UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 000-50394
Rio Vista Energy Partners L.P.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-0153267
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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1313 E. Alton Gloor Blvd., Suite J, Brownsville, Texas
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78526
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants Telephone Number, Including Area Code:
(956) 831-0886
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Units
Indicate by check mark if the registrant is a well-known seasonal issuer as defined in Rule
405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer or a smaller reporting company. See the definitions of
accelerated filer and large accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller Reporting Company
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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
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No
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The aggregate market value of the voting units held by non-affiliates of the Registrant was
$19,337,586 as of June 30, 2008.
The number of Common Units outstanding on March 30, 2009 was 2,762,463.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Annual 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 Annual 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:
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the volatility of realized natural gas prices;
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the discovery, estimation, development and replacement of oil and natural gas reserves;
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our business and financial strategy;
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our drilling locations;
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technology;
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our cash flow, liquidity and financial position;
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our production volumes;
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our lease operating expenses, general and administrative costs and finding and
development costs;
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the availability of drilling and production equipment, labor and other services;
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our future operating results;
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our prospect development and property acquisitions;
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the marketing of oil and natural gas;
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competition in the oil and natural gas industry and the transportation and terminaling
business;
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the impact of weather and the occurrence of natural disasters such as fires, floods,
hurricanes, earthquakes and other catastrophic events and natural disasters;
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governmental regulation of the oil and natural gas industry and the transportation and
terminaling business;
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required capital expenditures;
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cash distributions and qualified income;
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developments in oil producing and natural gas producing countries; and
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our strategic plans, objectives, expectations and intentions for future operations;
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our ability to restructure the TCW Credit Facility and/or the RZB Note under terms
satisfactory to us.
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All of these types of statements, other than statements of historical fact included in this Annual
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 Annual Report are largely based on our
expectations, which reflect estimates and assumptions made by our 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 Annual 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 and Managements Discussion and Analysis of Financial Condition and Results of
Operations section and elsewhere in this Annual Report. All forward-looking statements speak only
as of the date of this Annual Report. We do not intend to publicly update or revise any
forward-looking statements as a result of new information, future events or otherwise.
iii
GLOSSARY OF TERMS
As commonly used in the oil and gas industry and as used in this Annual Report on Form 10-K, the
following terms have the following meanings:
Bbl.
One stock tank barrel or 42 United States gallons liquid volume.
Bcf.
One billion cubic feet.
Bcfe.
One billion cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.
Btu.
One British thermal unit, which is the heat required to raise the temperature of a
one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Development well.
A well drilled within the proved area of an oil or gas reservoir to the depth
of a stratigraphic horizon known to be productive.
Dry hole
or
well.
A well found to be incapable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production would exceed production expenses
and taxes.
Field.
An area consisting of a single reservoir or multiple reservoirs all grouped on or related
to the same individual geological structural feature and/or stratigraphic condition.
FERC.
Federal Energy Regulatory Commission.
Gross acres
or
gross wells.
The total acres or wells, as the case may be, in which a working
interest is owned.
Hp.
Horsepower
MBbls.
One thousand barrels of oil or other liquid hydrocarbons.
Mcf.
One thousand cubic feet.
Mcfe.
One thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one
Bbl of oil, condensate or natural gas liquids.
MMBbls.
One million barrels of oil or other liquid hydrocarbons.
MMBtu.
One million Btus.
MMcf.
One million cubic feet.
MMcf/d.
One MMcf per day.
MMcfe.
One million cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.
MMcfe/d.
One MMcfe per day.
MMMBtu.
One billion Btus.
Net acres
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net wells.
The sum of the fractional working interests owned in gross acres or
gross wells, as the case may be.
NYMEX.
The New York Mercantile Exchange.
iv
Oil.
Crude oil, condensate and natural gas liquids.
Productive well.
A well that is found to be capable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production exceeds production expenses and
taxes.
Proved developed reserves.
Reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery techniques for supplementing
the natural forces and mechanisms of primary recovery are included in proved developed reserves
only after testing by a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved reserves.
Proved oil and gas reserves are the estimated quantities of gas, natural gas
liquids and oil which geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual arrangements, but not on
escalations based on future conditions. The definition of proved reserves is in accordance with
the Securities and Exchange Commissions definition set forth in Regulation S-X Rule 4-10(a) and
its subsequent staff interpretations and guidance.
Proved undeveloped drilling location.
A site on which a development well can be drilled
consistent with spacing rules for purposes of recovering proved undeveloped reserves.
Proved undeveloped reserves
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PUDs.
Reserves that are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled. Proved reserves for
other undrilled units are claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Estimates for proved undeveloped
reserves are not attributed to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been proved effective by
actual tests in the area and in the same reservoir.
Recompletion.
The completion for production of an existing wellbore in another formation from
that which the well has been previously completed.
Reservoir.
A porous and permeable underground formation containing a natural accumulation of
economically productive oil and/or gas that is confined by impermeable rock or water barriers and
is individual and separate from other reserves.
Standardized Measure.
Standardized Measure, or standardized measure of discounted future net
cash flows relating to proved oil and gas reserve quantities, is the present value of estimated
future net revenues to be generated from the production of proved reserves, determined in
accordance with the rules and regulations of the Securities and Exchange Commission (using prices
and costs in effect as of the date of estimation) without giving effect to non-property related
expenses, such as general and administrative expenses, debt service and future income tax expenses
or to depreciation, depletion and amortization, and discounted using an annual discount rate of
10%. Our Standardized Measure does not include future income tax expenses because our reserves
are owned by our subsidiary Rio Vista Penny LLC, which is not subject to income taxes.
Successful well.
A well capable of producing oil and/or gas in commercial quantities.
Undeveloped acreage.
Lease acreage on which wells have not been drilled or completed to a point
that would permit the production of commercial quantities of oil and gas regardless of whether
such acreage contains proved reserves.
Unproved reserves.
Lease acreage on which wells have not been drilled and where it is either
probable or possible that the acreage contains reserves.
Working interest.
The operating interest that gives the owner the right to drill, produce and
conduct operating activities on the property and a share of production.
Workover.
Operations on a producing well to restore or increase production
v
PART I
Items 1 and 2. Business and Properties.
Rio Vista Energy Partners L.P. and its consolidated subsidiaries (not including the General
Partner) are hereinafter referred to as Rio Vista. When referring to Rio Vista and using phrases
such as we, our, us, or the Company, our intent is to refer to Rio Vista and its
consolidated subsidiaries as a whole or on an entity basis, depending on the context in which the
statements are made.
General
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
interest is solely owned and controlled by Rio Vista GP LLC (General Partner). Our General Partner
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. Our General Partner is
responsible for the management of Rio Vista. Common unitholders do not participate in the
management of Rio Vista.
Our
principal executive offices are located at 1313 Alton Gloor, Suite J, Brownsville, Texas 78526,
and our telephone number is (956) 831-0886. Our website is located at
http://www.riovistaenergy.com.
Historical Assets and Operations
In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to
TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm,
together with associated improvements, leases, easements, licenses and permits; an LPG sales
agreement; and all of LPG inventory. In December 2007, Rio Vista completed the disposition of its
remaining LPG assets to TransMontaigne, including the U.S. portion of the two pipelines from a
Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along with all associated
rights-of-way and easements; all of the outstanding equity interests in entities owning interests
in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico; and all
of the rights for indirect control of an entity that owns a terminal site in Matamoros, Mexico. As
a result, effective January 1, 2008, Rio Vista no longer operates the assets associated with the
LPG business it had historically conducted.
1
Current Assets and Operations
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. The
businesses and assets we acquired in 2007 are described further below under the subheadings
Regional Enterprises and Oklahoma assets. 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. However, as discussed under Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources Debt
Obligations TCW Credit Facility, we may dispose of some of our assets, including our oil and gas
properties in Oklahoma, in connection with the restructuring of our debt. Beginning March 1, 2008
Rio Vista operating LLC (Operating) became the operator of the Oklahoma Assets.
Regional Enterprises
In July 2007, Rio Vista acquired the business of Regional Enterprises, Inc., a Virginia
corporation. The principal business of Regional is storage, transportation and railcar
transloading of bulk liquids, including chemical and petroleum products owned by its
customers.
Regionals principal facilities are located on the James River in Hopewell, Virginia, where it
receives bulk chemicals and petroleum products from ships and barges into approximately
10,400,000 gallons of available storage. Regional also receives product from a rail spur which
is capable of receiving 15 rail cars at any one time for transloading of chemical and
petroleum liquids for delivery throughout the mid-Atlantic region.
Regional utilizes its fleet of 32 tractors and 48 tankers to distribute the various products it
receives as well as to perform direct hauling operations on behalf of its customers.
For the year ended December 31, 2008, Regionals revenues were divided among transportation,
storage and transloading as follows:
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Year Ended December 31, 2008
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Revenue
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%
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Transportation
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6,687,000
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78
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Storage
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1,543,000
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18
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Transloading
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343,000
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4
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Total
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8,573,000
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%
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Transportation
. Regional transports a broad range of hazardous and non-hazardous liquid products,
including the following: aluminum sulfate solution, sulfuric acid, sodium hydroxide, hydrogen
peroxide, ferric chloride, ferric sulfate, hypochlorite solution, hydrochloric acid, ferrous
chloride and aqua ammonia. Regionals transportation services are primarily for the most part
short-haul in nature, with an estimated 85% of Regionals deliveries being made within 150 miles of
its Hopewell, Virginia terminal. Virtually all of Regionals transportation services are provided
within the states of Virginia, North Carolina, South Carolina, Georgia, Tennessee, Maryland,
Pennsylvania and Delaware.
Regional currently has a fleet of approximately 48 tanker units and 32 tractors dedicated to its
transportation services. The majority of tankers are constructed of stainless steel, with 11 being
rubber or chlorobutyl lined, which enables them to carry the toughest corrosives. The tanker fleet
also includes four aluminum-constructed tanks, which are equipped with vapor recovery. Rio Vista
believes that this extensive inventory of tankers enables Regional to service the majority of its
customers needs. The tractor fleet consists of late model, Western Star and Mack units.
2
Storage
. Regionals Hopewell facility has a total of 15 tanks, six of which have capacities in
excess of one million gallons; of these 15 tanks, 13 tanks are for customer utilization. These
tanks have a combined storage capacity of approximately 10.4 million gallons. As of December 31,
2008, Regional had two vacant tanks with a combined storage capacity of 76,000 gallons.
Regionals loading dock is parallel to the main shipping channel with berthing dolphin clusters
approximately 210 feet in length. Two six-inch and one ten-inch steel pipelines service the various
tanks. All of the tanks are constructed of carbon steel, both insulated and bare skin and some with
internal walls lined and unlined. Several tanks and all of the associated piping are equipped with
heat via either heat transfer (hot oil) or steam. As of December 31, 2008, Regional stored the
following products: two grades of asphalt, asphalt additive, sodium hydroxide, #2 oil and #4 oil.
