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 March 31, 2009
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
(State or Other Jurisdiction of Incorporation or Organization)
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20-0153267
(I.R.S. Employer Identification No.)
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1313 E. Alton Gloor Blvd., Suite J, Brownsville, Texas
(Address of Principal Executive Offices)
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78526
(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
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 May 1, 2009 was 2,762,463.
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
2
Part I FINANCIAL INFORMATION
Item 1.
Rio Vista Energy Partners L.P.s independent auditor was not engaged to and did not review the
consolidated financial statements included herein prior to the deadline for filing this Form 10-Q,
as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended.
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
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December 31,
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March 31,
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2008
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2009
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(Unaudited)
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Current Assets
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Cash
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$
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292,000
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$
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744,000
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Restricted cash
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Trade accounts receivable (less allowance for doubtful
accounts of $0 at
December 31, 2008 and March 31, 2009)
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1,662,000
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1,251,000
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Income tax receivable
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77,000
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Deferred tax assets
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99,000
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99,000
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Prepaid expenses and other current assets
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584,000
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490,000
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Total current assets
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2,637,000
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2,661,000
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Oil and gas properties and related equipment (successful efforts method) net
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28,243,000
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28,024,000
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Property, plant and equipment net
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12,414,000
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12,163,000
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Other non-current assets
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14,000
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15,000
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Goodwill
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5,121,000
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5,121,000
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Total assets
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$
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48,429,000
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$
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47,984,000
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The accompanying notes are an integral part of these statements.
3
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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March 31,
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2008
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2009
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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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25,594,000
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$
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25,450,000
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Short-term debt
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5,575,000
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4,875,000
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Due to Penn Octane Corporation, net
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778,000
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2,150,000
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Accounts payable
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2,451,000
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1,847,000
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Taxes payable
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921,000
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1,125,000
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Accrued liabilities
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2,852,000
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3,536,000
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Total current liabilities
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38,171,000
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38,983,000
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Commitments and contingencies
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Long-term debt, less current maturities
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150,000
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Deferred income taxes
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2,909,000
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2,909,000
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Partners Capital
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Common units
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7,054,000
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5,970,000
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General Partners equity
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145,000
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122,000
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Total partners capital
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7,199,000
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6,092,000
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Total liabilities and partners capital
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$
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48,429,000
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$
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47,984,000
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The accompanying notes are an integral part of these statements.
4
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended
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March 31,
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March 31,
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2008
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2009
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Revenues
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$
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3,095,000
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$
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2,908,000
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Cost of goods sold
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2,414,000
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1,974,000
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Gross profit
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681,000
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934,000
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Selling, general and administrative expenses and other
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Legal and professional fees
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539,000
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340,000
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Salaries and payroll related expenses
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554,000
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378,000
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Other
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779,000
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298,000
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1,872,000
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1,016,000
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Operating loss from operations
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(1,191,000
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)
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(82,000
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)
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Other income (expense)
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Interest expense
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(876,000
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)
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(944,000
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)
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Interest income
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7,000
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Loss before taxes
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(2,060,000
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)
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(1,026,000
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)
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Provision (benefit) for income taxes
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5,000
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110,000
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|
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Net loss
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$
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(2,065,000
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)
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$
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(1,136,000
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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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(2,065,000
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)
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$
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(1,136,000
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)
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Less General Partners interest in net loss
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41,000
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23,000
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Net loss allocable to the common units
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|
$
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(2,024,000
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)
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$
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(1,113,000
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)
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|
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Net loss per common unit
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$
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(0.83
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)
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$
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(0.40
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)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average common units outstanding
|
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|
2,452,918
|
|
|
|
2,762,463
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|
The accompanying notes are an integral part of these statements.
5
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Unaudited)
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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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|
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|
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|
Balance as of December 31, 2008
|
|
|
2,762,463
|
|
|
$
|
7,054,000
|
|
|
$
|
145,000
|
|
|
$
|
7,199,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(1,113,000
|
)
|
|
|
(23,000
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)
|
|
|
(1,136,000
|
)
|
Units-based compensation
|
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|
|
|
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|
29,000
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|
|
|
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Balance as of March 31, 2009
|
|
|
2,762,463
|
|
|
$
|
5,970,000
|
|
|
$
|
122,000
|
|
|
$
|
6,092,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
6
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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|
|
|
|
|
|
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|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,065,000
|
)
|
|
$
|
(1,136,000
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
493,000
|
|
|
|
526,000
|
|
Unit-based payment expense
|
|
|
145,000
|
|
|
|
29,000
|
|
Amortization of loan discount related to detachable warrants issued
|
|
|
19,000
|
|
|
|
6,000
|
|
Beneficial conversion
|
|
|
14,000
|
|
|
|
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(750,000
|
)
|
|
|
411,000
|
|
Prepaid and other current assets
|
|
|
120,000
|
|
|
|
17,000
|
|
Trade accounts payable, accrued and other liabilities
|
|
|
1,685,000
|
|
|
|
79,000
|
|
Due to/from Penn Octane Corporation, net
|
|
|
(110,000
|
)
|
|
|
1,372,000
|
|
U.S. and foreign taxes payable
|
|
|
60,000
|
|
|
|
204,000
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(389,000
|
)
|
|
|
1,508,000
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(797,000
|
)
|
|
|
(55,000
|
)
|
Other non-current assets
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(797,000
|
)
|
|
|
(56,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of equity, net
|
|
|
774,000
|
|
|
|
|
|
Cash distributions to partners
|
|
|
(620,000
|
)
|
|
|
|
|
Capital contribution
|
|
|
118,000
|
|
|
|
|
|
Payment of debt
|
|
|
(250,000
|
)
|
|
|
(1,000,000
|
)
|
Cost of registration
|
|
|
(203,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(181,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(1,367,000
|
)
|
|
|
452,000
|
|
Cash at beginning of period
|
|
|
3,450,000
|
|
|
|
292,000
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
2,083,000
|
|
|
$
|
744,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,015,000
|
|
|
$
|
135,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash transactions:
|
|
|
|
|
|
|
|
|
Unit based compensation
|
|
$
|
145,000
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
|
Units issued for compensation and penalties
|
|
$
|
344,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
7
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
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) (see note I General Partner Interest) 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
Liquidity and Capital Resources Distributions of Available Cash)
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.
