging that defendants delivered the LPG to an
unqualified driver and that defendants failed to properly odorize the LPG before delivery.
Discovery is being conducted and it is anticipated that a trial on a limited number of the
Plaintiffs will take place beginning on December 8, 2008.
21
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
Legal Proceedings Continued
The second case is captioned
Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation,
et al.
and was filed in the 107
th
Judicial District Court for Cameron County,
Texas, on November 14, 2005. The plaintiffs sought unspecified monetary damages. In March
2007, the Company entered into a settlement agreement with the plaintiffs on terms deemed
favorable to the Company. Pursuant to the settlement agreement this case was dismissed in
April 2007. The Companys legal fees and settlement costs were covered by insurance.
On December 13, 2007, Lexington Insurance Company (Lexington) filed a declaratory action
complaint against Penn Octane, Rio Vista and their related entities in the United States
District Court in the Southern District of Texas (Brownsville) requesting the US Federal Court
to rule that the plaintiff has no obligation to defend Penn Octane and the Rio Vista related
entities in the Camacho litigation based on alleged coverage exceptions. Federal jurisdiction
was contested and the case moved to state court. In a subsequent pleading, Lexington
assumed the defense of Penn Octane and Rio Vista. However, there remains undetermined the
obligation by Lexington to provide indemnification to Penn Octane and Rio Vista from any
judgment resulting from the Camacho suit. A trial date is currently set for the first week of
December 2008. If there is a determination that there is no insurance coverage resulting in
Penn Octane and Rio Vista having to fund all defense costs as well as any material settlement
or judgment amount in the Camacho suit, this could have a material adverse effect on Penn
Octanes and Rio Vistas business, financial condition and results of operations.
Management believes the remaining lawsuit against Penn Octane, Rio Vista and/or Rio Vistas
subsidiaries relating to the accident in Lucio Blanco is without merit and, based on the
advice of counsel, does not anticipate liability for damages in excess of anticipated
insurance coverage. The Companys insurance carrier is expected to bear the legal fees and
expenses in connection with defending this case. If, however, a court found liability on the
part of Penn Octane, Rio Vista or their subsidiaries, a judgment or settlement in excess of
insurance coverage could have a material adverse effect on Penn Octanes and Rio Vistas
business, financial condition and results of operations.
On November 3, 2004, there was an accident between a Regional truck driver and another
motorist who allegedly sustained injuries as a result of the accident. The other motorist
filed suit against Regional. The case was filed on February 26, 2007 as
Nolte v. Regional
Enterprizes, Inc.
in the United States District Court for the District of Maryland (Case No.
07
CV-0478-PJM).
This case was settled within the limits of insurance coverage on or about
January 28, 2008 and the case was dismissed accordingly on or about January 30, 2008.
On November 20, 2007, Rio Vista, Rio Vista Penny, LLC, Gary Moores, Bill Wood and GM Oil
Properties, Inc. jointly filed an action for declaratory relief against Energy Spectrum
Advisors, Inc. in the District Court in McIntosh County, Oklahoma. This action was filed in
response to Energy Spectrums assertion that Rio Vista, Rio Vista Penny, LLC, as well as GM
Oil Properties, Inc. owed Energy Spectrum a commission allegedly due and owing based on Rio
Vista Penny, LLCs November, 2007 purchase of certain assets from GM Oil Properties, Inc. The
foundation for the Energy Spectrum claim is a January 22, 2007 written agreement signed by
Energy Spectrum and GM Properties, Inc. Neither Rio Vista nor Rio Vista Penny were parties to
this agreement. Based in part on the fact that the GM Oil Properties acquisition was an asset
purchase, rather than a stock sale, management believes that the Rio Vista entities should
have no liability for any obligation that GM Oil Properties, Inc. may have to Energy Spectrum.
Discovery is currently pending.
22
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
Legal Proceedings Continued
On August 19, 2008, Rio Vista, Rio Vista GP LLC, Rio Vista Penny LLC, Jerome B. Richter and
Douglas G. Manner (Defendants) were named in a lawsuit filed by Northport Production Company and
Eugene A. Viele (Plaintiffs). Mr. Viele is currently a director of Penn Octane Corporation and
is also the principal owner of Northport Production Company. Mr. Manner currently serves as a
director of Penn Octane Corporation and Rio Vista GP LLC, the general partner of Rio Vista.
Plaintiffs allege breach of contract, negligent misrepresentation, and fraud. Plaintiffs are
seeking judgment for compensatory damages of $487,000 and exemplary damages of not less than
$200,000 as well as attorneys fees and other such relief as may be shown. Discovery is
currently pending. Rio Vista believes that the liability, if any, ultimately resulting from
this lawsuit should not materially affect its consolidated financial results.
Rio Vista and its subsidiaries are involved with other proceedings, lawsuits and claims. Rio
Vista believes that the liabilities, if any, ultimately resulting from such proceedings,
lawsuits and claims should not materially affect its consolidated financial results.
Credit Facility, Letters of Credit and Other
As of September 30, 2008, Penn Octane no longer is purchasing Fuel Products which were
historically financed through its credit facility with RZB. However, as of September 30, 2008,
Penn Octanes credit facility with RZB for demand loans and standby letters of credit (RZB
Credit Facility) was still outstanding as a result of the RZB Loan which was issued to Rio Vista
during July 2007 (see below). The RZB Credit Facility is an uncommitted facility under which the
letters of credit have an expiration date of no more than 90 days and the facility is reviewed
annually. In connection with the Spin-Off, Rio Vista agreed to guarantee Penn Octanes
obligations with respect to the RZB Credit Facility. In connection with Rio Vistas guaranty,
Rio Vista granted RZB a security interest and assignment in any and all of Rio Vistas accounts,
real property, buildings, pipelines, fixtures and interests therein or relating thereto, other
than the Oklahoma assets. Rio Vistas guarantee and asset pledge continue under the existing
RZB Credit Facility. In addition, Rio Vista may not permit to exist any subsequent lien,
security interest, mortgage, charge or other encumbrance of any nature on any of its properties
or assets, except in favor of RZB, without the consent of RZB.
Pursuant to the RZB Credit Facility, RZB has sole and absolute discretion to limit or terminate
its participation in the RZB Credit Facility and to refrain from making any loans or issuing any
letters of credit thereunder. RZB also has the right to demand payment of any and all amounts
outstanding under the RZB Credit Facility at any time.
On July 26, 2007, as a condition of the Loan Agreement, Penn Octane entered into a First
Amendment to Line Letter (First Amendment) with RZB. The First Amendment amends the Amended and
Restated Line Letter dated as of September 14, 2004 between Penn Octane and RZB. The First
Amendment reduced the amount of the RZB Credit Facility from $15,000,000 to $10,000,000. Subject
to RZBs discretion, the amount of the RZB Credit Facility will be increased dollar for dollar by
Rio Vistas principal repayments under the Loan Agreement. During July 2008, Penn Octane entered
into a second amendment to the Line Letter (Second Amendment) with RZB effectively extending the
maturity date of the RZB Note through August 29, 2008 (see note G).
23
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
Credit Facility, Letters of Credit and Other continued
Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required to
maintain net worth of a minimum of $10,000,000. As of September 30, 2008, neither Penn Octane
nor Rio Vista had a minimum net worth of $10,000,000.
Leases
Norfolk Southern Leases
On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern
Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection
with Regionals existing operations at Regionals facilities in Hopewell, Virginia. The lease
includes the right to maintain existing warehouses, storage tanks for handling petroleum and
chemical products, and necessary appurtenances. The lease term was January 1, 2003 through
December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30
days written notice. Rent is $1,500 per month subject to adjustment based on inflation.
On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk
Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land
which is utilized in connection with Regionals existing operations at Regionals facilities in
Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding
lease began on August 21, 2003 and continues until terminated by either party with 30 days
written notice. Rent is $4,875 per year, payable in advance.
As replacement of the foregoing leases, Regional is currently negotiating with Norfolk Southern
for the purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of
land on a long-term basis. On September 1, 2007, Regional executed a letter of intent from
Norfolk Southern dated May 29, 2007. Regional received a letter from Norfolk Southern dated
July 26, 2007, approving the purchase of the land and the lease on the terms contained in the
letter of intent. Regional is awaiting definitive documents from Norfolk Southern in order to
complete the purchase and lease transactions.