Regional receives the products it stores by ship, barge, rail and truck. The products Regional
stores are owned by its customers. Certain customers for whom Regional provides storage services
also use Regionals transportation services.
There is approximately 2.25 acres of undeveloped acreage at Regionals Hopewell facility, which
could be used to accommodate additional construction of up to an additional 4.2 million gallons of
storage capacity.
Transloading
. Regional provides transloading services utilizing its rail siding and off-loading
facilities to transfer products from railcars to tanker trucks. Open rail access to the Norfolk
Southern and CSX rail lines offers competitive rail economics and flexibility for Regionals
customers. Customers who utilize Regionals transloading services typically do so because either
their own rail service is at full capacity or Regionals strategic location provides them with an
important distribution point not available in their own distribution system. Transloading products,
either from storage tanks or tankers, in railcar quantities provides a logistical pricing advantage
over long-haul transportation in tanker trucks. Steam heat and compressed air is available at each
railcar spot.
Regional has two transloading facilities. Regional leases siding tracks and 15 railcar slots at its
Hopewell, Virginia facility, with Norfolk Southern conducting switching operations. As of December
31, 2008, Regional had no vacant slots but anticipates acquiring an additional 900 feet of track,
which would result in 16 additional rail slots. Regional also has a transloading facility in
Johnson City, Tennessee, where it leases siding tracks and six railcar slots. Switching operations
for the Johnson City, Tennessee facility are provided by East Tennessee Railway, which services
tracks over which both the CSX and Norfolk Southern railroads operate.
Headquarters Facility
. Regional has approximately 2,000 square feet of office facilities at its
Hopewell, Virginia headquarters from which it provides most of its management, administrative and
marketing operations.
Customers
. For the fiscal year ended December 31, 2008, Suffolk Sales, General Chemical Corporation
and Kemira Chemicals Canada Inc. accounted for approximately 14% 10% and 12% of Regionals
revenues, respectively, and approximately 19%, 8% and 10% of Regional accounts receivables,
respectively with no other individual customer accounting for more than 10% of Regionals revenues
and accounts receivable.
Competition
. The terminaling and transportation industry is highly competitive. We encounter
strong competition from other independent operators and from companies in acquiring equipment and
securing trained personnel. Many of these competitors have financial and technical resources and
staffs substantially larger than ours. As a result, our competitors may be able to bid for
contracts at rates which are more attractive to customers than our financial or human resources
permit.
We are also affected by competition for availability of specialized equipment. Certain trucking
equipment, including tankers, require significant lead time and possible higher prices to obtain.
Accordingly, we may not be able to bid for additional business which require equipment not
currently available to us.
Employees
. As of December 31, 2008, Regional had a total of approximately 61 full- and part-time
employees, consisting of 28 drivers, 17 terminal operators, two mechanics and 14 office staff.
Environmental and Regulatory
. Regional is a licensed contract or common carrier and holds permits
with the Hopewell wastewater treatment facility for treatment and disposal of its wastewater
generated through rainwater runoff and tanker washing operations. Regional is subject to various
laws and regulations, including those
relating to labor, maritime, transportation, environment and motor carrier.
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Tax Structure
. Regionals assets and operations are conducted within a C-Corp for federal income
tax purposes, as many of its activities are not considered Qualified Income. Rio Vista intends
to explore options regarding the reorganization of some or all of its Regional assets that produce
qualifying income into a more efficient tax structure.
Other
. Regional qualifies as a small business contractor and vendor capable of storing,
transporting and supplying bulk chemical and petroleum products on behalf of U.S. government
agencies. Regional intends to seek contracts with the Department of Defense and the Defense Energy
Support Center based on the proximity of its Hopewell facilities to multiple U.S. military bases.
Oklahoma Assets
In November 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary of
Rio Vista, completed the purchase of assets from G M Oil Properties, Inc., an Oklahoma corporation
(GM Oil) and Penny Petroleum Corporation, an Oklahoma corporation (Penny Petroleum) pursuant to
which we acquired real and personal property interests in certain oil and gas properties located in
Haskell, McIntosh and Pittsburg counties in Oklahoma, including all of the outstanding capital
stock of MV Pipeline Company (MV), an Oklahoma corporation.
In addition, in November 2007, Rio Vista GO, LLC (Rio Vista GO) an indirect, wholly-owned
subsidiary of Rio Vista, acquired all of the membership interests of GO, LLC, an Oklahoma limited
liability company (GO). GO operates an oil and gas pipeline business located in Haskell and
Pittsburg counties in Oklahoma.
Exploration and Production Assets
. The Oklahoma Assets include approximately 15,100 net acres
located in McIntosh, Haskell and Pittsburg counties in Oklahoma. The Oklahoma Assets also include a
25% participation interest on 4,800 acres owned by Concorde Resources. These assets represent a
majority interest in 114 wells that we now operate and 24 non-operated wells in the Booch Sand,
Hartshorne Cold Bed Methane, Georgias Fork and Spiro formations.
Gathering
. The Oklahoma Assets also include the wholly-owned and operated 25-mile Brooken pipeline
that gathers natural gas from several properties located in Haskell and Pittsburg counties, as well
as MVs wholly-owned and operated 40-mile pipeline that receives natural gas from leases in the
Texanna area north of Lake Eufaula and delivers product to the ONEOK intrastate pipeline in
McIntosh County, Oklahoma. The pipeline consists of 40 miles of Class I pipelines, a low-pressure
gas gathering system and a 3,000 horsepower central compressor station with a capacity of 50 MMcf
per day.
Proved Reserves.
Our proved reserves at December 31, 2008 were 22.5 Bcf, all of which were gas.
Approximately 8.1 Bcf were classified as proved developed, with a total Standardized Measure value
of $9.0 million. At December 31, 2008, we operated 114 wells, or 83%, of our 138 productive
wells. Our average proved reserves-to-production ratio, or average reserve life, is approximately
82.5 years, based on our December 31, 2008 reserve report and annualized production of current
production levels.
4
Core Operating Areas
The long-lived proved producing properties are principally comprised of majority interests in 177
operated wells (63 undeveloped as of December 31, 2008) and 24 non-operated wells located on either
side of Lake Eufaula in the Crouch Area, the Texanna Area, the Brooken Area and the Canadian
Area with production derived primarily from the Booch sand and Hartshorne Coal Bed Methane
reservoirs. We also derive a smaller portion of our reserves from the Georges Fork and Spiro
reservoirs. Rio Vista estimates that it has an average revenue interest of approximately 56.0%
in these leased interests. Characteristics of our reservoirs are as follows:
Booch sand:
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Acreage surrounding Lake Eufaula has net sand thickness of 25 feet
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Land surrounding the edges and underneath Lake Eufaula has locations
with net sand thickness up to 200 feet
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Well potential: 732 MMcf 827 MMcf per well
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Hartshorne coal bed methane:
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Coal thickness contours ranging from a minimum of 2 feet to over 4 feet
in select areas
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Well potential: 514 MMcf 827 MMcf per well
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5
The following diagram illustrates the location of the principal fields and
pipeline facilities associated with the Oklahoma assets.
T
exanna
. The Texanna Area, which is located on the north side of Lake Eufaula, is the area where
there has been a significant amount of Booch operating history. Historically, over 200 Bcf has
been produced from this formation in this area. Our current proved reserves in this region are
based on a second Booch formation which overlays the original Booch formation. In addition there
is current production from Hartshorne formations.
Crouch.
The Crouch Area, which is located on the north side of Lake Eufaula, immediately north of
the Texanna Area currently produces from the Booch, Georges Fork, Spiro, Hartshorne and Cromwell
formations.
The Texanna and Crouch Areas are located within our MV Pipeline gathering system. The MV pipeline
gathers natural gas from leases in the Texanna and Crouch Areas north of Lake Eufaula and delivers
to the ONEOK Gas Transportation, LLC (Oneok) intrastate pipeline in McIntosh County. The MV
Pipeline is 40 miles in length, Class I, low-pressure gas gathering system and is joined to a 3,000
hp central compressor station with capacity of 50 MMcf/d. This gathering system was originally
constructed in 1984, upgraded in 1998 and 2 new compressors were added during 2006.
All of our production associated with the MV Pipeline and Brooken Pipeline (see below) is sold to
Clearwater Enterprises LLC (Clearwater). The price we receive (excluding the impact of hedges) is
based on the Oneok monthly index price (MV Pipeline production) or the Centerpoint Energy Gas
Transmission (CEGT) index less fuel, gathering and compression. The Oneok and CEGT indexes
historically trade at an approximate 10% 30% discount to the NYMEX monthly averages.
6
Brooken.
The Brooken Area is located on the south side of Lake Eufaula at the intersection of
Haskell, McIntosh and Pittsburg counties. Our proven reserves in this are primarily relate to the
Booch sand, and Hartshorne Coal Bed Methane formations. All of the production in this area is
gathered by our Brooken pipeline gathering system. The Brooken pipeline is 25 miles long and has a
capacity of 10 MMcf/d. The Brooken Pipeline was originally constructed in 1992. All of the
production on the Brooken Pipeline connects to the Centerpoint Energy Field Services gathering
system and is sold by Clearwater based on the monthly CEGT index less fuel, gathering, and
compression.
We also perform limited gas gathering activities for third-parties which utilize our Brooken
pipeline system. The fee charged to third-party producers is set by contract and ranges from $0.70
to $0.75 per Mcf plus line loss and any compressor fuel. We aggregate these volumes with our
production and sell all the gas through our meters to the same purchasers. These revenues are
collected and distributed to the third-party producers in the normal course of our revenue
distribution cycle. We do not take any commodity risk associated with third party gas as we buy and
sell this production on similarly posted indexes which provide a guaranteed fixed margin. Most of
our gas gathering lines are not subject to United States Department of Transportation (US DOT)
safety regulations.
Canadian.
The Canadian Area is located southwest of the Brooken Area. It is an area characterized
by horizontal drilling for the Hartshorne coal beds. These wells typically produce at
significantly higher rates and higher ultimate reserve recovery than the wells in the vertical
drilling areas. The cost for the horizontal wells is about three times greater than drilling a
vertical well for the same Hartshorne target. Most of the wells currently producing in this area
are operated by third parties. All of the wells operated and non-operated feed into third party
gathering systems. All of the production from this area is sold under sales agreements which
provide for prices that are tied to the CEGT monthly and/or beginning of month indexes, less fuel,
gathering, compression and marketing fees.