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 in the State
of Oklahoma formerly owned by GM Oil Properties, Inc., Penny Petroleum Corporation and GO LLC
(GO). The businesses and assets acquired in 2007 are described further in note E. 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 consisting of transportation and terminaling. Beginning March
1, 2008, Rio Vista Operating LLC (Operating) became the operator of the Oklahoma Assets.
The accompanying consolidated financial statements include Rio Vista and its 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. All significant intercompany accounts
and transactions are eliminated.
The unaudited consolidated balance sheet as of March 31, 2009, the unaudited consolidated
statements of operations for the three months ended March 31, 2008 and 2009 and the unaudited
consolidated statements of cash flows for the three months ended March 31, 2008 and 2009, have
been prepared by Rio Vista without audit. Rio Vistas independent auditor was not engaged to and
did not review the unaudited consolidated financial statements included herein prior to the
deadline for filing this Form 10-Q, as required by Rule 10-01(d) of Regulation S-X promulgated
under the Securities Exchange Act of 1934, as amended. 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 March 31, 2009, the unaudited consolidated results of operations for the three
months ended March 31, 2008 and 2009 and the unaudited consolidated statements of cash flows for
the three months ended March 31, 2008 and 2009.
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, 2008
filed with the Securities and Exchange Commission.
8
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A ORGANIZATION Continued
Basis of Presentation
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.
Rio Vista utilizes unit-based awards as a form of compensation for employees, officers, manager
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 $145,000 ($0.06 per common unit) and $29,000 ($0.00 per common
unit) for the quarters ended March 31, 2008 and 2009, respectively, under the fair-value
provisions of SFAS 123R.
9
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2008
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(2,024,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(2,024,000
|
)
|
|
|
2,452,918
|
|
|
$
|
(0.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(1,113,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(1,113,000
|
)
|
|
|
2,762,463
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
NOTE D SALE OF REMAINING LPG ASSETS
On December 31, 2008, Rio Vista received a claim from TransMontaigne related to the Holdback of
$500,000 for diligence deductions and working capital adjustments, pursuant to the Purchase and
Sale Agreement. TransMontaigne claims a $316,000 working capital adjustment and $1,373,000 in
connection with the indemnification obligations included in the Purchase and Sale Agreement. Rio
Vista is working with TransMontaigne to define the scope of the adjustments to an amount which
Rio Vista considers to be more realistic. Any amount which may subsequently be agreed to by
TransMontaigne and Rio Vista shall first be charged to the $500,000 Holdback, and also is subject
to the $1,000,000 limitation of indemnification. As of March 31, 2009, Rio Vista has accrued
$220,000 to provide for these adjustments, in addition to the Holdback. Rio Vistas management
and its legal counsel believe that the amount of the TransMontaigne claim will be resolved within
the amounts already provided.
10
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
Oklahoma:
|
|
|
|
|
|
|
|
|
Pipelines and equipment
|
|
$
|
7,417,000
|
|
|
$
|
7,417,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional:
|
|
|
|
|
|
|
|
|
Land
|
|
|
237,000
|
|
|
|
237,000
|
|
Terminal and improvements
|
|
|
4,084,000
|
|
|
|
4,120,000
|
|
Automotive equipment
|
|
|
2,644,000
|
|
|
|
2,644,000
|
|
|
|
|
|
|
|
|
|
|
|
6,965,000
|
|
|
|
7,001,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,382,000
|
|
|
|
14,418,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,968,000
|
)
|
|
|
(2,255,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
12,414,000
|
|
|
$
|
12,163,000
|
|
|
|
|
|
|
|
|
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 $377,000 and
$287,000 for the three months ended March 31, 2008 and 2009, respectively.
NOTE F OIL AND GAS PROPERTIES AND RELATED EQUIPMENT, NET
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
Rio Vista incurred approximately $3,000 of costs related to oil and gas property development for
the three months ended March 31, 2009.
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.
11
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G DEBT OBLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
RZB Note
|
|
$
|
5,000,000
|
|
|
$
|
4,000,000
|
|
Richter Note Payable
|
|
|
575,000
|
|
|
|
575,000
|
|
Moores Note
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,575,000
|
|
|
$
|
4,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCW Credit Facility
|
|
$
|
24,700,000
|
|
|
$
|
24,700,000
|
|
Sellers Note Regional
|
|
|
744,000
|
|
|
|
750,000
|
|
Moores Note
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,744,000
|
|
|
|
25,450,000
|
|
Less current portion
|
|
|
25,594,000
|
|
|
|
25,450,000
|
|
|
|
|
|
|
|
|
|
|
$
|
150,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
RZB Note
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, (3.25% at March 31, 2009), 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% (Base Rate Margin). On July 27,
2008, the RZB Note was amended whereby the maturity date was extended until August 29, 2008. The
RZB Note was not paid on August 29, 2008. During December 2008, Rio Vista entered into a third
amendment to the RZB Note (Third Amendment). Under the terms of the Third Amendment, the
maturity date of the RZB Note was extended to February 27, 2009. In addition, the interest rate
calculation was modified to include a cost of funds rate definition in determining the base rate
and the Base Rate Margin was increased to 7.0%. Under the terms of the Third Amendment, the net
worth of Penn Octane, as defined, is required to be in excess of $3,300,000. In addition, the
Third Amendment required Rio Vista to repay $1,000,000 of the RZB Note. Effective January 1,
2009, Penn Octane agreed to loan Rio Vista the $1,000,000 of cash collateral held by RZB for
purpose of making the required payment described above.
During February 2009, Rio Vista entered into a fourth amendment to the RZB Note which extended
the maturity date of the RZB Note through March 31, 2009. During March 2009, Rio Vista entered
into a fifth amendment to the RZB Note which extended the maturity date of the RZB Note through
April 30, 2009. The RZB Note was not paid by April 30, 2009. Rio Vista and RZB are currently
negotiating an additional extension of the RZB Note.
In connection with the RZB Note, Regional granted to RZB a security interest in all of Regionals
assets, including a deed of trust on real property owned by Regional, and Rio Vista delivered to
RZB a pledge of the outstanding capital stock of Regional. On July 26, 2007, as a further
condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty)
with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness,
liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise. The RZB
Note is also guaranteed by Regional and RVOP.
12
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G DEBT OBLIGATIONS Continued
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 which option was not exercised and expired on May 19, 2008. The Moores
Note was not paid upon maturity.