Consulting Agreement
Effective November 2006, Rio Vista entered into a consulting agreement (Consulting Agreement)
with JBR Capital Resources, Inc. (JBR Capital) regarding consulting services to be rendered by
JBR Capital to Rio Vista and to Penn Octane. JBR Capital is controlled by Mr. Jerome Richter, a
former officer of Penn Octane. Pursuant to the Consulting Agreement, JBR Capital has agreed to
assist Rio Vista and Penn Octane with the potential acquisition and disposition of assets and
with other transactions involving Rio Vista or Penn Octane. In exchange for these services, Rio
Vista has agreed to pay JBR Capital a fee based on approved services rendered by JBR Capital plus
a fee based on the net proceeds to Rio Vista resulting from a sale of assets to a third party
introduced to Rio Vista by JBR Capital. In addition, in connection with the Regional
transaction, JBR Capital earned a fee of $180,000 which fee was expensed. The Consulting
Agreement continues for six-month terms unless terminated by either party at least 30 days before
the end of each term.
24
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
CEOcast
Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc.
(CEOcast) whereby CEOcast agreed to render investor relations services to Rio Vista. Under the
terms of the CEOcast agreement, CEOcast received cash fees of $7,500 per month and Rio Vista
agreed to issue to CEOcast (a) 1,399 of Rio Vistas fully-paid, non-assessable common units
(Common Units) and (b) $75,000 worth of Common Units on March 31, 2008 based on a calculation of
units as more fully described in the consulting agreement. The delivery of any Common Units was
to be made at the soonest practical date after March 31, 2008, based on the best efforts of Rio
Vista. In accordance with the Agreement, during April 2008, Rio Vista provided notice to CEOcast
that it would not renew the Agreement upon the expiration in July 2008. In connection with the
CEOcast agreement, on July 23, 2008, Rio Vista issued to CEOcast a total of 6,378 Common Units.
Based on the closing price of Rio Vista Common Units as of July 23, 2008, the date that the units
were issued to CEOcast, Rio Vista recorded additional expense of $80,000 associated with the
issuance of the common units.
Strategic Growth International
On May 28, 2008, Rio Vista and SGI entered into a one year consulting agreement whereby SGI
agreed to provide public relations consulting services. The agreement could be cancelled after 6
months and was cancelled on October 29, 2008 with an effective date of December 1, 2008. In
connection with the agreement, Penn Octane and Rio Vista were each required to pay monthly fees
of $9,000 per month. In addition, under the agreement between Rio Vista and SGI, Rio Vista
granted SGI 50,000 warrants to purchase common units of Rio Vista at an exercise price of $12.00
per common unit. The warrants cannot be exercised for one year from the date of issuance and the
warrants will expire three years from the date of issuance. As a result of the cancellation,
the number of warrants was reduced to 25,000.
Concentrations of Credit Risk
Financial instruments that potentially subject Rio Vista to credit risk include cash balances at
banks which at times exceed the federal deposit insurance.
Tax obligations of Penn Octane resulting from the Spin-Off
Rio Vista has agreed to indemnify Penn Octane for a period of three years from the fiscal year
end that includes the date of the Spin-Off for any federal income tax liabilities resulting from
the Spin-Off in excess of $2,500,000. Penn Octane has filed its federal income tax return for
the year of the Spin-Off and it did not incur a federal income tax liability in excess of
$2,500,000. However, the Internal Revenue Service (IRS) may review Penn Octanes federal income
tax returns and challenge positions that Penn Octane has taken with respect to the Spin-Off.
Further, if Penn Octane is determined to have a federal income tax liability in excess of the
amounts which were included in the federal income tax return related to the Spin-Off and if Penn
Octane is unable to pay such liabilities or Rio Vista is unable to pay, then the Internal Revenue
Service may assert that the Penn Octane stockholders who received common units in the Spin-Off
are liable for unpaid federal income taxes of Penn Octane, including interest and any penalties,
up to the value of the Rio Vista Common Units received by each stockholder.
25
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
Partnership Tax Treatment and Regional and MV Income Taxes
Rio Vista, excluding Regional and MV, is not a taxable entity for U.S. tax purposes (see below)
and incurs no U.S. Federal income tax liability. Regional and MV are corporations and as such
are subject to U.S. Federal and State corporate income tax. Each unitholder of Rio Vista is
required to take into account that unitholders share of items of income, gain, loss and
deduction of Rio Vista in computing that unitholders federal income tax liability, even if no
cash distributions are made to the unitholder by Rio Vista. Distributions by Rio Vista to a
unitholder are generally not taxable unless the amount of cash distributed is in excess of the
unitholders adjusted basis in Rio Vista.
Section 7704 of the Internal Revenue Code (Code) provides that publicly traded partnerships
shall, as a general rule, be taxed as corporations despite the fact that they are not classified
as corporations under Section 7701 of the Code. Section 7704 of the Code provides an exception
to this general rule for a publicly traded partnership if 90% or more of its gross income for
every taxable year consists of qualifying income (Qualifying Income Exception). For purposes
of this exception, qualifying income includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation (including pipelines) or
marketing of any mineral or natural resource. Other types of qualifying income include
interest (other than from a financial business or interest based on profits of the borrower),
dividends, real property rents, gains from the sale of real property, including real property
held by one considered to be a dealer in such property, and gains from the sale or other
disposition of capital assets held for the production of income that otherwise constitutes
qualifying income.
Rio Vista estimates that more than 90% of its gross income is qualifying income. No ruling has
been or will be sought from the IRS and the IRS has made no determination as to Rio Vistas
classification as a partnership for federal income tax purposes or whether Rio Vistas operations
generate a minimum of 90% of qualifying income under Section 7704 of the Code.
If Rio Vista was classified as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, Rio Vistas items of income, gain, loss and
deduction would be reflected only on Rio Vistas tax return rather than being passed through to
Rio Vistas unitholders, and Rio Vistas net income would be taxed at corporate rates.
If Rio Vista was treated as a corporation for federal income tax purposes, Rio Vista would pay
tax on income at corporate rates, which is currently a maximum of 35%. Distributions to
unitholders would generally be taxed again as corporate distributions, and no income, gains,
losses, or deductions would flow through to the unitholders. Because a tax would be imposed upon
Rio Vista as a corporation, the cash available for distribution to unitholders would be
substantially reduced and Rio Vistas ability to make minimum quarterly distributions would be
impaired. Consequently, treatment of Rio Vista as a corporation would result in a material
reduction in the anticipated cash flow and after-tax return to unitholders and therefore would
likely result in a substantial reduction in the value of Rio Vistas common units.
Current law may change so as to cause Rio Vista to be taxable as a corporation for federal income
tax purposes or otherwise subject Rio Vista to entity-level taxation. The partnership agreement
provides that, if a law is enacted or existing law is modified or interpreted in a manner that
subject Rio Vista to taxation as a corporation or otherwise subjects Rio Vista to entity-level
taxation for federal, state or local income tax purposes, then the minimum quarterly distribution
amount and the target distribution amount will be adjusted to reflect the impact of that law on
Rio Vista.
26
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K OIL AND GAS SALES CONTRACT
Rio Vista sells oil and gas in the normal course of its business and utilizes sales contracts
in the form of guaranteed fixed prices to minimize the variability in forecasted cash flows due
to price movements in oil and gas.
As of September 30, 2008, the following contracts were in effect:
|
|
|
Date
|
|
Terms
|
April 2008 October 2008:
|
|
1.0 MMcf/d @ $6.35/Mcf (MV Pipeline production)
|
April 2008 October 2008:
|
|
0.5 MMcf/d @ $7.97/Mcf (Brooken Pipeline production)
|
November 2008 March 2009:
|
|
1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)
|
November 2008 March 2009:
|
|
0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)
|
The contracts currently in place cover substantially all of Rio Vistas current production.
NOTE L RELATED PARTY TRANSACTIONS
The General Partner has a legal duty to manage Rio Vista in a manner beneficial to Rio Vistas
unitholders. This legal duty originates in statutes and judicial decisions and is commonly
referred to as a fiduciary duty. Because of Penn Octanes ownership and control of the
General Partner, Penn Octanes officers and managers of the General Partner also have fiduciary
duties to manage the business of the General Partner in a manner beneficial to Penn Octane and
its stockholders.
The partnership agreement limits the liability and reduces the fiduciary duties of the General
Partner to the unitholders. The partnership agreement also restricts the remedies available to
unitholders for actions that might otherwise constitute breaches of the General Partners
fiduciary duty.