Drilling Activity
During the year ended December 31, 2008, we drilled the following wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Working
|
|
|
Revenue
|
|
|
|
|
|
|
Well Name
|
|
Interest
|
|
|
Interest
|
|
|
Type of well
|
|
Net Cost
|
|
Urquhart 2
|
|
|
100.0
|
%
|
|
|
82.8
|
%
|
|
Vert. Coal
|
|
$
|
152,887
|
|
Brinsfield #3
|
|
|
92.8
|
%
|
|
|
75.4
|
%
|
|
Vert. U. Booch
|
|
$
|
75,790
|
|
Haskett #2
|
|
|
99.5
|
%
|
|
|
81.5
|
%
|
|
Vert. Coal
|
|
$
|
175,404
|
|
Groseclos #3V-17
|
|
|
100.0
|
%
|
|
|
85.2
|
%
|
|
Vert. U. Booch
|
|
$
|
198,191
|
|
Davis B #2
|
|
|
99.9
|
%
|
|
|
85.1
|
%
|
|
Vert. Coal
|
|
$
|
151,725
|
|
Tom 1A-1
|
|
|
100.0
|
%
|
|
|
81.4
|
%
|
|
Vert. Coal
|
|
$
|
131,666
|
|
Donna 1
|
|
|
100.0
|
%
|
|
|
80.1
|
%
|
|
Vert. Coal
|
|
$
|
166,849
|
|
Cannon 1-31
|
|
|
100.0
|
%
|
|
|
76.8
|
%
|
|
Vert. Spiro
|
|
$
|
740,501
|
|
Belt 2V-24
|
|
|
100.0
|
%
|
|
|
81.3
|
%
|
|
Vert. Savannah
|
|
$
|
76,577
|
|
Ace #2-36
|
|
|
51.0
|
%
|
|
|
41.4
|
%
|
|
Horiz. Coal
|
|
$
|
672,412
|
|
The above wells produced a combined 12,595 Mcf (net) during the month of December 2008.
We are currently not drilling any additional wells based on the current economics associated with
natural gas in the area of our leased properties and due to our inability to obtain additional
sources of funding for drilling.
7
If drilling activity were to resume, we intend to concentrate our drilling activity on lower risk,
development properties. The number, types, and location of wells we drill will vary depending on
our capital budget, the cost of each well, anticipated production and the estimated recoverable
reserves attributable to each well. We currently require additional funding to allow us to complete
the remainder of our development program.
We currently estimate that the cost to drill a new vertical well (gross) will be approximately
$172,000, and the cost to drill a new horizontal well will be approximately $780,000.
The information contained in this report about past operations of our wells should not be
considered indicative of future performance, nor should it be assumed that there is necessarily any
correlation between the number of productive wells drilled, quantities of reserves found or
economic value. Productive wells are those that produce commercial quantities of oil and gas,
regardless of whether they generate a reasonable rate of return. The ability for us to develop a
portion or all of the above wells is contingent on our having adequate capital on hand.
As shown in the tables below, as of December 31, 2008, we had 63 proved undeveloped drilling
locations (specific drilling locations as to which our independent engineering firm, Lee Keeling
and Associates, Inc., assigned proved undeveloped reserves as of such date).
GAS RESERVES BY FIELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
GAS RESERVES-MCF
|
|
|
|
WELLS
|
|
|
GROSS
|
|
|
NET
|
|
FIELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROOKEN
|
|
|
22
|
|
|
|
6,569.530
|
|
|
|
2,935.658
|
|
CANADIAN
|
|
|
6
|
|
|
|
4,330.734
|
|
|
|
1,272.063
|
|
TEXANNA
|
|
|
35
|
|
|
|
13,499.604
|
|
|
|
10,204.398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
PROVED UNDEVELOPED
|
|
|
63
|
|
|
|
24,399.868
|
|
|
|
14,412.119
|
|
|
|
|
|
|
|
|
|
|
|
GAS RESERVES BY RESERVOIR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
GAS RESERVES-MCF
|
|
|
|
WELLS
|
|
|
GROSS
|
|
|
NET
|
|
RESERVOIR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOOCH
|
|
|
8
|
|
|
|
6,150.338
|
|
|
|
4,623.062
|
|
HARTSHORNE COAL
|
|
|
55
|
|
|
|
18,249.530
|
|
|
|
9,789.057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED UNDEVELOPED
|
|
|
63
|
|
|
|
24,399.868
|
|
|
|
14,412.119
|
|
|
|
|
|
|
|
|
|
|
|
8
Oil and Natural Gas Prices
Our natural gas production is sold to purchasers based on the local monthly index price, which
typically is approximately 70% 90% of the NYMEX monthly average gas prices less any direct costs
for transportation, fuel and shrinkage. We recoup certain of the transportation costs that we pay
related to our own gathering systems.
We may enter into forward sales contracts to reduce the impact of commodity price volatility on our
cash flow from operations. By removing the price volatility from a significant portion of our oil
and gas production, we mitigate, but not eliminate, the potential effects of fluctuating oil and
gas prices on our cash flow from operations for those periods. We must obtain approval from TCW
before we actual enter into any future sales contracts.
Oil and Gas Data
Proved Reserves
Proved oil and gas reserves are the estimated quantities of oil and gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date
the estimate is made. Prices include consideration of changes in existing prices provided by
contractual arrangements, but not escalations based on future conditions. For additional
information regarding estimates of oil and gas reserves, including estimates of proved and proved
developed reserves, the standardized measure of discounted future cash flows and the changes in
discounted future cash flows, see Supplementary Oil and Gas Data (Unaudited) in Item 8. Financial
Statements and Supplementary Data.
The following table presents our estimated net proved oil and gas reserves and the present value of
our estimated proved reserves at December 31, 2007 and 2008, based on the reserve reports prepared
by Lee Keeling and Associates, Inc. The Standardized Measure values shown in the table are not
intended to represent the market value of our estimated oil and gas reserves at such dates.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
Reserve Data:
|
|
|
|
|
|
|
|
|
Estimated net proved reserves:
|
|
|
|
|
|
|
|
|
Gas (Bcf)
|
|
|
35.589
|
|
|
|
22.494
|
|
Oil (MMbls)
|
|
|
0.0
|
|
|
|
0.0
|
|
Total (Bcfe)
|
|
|
35.589
|
|
|
|
22.494
|
|
Proved developed (Bcfe)
|
|
|
12.766
|
|
|
|
8.082
|
|
Proved undeveloped (Bcfe)
|
|
|
22.823
|
|
|
|
14.412
|
|
Proved developed reserves as a % of total proved reserves
|
|
|
35.87
|
%
|
|
|
35.93
|
%
|
Standardized Measure (in millions)
(1)
|
|
$
|
41.272
|
|
|
$
|
13.305
|
|
Representative Gas Price per MCF
(2)
:
|
|
$
|
5.03
|
|
|
$
|
3.60
|
|
|
|
|
(1)
|
|
Does not give effect to forward sales related contracts
|
|
(2)
|
|
Rio Vista sells its production based on monthly average index prices and therefore the price
of gas used to determine the Standardized Measure was based on the monthly weighted average
price received by Rio Vista for all its production during December 2007 and 2008 regardless of
whether Rio Vista was the operator. The weighted average price excludes any impact associated
with sales contracts in effect during the period.
|
9
The data in the above tables are estimates. Oil and gas reserve engineering is inherently a
subjective process of estimating underground accumulations of oil and gas that cannot be measured
exactly. The accuracy of any reserve estimate is a function of the quality of available data and
engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary
from the quantities of oil and gas that are ultimately recovered.
Breakdown of Gas Sales December 2008
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
|
|
|
Realized (a)
|
|
|
Gas Production
|
|
|
|
(MCF)
|
|
|
(MCF)
|
|
|
|
|
|
|
|
|
|
|
Total Operated Wells
|
|
$
|
3.69
|
|
|
|
40,488
|
|
Total Non-operated Wells
|
|
$
|
2.25
|
|
|
|
2,688
|
|
Weighted Average Price Realized
|
|
$
|
3.60
|
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
Relevant Indexes (b)
|
|
|
|
|
|
|
|
|
NYMEX December 2008
|
|
$
|
6.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oneok December 2008 Index
|
|
$
|
4.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEGT Index Daily Average December 2008
|
|
$
|
4.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEGT Index December 2008
|
|
$
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Ignores impact of forward sales contracts and includes fuel, compression, gathering charges and marketing
|
|
(b)
|
|
Excludes fuel, compression, gathering and marketing charges
|
These reserve estimates are reviewed internally by management, with final approval by our Chairman
of the Board. The process performed by Lee Keeling and Associates, Inc. to estimate the
December 31, 2008 reserve amounts included their preparation of our estimated reserve quantities,
future producing rates, future net revenue and the present value of such future net revenue. The
independent engineering firm also prepared our estimates with respect to reserve categorization,
using the definitions for proved reserves set forth in Regulation S-X Rule 4-10 (a) and subsequent
Securities and Exchange Commission (SEC) staff interpretations and guidance. In the conduct of
their preparation of the reserve estimates, Lee Keeling and Associates, Inc. did not independently
verify the accuracy and completeness of information and data furnished by the Company with respect
to ownership interests, oil and gas production, well test data, historical costs of operation and
development, product prices, and any agreements relating to current and future operations of the
properties and sales of production. However, if in the course of their work, something came to
their attention which brought into question the validity or sufficiency of any such information or
data, they did not rely on such information or data until they had satisfactorily resolved their
questions relating thereto. Their estimates of reserves conform to the guidelines of the SEC,
including the criteria of reasonable certainty, as it pertains to expectations about the
recoverability of reserves in future years, under existing economic and operating conditions. We
have not filed reserve estimates with any Federal authority or agency.
Future prices received for production may vary, perhaps significantly, from the prices assumed for
purposes of our estimate of Standardized Measure. The Standardized Measure shown should not be
construed as the market value of the reserves at the date shown. The 10% discount factor used to
calculate Standardized Measure, which is required by Statement of Financial Accounting Standard
(SFAS) No. 69,
Disclosures about Oil and Gas Producing Activities,
is not necessarily the most
appropriate discount rate. The Standardized Measure, no matter what discount rate is used, is
materially affected by assumptions as to timing of future production, which may prove to be
inaccurate.
10
Production and Price History
The following table sets forth information regarding net production of oil and gas and certain
price information for the period November 19, 2007 to December 31, 2007 and the year ended December
31, 2008, which are the periods during which we owned the Oklahoma Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 19, 2007 to December 31, 2007
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Operated
|
|
|
Operated
|
|
|
|
|
|
|
Operated
|
|
|
Operated
|
|
|
|
|
|
|
Wells
|
|
|
Wells
|
|
|
Total
|
|
|
Wells
|
|
|
Wells
|
|
|
Total
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas production (Mcf)
|
|
|
64,391
|
|
|
|
15,905
|
|
|
|
80,296
|
|
|
|
450,395
|
|
|
|
70,730
|
|
|
|
521,125
|
|
Oil production (MBbls)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production (Mcfe)
|
|
|
64,391
|
|
|
|
15,905
|
|
|
|
80,296
|
|
|
|
450,395
|
|
|
|
70,730
|
|
|
|
521,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily production (Mcfe/d)
|
|
|
1,056
|
|
|
|
260
|
|
|
|
1,316
|
|
|
|
1,234
|
|
|
|
194
|
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Realized Prices
(1),(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
$
|
5.33
|
|
|
$
|
4.23
|
|
|
$
|
5.11
|
|
|
$
|
5.99
|
|
|
$
|
5.38
|
|
|
$
|
5.91
|
|
Oil (Bbl)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Mcfe)
|
|
$
|
5.33
|
|
|
$
|
4.23
|
|
|
$
|
5.11
|
|
|
$
|
5.99
|
|
|
$
|
5.38
|
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes the effect of realized prices from forward sales contracts.
|
|
(2)
|
|
The final NYMEX settled price for December 2007 and 2008 was $7.20 (Mcf) and $6.89
(Mcf) before fuel, gathering and compression, respectively.
|
11
Productive Wells
The following table sets forth information relating to the productive wells in which we owned a
working interest as of December 31, 2008. Productive wells consist of producing wells and wells
capable of production, including gas wells awaiting pipeline connections to commence deliveries.