On June 27, 2008, the Moores Note was amended (Amended Moores Note). In connection with the
Amended 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. The Amended Moores Note was not paid
upon maturity. In November 2008, Gary Moores filed a civil action against Rio Vista as a result
of the non-payment (Civil Action).
On January 20, 2009, the Moores Note was once again amended (Second Amended Moores Note). In
connection with the Second Amended Moores Note, Rio Vista agreed to make monthly principal
payments of $12,500 plus interest beginning May 10, 2009 and to continue such payments for 5
consecutive months. Each month thereafter, Rio Vista is required to make principal payments of
$37,500 plus interest until all amounts due and payable have been paid. The May 10, 2009
principal payment was not made. In addition, in connection with the Second Amended Moores Note,
Gary Moores agreed to dismiss the Civil Action.
Richter Note Payable
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. Under the terms of the Richter Note Payable, Rio Vista is required to repay the
Richter Note Payable on November 15, 2008 which payment was not made. 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.
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 also approved a plan of development (APOD) for the Oklahoma assets
totaling approximately $2,000,000, 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 were 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.
13
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G DEBT OBLIGATIONS Continued
TCW Credit Facility Continued
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. The conversion rights of TCW as described above were
formalized through the issuance of a warrant by Rio Vista (TCW Warrant). 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 TCW Warrant within 90 days following the first
exercise of the TCW Warrant.
Rio Vista Penny and Rio Vista GO, which hold the Oklahoma Assets, are prohibited from making
upstream distributions to Rio Vista unless certain conditions are met. In addition, the TCW
Credit Facility requires semi-annual reserve reports by an independent engineer which is used in
determining the allowable borrowing base.
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. 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.
Rio Vista Penny and TCW entered into several letter agreements whereby TCW agreed to extend the
payment obligations under the TCW Credit Facility (including the December 2008 and March 2009
principal payments and interest payments due) and other requirements pursuant to the TCW Credit
Facility until May 20, 2009 (TCW Waiver). In connection with one of the extensions, TCW agreed
to provide Rio Vista with 62 days advance written notice to exercise the TCW Warrant, except for
up to 400,000 common units of Rio Vista.
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 recorded a discount of $116,000 (10% effective rate), representing the portion
of interest associated with the note, which was to be amortized over the term of the note.
During January 2008, the first installment was paid. On July 27, 2008 and January 27, 2009, the
second and third installment was due to be paid. Regional did not make the second or third
installment payments as it believes that there exists offsets in connection with the acquisition
of Regional in excess of the payments. For the quarters ended March 31, 2008 and 2009, $18,000
and $0, respectively, of the discount was amortized.
14
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H PARTNERS CAPITAL
Common Units
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.
In addition to its 2% General Partner interest, the General Partner is currently the holder of
incentive distribution rights which entitled 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 due to Penn Octane Corporation in the accompanying consolidated balance
sheet for the specific purpose of funding Rio Vistas June 2008 quarterly distribution.
The amount of the distributions paid through the June 2008 quarterly distributions represented
the minimum quarterly distributions required to be made by Rio Vista pursuant to the partnership
agreement. Rio Vista has not declared a distribution for the quarters ended September 30, 2008,
December 31, 2008 and March 31, 2009.
15
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 quarter ended March 31, 2009.
TCW Warrant
Under the terms of the Note Purchase Agreement, TCW 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. In addition, TCW has the right to convert any balance of the debt under the
TCW Credit Facility other than the Demand Loan 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. The
conversion rights of TCW as described above were formalized through the issuance of a warrant by
Rio Vista (TCW Warrant). At March 31, 2009, the outstanding balance owing under the TCW Credit
Facility was approximately $24,700,000 plus accrued interest since September 29, 2008.
Equity Incentive Plan
On March 9, 2005, the board of managers of the General Partner approved the Rio Vista 2005 Equity
Incentive Plan (2005 Plan). The 2005 Plan permits the grant of common unit options, common unit
appreciation rights, restricted common units and phantom common units to any person who is an
employee (including to any executive officer) or consultant of Rio Vista or the General Partner
or any affiliate of Rio Vista or the General Partner. The 2005 Plan provides that each outside
manager of the General Partner shall be granted a common unit option once each fiscal year for
not more than 5,000 common units, in an equal amount as determined by the board of managers. The
aggregate number of common units authorized for issuance as awards under the 2005 Plan is
750,000. The 2005 Plan shall remain available for the grant of awards until March 9, 2015, or
such earlier date as the board of managers may determine. The 2005 Plan is administered by the
compensation committee of the board of managers. In addition the board of managers may exercise
any authority of the compensation committee under the 2005 Plan. Under the terms of the
partnership agreement and applicable rules of the NASDAQ National Market, no approval of the 2005
Plan by the common unitholders of Rio Vista was required.
16
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
In December of 2008, one of the insurance carriers, Ace Insurance, tendered its limit of one
million in settlement of all claims brought by American citizens who were injured in the
explosion. Those claims were dismissed. The legal damages that can be recovered by the
remaining plaintiffs will be governed by Mexican law, which provides limited, scheduled recovery.
This is deemed favorable to Rio Vista. Rio Vistas legal fees and settlement costs were covered
by insurance.
Since that settlement the remaining insurance carrier was Lexington Insurance Company
(Lexington). 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. Cross motions for summary judgment were filed by the parties, and the
court ruled that the insurance policy issued by Lexington did cover the incident which occurred
in Mexico. Lexington has subsequently filed a Notice of Appeals, and is proceeding to appeal the
trial courts ruling. Nevertheless, Lexington continued to provide a defense to Rio Vista in the
Camacho case. As the case currently stands, the trial court has ruled that insurance coverage
does exist to provide coverage in the Camacho case.
17
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
Legal Proceedings Continued
The Camacho case is not presently set for trial. It is anticipated that a small group of
plaintiffs will be identified by the court, and that group will be set for trial. It is
anticipated that the trial group will not be set until the fall of 2009. No judgment following
that trial will become final until all plaintiffs have gone to trial.
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 20, 2007, Rio Vista, Rio Vista Penny, LLC, Gary Moores, Bill Wood and GM Oil
Properties, Inc. (GM) jointly filed an action for declaratory relief against Energy Spectrum
Advisors, Inc. (Energy Spectrum) in the District Court of McIntosh County, Oklahoma. This action
was filed in response to Energy Spectrums assertion that Rio Vista, Rio Vista Penny, LLC, as well as GM owed Energy Spectrum a
commission based on Rio Vista Penny, LLCs November, 2007 purchase of certain assets from GM.