Sale Purchase of Rio Vista Common Units
At meetings held on May 30, 2008, in connection with the previously disclosed discussions between
Rio Vista and the Nasdaq Stock Market (Nasdaq) regarding Rio Vistas compliance with Nasdaqs
Marketplace Rule 4450(a)(3) on capital adequacy, the board of managers authorized the issuance
and sale by Rio Vista of 197,628 of Rio Vistas common units to Penn Octane at $10.12 per unit,
and Penn Octanes board authorized its purchase of such Rio Vista units at that price, for an
aggregate price of approximately $2,000,000. Thereafter, Rio Vistas officers continued to
formulate a plan of ongoing compliance with Rule 4450(a)(3) on terms satisfactory to
Nasdaq, and notified Nasdaq regarding the proposed issuance of its units. Rio Vista also filed a
listing of additional units notification with Nasdaq (LAS) based on its intention to go forward
with the proposed purchase and sale. Following further discussions with Nasdaq, at board meetings
on July 15, 2008, the board of managers and the board of directors of Penn Octane confirmed their
desire to implement promptly the previously authorized purchase and sale, and the companies
agreed to complete the transaction, subject to Nasdaq approval of Rio Vistas LAS. On July 23,
2008, after the period of review for the LAS passed, the common units were issued to Penn Octane.
27
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L RELATED PARTY TRANSACTIONS Continued
Loans To Rio Vista
As of July 23, 2008, Rio Vista off-set $2,000,000 owed to Penn Octane against the amounts owed by
Penn Octane to acquire Rio Vista common units (see above). In addition, Penn Octane has loaned
additional amounts to Rio Vista for the sole purpose of allowing Rio Vista to fund ongoing
operations and the June 2008 quarterly distribution.
Omnibus Agreement
In connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement with Rio Vista
that governs, among other things, indemnification obligations among the parties to the agreement,
related party transactions and the provision of general administration and support services by
Penn Octane.
The Omnibus Agreement prohibits Rio Vista from entering into any material agreement with Penn
Octane without the prior approval of the conflicts committee of the board of managers of the
General Partner. For purposes of the Omnibus Agreement, a material agreement is any agreement
between Rio Vista and Penn Octane that requires aggregate annual payments in excess of $100,000.
The Omnibus Agreement may be amended by written agreement of the parties; provided, however that
it may not be amended without the approval of the conflicts committee of the General Partner if
the amendment would adversely affect the unitholders of Rio Vista. The Omnibus Agreement has an
initial term of five years that automatically renews for successive five-year terms and, other
than the indemnification provisions, will terminate if Rio Vista is no longer an affiliate of
Penn Octane.
Under the terms of the Omnibus Agreement, Penn Octane charged Rio Vista $217,000 and $542,000
for expenses during the three months and nine months ended September 30, 2008, respectively.
NOTE M 401K
Regional sponsors a defined contribution retirement plan (401(k) Plan) covering all eligible
employees effective November 1, 1988. The 401(k) Plan allows eligible employees to contribute,
subject to Internal Revenue Service limitations on total annual contributions, up to 60% of
their compensation as defined in the 401(k) plan, to various investment funds. Regional
matches, on a discretionary basis, 50% of the first 6% of employee compensation. Furthermore,
Regional may make additional contributions on a discretionary basis at the end of the Plan year
for all eligible employees. Regional has made no discretionary contributions since the
acquisition of Regional to September 30, 2008.
28
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE N REALIZATION OF ASSETS
The accompanying consolidated balance sheet has been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate
continuation of Rio Vista as a going concern. Rio Vista had a loss from continuing
operations for each of the two years ended December 31, 2007 and the three months and nine
months ended September 30, 2008 and has a deficit in working capital. Currently, all
revenues generated from the Oklahoma assets are held as collateral against the TCW Credit
Facility. The current portion of the TCW Credit Facility, the Moores Note, the RZB Note,
the Seller Note Regional and the Richter Note Payable is approximately $11,613,000. In
addition, the RZB Note was not paid on its maturity date of August 29, 2008 (see note G).
The Oklahoma assets and/or the Regional operations currently do not generate sufficient cash
flow to pay general and administrative and other operating expenses of Rio Vista and all debt
service requirements. The TCW Credit Facility prohibits distributions by Rio Vistas Oklahoma
subsidiaries until December 2008 and subsequent thereto, those distributions are limited to 75%
of defined available cash flow. In addition, Rio Vista requires additional funding in order to
increase production levels for its Oklahoma assets.
Rio Vista has guaranteed certain of Penn Octanes obligations. Substantially all of Rio
Vistas and Penn Octanes assets are pledged or committed to be pledged as collateral on the
TCW Credit Facility, the RZB Note, RZB Credit Facility and the Richter Note Payable, and
therefore, both Rio Vista and Penn Octane may be unable to obtain additional financing
collateralized by those assets. Penn Octanes Report of Independent Registered Public
Accounting Firm on the consolidated financial statements of Penn Octane at December 31, 2007
contained an explanatory paragraph which describes an uncertainty about Penn Octanes
ability to continue as a going concern. If Penn Octanes and Rio Vistas cash flows are not
adequate to pay their obligations, Penn Octane and/or Rio Vista may be required to raise
additional funds to avoid foreclosure by creditors. There can be no assurance that such
additional funding will be available on terms attractive to either Penn Octane or Rio Vista
or available at all. If additional amounts cannot be raised and cash flow is inadequate,
Penn Octane and/or Rio Vista would likely be required to seek other alternatives which could
include the sale of assets, closure of operations and/or protection under the U.S.
bankruptcy laws.
In view of the matters described in the preceding paragraphs, recoverability of the recorded
asset amounts shown in the accompanying unaudited consolidated balance sheet is dependent
upon the ability of Rio Vista to continue as a going concern. The unaudited consolidated
financial statements do not include any adjustments related to the recoverability and
classification of recorded asset amounts or amounts and classification of liabilities that
might be necessary should Rio Vista be unable to continue in existence.
To provide Rio Vista with the ability it believes necessary to continue in existence,
management is taking steps to restructure its existing debt obligations, raise additional
debt and/or equity financing and sell assets.
29
RIO VISTA ENERGY PARTNERS L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE O SEGMENT INFORMATION
Rio Vista has the following reportable segments for the three months and nine months ended
September 30, 2008: Transportation and Terminalling and Oil and Gas. The Transportation and
Terminalling segment transports bulk liquids, including chemical and petroleum products, by truck
and provides terminalling and storage services; the Oil and Gas segment produces, transports and
sells oil and gas.
Segment profit (loss) is based on gross profit (loss) from operations before selling, general and
administrative expenses, other income (expense) and income tax. The reportable segments are
distinct business units operating in similar industries. They are separately managed, with
separate marketing and distribution systems. The following information about the segments is for
the three months and nine months ended September 30, 2008. The Transportation and Terminalling
segment commenced August 22, 2006 and the Oil and Gas segment commenced November 19, 2007.
Three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
|
|
Terminalling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
Revenues from external customers
|
|
|
2,279,000
|
|
|
|
2,419,000
|
|
|
|
4,698,000
|
|
Interest expense
|
|
|
143,000
|
|
|
|
766,000
|
|
|
|
909,000
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
278,000
|
|
|
|
287,000
|
|
|
|
565,000
|
|
Segment gross profit
|
|
|
559,000
|
|
|
|
448,000
|
|
|
|
1,007,000
|
|
Segment assets
|
|
|
12,179,000
|
|
|
|
37,109,000
|
|
|
|
49,288,000
|
|
Segment liabilities
|
|
|
4,384,000
|
|
|
|
28,465,000
|
|
|
|
32,849,000
|
|
Expenditure for segment assets
|
|
|
26,000
|
|
|
|
540,000
|
|
|
|
566,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
|
|
|
|
$
|
5,269,000
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
(571,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
|
|
|
|
$
|
4,698,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit for reportable segments
|
|
|
|
|
|
|
|
|
|
|
1,007,000
|
|
Other gross profit
|
|
|
|
|
|
|
|
|
|
|
(11,000
|
)
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(1,051,000
|
)
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
|
|
|
|
(978,000
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
|
|
|
|
$
|
(1,031,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
|
|
|
|
|
49,288,000
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
204,000
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
|
|
|
|
$
|
49,492,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE O SEGMENT INFORMATION Continued
Nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
|
|
Terminalling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
Revenues from external customers
|
|
|
6,539,000
|
|
|
|
5,264,000
|
|
|
|
11,803,000
|
|
Interest expense
|
|
|
531,000
|
|
|
|
2,063,000
|
|
|
|
2,594,000
|
|
Interest income
|
|
|
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Depreciation and amortization
|
|
|
818,000
|
|
|
|
712,000
|
|
|
|
1,530,000
|
|
Segment gross profit
|
|
|
1,448,000
|
|
|
|
968,000
|
|
|
|
2,416,000
|
|
Segment assets
|
|
|
12,179,000
|
|
|
|
37,109,000
|
|
|
|
49,288,000
|
|
Segment liabilities
|
|
|
4,384,000
|
|
|
|
28,465,000
|
|
|
|
32,849,000
|
|
Expenditure for segment assets
|
|
|
226,000
|
|
|
|
3,333,000
|
|
|
|
3,559,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
|
|
|
|
$
|
13,930,000
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
(2,127,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
|
|
|
|
$
|
11,803,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit for reportable segments
|
|
|
|
|
|
|
|
|
|
|
2,416,000
|
|
Other gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(4,128,000
|
)
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
|
|
|
|
(2,694,000
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
|
|
|
|
$
|
(4,398,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
|
|
|
|
|
49,288,000
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
204,000
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
|
|
|
|
$
|
49,492,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Item 2
.