Gross wells refers to the total number of producing wells in which we have an interest, and net
wells refers to the sum of our fractional revenue interests owned in gross wells.
GAS RESERVES BY FIELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROOKEN
|
|
|
39
|
|
|
|
4,999
|
|
|
|
6,713.831
|
|
|
|
4,392.880
|
|
|
|
65.43
|
%
|
CANADIAN
|
|
|
16
|
|
|
|
574
|
|
|
|
3,068.581
|
|
|
|
1,119.642
|
|
|
|
36.49
|
%
|
CROUCH AREA
|
|
|
47
|
|
|
|
6,620
|
|
|
|
915.424
|
|
|
|
670.909
|
|
|
|
73.29
|
%
|
TEXANNA
|
|
|
4
|
|
|
|
0
|
|
|
|
347.268
|
|
|
|
295.630
|
|
|
|
85.13
|
%
|
OTHER
|
|
|
8
|
|
|
|
2,242
|
|
|
|
1,193.858
|
|
|
|
926.516
|
|
|
|
77.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED DEVELOPED
|
|
|
114
|
|
|
|
14,435
|
|
|
|
12,238.962
|
|
|
|
7,405.577
|
|
|
|
60.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROOKEN
|
|
|
12
|
|
|
|
217
|
|
|
|
523.986
|
|
|
|
101.864
|
|
|
|
19.44
|
%
|
CANADIAN
|
|
|
6
|
|
|
|
199
|
|
|
|
2,373.143
|
|
|
|
569.554
|
|
|
|
24.00
|
%
|
CROUCH AREA
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
TEXANNA
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
OTHER
|
|
|
4
|
|
|
|
160
|
|
|
|
601.020
|
|
|
|
5.134
|
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED DEVELOPED
|
|
|
24
|
|
|
|
576
|
|
|
|
3,498.149
|
|
|
|
676.552
|
|
|
|
19.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROOKEN
|
|
|
51
|
|
|
|
5,216
|
|
|
|
7,237.817
|
|
|
|
4,494.744
|
|
|
|
62.10
|
%
|
CANADIAN
|
|
|
22
|
|
|
|
773
|
|
|
|
5,441.724
|
|
|
|
1,689.196
|
|
|
|
31.04
|
%
|
CROUCH AREA
|
|
|
49
|
|
|
|
6,620
|
|
|
|
915.424
|
|
|
|
670.909
|
|
|
|
73.29
|
%
|
TEXANNA
|
|
|
4
|
|
|
|
0
|
|
|
|
347.268
|
|
|
|
295.630
|
|
|
|
85.13
|
%
|
OTHER
|
|
|
12
|
|
|
|
2,402
|
|
|
|
1,794.878
|
|
|
|
931.650
|
|
|
|
51.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED DEVELOPED
|
|
|
138
|
|
|
|
15,011
|
|
|
|
15,737.111
|
|
|
|
8,082.129
|
|
|
|
51.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
GAS RESERVES BY RESERVOIR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOOCH
|
|
|
33
|
|
|
|
6,072
|
|
|
|
4,983.136
|
|
|
|
3,359.632
|
|
|
|
67.42
|
%
|
GEORGES FORK
|
|
|
33
|
|
|
|
4,939
|
|
|
|
231.275
|
|
|
|
190.753
|
|
|
|
82.48
|
%
|
HARTSHORNE COAL
|
|
|
27
|
|
|
|
669
|
|
|
|
4,254.925
|
|
|
|
2,187.801
|
|
|
|
51.42
|
%
|
PITTSBURG CBM AREA
|
|
|
4
|
|
|
|
54
|
|
|
|
945.588
|
|
|
|
492.540
|
|
|
|
52.09
|
%
|
SPIRO
|
|
|
8
|
|
|
|
1,721
|
|
|
|
492.177
|
|
|
|
379.794
|
|
|
|
77.17
|
%
|
OTHER
|
|
|
9
|
|
|
|
980
|
|
|
|
1,331.861
|
|
|
|
795.056
|
|
|
|
59.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED DEVELOPED
|
|
|
114
|
|
|
|
14,435
|
|
|
|
12,238.962
|
|
|
|
7,405.576
|
|
|
|
60.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOOCH
|
|
|
12
|
|
|
|
217
|
|
|
|
523.986
|
|
|
|
101.864
|
|
|
|
19.44
|
%
|
GEORGES FORK
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
HARTSHORNE COAL
|
|
|
11
|
|
|
|
199
|
|
|
|
2,974.163
|
|
|
|
574.689
|
|
|
|
19.32
|
%
|
PITTSBURG CBM AREA
|
|
|
1
|
|
|
|
160
|
|
|
|
0
|
|
|
|
|
|
|
|
0.00
|
%
|
SPIRO
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
OTHER
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED DEVELOPED
|
|
|
24
|
|
|
|
576
|
|
|
|
3,498.149
|
|
|
|
676.553
|
|
|
|
19.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOOCH
|
|
|
45
|
|
|
|
6,289
|
|
|
|
5,507.122
|
|
|
|
3,461.496
|
|
|
|
62.85
|
%
|
GEORGES FORK
|
|
|
33
|
|
|
|
4,939
|
|
|
|
231.275
|
|
|
|
190.753
|
|
|
|
82.48
|
%
|
HARTSHORNE COAL
|
|
|
38
|
|
|
|
868
|
|
|
|
7,229.088
|
|
|
|
2,762.490
|
|
|
|
38.21
|
%
|
PITTSBURG CBM AREA
|
|
|
5
|
|
|
|
214
|
|
|
|
945.588
|
|
|
|
492.540
|
|
|
|
52.09
|
%
|
SPIRO
|
|
|
8
|
|
|
|
1,721
|
|
|
|
492.177
|
|
|
|
379.794
|
|
|
|
77.17
|
%
|
OTHER
|
|
|
9
|
|
|
|
980
|
|
|
|
1,331.861
|
|
|
|
795.056
|
|
|
|
59.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED DEVELOPED
|
|
|
138
|
|
|
|
15,011
|
|
|
|
15,737.111
|
|
|
|
8,082.129
|
|
|
|
51.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Developed and Undeveloped Acreage
The following table sets forth information as of December 31, 2008, relating to our leasehold
acreage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
Undeveloped
|
|
|
Total
|
|
|
|
Acreage
|
|
|
Acreage
|
|
|
Acreage
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
Operated
|
|
|
18,640
|
|
|
|
14,435
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,640
|
|
|
|
14,435
|
|
Non-operated
|
|
|
2,880
|
|
|
|
576
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,880
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,520
|
|
|
|
15,011
|
|
|
|
0
|
|
|
|
0
|
|
|
|
21,520
|
|
|
|
15,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas Operational Overview
We seek to be the operator of wells in which we have an interest. Effective March 1, 2008, Rio
Vista Penny LLC became the operator of the wells which were previously operated, under a transition
operating agreement, by the predecessor entity, GM Oil Properties Inc., from the date of
acquisition of the Oklahoma assets through February 28, 2008. As operator, we design and manage
the drilling and enhancement activities and supervise operation and maintenance activities on a
day-to-day basis. In connection with the acquisition of the Oklahoma Assets, we obtained a
completion and drilling rig (which we subsequently sold), and we enter into consulting arrangements
with outside third parties to supervise certain aspects of our drilling operations. We plan to
enter contracts for additional third-party drilling rigs as needed to carry out our future drilling
program. In addition, we utilize drilling, production and reservoir engineers, geologists and
other specialists who work to improve production rates, increase reserves and lower the cost of
operating our oil and gas properties.
Seasonal weather conditions and lease stipulations can limit our drilling and producing activities
and other operations in Oklahoma, and, as a result, we perform the majority of our drilling during
the summer months in these areas. These seasonal anomalies can pose challenges for meeting our
well drilling objectives and increase competition for equipment, supplies and personnel during the
spring and summer months, which could lead to employee shortages, increased costs or delays in
operations. The demand for gas typically decreases during the summer months and increases during
the winter months. Seasonal anomalies such as mild winters or hot summers sometimes lessen this
fluctuation. In addition, certain gas users utilize gas storage facilities and purchase some of
their anticipated winter requirements during the summer. This can also lessen seasonal demand
fluctuations.
Employees
At December 31, 2008, Rio Vista did not employ any personnel in connection with operation of
the Oklahoma Assets. Beginning March 1, 2008, Rio Vista Operating LLC became the operator of the
Oklahoma assets and employs approximately six employees, consisting of eight field workers and
three office staff personnel as of such date.
Principal Customers
For
the year ended December 31, 2008, approximately 68% of our gas production was sold
through Clearwater Enterprises LLC (Clearwater) and approximately 22%
was sold to Unimark, LLC. Clearwater in turns sells our production to
retail customers within proximity of our gathering system. We believe that if we were to lose
Clearwater as a customer, we would be able to sell our production to other customers under similar
sales terms.
14
Competition
The oil and gas industry is highly competitive. We encounter strong competition from other
independent operators and from major oil companies in acquiring properties, contracting for
drilling equipment and securing trained personnel. Many of these competitors have financial and
technical resources and staffs substantially larger than ours. As a result, our competitors may be
able to pay more for desirable leases, or to evaluate, bid for and purchase a greater number of
properties or prospects, than our financial or human resources permit.
We are also affected by competition for drilling rigs and the availability of related equipment.
In the past, the oil and gas industry has experienced shortages of drilling rigs, equipment, pipe
and personnel, which has delayed development drilling and has caused significant price increases.
We are unable to predict when, or if, such shortages may occur or how they would affect our
drilling program.
Competition is also strong for attractive oil and gas producing properties, undeveloped leases and
drilling rights, and we cannot guarantee that we will be able to compete satisfactorily when
attempting to make further acquisitions.
Environmental Matters and Regulation
We believe that our properties and operations are in substantial compliance with applicable
environmental laws and regulations, and our operations to date have not resulted in any material
environmental liabilities. To protect against potential environmental risk, we typically obtain
Phase I environmental assessments of any properties to be acquired prior to completing each
acquisition.