Energy Spectrum counterclaimed asserting that Rio Vista and Rio Vista Penny tortiously interfered
with the commission agreement between Energy Spectrum and GM. Neither Rio Vista nor Rio Vista
Penny were parties to this agreement. Mr. Woods and Mr. Moores have recently been named as
defendants in the Energy Spectrum counter-claim. According to an indemnification agreement
between Rio Vista, Mr. Woods and Mr. Moores, Rio Vista may be required to indemnify Mr. Woods and
Mr. Moores upon the fulfillment of certain terms and conditions stipulated in the agreement. To
date these terms and conditions have not be met or fulfilled. Management believes that the Rio
Vista entities should have no liability for any commission obligation that GM may owe to Energy
Spectrum. However the outcome of litigation cannot reliably be predicted. Discovery in the case
is ongoing. No trial date has been set.
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 the General Partner of Rio Vista. Mr. Richter is
currently a consultant to Penn Octane and Rio Vista. Plaintiffs allege breach of contract,
negligent misrepresentation, and fraud in connection with the acquisition of the Oklahoma Assets.
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 in the
ordinary course of its business. Rio Vista believes that the liabilities, if any, ultimately
resulting from such proceedings, lawsuits and claims should not materially affect its
consolidated financial results.
18
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
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.
On June 1, 2007, Regional executed a letter of intent with Norfolk Southern dated May 29, 2007
which provides for the replacement of the foregoing leases, through a purchase of approximately
3.5 acres of land and the lease of approximately 1.9 acres of land on a long-term basis.
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. Richter. 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.
During April 2009, Rio Vista and Penn Octane each provided JBR Capital notice of their intention
to terminate the Consulting Agreement on May 31, 2009.
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.
19
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J COMMITMENTS AND CONTINGENCIES Continued
Partnership Tax Treatment and Mexican Subsidiaries, 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. Non qualifying income which is held and taxed through a taxable entity
(such as Regional), is excluded from the calculation in determining which the publicly traded
partnership meets the qualifying income test.
Rio Vista estimates that more than 90% of its gross income (excluding Regional) 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.
20
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
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 considers the use of
forward 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.
During January 2009, Rio Vista entered into an agreement to sell its February 2009 and March
2009 sales contracts. In connection with the settlement of the contracts, Rio Vista received
approximately $400,000. As a result of the above, beginning February 1, 2009, none of Rio
Vistas oil and gas production is subject to forward sales contracts.
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
National Market (NASDAQ) regarding Rio Vistas compliance with NASDAQs Marketplace Rule 4450(a)(3) on capital adequacy,
the Board of Managers of the General Partner 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 of the General Partner 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.
21
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L RELATED PARTY TRANSACTIONS Continued
Loans To Rio Vista
As of July 23, 2008, Rio Vista offset $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.
In connection with the Third Amendment of the RZB Note, Rio Vista was required to repay
$1,000,000 of the RZB Note. Effective January 1, 2009, Penn Octane loaned Rio Vista $1,000,000
of its cash collateral held by RZB for the purpose of funding Rio Vistas obligation to make the
required payment described above.
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.
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 made no discretionary contributions from the acquisition of
Regional to March 31, 2009.
22
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
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 the three months ended March 31, 2009 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 TCW Credit Facility, the Moores Note, the RZB Note, the
Sellers Note Regional and the Richter Note Payable total approximately $30,301,000 and
are all classified as current liabilities. The TCW Credit Facility extension expires on May
20, 2009 and the RZB Note has not been extended. RZB has not yet given Rio Vista notice of
default and the parties continue to negotiate an extension of the RZB Note. In the event
such obligations are not satisfactorily restructured, further extended or actions to enforce
collections do not continue to be deferred by creditors, the TCW Credit Facility, the RZB
Note and/or other obligations will be due immediately (see note G). The TCW Credit Facility
and RZB Note are collateralized by the Oklahoma Assets and the Regional assets,
respectively.
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 unless certain conditions are met which currently are not expected to be met. In
addition, Rio Vista requires additional funding in order to increase production levels for its
Oklahoma Assets.
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, 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 Octane has provided financing and management to Rio
Vista, and guarantees the RZB note. As a result, Rio Vista is dependent on Penn Octane.
Penn Octanes Report of Independent Registered Public Accounting Firm on the consolidated
financial statements of Penn Octane at December 31, 2008 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. Under the terms of
the TCW Credit Facility, TCW may convert a portion or all of its debt obligations into
common units of Rio Vista which may be severely dilutive to existing unitholders and may be
a deterrent to future equity financings. If additional amounts cannot be raised, existing
debts restructured 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 consolidated balance sheet is dependent upon the
ability of Rio Vista to restructure the TCW Credit Facility and the RZB Note and to continue
as a going concern. In connection with Rio Vistas annual report on Form 10-K for the
fiscal year ended December 31, 2008, our independent public accountants report contained an
explanatory paragraph which describes an uncertainty about Rio
Vistas ability to continue as a going concern. The 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 restructure such debt and 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, sell assets, raise
additional debt and/or equity financing, reduce its general and administrative and other
operating expenses.
23
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: Transportation and Terminaling and Oil and Gas.
The Transportation and Terminaling segment transports bulk liquids, including chemical and
petroleum products, by truck and provides terminaling and storage services and the Oil and Gas
segment produces, transports and sells oil and gas.