Managements Discussion and Analysis of Financial Condition and
Results of Operations
Rio Vista Energy Partners L.P. and its consolidated subsidiaries are collectively hereinafter
referred to as Rio Vista.
The following discussion of Rio Vistas liquidity and capital resources should be read in
conjunction with the unaudited consolidated financial statements of Rio Vista and related notes
thereto appearing elsewhere herein. References to specific years preceeded by fiscal (e.g.
fiscal 2008) refer to Rio Vistas fiscal year ending December 31.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. This Quarterly Report contains forward-looking statements that
are subject to a number of risks and uncertainties, many of which are beyond our control, which may
include statements about:
|
|
|
the volatility of realized natural gas prices;
|
|
|
|
|
the discovery, estimation, development and replacement of oil and natural gas reserves;
|
|
|
|
|
our business and financial strategy;
|
|
|
|
|
our drilling locations;
|
|
|
|
|
technology;
|
|
|
|
|
our cash flow, liquidity and financial position;
|
|
|
|
|
our production volumes;
|
|
|
|
|
our lease operating expenses, general and administrative costs and finding and
development costs;
|
|
|
|
|
the availability of drilling and production equipment, labor and other services;
|
|
|
|
|
our future operating results;
|
|
|
|
|
our prospect development and property acquisitions;
|
|
|
|
|
the marketing of oil and natural gas;
|
|
|
|
|
competition in the oil and natural gas industry and the transportation and terminalling
business;
|
|
|
|
|
the impact of weather and the occurrence of natural disasters such as fires, floods,
hurricanes, earthquakes and other catastrophic events and natural disasters;
|
|
|
|
|
governmental regulation of the oil and natural gas industry and the transportation and
terminalling business;
|
|
|
|
|
required capital expenditures;
|
|
|
|
|
cash distributions and qualified income;
|
|
|
|
|
developments in oil producing and natural gas producing countries; and
|
|
|
|
|
our strategic plans, objectives, expectations and intentions for future operations.
|
All of these types of statements, other than statements of historical fact included in this
Quarterly Report are forward-looking statements. In some cases, forward-looking statements can be
identified by terminology such as may, could, should, expect, plan, project, intend,
anticipate, believe, estimate, predict, potential, pursue, target, continue, the
negative of such terms or other comparable terminology.
The forward-looking statements contained in this Quarterly Report are largely based on our
expectations, which reflect estimates and assumptions made by our General Partners management.
These estimates and assumptions reflect our best judgment based on currently known market
conditions and other factors. Although we believe such estimates and assumptions to be reasonable,
they are inherently uncertain and involve a number of risks and uncertainties that are beyond our
control. In addition, managements assumptions about future events may prove to be inaccurate.
Management cautions all readers that the
forward-looking
statements contained in this Quarterly
Report are not guarantees of future performance, and we cannot assure any reader that such
statements will be realized or the forward-looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied in the forward-looking statements
due to factors listed in the Risk Factors section in Rio Vistas Annual Report on Form 10-K for
the fiscal year ended December 31, 2007. All forward-looking statements speak only as of the date
of this Quarterly Report. We do not intend to publicly update or revise any forward-looking
statements as a result of new information, future events or otherwise.
32
Overview
Historical Assets and Operations
From inception until December 31, 2007, Rio Vista was focused on the operation of the assets
acquired from Penn Octane, including an LPG terminal facility in Matamoros, Mexico and
approximately 23 miles of pipelines connecting the Matamoros Terminal Facility to an LPG terminal
facility in Brownsville, Texas. After August 2006, Rio Vista operated this system exclusively on
behalf of TransMontaigne Partners L.P. and its affiliates (TransMontaigne) to transport their LPG
on a fee for service basis.
In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to
TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm,
together with associated improvements, leases, easements, licenses and permits; an LPG sales
agreement; and all LPG inventory (Rio Vista Restated PSA). In December 2007, Rio Vista completed
the disposition of its remaining LPG assets to TransMontaigne, including the U.S. portion of the
two pipelines from a Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along
with all associated rights-of-way and easements; all of the outstanding equity interests in
entities owning interests in the portion of the two pipelines that extend from the U.S. border to
Matamoros, Mexico; and all of the rights for indirect control of an entity that owns a terminal
site in Matamoros, Mexico. As a result, effective January 1, 2008, Rio Vista no longer operates the
assets acquired from Penn Octane or conducts the businesses it had historically conducted. During
the nine months ended September 30, 2008, Rio Vista recorded a loss from discontinued operations of
$343,000 related to additional expense of its Mexican subsidiaries in excess of initial estimates
and in excess of the amount of purchase price retained by TransMontaigne for such contingencies.
Current Assets and Operations
In July 2007, Rio Vista acquired Regional and in November 2007, Rio Vista acquired certain oil and
natural gas producing properties and related assets in the State of Oklahoma formerly owned by GM
Oil Properties, Inc., Penny Petroleum Corporation and GO LLC. As a result of these acquisitions in
2007, Rio Vista is now focused on the acquisition, development and production of oil and natural
gas properties and related midstream assets, and the operation and development of Regionals
business. Beginning March 1, 2008, Rio Vista Operating LLC became the operator of the Oklahoma
assets.
The above acquisitions were funded by a combination of debt (new and assumed), private placements
of Rio Vista common units and proceeds from the sale of Rio Vistas LPG related assets. During
November 2007, Rio Vista completed a private placement of common units raising gross proceeds of
$4.0 million.
Liquidity and Capital Resources
General
As of September 30, 2008, Rio Vista had approximately $963,000 of cash available and short-term
debt obligations of $11.6 million due within the next 12 months. In addition, TCW could demand
repayment of up to $2.2 million beginning January 1, 2009 under the TCW Credit Facility described
below, and Rio Vista could be liable on its guarantee of Penn Octanes obligations under the RZB
Credit Facility described below. We will need to obtain additional sources of funding to continue
our operations, which may include debt or equity financing, selling assets or entering into another
strategic transaction. However, we may not be able to obtain any financing on terms reasonably
acceptable to us, or at all. If we are unable to generate sufficient revenues or obtain financing
to fund our operations, we may be required to close certain or all of our operations or seek
protection under the U.S. bankruptcy laws. The TCW Facility which is owed by Rio Vista Penny LLC
and its subsidiaries is non-recourse to Rio Vista.
33
As a result of the disposition of the LPG-related businesses in 2006 and 2007 and the acquisition
of Regionals business and the Oklahoma assets, Rio Vistas sources of operating cash flows are
expected to be derived from the operations of Regional and from the revenues received from the
Oklahoma assets. Although the operations of Regional are expected to be profitable, the cash flows
of Regional are subject to payments required under the RZB Loan Agreement described below under
Debt Obligations and income taxes payable on Regionals stand-alone taxable income. Based on the
current production levels from the Oklahoma assets and current prices for oil and natural gas,
there is not expected to be sufficient cash from the Oklahoma asset operations to meet debt service
requirements under the TCW Credit Facility described below under Debt Obligations unless
additional production and/or financing can be realized. Rio Vista has minimal management
experience operating oil and gas properties and will be relying on the assistance of its Chairman
of the Board and outside consultants to provide ongoing management expertise. Additional
production from the Oklahoma assets will require additional capital expenditures to fund drilling
expansion opportunities.
In addition, pursuant to the Omnibus Agreement, Penn Octane is entitled to reimbursement of costs
incurred on behalf of Rio Vista, including an allocable share of overhead. However, the TCW
Credit Facility prohibits distributions by Rio Vistas Oklahoma subsidiaries until December 2008
and subsequent thereto, those distributions are limited to 75% of defined available cash flow. As
a result, Rio Vista may not have sufficient available cash to pay its separate general and
administrative and other operating expenses, debt service and/or minimum quarterly distributions to
unitholders. In addition, Rio Vista may not be able to distribute to its unitholders sufficient
cash to meet the tax obligations of unitholders associated with the ownership of common units.