General.
Our operations are subject to stringent federal, state and local laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental
protection. Our operations are subject to the same environmental laws and regulations as other
companies in the oil and gas industry. These laws and regulations may:
|
|
|
require the acquisition of various permits before drilling commences;
|
|
|
|
require the installation of expensive pollution control equipment;
|
|
|
|
restrict the types, quantities and concentration of various substances
that can be released into the environment in connection with drilling and production
activities;
|
|
|
|
limit or prohibit drilling activities on lands lying within wilderness,
wetlands and other protected areas;
|
|
|
|
require remedial measures to prevent pollution from former operations,
such as pit closure and plugging of abandoned wells;
|
|
|
|
impose substantial liabilities for pollution resulting from our
operations; and
|
|
|
|
with respect to operations affecting federal lands or leases, require
preparation of a Resource Management Plan, an Environmental Assessment, and/or an
Environmental Impact Statement.
|
15
These laws, rules and regulations may also restrict the rate of oil and gas production below the
rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases
the cost of doing business and consequently affects profitability. In addition, Congress and
federal and state agencies frequently revise environmental laws and regulations, and any changes
that result in more stringent and costly waste handling, disposal and clean-up requirements for the
oil and gas industry could have a significant impact on our operating costs. We believe that we
substantially comply with all current applicable environmental laws and regulations and that our
continued compliance with existing requirements will not have a material adverse impact on our
financial condition and results of operations. However, we cannot predict how future environmental
laws and regulations may impact our properties or operations. For the year ended December 31,
2008, we did not incur any material capital expenditures for installation of remediation or
pollution control equipment at any of our facilities. We are not aware of any environmental issues
or claims that will require material capital expenditures during 2009 or that will otherwise have a
material impact on our financial position or results of operations.
Environmental laws and regulations that have a material impact on the oil and gas industry include
the following:
National Environmental Policy Act.
Oil and gas production activities on federal lands are subject
to the National Environmental Policy Act (NEPA). NEPA requires federal agencies, including the
Department of Interior, to evaluate major agency actions having the potential to significantly
impact the environment. In the course of such evaluations, an agency will typically prepare an
Environmental Assessment to assess the potential direct, indirect and cumulative impacts of a
proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement
that may be made available for public review and comment. All of our current development and
production activities, as well as proposed development plans, on federal lands require governmental
permits that are subject to the requirements of NEPA. This process has the potential to delay the
development of oil and gas projects.
Resource Conservation and Recovery Act.
The Resource Conservation and Recovery Act (RCRA), and
comparable state statutes, regulate the generation, transportation, treatment, storage, disposal
and cleanup of hazardous wastes and the disposal of non-hazardous wastes. Under the auspices of
the Environmental Protection Agency (EPA), individual states administer some or all of the
provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling
fluids, produced waters and most of the other wastes associated with the development and production
of oil, gas or geothermal energy constitute solid wastes, which are regulated under the less
stringent non-hazardous waste provisions, but there is no guarantee that the EPA or individual
states will not adopt more stringent requirements for the handling of non-hazardous wastes or
recategorize some non-hazardous wastes as hazardous for future regulation.
We believe that we are currently in substantial compliance with the requirements of RCRA and
related state and local laws and regulations, and that we hold all necessary and up-to-date
permits, registrations and other authorizations to the extent that our operations require them
under such laws and regulations. Although we do not believe the current costs of managing our
wastes as they are presently classified to be significant, any legislative or regulatory
reclassification of oil and gas development and production wastes could increase our costs to
manage and dispose of such wastes.
Comprehensive Environmental Response, Compensation and Liability Act.
The Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), also known as the Superfund law,
imposes joint and several liability, without regard to fault or legality of conduct, on persons who
are considered to be responsible for the release of a hazardous substance into the environment.
These persons include the owner or operator of the site where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substance at the site. Under CERCLA,
such persons may be liable for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the costs of certain health
studies. In addition, it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the hazardous substances
released into the environment.
16
We currently own, lease, or operate numerous properties that have been used for oil and gas
development and production for many years. Although we believe we have utilized operating and
waste disposal practices that were standard in the industry at the time, hazardous substances,
wastes or hydrocarbons may have been released on or under the properties owned or leased by us, or
on or under other locations, including off-site locations, where such substances have been taken
for disposal. In addition, some of these properties have been operated by third parties or by
previous owners or operators whose treatment and disposal of hazardous substances, wastes or
hydrocarbons was not under our control. These properties and the substances disposed or released
on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be
required to remove previously disposed substances and wastes, remediate contaminated property or
perform remedial plugging or pit closure operations to prevent future contamination.
Water Pollution Control Act.
The Federal Water Pollution Control Act, also known as the
Clean Water Act, and analogous state laws impose restrictions and strict controls on the discharge
of pollutants, including produced waters and other oil and gas wastes, into waters of the United
States. The discharge of pollutants into regulated waters is prohibited, except in accordance with
the terms of a permit issued by the EPA or the relevant state. The Clean Water Act also prohibits
the discharge of dredge and fill material in regulated waters, including wetlands, unless
authorized by a permit issued by the U.S. Army Corps of Engineers. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties for non-compliance with discharge
permits or other requirements of the federal Clean Water Act and analogous state laws and
regulations. We believe that we are in substantial compliance with the requirements of the Clean
Water Act.
Clean Air Act.
The Clean Air Act, and associated state laws and regulations, regulate emissions
of various air pollutants through the issuance of permits and the imposition of other
requirements. In addition, the EPA has developed, and continues to develop, stringent regulations
governing emissions of toxic air pollutants at specified sources. Some of our new facilities may
be required to obtain permits before work can begin, and existing facilities may be required to
incur capital costs in order to comply with new emission limitations. These regulations may
increase the costs of compliance for some facilities, and federal and state regulatory agencies can
impose administrative, civil and criminal penalties for non-compliance. We believe that we are in
substantial compliance with the requirements of the Clean Air Act.
Oil Pollution Act.
The Federal Oil Pollution Act (OPA) requires owners and operators of
facilities that could be the source of an oil spill into waters of the U.S. (a term defined to
include rivers, creeks, wetlands and coastal waters) to adopt and implement plans and procedures to
prevent any such oil spill. OPA also requires affected facility owners and operators to
demonstrate that they have at least $35 million in financial resources to pay the costs of cleaning
up an oil spill and to compensate any parties damaged by an oil spill. Such financial assurances
may be increased to as much as $150 million if a formal assessment indicates such an increase is
warranted.
Other Laws and Regulation.
The Kyoto Protocol to the United Nations Framework Convention on
Climate Change (the Protocol) became effective in February 2005. Under the Protocol, participating
nations are required to implement programs to reduce emissions of certain gases, typically referred
to as greenhouse gases, that are suspected of contributing to global warming. The United States is
not currently a participant in the Protocol, and Congress has resisted recent proposed legislation
directed at reducing greenhouse gas emissions. However, there has been support in various regions
of the country for legislation that requires reductions in greenhouse gas emissions, and some
states have already adopted legislation addressing greenhouse gas emissions from various sources,
primarily power plants. The oil and gas industry is a direct source of certain greenhouse gas
emissions, namely carbon dioxide and methane, and future restrictions on such emissions could
impact our future operations. Our operations are not adversely impacted by current state and local
climate change initiatives and, at this time, it is not possible to accurately estimate how
potential future laws or regulations addressing greenhouse gas emissions would impact our business.
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Other Regulation of the Oil and Gas Industry
The oil and gas industry is extensively regulated by numerous federal, state and local
authorities. Legislation affecting the oil and gas industry is under constant review for amendment
or expansion, which frequently increases the regulatory burden. In addition, numerous departments
and agencies, both federal and state, are authorized by statute to issue rules and regulations
binding on the oil and gas industry and its individual members, some of which carry substantial
penalties for failure to comply. Although the regulatory burden on the oil and gas industry
increases our cost of doing business and, consequently, affects our profitability, these burdens do
not affect us any differently or to any greater or lesser extent than they affect other companies
in the industry with similar types, quantities and locations of production.
Legislation continues to be introduced in Congress, and development of regulations continues in the
Department of Homeland Security and other agencies concerning the security of industrial
facilities, including oil and gas facilities. Our operations may be subject to such laws and
regulations. Presently, it is not possible to accurately estimate the costs we would incur to
comply with any such facility security laws or regulations, but such expenditures could be
substantial.
Drilling and Production.
Our operations are subject to various types of regulation at the federal,
state and local levels. These types of regulation include requiring permits for the drilling of
wells, drilling bonds and reports concerning operations. Most states, and some counties and
municipalities, in which we operate regulate one or more of the following:
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the method of drilling and casing wells;
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rates of production from wells;
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the surface use and restoration of properties upon which wells are
drilled;
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the plugging and abandoning of wells; and
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notice to surface owners and other third parties.
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State laws regulate the size and shape of drilling and spacing of units or proportion of units
governing the pooling of oil and gas properties. Some states allow forced pooling or integration
of tracts to facilitate development while other states rely on voluntary pooling of lands and
leases. In some instances, forced pooling or unitization may be implemented by third parties and
may reduce our interest in the unitized properties. In addition, state conservation laws establish
maximum rates of production from oil and gas wells, prohibit the venting or flaring of gas and
impose requirements regarding the ratability of production. These laws and regulations may limit
the amount of oil and gas we can produce from our wells or limit the number of wells or the
locations at which we can drill. Moreover, each state typically imposes a production or severance
tax with respect to the production and sale of oil, gas and natural gas liquids within its
jurisdiction.
Oil and Gas Transportation and Pricing.
The availability, terms and cost of transportation
significantly affect sales of oil and gas. The interstate transportation and sale of oil and gas
are subject to federal regulation, primarily by the FERC, including regulation of the terms,
conditions and rates for interstate transportation, storage and various other matters. Federal and
state regulations govern the price and terms for access to oil and gas pipeline transportation.
The FERCs regulations for interstate oil and gas transmission in some circumstances may also
affect the intrastate transportation of oil and gas.
Although oil and gas prices are currently unregulated, Congress historically has been active in the
area of oil and gas regulation. We cannot predict whether new legislation to regulate oil and gas
operations might be proposed, what proposals, if any, might actually be enacted by Congress or the
various state legislatures, and what effect, if any, the proposals might have on the operations of
the underlying properties.
Rio Vista Employees
Rio Vista has no employees. At December 31, 2008, Rio Vistas subsidiaries employed personnel in
connection with the operation of their businesses as described above. The business of Rio Vista
is managed by the General Partner. Penn Octane employs all persons, other than Rio Vistas
employees referred to herein, including executive officers, necessary for the operation of Rio
Vistas business.