The accounting policies used to develop segment information correspond to those described in the
summary of significant accounting policies. 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 three months ended March 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
Year ended March 31, 2009:
|
|
Terminaling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
1,740,000
|
|
|
|
1,168,000
|
|
|
|
2,908,000
|
|
Interest expense
|
|
|
186,000
|
|
|
|
770,000
|
|
|
|
956,000
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
159,000
|
|
|
|
360,000
|
|
|
|
519,000
|
|
Segment gross profit
|
|
|
527,000
|
|
|
|
407,000
|
|
|
|
934,000
|
|
Segment assets
|
|
|
11,800,000
|
|
|
|
35,896,000
|
|
|
|
47,696,000
|
|
Segment liabilities
|
|
|
4,566,000
|
|
|
|
28,734,000
|
|
|
|
33,300,000
|
|
Expenditure for segment assets
|
|
|
26,000
|
|
|
|
2,000
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
$
|
2,908,000
|
|
|
|
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
$
|
2,908,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit (loss) for reportable
Segments
|
|
|
|
|
|
$
|
934,000
|
|
|
|
|
|
Other gross profits (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
(1,016,000
|
)
|
|
|
|
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
(944,000
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
$
|
(1,026,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
$
|
47,696,000
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
288,000
|
|
|
|
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
$
|
47,984,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE O SEGMENT INFORMATION Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
Year ended March 31, 2008:
|
|
Terminaling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
Revenues from external customers
|
|
|
2,107,000
|
|
|
|
988,000
|
|
|
|
3,095,000
|
|
Interest expense
|
|
|
222,000
|
|
|
|
638,000
|
|
|
|
860,000
|
|
Interest income
|
|
|
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Depreciation and amortization
|
|
|
282,000
|
|
|
|
211,000
|
|
|
|
493,000
|
|
Segment gross profit
|
|
|
345,000
|
|
|
|
325,000
|
|
|
|
670,000
|
|
Segment assets
|
|
|
12,519,000
|
|
|
|
35,929,000
|
|
|
|
48,448,000
|
|
Segment liabilities
|
|
|
4,472,000
|
|
|
|
26,515,000
|
|
|
|
30,987,000
|
|
Expenditure for segment assets
|
|
|
168,000
|
|
|
|
683,000
|
|
|
|
851,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
$
|
3,095,000
|
|
|
|
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
$
|
3,095,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit (loss) for reportable
Segments
|
|
|
|
|
|
|
670,000
|
|
|
|
|
|
Other gross profits (loss)
|
|
|
|
|
|
|
11,000
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
(1,872,000
|
)
|
|
|
|
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
(876,000
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
$
|
(2,060,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
|
48,448,000
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
575,000
|
|
|
|
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
$
|
49,023,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
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.
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;
|
|
|
|
|
our strategic plans, objectives, expectations and intentions for future operations; and
|
|
|
|
|
our ability to restructure the TCW Credit Facility and/or the RZB Note under terms
satisfactory to us.
|
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, 2008. 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.
26
Overview
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 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
consisting of transportation and terminaling. Beginning March 1, 2008, Rio Vista Operating LLC
(Operating) became the operator of the Oklahoma Assets.
Results of Operations
The results of operations from continuing operations during the quarters ended March 31, 2008 and
2009 reflect the results associated with the i.) the Transportation and Terminaling Business
associated with bulk and petroleum products associated with Regional operations which was acquired
during July 2007, ii.) the operation of the Oklahoma Assets, which was acquired during November
2007 and iii.) all indirect income and expenses of Rio Vista.
QUARTER ENDED MARCH 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets
|
|
|
Enterprises
|
|
|
Transportation (a)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,168,000
|
|
|
|
1,740,000
|
|
|
|
|
|
|
|
(0
|
)
|
|
|
2,908,000
|
|
Cost Of Goods Sold
|
|
|
761,000
|
|
|
|
1,213,000
|
|
|
|
|
|
|
|
|
|
|
|
1,974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
407,000
|
|
|
|
527,000
|
|
|
|
|
|
|
|
(0
|
)
|
|
|
934,000
|
|
Selling, General And
Administrative Expenses
|
|
|
249,000
|
|
|
|
191,000
|
|
|
|
|
|
|
|
576,000
|
|
|
|
1,016,000
|
|
Loss On Sale Of Remaining
LPG Related Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
158,000
|
|
|
|
336,000
|
|
|
|
|
|
|
|
(576,000
|
)
|
|
|
(82,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(770,000
|
)
|
|
|
(186,000
|
)
|
|
|
|
|
|
|
12,000
|
|
|
|
(944,000
|
)
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
(612,000
|
)
|
|
|
150,000
|
|
|
|
|
|
|
|
(564,000
|
)
|
|
|
(1,026,000
|
)
|
Provision (Benefit) For Income Taxes
|
|
|
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(612,000
|
)
|
|
|
40,000
|
|
|
|
|
|
|
|
(564,000
|
)
|
|
|
(1,136,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTER ENDED MARCH 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets
|
|
|
Enterprises
|
|
|
Transportation (a)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
988,000
|
|
|
|
2,107,000
|
|
|
|
|
|
|
|
|
|
|
|
3,095,000
|
|
Cost Of Goods Sold
|
|
|
663,000
|
|
|
|
1,762,000
|
|
|
|
|
|
|
|
(11,000
|
)
|
|
|
2,414,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
325,000
|
|
|
|
345,000
|
|
|
|
|
|
|
|
11,000
|
|
|
|
681,000
|
|
Selling, General And
Administrative Expenses
|
|
|
58,000
|
|
|
|
245,000
|
|
|
|
|
|
|
|
1,430,000
|
|
|
|
1,733,000
|
|
Loss On Sale Of Remaining
LPG Related Assets
|
|
|
|
|
|
|
|
|
|
|
139,000
|
|
|
|
|
|
|
|
139,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
267,000
|
|
|
|
100,000
|
|
|
|
(139,000
|
)
|
|
|
(1,419,000
|
)
|
|
|
(1,191,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(638,000
|
)
|
|
|
(222,000
|
)
|
|
|
|
|
|
|
(16,000
|
)
|
|
|
(876,000
|
)
|
Interest Income
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
(364,000
|
)
|
|
|
(122,000
|
)
|
|
|
(139,000
|
)
|
|
|
(1,435,000
|
)
|
|
|
(2,060,000
|
)
|
Provision (Benefit) For Income Taxes
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(364,000
|
)
|
|
|
(127,000
|
)
|
|
|
(139,000
|
)
|
|
|
(1,435,000
|
)
|
|
|
(2,065,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
CHANGES FOR QUARTER ENDED MARCH 31, 2009 COMPARED WITH QUARTER ENDED MARCH 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets
|
|
|
Enterprises
|
|
|
Transportation (a)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
180,000
|
|
|
|
(367,000
|
)
|
|
|
|
|
|
|
(0
|
)
|
|
|
(187,000
|
)
|
Cost Of Goods Sold
|
|
|
98,000
|
|
|
|
(549,000
|
)
|
|
|
|
|
|
|
11,000
|
|
|
|
(440,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
82,000
|
|
|
|
182,000
|
|
|
|
|
|
|
|
(11,000
|
)
|
|
|
253,000
|
|
Selling, General And
Administrative Expenses
|
|
|
191,000
|
|
|
|
(54,000
|
)
|
|
|
|
|
|
|
(854,000
|
)
|
|
|
(717,000
|
)
|
Loss On Sale Of Remaining
LPG Related Assets
|
|
|
|
|
|
|
|
|
|
|
(139,000
|
)
|
|
|
|
|
|
|
(139,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(109,000
|
)
|
|
|
236,000
|
|
|
|
139,000
|
|
|
|
843,000
|
|
|
|
1,109,000
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(132,000
|
)
|
|
|
36,000
|
|
|
|
|
|
|
|
28,000
|
|
|
|
(68,000
|
)
|
Interest Income
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
(248,000
|
)
|
|
|
272,000
|
|
|
|
139,000
|
|
|
|
871,000
|
|
|
|
1,034,000
|
|
Provision (Benefit) For Income Taxes
|
|
|
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(248,000
|
)
|
|
|
167,000
|
|
|
|
139,000
|
|
|
|
871,000
|
|
|
|
929,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
LPG Transportation business commenced in August 2006 and sold December 31,
2007. Costs represent remaining charges associated with the sale which were
recorded during 2008.