Rio Vista may obtain additional sources of revenues through the completion of future transactions,
including acquisitions and/or dispositions of assets. The ability of Rio Vista to complete future
acquisitions may require the use of a portion or substantially all of Rio Vistas liquid assets,
the issuance of additional debt and/or the issuance of additional common units. Currently,
substantially all of Rio Vistas assets are pledged or committed to be pledged as collateral on
existing debt in connection with the RZB Credit Facility described below under Debt Obligations
the TCW Credit Facility, the Richter Note Payable and the RZB Loan Agreement. Accordingly Rio
Vista may be unable to obtain additional financing collateralized by those assets.
See note G to the unaudited consolidated financial statements for Rio Vistas debt obligations and
note J for a discussion of the RZB Credit Facility.
Distributions of Available Cash
All Rio Vista unitholders have the right to receive distributions from Rio Vista of available
cash (as defined in the partnership agreement) in an amount equal to at least the minimum
distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum
quarterly distribution on the units from prior quarters subject to any reserves determined by our
General Partner. Our General Partner has a right to receive a distribution corresponding to its
2% General Partner interest and the incentive distribution rights described below. The
distributions are to be paid within 45 days after the end of each calendar quarter. However, Rio
Vista is prohibited from making any distributions to unitholders if it would cause an event of
default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has
guaranteed.
In addition to its 2% General Partner interest, our General Partner is currently the holder of
incentive distribution rights which entitles the holder to an increasing portion of cash
distributions as described in the partnership agreement. As a result, cash distributions from Rio
Vista are shared by the holders of the common units and our General Partner based on a formula
whereby our General Partner receives disproportionately more distributions per percentage interest
than the holders of the common units as annual cash distributions exceed certain milestones.
34
During July 2008, Penn Octane approved the loan of approximately $700,000 to Rio Vista which
amount is included in the due to Penn Octane Corporation in the accompanying balance sheet for the
specific purpose of funding Rio Vistas June 2008 quarterly distribution. Rio Vista made the
following distributions subsequent to December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
Quarter
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
December 2007
|
|
|
02/14/08
|
|
|
$
|
0.25
|
|
|
$
|
607,000
|
|
|
$
|
12,000
|
|
March 2008
|
|
|
05/16/08
|
|
|
$
|
0.25
|
|
|
$
|
629,000
|
|
|
$
|
13,000
|
|
June 2008
|
|
|
08/14/08
|
|
|
$
|
0.25
|
|
|
$
|
679,000
|
|
|
$
|
14,000
|
|
Rio Vista has not declared a distribution for the quarter ended September 30, 2008.
Debt Obligations
RZB Loan Agreement
In connection with the acquisition of Regional during July 2007, Rio Vista funded a portion of the
acquisition through a loan of $5.0 million (RZB Note) from RZB Finance LLC (RZB) dated July 26,
2007. The RZB Note was due on demand and if no demand, with a one-year maturity. The RZB Note
carries a variable annual rate of interest equal to the higher of (a) the rate of interest
established from time to time by JPMorgan Chase Bank, N.A. as its base rate or its prime rate,
or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%, in each
case plus a margin of 4.75%. On July 27, 2008, the RZB Note was amended whereby the maturity date
was extended until August 29, 2008 (see note G to the unaudited consolidated financial statements).
The RZB Note was not paid on August 29, 2008. Rio Vista and RZB are currently negotiating an
additional extension of the maturity date to February 28, 2009. In connection therewith, Penn
Octane has provided $1.0 million in cash as collateral on the RZB Note. RZB currently holds Penn
Octanes $1.0 million which Penn Octane classifies as restricted cash in the accompanying balance
sheet.
In addition, RZB will require Rio Vista to establish a lockbox collection system with respect to
all of Regionals cash collection as additional collateral for the RZB Note. The collected cash
will be held as restricted cash. At RZBs discretion, the restricted cash be released to Regional
and Rio Vista to pay normal operating expenses.
Under the RZB Note, either Rio Vista or Penn Octane is required to maintain a minimum net worth of
$10 million. In connection with the RZB Note, Regional granted to RZB a security interest in all
of Regionals assets, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of
Regional. Penn Octane, Regional and RVOP have also provided a guaranty of Rio Vistas obligations
under the RZB Loan Agreement in favor of RZB. As of September 30, 2008, neither Penn Octane nor
Rio Vista had a minimum net worth of $10.0 million.
TCW Credit Facility
In connection with the acquisition of certain of the Oklahoma assets, Rio Vista Penny LLC, an
indirect, wholly-owned subsidiary of Rio Vista, entered into a $30 million senior secured credit
facility (TCW Credit Facility) with TCW Asset Management Company and certain TCW Energy Fund X
investors (collectively, TCW) in November 2007. The TCW Credit Facility has a maturity date of
August 29, 2010. However, at any time during the period from May 19, 2008 through November 19,
2009, TCW had the right to demand payment of $2.2 million of the amount outstanding under the TCW
Credit Facility. The TCW Credit Facility is secured by a first lien on all of the Oklahoma assets
and associated production proceeds. The interest rate on borrowings under the TCW Credit Facility
is 10.5%, increasing an additional 2% if there is an event of default (see below). Payments under
the TCW Credit Facility are interest-only until December 29, 2008. The TCW Credit Facility has no
prepayment penalty. Certain Rio Vista subsidiaries have guaranteed payment of the obligations
outstanding under the TCW Credit Facility. Rio Vista Penny and Rio Vista GO LLC, an indirect,
wholly-owned subsidiary of Rio Vista, both of which hold all of the Oklahoma assets, are prohibited
from making upstream distributions to Rio Vista before November 30, 2008. Thereafter, upstream
distributions to Rio Vista not in excess of 75% of quarterly cash flow are permitted subject to
certain conditions.
35
On September 29, 2008, Rio Vista Penny entered into a First Amendment to the Note Purchase
Agreement (First TCW Amendment) with TCW. Under the terms of the First TCW Amendment, TCW agreed
to fund Rio Vista Penny an additional $1.0 million under the TCW Credit Facility for certain APOD
costs as described in the First TCW Amendment. In addition, under the terms of the First TCW
Amendment, the interest rate under the TCW Credit Facility increased from 10.5% per annum to 12.5%
per annum beginning July 1, 2008. The interest rate will revert back to 10.5% per annum beginning
January 1, 2009, provided that Rio Vista Penny delivers to TCW an Effective Rate Certificate, as
defined under the First TCW Amendment, which among other things certifies that no default exists
under the TCW Credit Facility and that the collateral coverage ratio, as defined under the TCW
Credit Facility, is at least 1.5 to 1.0 as of the applicable date based on the results of an
engineering report due December 1, 2008 with an effective date of November 1, 2008. Under the terms
of the First TCW Amendment, TCW agreed to change the period for which a notice to demand repayment
from Rio Vista Penny of up to $2.2 million of indebtedness under the TCW Credit Facility from
May 19, 2008 to January 1, 2009 and Rio Vista Penny also agreed to extend the demand repayment
option on the $2.2 million through the date of maturity of the TCW Credit Facility. In addition,
under the terms of the First TCW Amendment, TCW has agreed to waive other defaults identified in
the First TCW Amendment which either occurred and/or were existing prior to the date of the First
TCW Amendment.
In addition, on September 29, 2008, in connection with the TCW Credit Facility, Rio Vista Penny,
Rio Vista, Operating and TCW entered into an Amended and Restated Management Services Agreement
(Amended MSA). Under the terms of the Amended MSA, Operating was named as manager of the Oklahoma
properties, replacing Northport Production Company, an Oklahoma corporation, which was previously
named as manager under the original management services agreement.
RZB Credit Facility Guarantee
As of September 30, 2008, Penn Octane no longer is purchasing Fuel Products which were historically
financed through its credit facility with RZB. However, as of September 30, 2008, Penn Octanes
credit facility with RZB for demand loans and standby letters of credit (RZB Credit Facility) was
still outstanding as a result of the RZB Loan which was issued to Rio Vista during July 2007 (see
above). In connection with the spin-off of the LPG business by Penn Octane to Rio Vista, Rio Vista
agreed to guarantee Penn Octanes obligations with respect to the RZB Credit Facility. In
connection with Rio Vistas guaranty, Rio Vista granted RZB a security interest and assignment in
any and all of Rio Vistas accounts, real property, buildings, pipelines, fixtures and interests
therein or relating thereto, other than the Oklahoma assets. In addition, Rio Vista may not permit
to exist any subsequent lien, security interest, mortgage, charge or other encumbrance of any
nature on any of its properties or assets, except in favor of RZB, without the consent of RZB. Rio
Vista may also be prohibited from making any distributions to unitholders if it would cause an
event of default, or if an event of default is existing, under the RZB Credit Facility.