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Item 1A. Risk Factors
Limited partner interests are inherently different from capital stock of a corporation, although
many of the business risks to which we are subject are similar to those that would be faced by a
corporation engaged in a similar business. The following are some of the important factors that
could affect our business, financial condition, results of operations and our actual results could
differ materially from estimates contained in our forward-looking statements. We may encounter
risks in addition to those described below. Additional risks and uncertainties not currently known
to us, or that we currently deem to be immaterial, may also adversely impair or offset our business
results of operation, financial condition and prospects.
Risks Related to Our Business
We may not have sufficient cash flow from operations to make the quarterly distribution on our
common units following establishment of cash reserves and payment of fees and expenses, including
reimbursement of expenses to our General Partner.
We may not have sufficient available cash each quarter to make the quarterly distribution of $0.25
per unit or any other amount. Under the terms of our partnership agreement, the amount of cash
otherwise available for distribution will be reduced by our operating expenses and the amount of
any cash reserve our General Partner establishes to provide for the proper conduct of our business,
meet any of our obligations arising from any of our debt instruments, or other agreements, comply
with applicable law, and provide funds for distributions to our unitholders and to our General
Partner for any one or more of the next four quarters.
The amount of cash we actually generate will depend upon numerous factors related to our business
that may be beyond our control, including, among other things, the risks described in these Risk
Factors. In addition, the actual amount of cash that we will have available for distribution will
depend on other factors, including:
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the level of our capital expenditures;
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our ability to make borrowings under our revolving credit facilities, if any, to make
distributions;
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limitations on our subsidiaries ability to make distributions to us under the TCW
credit facility, as discussed under Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations;
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sources of cash used to fund acquisitions;
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debt service requirements and restrictions on distributions contained in our existing
and future debt agreements;
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interest payments;
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fluctuations in our working capital needs;
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general and administrative expenses, including expenses we will incur as a result of
being a public company;
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cash settlement of commodity derivative contracts;
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timing and collectibility of receivables; and
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the amount of cash reserves, which we expect to be substantial, established by the
General Partner for the proper conduct of our business.
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Our
estimate of the available cash as defined in the partnership agreement, is necessary for us
to make a distribution on all units at the target distribution rate for each of the four quarters
ending December 31, 2009 and is based on assumptions that are inherently uncertain and are subject to
significant business, economic, financial, legal, regulatory and competitive risks and
uncertainties that could cause actual results to differ materially from those estimated.
Our
estimate of available cash as defined in the partnership agreement, is necessary for us to
make a distribution on all units at the target distribution rate for each of the four quarters
ending December 31, 2009 and is based on our managements calculations, and we have not received an
opinion or report on it from any independent accountant. This estimate is based on assumptions
about development, production, oil and natural gas prices, settlements under commodity derivative
contracts, capital expenditures, expenses, borrowings and other matters that are inherently
uncertain and are subject to significant business, economic, financial, legal, regulatory and
competitive risks and uncertainties that could cause actual results to differ materially from those
estimated. If any of these assumptions prove to have been inaccurate, our actual results may differ
materially from those set forth in our estimates, and we may be unable to make all or part of the
initial quarterly distribution on our units.
Our oil and natural gas reserves naturally decline, and we will be unable to sustain distributions
at the level of our initial quarterly distribution without making accretive acquisitions or
substantial capital expenditures that maintain or grow our asset base.
Our future oil and natural gas reserves, production volumes, cash flow and ability to make
distributions depend on our success in developing and exploiting our current reserves efficiently
and finding or acquiring additional recoverable reserves economically. We may not be able to
develop, find or acquire additional reserves to replace our current and future production at
acceptable costs, which would adversely affect our business, financial condition and results of
operations and reduce cash available for distribution.
Because our oil and natural gas properties are a depleting asset, we will need to make substantial
capital expenditures to maintain and grow our asset base, which will reduce our cash available for
distribution. Because the timing and amount of these capital expenditures fluctuate each quarter,
we expect to reserve substantial amounts of cash each quarter to finance these expenditures over
time. We may use the reserved cash to reduce indebtedness until we make the capital expenditures.
Over a longer period of time, if we do not set aside sufficient cash reserves or make sufficient
expenditures to maintain our asset base, we will be unable to make distributions at the current
level from cash generated from operations and would therefore expect to reduce our distributions.
If our reserves decrease and we do not reduce our distribution, then a portion of the distribution
may be considered a return of part of a unitholders investment in us as opposed to a return on
investment. Also, if we do not make sufficient growth capital expenditures, we will be unable to
expand our business operations and will therefore be unable to raise the level of future
distributions.
To fund our substantial capital expenditures, we will be required to use cash generated from our
operations, additional borrowings or the issuance of additional equity or debt securities, or some
combination thereof, which may limit our ability to make distributions at the then-current
distribution rate.
The use of cash generated from operations to fund capital expenditures will reduce cash available
for distribution to our unitholders. Our ability to obtain bank financing or to access the capital
markets for future equity or debt offerings may be limited by our financial condition at the time
of any such financing or offering and the covenants in our existing debt agreements, as well as by
adverse market conditions resulting from, among other things, general economic conditions and
contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for
necessary future capital expenditures could have a material adverse effect on our business, results
of operations, financial condition and ability to make distributions.
Even if we are successful in obtaining the necessary funds, the terms of such financings could
limit our ability to make distributions to our unitholders, either directly or indirectly. For
example, our existing credit facility with TCW prohibits our Oklahoma subsidiaries from making any
distributions to us unless we meet certain conditions which we do not currently expect to meet. If
we are not able to receive sufficient operating cash from our subsidiaries, our ability to make
distributions to our unitholders at the then-current distribution rate could be adversely affected.
21
In addition, incurring additional debt may significantly increase our interest expense and
financial leverage. Issuing additional common units may result in significant unitholder dilution
thereby increasing the aggregate amount of cash required to maintain the then-current distribution
rate. Any of these events could limit our ability to make distributions at the then-current
distribution rate.
We may not make cash distributions during periods when we record net income.
The amount of cash we have available for distribution depends primarily on our cash flow, including
cash from financial reserves, working capital or other borrowings, and not solely on profitability,
which will be affected by non-cash items. As a result, we may make cash distributions during
periods when we record losses and may not make cash distributions during periods when we record net
income.
Oil and natural gas prices are very volatile. A decline in commodity prices will cause a decline in
our cash flow from operations, which may force us to reduce our distributions or cease paying
distributions altogether.
The oil and natural gas markets are very volatile, and we cannot predict future oil and natural gas
prices. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes
in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond our control, such as:
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our ability to make borrowings under our revolving credit facilities, if any, to make
distributions;
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domestic and foreign supply of and demand for oil and natural gas;
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weather conditions;
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overall domestic and global economic conditions;
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political and economic conditions in oil and natural gas producing countries, including
those in the Middle East and South America;
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actions of the Organization of Petroleum Exporting Countries, or OPEC, and other
state-controlled oil companies relating to oil price and production controls;
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impact of the U.S. dollar exchange rates on oil and natural gas prices;
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technological advances affecting energy consumption and energy supply;
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domestic and foreign governmental regulations and taxation;
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the impact of energy conservation efforts;
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the proximity, capacity, cost and availability of oil and natural gas pipelines and
other transportation facilities;
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the availability of refining capacity; and
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the price and availability of alternative fuels.
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Our revenue, profitability and cash flow depend upon the prices of and demand for oil and natural
gas, and a drop in prices can significantly affect our financial results and impede our growth. In
particular, declines in commodity prices will:
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negatively impact the value of our reserves, because declines in oil and natural gas
prices would reduce the amount of oil and natural gas that we can produce economically;
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reduce the amount of cash flow available for capital expenditures;
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limit our ability to borrow money or raise additional capital; and
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impair our ability to make distributions.
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If we raise our distribution levels in response to increased cash flow during periods of relatively
high commodity prices, we may not be able to sustain those distribution levels during subsequent
periods of lower commodity prices.
An increase in the differential between the NYMEX or other benchmark prices of oil and natural gas
and the wellhead price we receive could significantly reduce our cash available for distribution
and adversely affect our financial condition.
The prices that we receive for our oil and natural gas production sometimes trade at a discount to
the relevant benchmark prices, such as NYMEX, that are used for calculating commodity derivative
positions. The difference between the benchmark price and the price we receive is called a
differential. We cannot accurately predict oil and natural gas differentials. Increases in the
differential between the benchmark price for oil and natural gas and the wellhead price we receive
could significantly reduce our cash available for distribution and adversely affect our financial
condition.
Future price declines may result in a write-down of our asset carrying values, which could have a
material adverse effect on our results of operations and limit our ability to borrow and make
distributions.
Declines in oil and natural gas prices may result in our having to make substantial downward
adjustments to our estimated proved reserves. If this occurs, or if our estimates of development
costs increase, production data factors change or development results deteriorate, accounting rules
may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and
natural gas properties for impairments. If we incur impairment charges in the future, it could have
a material adverse effect on our results of operations in the period incurred and on our ability to
borrow funds under our revolving credit facility, which in turn may adversely affect our ability to
make cash distributions to our unitholders.
Our commodity derivative contract activities could result in financial losses or could reduce our
income, which may adversely affect our ability to make distributions to our unitholders.
To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the
prices of oil and natural gas, we may in the future enter into derivative arrangements for a
significant portion of our oil and natural gas production that could result in both realized and
unrealized commodity derivative losses. The extent of our commodity price exposure is related
largely to the effectiveness and scope of our derivative activities. For example, the derivative
instruments we utilize are based on posted market prices, which may differ significantly from the
actual crude oil, natural gas and NGL prices we realize in our operations.
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Our actual future production may be significantly higher or lower than we estimate at the time we
enter into derivative transactions for such period. If the actual amount is higher than we
estimate, we will have greater commodity price exposure than we intended. If the actual amount is
lower than the nominal amount that is subject to our derivative financial instruments, we might be
forced to satisfy all or a portion of our derivative transactions without the benefit of the cash
flow from our sale or purchase of the underlying physical commodity, resulting in a substantial
diminution of our liquidity. As a result of these factors, our derivative activities may not be as
effective as we intend in reducing the volatility of our cash flows, and in certain circumstances
may actually increase the volatility of our cash flows. In addition, our derivative activities are
subject to the following risks:
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a counterparty may not perform its obligation under the applicable derivative
instrument; and
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there may be a change in the expected differential between the underlying commodity
price in the derivative instrument and the actual price received, which may result in
payments to our derivative counterparty that are not accompanied by our receipt of higher
prices from our production in the field.
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Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any
material inaccuracies in these reserve estimates or underlying assumptions will materially affect
the quantities and present value of our reserves.
It is not possible to measure underground accumulations of oil or natural gas in an exact way. Oil
and natural gas reserve engineering requires subjective estimates of underground accumulations of
oil and natural gas and assumptions concerning future oil and natural gas prices, future production
levels and operating and development costs. In estimating our level of oil and natural gas
reserves, we and our independent reserve engineers make certain assumptions that may prove to be
incorrect, including assumptions relating to the level of oil and natural gas prices, future
production levels, capital expenditures, operating and development costs, the effects of regulation
and availability of funds. If these assumptions prove to be incorrect, our estimates of reserves,
the economically recoverable quantities of oil and natural gas attributable to any particular group
of properties, the classifications of reserves based on risk of recovery and our estimates of the
future net cash flows from our reserves could change significantly.