|
Quarter Ended March 31, 2009 Compared With Quarter Ended March 31, 2008
Revenues.
Revenues for the three months ended March 31, 2009 were $2.9 million compared with
revenues during the three months ended March 31, 2008 of $3.1 million. The revenues from the
Oklahoma Assets increased slightly as the result of higher production during the three month s
ended March 31, 2009 compared with the three months ended March 31, 2008. The revenues from
Regional decreased during the three months ended March 31, 2009 compared with the three months
ended March 31, 2008, primarily due to reduced fuel surcharges received from its transportation
operations.
Cost of goods sold.
Cost of goods sold for the three months ended March 31, 2009 were $2.0
million compared with cost of goods sold during the three months ended March 31, 2008 of $2.4
million. The cost of goods sold from the Oklahoma Assets increased slightly as the result of
higher production during the three month s ended March 31, 2009 compared with the three months
ended March 31, 2008. The cost of goods sold from Regional decreased during the three months ended
March 31, 2009 compared with the three months ended March 31, 2008, primarily due to reduced fuel
costs and other operating efficiencies achieved.
Selling, general and administrative expenses.
Selling, general and administrative expenses
decreased by $0.7 million during the three months ended March 31, 2009 compared with the three
months ended March 31, 2008, primarily as the result of reduced selling, general and administrative
expenses associated with corporate related activities. These costs included the reduction of unit
based costs, payroll related costs and professional fees. Indirect selling, general and
administrative expenses directly incurred by Rio Vista or allocated by Penn Octane to Rio Vista are
made in accordance with the Omnibus Agreement. These costs consist of salary related costs, legal,
accounting and other professional fees, and other corporate related costs, including insurance,
taxes other than income, and public company expenses. The amounts allocated by Penn Octane were
based on the percentage of time spent by those employees (including executive officers) in
performing Rio Vista related matters compared with the overall time spent working by those
employees.
These decreases were slightly offset by additional costs associated with becoming the operator
of the Oklahoma Assets beginning March 2008, which resulted in additional office administration
costs and an increase in professional fees related to legal, accounting and engineering services
during the three months ended March 31, 2009.
28
Liquidity and Capital Resources
General
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 Note 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 gas, there is not expected to be sufficient cash from operations to meet
debt service requirements under the TCW Credit Facility described below under Debt Obligations
unless additional production can be realized. Additional production will require additional
capital expenditures to fund drilling expansion opportunities. Rio Vista currently does not have
funding available to perform additional development. In addition, Rio Vista projects that monthly
cash flows received from the Oklahoma Assets during the months of April through September will be
less than during the months of October through March as a result of seasonality. Rio Vista does
not expect that the Oklahoma Assets will be a source of generating cash flow for the foreseeable
future based on current cash flow levels and the required debt covenants associated with the TCW
Credit Facility, which prohibits distributions by Rio Vistas Oklahoma subsidiaries unless certain
conditions are met. Rio Vista is currently in discussions with TCW to restructure the TCW Credit
Facility. See Debt Obligations TCW Credit Facility below.
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. 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 unless Rio
Vista is able to restructure the TCW Credit Facility and the RZB Note under terms which would
provide an acceptable debt service and cash flow arrangement. In addition, Rio Vista may not
distribute 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 units. Currently, substantially
all of Rio Vistas assets are pledged or committed to be pledged as collateral on existing debt in
connection with the TCW Credit Facility and the RZB Note (see below). Accordingly, Rio Vista may
be unable to obtain additional financing collateralized by those assets.
At March 31, 2009, Rio Vista had a working capital deficit of approximately $36.2 million. Rio
Vista cannot be certain that future cash flows from Regionals business or the Oklahoma Assets
operations and future investments, if any, will be adequate to cover all of its future working
capital requirements, including minimum distributions to unitholders.
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.
In addition to its 2% General Partner interest, the General Partner is currently the holder of
incentive distribution rights which entitled 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 due to Penn Octane Corporation in the accompanying consolidated balance sheet for
the specific purpose of funding Rio Vistas June 2008 quarterly distribution.
The amount of the distributions paid through the June 2008 quarterly distributions represented the
minimum quarterly distributions required to be made by Rio Vista pursuant to the partnership
agreement. Rio Vista has not declared a distribution for the quarters ended September 30, 2008,
December 31, 2008 and March 31, 2009.
29
Debt Obligations
RZB Note
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,
(3.25% at March 31, 2009), 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% (Base Rate Margin). On July 27, 2008, the
RZB Note was amended whereby the maturity date was extended until August 29, 2008. The RZB Note was
not paid on August 29, 2008. During December 2008, Rio Vista entered into a third amendment to the
RZB Note (Third Amendment). Under the terms of the Third Amendment, the maturity date of the RZB
Note was extended to February 27, 2009. In addition, the interest rate calculation was modified to
include a cost of funds rate definition in determining the base rate and the Base Rate Margin was
increased to 7.0%. Under the terms of the Third Amendment, the net worth of Penn Octane, as
defined, is required to be in excess of $3.3 million. In addition, the Third Amendment required
Rio Vista to repay $1.0 million of the RZB Note. Effective January 1, 2009, Penn Octane agreed to
loan Rio Vista the $1.0 million of cash collateral held by RZB for purpose of making the required
payment described above.