Pursuant to the RZB Credit Facility, RZB has sole and absolute discretion to limit or terminate its
participation in the RZB Credit Facility and to refrain from making any loans or issuing any
letters of credit thereunder. RZB also has the right to demand payment of any and all amounts
outstanding under the RZB Credit Facility at any time.
36
Moores Note
In connection with the purchase of the Penny Assets, Rio Vista issued a promissory note with the
principal amount of $500,000 bearing interest at 7% per annum (the Moores Note) payable to Gary
Moores on May 19, 2008. Under the terms of the Moores Note, beginning February 19, 2008, Gary
Moores had the option to convert the outstanding principal and interest of the Moores Note into
common units of Rio Vista at a conversion price equal to 90% of the 10-day average closing price of
such common units as reported by the NASDAQ Stock Market at the time of conversion. The conversion
option could have been exercised on only one occasion and expired on May 19, 2008. On June 27,
2008, in connection with an amendment of the Moores Note, Rio Vista made a principal payment of
$100,000, plus accrued interest through that date and the maturity date of the remaining principal
balance was extended to November 19, 2008. In addition, the interest rate on the remaining balance
of the Moores Note was increased to 10% per annum. Simultaneously with the amendment of the Moores
Note, Penny agreed to the sale and transfer of certain goods and chattels to Gary Moores in
exchange for $100,000 which was paid through a credit against the outstanding principal balance due
under the Moores Note and Penny also received from a company owned by Gary Moores, a used vehicle
with nominal value, to be used by Penny for general operations.
Sellers Note Regional
In connection with the Regional acquisition, Regional issued a promissory note in the amount of
$1.0 million to be paid in four equal semiannual installments of $250,000 beginning January 27,
2008. Rio Vista has recorded a discount of $116,000 (10% effective rate), representing the portion
of interest associated with the note, which shall be amortized over the term of the note. During
January 2008, the first installment was paid. On July 27, 2008, the second installment was due to
be paid. Regional did not make the second installment payment as it believes that there exists
offsets in connection with the acquisition of Regional in excess of the payment. For the three
months and nine months ended September 30, 2008, $17,000 and $52,000, respectively, of the discount
was amortized.
A Former Officer of Penn Octane Note
On April 15, 2008, Mr. Jerome B. Richter, a former officer of Penn Octane, agreed to loan Rio Vista
$575,000 in exchange for a promissory note issued by Rio Vista, guaranteed by Penn Octane (Richter
Note Payable) and collaterialized by the assets of Rio Vista subject to the consent of RZB and TCW
(see note G). Under the terms of the Richter Note Payable, Rio Vista is required to repay the
Richter Note Payable on the earlier of (1) the six (6) month anniversary of the Richter Note
Payable, which date was extended to November 15, 2008 or (ii) the sale of all or substantially
all of the assets of Rio Vista. The Richter Note Payable was not paid on November 15, 2008. Rio Vista and Mr. Richter are negotiating an extension of the due date. The Richter Note Payable accrues interest at an annual rate of 8
percent (8%). Proceeds from the Richter Note Payable were used for working capital.
Leases
Norfolk Southern Leases
On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern
Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection
with Regionals existing operations at Regionals facilities in Hopewell, Virginia. The lease
includes the right to maintain existing warehouses, storage tanks for handling petroleum and
chemical products, and necessary appurtenances. The lease term was January 1, 2003 through
December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30
days written notice. Rent is $1,500 per month subject to adjustment based on inflation.
On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk
Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land
which is utilized in connection with Regionals existing operations at Regionals facilities in
Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding
lease began on August 21, 2003 and continues until terminated by either party with 30 days
written notice. Rent is $4,875 per year, payable in advance.
As replacement of the foregoing leases, Regional is currently negotiating with Norfolk Southern
for the purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of
land on a long-term basis. On September 1, 2007, Regional executed a letter of intent from
Norfolk Southern dated May 29, 2007. Regional received a letter form Norfolk Southern dated
July 26, 2007, approving the purchase of the land and the lease on
the terms contained in the letter of intent. Regional is awaiting definitive documents from
Norfolk Southern in order to complete the purchase and lease transactions.
37
CEOcast Agreement
Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc. (CEOcast)
whereby CEOcast agreed to render investor relations services to Rio Vista. Under the terms of the
CEOcast agreement, CEOcast will receive cash fees of $7,500 per month and Rio Vista agreed to issue
to CEOcast (a) 1,399 of Rio Vistas fully-paid, non-assessable common units (Common Units) and (b)
$75,000 worth of Common Units on March 31, 2008 based on a calculation of units contained in the
consulting agreement. The delivery of any Common Units was to be made at the soonest practical
date after March 31, 2008, based on the best efforts of Rio Vista. In accordance with the
Agreement, during April 2008 Rio Vista provided notice to CEOcast that it would not renew the
Agreement upon the expiration in July 2008. In connection with the CEOcast agreement, on July
23, 2008, Rio Vista issued to CEOcast a total of 6,378 Common Units. Based on the closing price of
Rio Vista Common Units as of July 23, 2008, the date that units were issued to CEOcast, Rio Vista
recorded additional expense of $80,000 associated with the issuance of the common units.
Strategic Growth International
On May 28, 2008, Rio Vista and SGI entered into a one year consulting agreement whereby SGI agreed
to provide public relations consulting services. The agreement could be cancelled after 6 months
and was cancelled on October 29, 2008 with an effective date of December 1, 2008. In connection
with the agreement, Penn Octane and Rio Vista were each required to pay monthly fees of $9,000 per
month. In addition, under the agreement between Rio Vista and SGI, Rio Vista granted SGI 50,000
warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common unit. The
warrants cannot be exercised for one year from the date of issuance and the warrants will expire
three years from the date of issuance. As a result of the aforementioned cancellation, the number
of warrants granted was reduced to 25,000.
Related Party Transactions
At meetings held on May 30, 2008, in connection with the previously disclosed discussions between
Rio Vista and the Nasdaq Stock Market (Nasdaq) regarding Rio Vistas compliance with Nasdaqs
Marketplace Rule 4450(a)(3) on capital adequacy, the board of managers authorized the issuance and
sale by Rio Vista of 197,628 of Rio Vistas common units to Penn Octane at $10.12 per unit, and
Penn Octanes board authorized its purchase of such Rio Vista units at that price, for an aggregate
price of approximately $2.0 million. Thereafter, Rio Vistas officers continued to formulate a
plan of ongoing compliance with Rule 4450(a)(3) on terms satisfactory to Nasdaq, and notified
Nasdaq regarding the proposed issuance of its units. Rio Vista also filed a listing of additional
units notification with Nasdaq (LAS) based on its intention to go forward with the proposed
purchase and sale. Following further discussions with Nasdaq, at board meetings on July 15, 2008,
the board of managers and the board of directors of Penn Octane confirmed their desire to implement
promptly the previously authorized purchase and sale, and the companies agreed to complete the
transaction, subject to Nasdaq approval of Rio Vistas LAS. On July 23, 2008, after the period of
review for the LAS passed, the common units were issued to Penn Octane.
As of July 23, 2008, Rio Vista offset $2.0 million owed to Penn Octane against the amounts owed by
Penn Octane to acquire Rio Vista units (see above). In addition, Penn Octane has loaned
additional amounts to Rio Vista for the sole purpose of allowing Rio Vista to fund ongoing
operations and the June 2008 quarterly distribution.
38
Nasdaq Market
On September 16, 2008, Rio Vista received notice from Nasdaq that its application to transfer
trading of its common units to The Nasdaq Capital Market (Capital Market) from The Nasdaq Global
Market (Global Market) was approved. Rio Vista currently complies with the minimum stockholders
equity requirement of the Capital Market. There is no assurance that in the future Rio Vista will
continue to satisfy Nasdaq listing requirements, including the Capital Market minimum stockholders
equity requirement, with the result that its common units may be delisted from the Capital Market.
Realization of Assets
The accompanying consolidated balance sheet has been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate continuation
of Rio Vista as a going concern. Rio Vista had a loss from continuing operations for each of
the two years ended December 31, 2007 and the three months and nine months ended September 30,
2008 and has a deficit in working capital. Currently, all revenues generated from the
Oklahoma assets are held as collateral against the TCW Credit Facility. The current portion
of the TCW Credit Facility, the Moores Note, the RZB Note, the Seller Note Regional and the
Richter Note Payable is approximately $11.6 million. In addition, the RZB Note was not paid
on its maturity date of August 29, 2008 (see note G to the unaudited consolidated financial
statements).