Our Standardized Measure is calculated using prices and costs in effect as of the date of
estimation, less future development, production and income tax expenses, and discounted to reflect
the timing of future net revenue in accordance with the rules and regulations of the SEC. Over
time, we may make material changes to reserve estimates to take into account changes in our
assumptions and the results of actual development and production.
The reserve estimates we make for fields that do not have a lengthy production history are less
reliable than estimates for fields with lengthy production histories. A lack of production history
may contribute to inaccuracy in our estimates of proved reserves, future production rates and the
timing of development expenditures.
The Standardized Measure of our estimated proved reserves is not necessarily the same as the
current market value of our estimated proved oil and natural gas reserves. We base the estimated
discounted future net cash flows from our estimated proved reserves on prices and costs in effect
on the day of estimate.
The timing of both our production and our incurrence of expenses in connection with the development
and production of oil and natural gas properties will affect the timing of actual future net cash
flows from proved reserves, and thus their actual present value. In addition, the 10% discount
factor we use when calculating discounted future net cash flows in compliance with SFAS No. 69,
Disclosures about Oil and Gas Producing Activities, may not be the most appropriate discount
factor based on interest rates in effect from time to time and risks associated with us or the oil
and natural gas industry in general.
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Developing and producing oil and natural gas are costly and high-risk activities with many
uncertainties that could adversely affect our financial condition or results of operations and, as
a result, our ability to make distributions to our unitholders.
The cost of developing, completing and operating a well is often uncertain, and cost factors can
adversely affect the economics of a well. Our efforts will be uneconomical if we drill dry holes or
wells that are productive but do not produce as much oil and natural gas as we had estimated.
Furthermore, our development and producing operations may be curtailed, delayed or canceled as a
result of other factors, including:
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high costs, shortages or delivery delays of rigs, equipment, labor or other services;
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unexpected operational events and/or conditions;
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reductions in oil and natural gas prices;
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increases in severance taxes;
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limitations in the market for oil and natural gas;
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adverse weather conditions and natural disasters;
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facility or equipment malfunctions, and equipment failures or accidents;
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title problems;
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pipe or cement failures and casing collapses;
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compliance with environmental and other governmental requirements;
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environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and
discharges of toxic gases;
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lost or damaged oilfield development and service tools;
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unusual or unexpected geological formations, and pressure or irregularities in
formations;
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loss of drilling fluid circulation;
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fires, blowouts, surface craterings and explosions;
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uncontrollable flows of oil, natural gas or well fluids; and
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loss of leases due to incorrect payment of royalties.
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If any of these factors were to occur with respect to a particular field, we could lose all or a
part of our investment in the field, or we could fail to realize the expected benefits from the
field, either of which could materially and adversely affect our revenue and profitability.
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Shortages of rigs, equipment and crews could delay our operations and reduce our cash available for
distribution.
Higher oil and natural gas prices generally increase the demand for rigs, equipment and crews and
can lead to shortages of, and increasing costs for, development equipment, services and personnel.
Shortages of, or increasing costs for, experienced development crews and oil field equipment and
services could restrict our ability to drill the wells and conduct the operations that we currently
have planned. Any delay in the development of new wells or a significant increase in development
costs could reduce our revenues.
If we do not make acquisitions on economically acceptable terms, our future growth and ability to
make or increase distributions will be limited.
Our ability to grow and to increase distributions to unitholders depends in part on our ability to
make acquisitions that result in an increase in pro forma available cash per unit. We may be unable
to make such acquisitions because we are:
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unable to identify attractive acquisition candidates or negotiate acceptable purchase
contracts with them;
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unable to obtain financing for these acquisitions on economically acceptable terms; or
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outbid by competitors.
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If we are unable to acquire properties containing proved reserves, our total level of proved
reserves will decline as a result of our production, and we will be limited in our ability to
increase or possibly even to maintain our level of cash distributions.
Any acquisitions we complete are subject to substantial risks that could reduce our ability to make
distributions to unitholders.
Even if we do make acquisitions that we believe will increase pro forma available cash per unit,
these acquisitions may nevertheless result in a decrease in pro forma available cash per unit. Any
acquisition involves potential risks, including, among other things:
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the validity of our assumptions about reserves, future production, revenues, capital
expenditures, operating expenses and costs, including synergies;
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an inability to integrate the businesses we acquire successfully;
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a decrease in our liquidity by using a significant portion of our available cash or
borrowing capacity to finance acquisitions;
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a significant increase in our interest expense or financial leverage if we incur
additional debt to finance acquisitions;
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the assumption of unknown liabilities, losses or costs for which we are not indemnified
or for which our indemnity is inadequate;
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the diversion of managements attention from other business concerns;
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an inability to hire, train or retain qualified personnel to manage and operate our
growing business and assets;
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natural disasters;
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the incurrences of other significant charges, such as impairment of goodwill or other
intangible assets, asset devaluation or restructuring charges;
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unforeseen difficulties encountered in operating in new geographic areas; and
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customer or key employee losses at the acquired businesses.
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Our decision to acquire a property will depend in part on the evaluation of data obtained from
production reports
and engineering studies, geophysical and geological analyses and seismic and other information, the
results of which are often inconclusive and subject to various interpretations.
In addition, our reviews of acquired properties are inherently incomplete because it generally is
not feasible to perform an in-depth review of the individual properties involved in each
acquisition given time constraints imposed by sellers. Even a detailed review of records and
properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their deficiencies and potential.
Inspections may not always be performed on every well, and environmental problems, such as
groundwater contamination, are not necessarily observable even when an inspection is undertaken.
Due to our lack of geographic diversification, adverse developments in our operating areas would
reduce our ability to make distributions to our unitholders.
Currently, our only oil and natural gas properties and related assets are located in Oklahoma and
the greatest part of Regionals operations are conducted within a 150-mile radius of its principal
facility in southeastern Virginia. Due to our lack of diversification in location, an adverse
development in the relevant businesses within our geographic areas would have a significantly
greater impact on our results of operations and cash available for distribution to our unitholders
than if we maintained more diverse locations.
We may be unable to compete effectively with larger companies, which may adversely affect our
ability to generate sufficient revenue to allow us to make distributions to our unitholders.
The oil and natural gas industry is intensely competitive with respect to acquiring prospects and
productive properties, marketing oil and natural gas and securing equipment and trained personnel,
and we compete with other companies that have greater resources. Many of our competitors are major
and large independent oil and natural gas companies, and possess and employ financial, technical
and personnel resources substantially greater than ours. Those companies may be able to develop and
acquire more prospects and productive properties than our financial or personnel resources permit.
Our ability to acquire additional properties and to discover reserves in the future will depend on
our ability to evaluate and select suitable properties and to consummate transactions in a highly
competitive environment. Many of our larger competitors not only drill for and produce oil and
natural gas but also carry on refining operations and market petroleum and other products on a
regional, national or worldwide basis. These companies may be able to pay more for oil and natural
gas properties and evaluate, bid for and purchase a greater number of properties than our financial
or human resources permit. In addition, there is substantial competition for investment capital in
the oil and natural gas industry. These larger companies may have a greater ability to continue
development activities during periods of low oil and natural gas prices and to absorb the burden of
present and future federal, state, local and other laws and regulations. Our inability to compete
effectively with larger companies could have a material adverse impact on our business activities,
financial condition and results of operations.
We may incur substantial additional debt to enable us to make our quarterly distributions, which
may negatively affect our ability to execute our business plan and make future distributions.
We may be unable to make a distribution at the initial distribution rate or the then-current
distribution rate without incurring indebtedness. When we borrow to make distributions, we are
distributing more cash than we are generating from our operations on a current basis. This means
that we are using a portion of our borrowing capacity under our revolving credit facility to make
distributions rather than to maintain or expand our operations. If we use borrowings under our
revolving credit facility to make distributions for an extended period of time rather than toward
funding capital expenditures and other matters relating to our operations, we may be unable to
support or grow our business. Such a curtailment of our business activities, combined with our
payment of principal and interest on our future indebtedness to make these distributions, will
reduce our cash available for distribution on our units and will have a material adverse effect on
our business, financial condition and results of operations. If we borrow to make distributions
during periods of low commodity prices and commodity prices remain low, we may have to reduce our
distribution in order to avoid excessive leverage.
27
Our future debt levels may limit our flexibility to obtain additional financing and pursue other
business opportunities and may affect our ability to make future distributions.
As of December 31, 2008, we had approximately $31.3 million of debt. We may incur additional debt
in the
future. Our future indebtedness could have important consequences to us, including:
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our ability to obtain additional financing, if necessary, for working capital, capital
expenditures, acquisitions or other purposes may be impaired or such financing may not be
available on favorable terms;
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covenants contained in our future debt arrangements may require us to meet financial
tests that may affect our flexibility in planning for and reacting to changes in our
business, including possible acquisition opportunities;
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we may need a substantial portion of our cash flow to make principal and interest
payments on our indebtedness, reducing the funds that would otherwise be available for
operations, future business opportunities and distributions to unitholders; and
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our debt level may make us more vulnerable than our competitors with less debt to
competitive pressures or a downturn in our business or the economy generally.
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Our ability to service our indebtedness will depend upon, among other things, our future financial
and operating performance, which will be affected by prevailing economic conditions and financial,
business, regulatory and other factors, some of which are beyond our control. If our operating
results are not sufficient to service our current or future indebtedness, we will be forced to take
actions such as reducing distributions, reducing or delaying business activities, acquisitions,
investments and/or capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital or bankruptcy protection. We may not be able to
effect any of these remedies on satisfactory terms or at all.
Our operations are subject to operational hazards and unforeseen interruptions for which we may not
be adequately insured.
There are a variety of operating risks inherent in our wells, gathering systems, pipelines,
transportation, storage, transloading and other facilities, such as leaks, accidents, fires,
explosions, mechanical problems, hurricanes, adverse weather conditions, hazardous materials
releases, mechanical failures and other events beyond our control, all of which could cause
substantial financial losses. Any of these or other similar occurrences could result in the
disruption of our operations, substantial repair costs, personal injury or loss of human life,
significant damage to property, fines, environmental pollution, impairment of our operations and
substantial revenue losses. The location of our facilities near populated areas, including
residential areas, commercial business centers and industrial sites, could significantly increase
the level of damages resulting from these risks. As a result of the foregoing, we are, and are
likely to continue to be, a defendant in various legal proceedings and litigation arising in the
ordinary course of business.