During February 2009, Rio Vista entered into a fourth amendment to the RZB Note which extended the
maturity date of the RZB Note through March 31, 2009. During March 2009, Rio Vista entered into a
fifth amendment to the RZB Note which extended the maturity date of the RZB Note through April 30,
2009. The RZB Note was not paid by April 30, 2009. Rio Vista and RZB are currently negotiating
an additional extension of the RZB Note (Extended RZB Note). Rio Vista expects that the Extended
RZB Note will have a three year maturity, with monthly amortization, and will provide Regional with
the ability to make minimum monthly payments to Rio Vista to cover a portion of Rio Vistas
corporate overhead subject to Regional meeting required debt service covenants. In addition, Rio
Vista will be required to subordinate repayment of its intercompany loan with Regional and Regional
will be required to enter into a control agreement with its banks which will provide RZB with the
ability to access Regionals cash in the event of a default. The Extended RZB Note has not been
executed and is subject to due diligence, final loan documents and approval of both parties.
In connection with the RZB Note, Regional granted to RZB a security interest in all of Regionals
assets, including a deed of trust on real property owned by Regional, and Rio Vista delivered to
RZB a pledge of the outstanding capital stock of Regional. On July 26, 2007, as a further
condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty)
with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness,
liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise. The RZB
Note is also guaranteed by Regional and RVOP.
TCW Credit Facility
The TCW Credit Facility is a $30.0 million 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 $21.7 million, consisting of $16.8 million in assumption of the existing indebtedness
in the principal amount of $16.5 million plus accrued but unpaid interest in the amount of
$250,000 owed by GM Oil to TCW, $2.0 million 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 $3.0 million to fund the acquisition of the membership
interests of GO by Rio Vista GO. TCW had also approved a plan of development (APOD) for the
Oklahoma assets totaling approximately $2.0 million, 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 were 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 has the right to demand payment of $2.2 million 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. The conversion rights of TCW as
described above were formalized through the issuance of a warrant by Rio Vista (TCW Warrant). Rio
Vista has agreed to file with the SEC a registration statement on Form S-3 covering the common
units issued pursuant to the TCW Warrant within 90 days following the first exercise of the TCW
Warrant.
30
Rio Vista Penny and Rio Vista GO, which hold the Oklahoma Assets, are prohibited from making
upstream distributions to Rio Vista unless certain conditions are met which currently are not
expected to be met in the future. In addition, the TCW Credit Facility requires semi-annual
reserve reports by an independent engineer which is used in determining the allowable borrowing
base.
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. 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.
Rio Vista Penny and TCW have entered into several letter agreements whereby TCW agreed to extend
the payment obligations under the TCW Credit Facility (including the December 2008 and March 2009
principal payments and interest payments due) and other requirements pursuant to the TCW Credit
Facility until May 20, 2009 (TCW Waiver). In connection with one of the extensions, TCW agreed to
provide Rio Vista with 62 days advance written notice to exercise the TCW Warrant, except for up to
400,000 common units of Rio Vista.
Rio Vistas management is in discussions with TCW to restructure the TCW Credit Facility. Although
no definitive agreement has been reached, these discussions include surrendering to TCW all of the
Oklahoma Assets and some equity in satisfaction of outstanding indebtedness.
However, if Rio Vistas management is unable to restructure the TCW Credit Facility or obtain
additional extensions or waivers of its requirements of payment terms and covenants contained in
the TCW Credit Facility, then Rio Vista Penny will be in default under the terms of the TCW Credit
Facility.
TCW has the right to foreclose against Rio Vista Penny under the terms of the TCW Credit Facility.
TCW has no recourse against Rio Vista, except that TCW holds the TCW Warrant, granting it the
right, but not the obligation, to convert a portion or all of the value of the debt owing under the
TCW Credit Facility, including accrued interest and penalties, into Rio Vista common units at the
exercise price defined in the TCW Warrant (approximately 90% of the market value of the common
units on the 20 trading days preceding the conversion date).
If TCW converts any amounts owing under the TCW Credit Facility into Rio Vista common units then,
the current Rio Vista common unit holders will be significantly diluted.
As of March 31, 2009, the net book value of the Oklahoma Assets was
approximately $35.1 million. As a result of foreclosure, based on March 31, 2009 balances, Rio Vista would record
a loss related to the Oklahoma Assets which could approximate $7.3 million. The exercise by TCW of any
amount under the TCW Warrant would reduce the amount of the recordable loss by a
corresponding amount.
31
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 which option was not exercised and expired on May 19, 2008. The Moores Note was not
paid upon maturity.
On June 27, 2008, the Moores Note was amended (Amended Moores Note). In connection with the
Amended 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. The Amended Moores Note was not paid upon maturity. In November
2008, Gary Moores filed a civil action against Rio Vista as a result of the non-payment (Civil
Action).
On January 20, 2009, the Moores Note was once again amended (Second Amended Moores Note). In
connection with the Second Amended Moores Note, Rio Vista agreed to make monthly principal payments
of $12,500 plus interest beginning May 10, 2009 and to continue such payments for 5 consecutive
months. Each month thereafter, Rio Vista is required to make principal payments of $37,500 plus
interest until all amounts due and payable have been paid. The May 10, 2009 principal payment was
not made. In addition, in connection with the Second Amended Moores Note, Gary Moores agreed to
dismiss the Civil Action.
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 recorded a discount of $116,000 (10% effective rate), representing the portion of
interest associated with the note, which was to be amortized over the term of the note. During
January 2008, the first installment was paid. On July 27, 2008 and January 27, 2009, the second
and third installment was due to be paid. Regional did not make the second or third installment
payments as it believes that there exists offsets in connection with the acquisition of Regional in
excess of the payments.
Richter Note Payable
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.
Under the terms of the Richter Note Payable, Rio Vista is required to repay the Richter Note
Payable on November 15, 2008 which payment was not made. 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
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.
On June 1, 2007, Regional executed a letter of intent with Norfolk Southern dated May 29, 2007
which provides for the replacement of the foregoing leases through a purchase of approximately 3.5
acres of land and the lease of approximately 1.9 acres of land on a long-term basis. 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.
32
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. Richter. 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. During
April 2009, Rio Vista and Penn Octane each provided JBR Capital notice of their intention to
terminate the Consulting Agreement on May 31, 2009.