The Oklahoma assets and/or the Regional operations currently do not generate sufficient cash flow
to pay general and administrative and other operating expenses of Rio Vista and all debt service
requirements. The TCW Credit Facility prohibits distributions by Rio Vistas Oklahoma subsidiaries
until December 2008 and subsequent thereto, those distributions are limited to 75% of defined
available cash flow. In addition, Rio Vista requires additional funding in order to increase
production levels for its Oklahoma assets.
Rio Vista has guaranteed certain of Penn Octanes obligations. Substantially all of Rio Vistas
and Penn Octanes assets are pledged or committed to be pledged as collateral on the TCW Credit
Facility, the RZB Note, RZB Credit Facility and the Richter Note Payable and therefore, both Rio
Vista and Penn Octane may be unable to obtain additional financing collateralized by those assets.
Penn Octanes Report of Independent Registered Public Accounting Firm on the consolidated
financial statements of Penn Octane at December 31, 2007 contained an explanatory paragraph which
describes an uncertainty about Penn Octanes ability to continue as a going concern. If Penn
Octanes and Rio Vistas cash flows are not adequate to pay their obligations, Penn Octane and/or
Rio Vista may be required to raise additional funds to avoid foreclosure by creditors. There can
be no assurance that such additional funding will be available on terms attractive to either Penn
Octane or Rio Vista or available at all. If additional amounts cannot be raised and cash flow is
inadequate, Penn Octane and/or Rio Vista would likely be required to seek other alternatives which
could include the sale of assets, closure of operations and/or protection under the U.S. bankruptcy
laws.
In view of the matters described in the preceding paragraphs, recoverability of the recorded
asset amounts shown in the accompanying unaudited consolidated balance sheet is dependent upon
the ability of Rio Vista to continue as a going concern. The unaudited consolidated financial
statements do not include any adjustments related to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might be necessary
should Rio Vista be unable to continue in existence.
To provide Rio Vista with the ability it believes necessary to continue in existence, management
is taking steps to restructure its existing debt obligations, raise additional debt and/or
equity financing and sell assets.
39
Results of Operations
Because of our rapid growth through acquisitions during 2008, our historical results of operations
and period-to-period comparisons of these results and certain financial data may not be meaningful
or indicative of future results. The following discussion of Rio Vistas results of operations
from continuing operations for all periods presented excludes the results of operations related to
the assets that have been disposed, including revenues, direct costs, associated interest expenses,
minority interest and income taxes, which have been reclassified as discontinued operations (see
below). The results of operations from continuing operations reflect only the results associated
with (i) the Transportation and Terminaling Business consisting of Regionals transportation of
bulk liquids, and its related terminalling and storage services, (ii) the LPG (sold December 31,
2007) operations of the US-Mexico Pipelines and Matamoros Terminal Facility, and (iii) the oil and
gas operations associated with the Oklahoma Assets, and all indirect income and expenses of Rio
Vista relating thereto. Revenues from Rio Vistas Transportation and Terminaling Segment commenced
on August 22, 2006 although expenses associated with operation of the US-Mexico Pipelines and
Matamoros Terminal Facility were incurred during the entire period for each period presented.
Revenues from the oil and gas segment commenced on November 19, 2007.
Three months ended September 30, 2008 Compared With Three months ended September 30, 2007
THREE MONTHS ENDED SEPTEMBER 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
2,419,000
|
|
|
|
2,279,000
|
|
|
|
|
|
|
|
|
|
|
|
4,698,000
|
|
Cost Of Goods Sold
|
|
|
1,971,000
|
|
|
|
1,720,000
|
|
|
|
|
|
|
|
11,000
|
|
|
|
3,702,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
448,000
|
|
|
|
559,000
|
|
|
|
|
|
|
|
(11,000
|
)
|
|
|
996,000
|
|
Selling, General And
Administrative
Expenses
|
|
|
(9,000
|
)
|
|
|
(246,000
|
)
|
|
|
|
|
|
|
(796,000
|
)
|
|
|
(1,051,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
439,000
|
|
|
|
313,000
|
|
|
|
|
|
|
|
(807,000
|
)
|
|
|
(55,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(766,000
|
)
|
|
|
(143,000
|
)
|
|
|
|
|
|
|
(69,000
|
)
|
|
|
(978,000
|
)
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From
Operations Before
Taxes
|
|
|
(327,000
|
)
|
|
|
170,000
|
|
|
|
|
|
|
|
(874,000
|
)
|
|
|
(1,031,000
|
)
|
Provision (Benefit)
for Income Taxes
|
|
|
(32,000
|
)
|
|
|
39,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(295,000
|
)
|
|
|
131,000
|
|
|
|
|
|
|
|
(874,000
|
)
|
|
|
(1,038,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquired during November 2007
|
|
(b)
|
|
Acquired during July 2007
|
|
(c)
|
|
Business commenced in August 2006 and sold December 31, 2007
|
40
THREE MONTHS ENDED SEPTEMBER 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
1,211,000
|
|
|
|
439,000
|
|
|
|
|
|
|
|
1,650,000
|
|
Cost Of Goods Sold
|
|
|
|
|
|
|
827,000
|
|
|
|
444,000
|
|
|
|
|
|
|
|
1,271,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
384,000
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
379,000
|
|
Selling, General And
Administrative Expenses
|
|
|
|
|
|
|
(123,000
|
)
|
|
|
(42,000
|
)
|
|
|
(1,129,000
|
)
|
|
|
(1,294,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
|
|
|
|
261,000
|
|
|
|
(47,000
|
)
|
|
|
(1,129,000
|
)
|
|
|
(915,000
|
)
|
Interest (Expense) Income
|
|
|
|
|
|
|
(174,000
|
)
|
|
|
(31,000
|
)
|
|
|
5,000
|
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From
Operations Before Taxes
|
|
|
|
|
|
|
87,000
|
|
|
|
(78,000
|
)
|
|
|
(1,124,000
|
)
|
|
|
(1,115,000
|
)
|
Provision For Income Taxes
|
|
|
|
|
|
|
35,000
|
|
|
|
|
|
|
|
9,000
|
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
|
|
|
|
52,000
|
|
|
|
(78,000
|
)
|
|
|
(1,133,000
|
)
|
|
|
(1,159,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquired during November 2007
|
|
(b)
|
|
Acquired during July 2007
|
|
(c)
|
|
Business commenced in August 2006 and sold December 31, 2007
|
41
Nine months ended September 30, 2008 Compared With Nine months ended September 30, 2007
NINE MONTHS ENDED SEPTEMBER 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
5,264,000
|
|
|
|
6,539,000
|
|
|
|
|
|
|
|
|
|
|
|
11,803,000
|
|
Cost Of Goods Sold
|
|
|
4,296,000
|
|
|
|
5,091,000
|
|
|
|
|
|
|
|
|
|
|
|
9,387,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
968,000
|
|
|
|
1,448,000
|
|
|
|
|
|
|
|
|
|
|
|
2,416,000
|
|
Selling, General And
Administrative
Expenses
|
|
|
(90,000
|
)
|
|
|
(688,000
|
)
|
|
|
|
|
|
|
(3,350,000
|
)
|
|
|
(4,128,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
878,000
|
|
|
|
760,000
|
|
|
|
|
|
|
|
(3,350,000
|
)
|
|
|
(1,712,000
|
)
|
Interest Expense
|
|
|
(2,063,000
|
)
|
|
|
(531,000
|
)
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(2,694,000
|
)
|
Interest income
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From
Operations Before
Taxes
|
|
|
(1,178,000
|
)
|
|
|
229,000
|
|
|
|
|
|
|
|
(3,449,000
|
)
|
|
|
(4,398,000
|
)
|
Provision (Benefit)
For Income Taxes
|
|
|
(98,000
|
)
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
(91,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
|
|
|
(1,080,000
|
)
|
|
|
222,000
|
|
|
|
|
|
|
|
(3,449,000
|
)
|
|
|
(4,307,000
|
)
|
Loss on sale of
discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(343,000
|
)
|
|
|
|
|
|
|
(343,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
(1,080,000
|
)
|
|
|
222,000
|
|
|
|
(343,000
|
)
|
|
|
(3,449,000
|
)
|
|
|
(4,650,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquired during November 2007
|
|
(b)
|
|
Acquired during July 2007
|
|
(c)
|
|
Business commenced in August 2006 and sold December 31, 2007
|
42
NINE MONTHS ENDED SEPTEMBER 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
1,211,000
|
|
|
|
1,554,000
|
|
|
|
|
|
|
|
2,765,000
|
|
Cost Of Goods Sold
|
|
|
|
|
|
|
827,000
|
|
|
|
1,240,000
|
|
|
|
|
|
|
|
2,067,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
384,000
|
|
|
|
314,000
|
|
|
|
|
|
|
|
698,000
|
|
Selling, General And
Administrative Expenses
|
|
|
|
|
|
|
(123,000
|
)
|
|
|
(156,000
|
)
|
|
|
(2,426,000
|
)
|
|
|
(2,705,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
|
|
|
|
261,000
|
|
|
|
158,000
|
|
|
|
(2,426,000
|
)
|
|
|
(2,007,000
|
)
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (Expense) Income
|
|
|
|
|
|
|
(174,000
|
)
|
|
|
(83,000
|
)
|
|
|
7,000
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From
Operations Before Taxes
|
|
|
|
|
|
|
87,000
|
|
|
|
75,000
|
|
|
|
(2,419,000
|
)
|
|
|
(2,257,000
|
)
|
Provision For Income Taxes
|
|
|
|
|
|
|
35,000
|
|
|
|
|
|
|
|
34,000
|
|
|
|
69,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
|
|
|
|
52,000
|
|
|
|
75,000
|
|
|
|
(2,453,000
|
)
|
|
|
(2,326,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquired during November 2007
|
|
(b)
|
|
Acquired during July 2007
|
|
(c)
|
|
Business commenced in August 2006 and sold December 31, 2007
|
Off-Balance Sheet Arrangements
Rio Vista does not have any off-balance sheet arrangements.
43
Statement by Management Concerning Review of Interim Information by An Independent Registered
Public Accounting Firm.
The unaudited consolidated financial statements included in this filing on Form 10-Q have been
reviewed by Burton McCumber & Cortez, L.L.P., an independent registered public accounting firm, in
accordance with established professional standards and procedures for such review. The report of
Burton McCumber & Cortez, L.L.P. commenting on their review, accompanies the unaudited consolidated
financial statements included in Item 1 of Part I.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
Disclosure controls are procedures that are designed with the objective of ensuring that
information required to be disclosed in our reports under the Securities Exchange Act of 1934, as
amended (Exchange Act), such as this Form 10-Q, is reported in accordance with the rules of the
SEC. Disclosure controls are also designed with the objective of ensuring that such information is
accumulated appropriately and communicated to management, including the chief executive officer and
chief financial officer, as appropriate, to allow for timely decisions regarding required
disclosures.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our General Partners management, including our General
Partners chief executive officer/chief financial officer and our General Partners controller, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e).
During late 2006, all of 2007 and the first three months of 2008, our General Partners
accounting department consisted of only the controller, an accounting clerk and the chief financial
officer. Such a limited number of financial and accounting personnel makes segregation of duties
difficult. In late 2006, our General Partners chief executive officer resigned and the chief
financial officer assumed both the duties of the chief executive officer and the chief financial
officer. Prior to his departure, the former chief executive officer provided some additional
controls over financial reporting and accounting, although the internal control environment was
still limited. Thus, the material weakness was compounded when the chief financial officer began
functioning in a dual capacity beginning in 2006. In March 2008, our General Partners accounting
clerk resigned. As a result, our General Partners internal control environment is limited in such
a manner that there is less than the desired internal control over financial reporting and
accounting, and a system of checks and balances is lacking. As a result of this material weakness,
our management concluded that our disclosure controls and procedures were not effective as of
September 30, 2008.
Since March 31, 2008, management has taken the following steps to improve internal control
over financial reporting:
|
|
|
In May 2008, our General Partner hired an assistant controller to provide additional
assistance with internal accounting responsibilities and financial reporting. The newly
hired assistant controller has previous oil and gas experience.
|
|
|
|
|
In June 2008, our General Partner hired a vice president, who is primarily responsible
for overseeing the operations of our oil and gas properties.
|
|
|
|
|
Our General Partner is continuing to have ongoing discussions with a potential Chief
Executive Officer candidate. This candidate has extensive oil and gas expertise. We are
currently negotiating with this candidate in an effort to have him accept the role as Chief
Executive Officer.
|
44
|
|
|
In March 2008 and in connection with the acquisition of the Oklahoma operations, our
General Partner hired two employees who were previously engaged in accounting functions of
those businesses. We are currently training those employees.
|
|
|
|
|
In May 2008, our General Partner engaged the services of a software consulting firm to
implement an Oracle ERP accounting software system. This system is intended to enhance
internal controls over the ability to enter transactions into the financial system and
financial reporting. This system will also provide for multiple user access, timely access
to accounting information and additional data security.
|
|
|
|
|
Management is currently reviewing employee compensation and incentives to ensure that
it continues to attract and retain qualified employees.
|
Before concluding that the material weakness has been remediated, management believes that the
new internal controls should be implemented and operational for a sufficient period of time to
demonstrate that the controls are operating effectively.
During the quarter ended September 30, 2008, there were no other changes in our internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
We believe our unaudited consolidated financial statements included in this Form 10-Q fairly
present in all material respects our financial position, results of operations and cash flows for
the periods presented in accordance with United States generally accepted accounting principles.
45
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
See note J to the unaudited consolidated financial statements included in this report.
Item 1A. Risk Factors.
Not applicable
.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
See notes H and I to the unaudited consolidated financial statements included in this
report.
The above transactions were exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof because the issuance did not involve a public offering of
securities.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
46
Item 6
.
Exhibits.
The following Exhibits are filed as part of this report:
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.1
|
|
|
First Amendment to Note Purchase Agreement dated as of September 29, 2008
by and among Rio Vista Penny LLC, TCW Asset Management Company, and the
Holders party to the Original Note Purchase Agreement.
|
|
|
|
|
|
|
10.2
|
|
|
Amended and Restated Management Services Agreement, dated and effective
as of September 29, 2008, is made by and among Rio Vista Operating LLC,
Rio Vista Energy Partners L.P., and Rio Vista Penny LLC.
|
|
|
|
|
|
|
10.3
|
|
|
Promissory Note dated April 15, 2008 between Rio Vista Energy Partners
L.P. and Jerome B. Richter.
|
|
|
|
|
|
|
15
|
|
|
Accountants Acknowledgment.
|
|
|
|
|
|
|
31.1
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d-14(a) of the Exchange Act
|
|
|
|
|
|
|
31.2
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d-14(a) of the Exchange Act
|
|
|
|
|
|
|
32
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
|
All of the Exhibits are available from the SECs website at
www.sec.gov
. In addition, Rio
Vista will furnish a copy of any Exhibit upon payment of a fee (based on the estimated actual
cost which shall be determined at the time of the request) together with a request addressed
to Ian T. Bothwell, Rio Vista Energy Partners L.P., 1313 Alton Gloor Blvd., Suite J,
Brownsville, Texas 78526.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following person on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
|
|
RIO VISTA ENERGY PARTNERS L.P.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
Rio Vista GP LLC, its General Partner
|
|
|
|
|
|
|
|
|
|
November 17, 2008
|
|
By:
|
|
/s/ Ian T. Bothwell
Ian T. Bothwell
|
|
|
|
|
|
|
Acting Chief Executive Officer, Acting President,
Vice-President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Executive, Financial and Accounting Officer)
of Rio Vista GP LLC, general partner of
Rio Vista Energy Partners L.P.
|
|
|
48
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
10.1
|
|
|
First Amendment to Note Purchase Agreement dated as of September 29, 2008
by and among Rio Vista Penny LLC, TCW Asset Management Company, and the
Holders party to the Original Note Purchase Agreement.
|
|
|
|
|
|
|
10.2
|
|
|
Amended and Restated Management Services Agreement, dated and effective
as of September 29, 2008, is made by and among Rio Vista Operating LLC,
Rio Vista Energy Partners L.P., and Rio Vista Penny LLC.
|
|
|
|
|
|
|
10.3
|
|
|
Promissory Note dated April 15, 2008 between Rio Vista Energy Partners
L.P. and Jerome B. Richter.
|
|
|
|
|
|
|
15
|
|
|
Accountants Acknowledgment.
|
|
|
|
|
|
|
31.1
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d-14(a) of the Exchange Act
|
|
|
|
|
|
|
31.2
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d-14(a) of the Exchange Act
|
|
|
|
|
|
|
32
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
|
All
of the Exhibits are available from the SECs website at
www.sec.gov
. In addition, Rio
Vista will furnish a copy of any Exhibit upon payment of a fee (based on the estimated actual
cost which shall be determined at the time of the request) together with a request addressed
to Ian T. Bothwell, Rio Vista Energy Partners L.P., 1313 Alton Gloor Blvd., Suite J,
Brownsville, Texas 78526.
49
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