Sale Of Remaining LPG Assets
On December 31, 2008, Rio Vista received a claim from TransMontaigne related to the Holdback of
$500,000 for diligence deductions and working capital adjustments, pursuant to the Purchase and
Sale Agreement. TransMontaigne claims a $316,000 working capital adjustment and $1.4 million in
connection with the indemnification obligations included in the Purchase and Sale Agreement. Rio
Vista is working with TransMontaigne to define the scope of the adjustments to an amount which Rio
Vista considers to be more realistic. Any amount which may subsequently be agreed to by
TransMontaigne and Rio Vista shall first be charged to the $500,000 Holdback, and also is subject
to the $1.0 million limitation of indemnification. As of March 31, 2009, Rio Vista has accrued
$220,000 to provide for these adjustments, in addition to the Holdback. Rio Vistas management and
its legal counsel believe that the amount of the TransMontaigne claim will be resolved within the
amounts already provided.
Related Party Loans to Rio Vista
As of July 23, 2008, Rio Vista off-set $2.0 million 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.
In connection with the Third Amendment of the RZB Note, Rio Vista was required to repay $1.0
million of the RZB Note. Effective January 1, 2009, Penn Octane loaned Rio Vista $1.0 million of
its cash collateral held by RZB for the purpose of funding Rio Vistas obligation to make the
required payment described above.
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 the three months
ended March 31, 2009 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 TCW Credit
Facility, the Moores Note, the RZB Note, the Sellers Note Regional and the Richter Note Payable
total approximately $30,301,000 and are all classified as current liabilities. The TCW Credit
Facility extension expires on May 20, 2009 and the RZB Note has not been extended. RZB has not yet
given Rio Vista notice of default and the parties continue to negotiate an extension of the RZB
Note. In the event such obligations are not satisfactorily restructured, further extended or
actions to enforce collections do not continue to be deferred by creditors, the TCW Credit
Facility, the RZB Note and/or other obligations will be due immediately (see note G). The TCW
Credit Facility and RZB Note are collateralized by the Oklahoma Assets and the Regional assets,
respectively.
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
unless certain conditions are met which currently are not expected to be met. In addition, Rio
Vista requires additional funding in order to increase production levels for its Oklahoma Assets.
33
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, 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 Octane has provided
financing and management to Rio Vista, and guarantees the RZB note. As a result, Rio Vista is
dependent on Penn Octane. Penn Octanes Report of Independent Registered Public Accounting Firm on
the consolidated financial statements of Penn Octane at December 31, 2008 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. Under the terms of the TCW
Credit Facility, TCW may convert a portion or all of its debt obligations into common units of Rio
Vista which may be severely dilutive to existing unitholders and may be a deterrent to future
equity financings. If additional amounts cannot be raised, existing debts restructured 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 consolidated balance sheet is dependent upon the ability of Rio
Vista to restructure the TCW Credit Facility and the RZB Note and to continue as a going concern.
In connection with Rio Vistas annual report on Form 10-K for the fiscal year ended December 31,
2008, our independent public accountants report contained an explanatory paragraph which describes
an uncertainty about Rio Vistas ability to continue as a going concern. The 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 restructure such debt and 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, sell assets, raise additional debt
and/or equity financing, reduce its general and administrative and other operating expenses.
Off-Balance Sheet Arrangements
Rio Vista does not have any off-balance sheet arrangements.
Recently Issued Financial Accounting Standards
In December 2007, the FASB released SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51, which establishes accounting and reporting
standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interests and requires
disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. Previously, net income
attributable to the noncontrolling interest was reported as an expense or other deduction in
arriving at consolidated net income. SFAS No. 160 is effective for us beginning January 1, 2009.
Rio Vista believes the adoption of this statement will not have a material impact on its
consolidated financial statements.
In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 161 (SFAS No. 161), Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133 to provide greater transparency about how and why an entity uses
derivative instruments, how derivative instruments and related hedge items are accounted for under
SFAS No. 133 and its related interpretations and how derivative instruments and related hedged
items affect an entitys financial position, results of operations and cash flows. SFAS No. 161
requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on derivative instruments and
disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for us beginning January 1, 2009. Rio Vista does not expect the adoption of the new
accounting standard to have an impact on Rio Vistas financial statements.
Critical Accounting Policies
The consolidated financial statements of Rio Vista reflect the selection and application of
accounting policies which require management to make significant estimates and judgments. See note
B to Rio Vistas consolidated financial statements included in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2008, Summary of Significant Accounting Policies.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures
Disclosure Controls
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-K, 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). Based on that evaluation, our General Partners
President and Chief Executive Officer and our General Partners Chief Financial Officer concluded
that our disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
Our General Partner may not be able to complete its intended goal of implementing a new accounting
software system which would provide enhanced internal controls over financial reporting as well as
to provide for multiple user access, timely access to accounting information and additional data
security. Furthermore, our General Partner may be limited in its ability to attract and/or retain
qualified employees and professionals.
The consolidated financial statements for the three months ended March 31, 2009 were not reviewed
by our independent auditor due to our financial inability to compensate them for their services.
Our General Partner continues to seek solutions to improve internal control over financial
reporting. However because there are currently limited financial resources, our General Partner
does not expect to be able to take additional steps to improve its internal control over financial
reporting in the near-term.
During the three months ended March 31, 2009, 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 consolidated financial statements included in this Quarterly Report on 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.
35
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
None.
Item 3. Defaults upon Senior Securities
See note G to the unaudited consolidated financial statements included in this report for
material defaults with respect to Rio Vista and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Rio Vistas outside independent accountants did not review the included unaudited financial
statements as required by Reg. S-X Rule 10-01(d) due to Rio Vistas nonpayment of fees owed
to its accountants. As a result, Rio Vista is no longer eligible to use a registration
statement on Form S-3.
Item 6. Exhibits
The following Exhibits are filed as part of this report:
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Exhibit No.
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10.1
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Letter agreement to extend payments and other requirements pursuant to
Note Purchase Agreement dated April 13, 2009 between Rio Vista Penny LLC
and TCW Asset Management Company.
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31.1
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Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
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31.2
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Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
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32
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
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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.
36
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.
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RIO VISTA ENERGY PARTNERS L.P.
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By:
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Rio Vista GP LLC, its General Partner
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May 20, 2009
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By:
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/s/ Ian T. Bothwell
Ian T. Bothwell
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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.
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37
EXHIBIT INDEX
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Exhibit No.
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Description
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10.1
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Letter agreement to extend payments and other requirements pursuant to
Note Purchase Agreement dated April 13, 2009 between Rio Vista Penny LLC
and TCW Asset Management Company.
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31.1
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Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
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31.2
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Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
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32
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
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38
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