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We are not fully insured against all risks, including development and completion risks that are
generally not recoverable from third parties or insurance. In addition, pollution and environmental
risks generally are not fully insurable. We may also elect not to obtain insurance if we believe
that the cost of available insurance is excessive relative to the perceived risks presented. Losses
could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing
insurance coverage. Moreover, insurance may not be available in the future at commercially
reasonable costs and on commercially reasonable terms. Changes in the insurance markets due to
terrorist attacks and hurricanes have made it more difficult for us to obtain certain types of
coverage. We may not be able to obtain the levels or types of insurance we would otherwise have
obtained prior to these market changes, and our insurance may contain large deductibles or fail to
cover certain hazards or cover all potential losses. Losses and liabilities from uninsured and
underinsured events and delay in the payment of insurance proceeds could have a material adverse
effect on our business, financial condition, results of operations and ability to make
distributions to our unitholders.
Our business depends in part on gathering and transportation facilities owned by others. Any
limitation in the availability of those facilities could interfere with our ability to market our
oil and natural gas production and could harm our business.
The marketability of our oil and natural gas production depends in part on the availability,
proximity and capacity of pipelines, oil and natural gas gathering systems and processing
facilities. The amount of oil and natural gas that can be produced and sold is subject to
curtailment in certain circumstances, such as pipeline interruptions due to scheduled and
unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on such
systems. The curtailments arising from these and similar circumstances may last from a few days to
several months. In many cases, we are provided only with limited, if any, notice as to when these
circumstances will arise and their duration. Any significant curtailment in gathering system or
pipeline capacity could reduce our ability to market our oil and natural gas production and harm
our business.
We have limited control over the activities on properties we do not operate.
Other companies operated approximately 17.4% of our wells on a pro forma basis as of December 31,
2008. We have limited ability to influence or control the operation or future development of these
non-operated properties or the amount of capital expenditures that we are required to fund with
respect to them. Our dependence on the operator and other working interest owners for these
projects and our limited ability to influence or control the operation and future development of
these properties could materially adversely affect the realization of our targeted returns on
capital in drilling or acquisition activities and lead to unexpected future costs.
We are subject to complex federal, state, local and other laws and regulations that could adversely
affect the cost, manner or feasibility of conducting our operations.
Our oil and natural gas exploration and production operations are subject to complex and stringent
laws and regulations. Environmental and other governmental laws and regulations have increased the
costs to plan, design, drill, install, operate and abandon oil and natural gas wells and related
pipeline and processing facilities. In order to conduct our operations in compliance with these
laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from
various federal, state and local governmental authorities. We may incur substantial costs in order
to maintain compliance with these existing laws and regulations. In addition, our costs of
compliance may increase if existing laws and regulations are revised or reinterpreted, or if new
laws and regulations become applicable to our operations.
Our business is subject to federal, state and local laws and regulations as interpreted and
enforced by governmental authorities possessing jurisdiction over various aspects of the
exploration for, and production of, oil and natural gas. Failure to comply with such laws and
regulations, as interpreted and enforced, could have a material adverse effect on our business,
financial condition, results of operations and ability to make distributions to our unitholders.
29
Our pipeline integrity program may subject us to significant costs and liabilities.
As a result of pipeline integrity testing under the Pipeline Safety Improvement Act of 2002, we may
incur significant and unanticipated operating and capital expenditures for repairs or upgrades
deemed necessary to ensure the continued safe and reliable operation of our pipelines. Furthermore,
the Act or an increase in public expectations for pipeline safety may require additional reporting,
the replacement of our pipeline segments, additional monitoring equipment and more frequent
inspection or testing of our pipeline facilities. Any repair, remediation, preventative or
mitigating actions may require significant capital and operating expenditures. Should we fail to
comply with the U.S. Department of Transportation rules and related regulations and orders, we
could be subject to penalties and fines, which could have a material adverse effect on our ability
to make distributions to our unitholders.
Our business would be adversely affected if operations at our terminaling, transportation and
distribution facilities experienced significant interruptions. Our business would also be adversely
affected if the operations of our customers and suppliers experienced significant interruptions.
Our operations are dependent upon our terminaling and storage facilities and various means of
transportation. We are also dependent upon the uninterrupted operations of certain facilities owned
or operated by our suppliers and customers. Any significant interruption at these facilities or
inability to transport products to or from these facilities or to or from our customers for any
reason would adversely affect our results of operations, cash flow and ability to make
distributions to our unitholders or to make principal and interest payments on our debt securities.
Operations at our facilities and at the facilities owned or operated by our suppliers and customers
could be partially or completely shut down, temporarily or permanently, as the result of any number
of circumstances that are not within our control, such as:
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weather conditions;
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environmental remediations;
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labor difficulties; and
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disruptions in the supply of our products to our facilities or means of transportation.
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In addition, terrorist attacks and acts of sabotage could target oil and gas production facilities,
refineries, processing plants, terminals and other infrastructure facilities. Any significant
interruptions at our facilities, facilities owned or operated by our suppliers or customers, or in
the oil and gas industry as a whole caused by such attacks or acts could have a material adverse
affect on our results of operations, cash flow and ability to make distributions to our unitholders
or to make principal and interest payments on our debt securities.
The occurrence or threat of extraordinary events, including domestic and international terrorist
attacks, and laws and regulations related thereto may disrupt our operations and decrease demand
for our products and services.
Chemical-related assets, such as those handled at our terminaling and storage facilities, may be
at greater risk of future terrorist attacks than other possible targets in the United States.
Federal legislation is under consideration that could impose new site security requirements,
specifically on chemical facilities, which may increase our overhead expenses. Our business or our
customers businesses could be adversely affected because of the cost of complying with new
security regulations.
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New federal regulations have already been adopted to increase the security of the transportation of
hazardous chemicals in the United States. We believe we have met these requirements but additional
federal and local regulations that limit the distribution of hazardous materials are being
considered. We store, ship and receive materials that are classified as hazardous. Bans on movement
of hazardous materials through certain cities could affect the efficiency of our logistical
operations. Broader restrictions on hazardous material movements could lead to additional
investment to produce hazardous raw materials and change where and what products we provide and
transport.
The occurrence of extraordinary events, including future terrorist attacks and the outbreak or
escalation of hostilities, cannot be predicted, and their occurrence can be expected to continue to
affect negatively the economy in general, and specifically the markets for our products. The
resulting damage from a direct attack on our assets, or assets used by us, could include loss of
life and property damage. In addition, available insurance coverage may not be sufficient to cover
all of the damage incurred or, if available, may be prohibitively expensive.
We are subject to many environmental and safety regulations that may result in significant
unanticipated costs or liabilities or cause interruptions in our operations.
Our operations involve the handling, production, transportation, treatment and disposal of
materials that are classified as hazardous or toxic and that are extensively regulated by
environmental and health and safety laws, regulations and permit requirements. We may incur
substantial costs, including fines, damages and criminal or civil sanctions, or experience
interruptions in our operations for actual or alleged violations or compliance requirements arising
under environmental laws, any of which could have a material adverse effect on our business,
financial condition, results of operations or cash flows. Our operations could result in violations
of environmental laws, including spills or other releases of hazardous substances to the
environment. In the event of a catastrophic incident, we could incur material costs. Furthermore,
we may be liable for the costs of investigating and cleaning up environmental contamination on or
from our properties or at off-site locations where we disposed of or arranged for the disposal or
treatment of hazardous materials. We own or lease a number of properties that have been used to
store or distribute refined products for many years. Many of these properties, such as the assets
acquired from Regional Enterprises, Inc. in 2007 and the Oklahoma assets, were operated by third
parties whose handling, disposal, or release of hydrocarbons and other wastes was not under our
control. If significant previously unknown contamination is discovered, or if existing laws or
their enforcement change, then the resulting expenditures could have a material adverse effect on
our business, financial condition, results of operations or cash flows.
Environmental, health and safety laws, regulations and permit requirements, and the potential for
further expanded laws, regulations and permit requirements may increase our costs or reduce demand
for our products and thereby negatively affect our business. Environmental permits required for our
operations are subject to periodic renewal and may be revoked or modified for cause or when new or
revised environmental requirements are implemented. Changing and increasingly strict environmental
requirements and the potential for further expanded regulation may increase our costs and can
affect the manufacturing, handling, processing, distribution and use of our products. If so
affected, our business and operations may be materially and adversely affected. In addition,
changes in these requirements may cause us to incur substantial costs in upgrading or redesigning
our facilities and processes, including our waste treatment, storage, disposal and other waste
handling practices and equipment. For these reasons, we may need to make capital expenditures
beyond those currently anticipated to comply with existing or future environmental or safety laws.
31
We store and transport hazardous or volatile chemicals at some of our facilities. If our safety
procedures are not effective, an accident involving these other hazardous or volatile chemicals
could result in serious injuries or death, or result in the shutdown of our facilities.
We store and transport hazardous chemicals such as aqua ammonia, phosphoric acid, hydrochloric acid
and sulfuric acid. An accident involving any of these chemicals could result in serious injuries or
death, or evacuation of areas near an accident. An accident could also result in third-party
property damage or shutdown of our terminaling facilities, or cause us to expend significant
amounts to remediate safety issues or to repair damaged facilities. As a result, an accident
involving any of these chemicals could have a material adverse effect on our results of operations,
liquidity or financial condition.
Risks Inherent in an Investment in Us
The amount of cash distributions that we will be able to distribute to unitholders will be reduced
by the costs associated with general and administrative expenses and reserves that our General
Partner believes prudent to maintain for the proper conduct of our business and for future
distributions.
Before we can pay distributions to our unitholders, we must first pay or reserve cash for our
expenses, including capital expenditures and the costs of being a public company and other
operating expenses, and we may reserve cash for future distributions during periods of limited cash
flows. The amount of cash we have available for distribution to our unitholders will be affected by
our level of reserves and expenses. Because of restrictions in our credit agreements and lack of
available cash, we have not made distributions for the quarters ended September 30, 2008 and
December 31, 2008.
Our General Partner and its affiliates own a controlling interest in us and may have conflicts of
interest with us and limited fiduciary duties to us, which may permit them to favor their own
interests to the detriment of our unitholders.
Penn Octane Corporation controls our General Partner, which controls us. The managers and officers
of our General Partner have a fiduciary duty to manage our General Partner in a manner beneficial
to Penn Octane. Furthermore, certain managers and officers of our General Partner may be directors
or officers of affiliates of our General Partner, including Penn Octane. Conflicts of interest may
arise between Penn Octane and its affiliates, including our General Partner, on the one hand, and
us and our unitholders, on the other hand. As a result of these conflicts, our General Partner may
favor its own interests and the interests of its affiliates over the interests of our unitholders.
These potential conflicts include, among others, the following situations:
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neither our partnership agreement nor any other agreement requires Penn Octane or its
affiliates (other than our General Partner) to pursue a business strategy that favors us.
Penn Octanes directors and officers have a fiduciary duty to make these decisions in the
best interests of its unitholders, which may be contrary to our interests;
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our General Partner is allowed to take into account the interests of parties other than
us, such as Penn Octane, in resolving conflicts of interest, which has the effect of
limiting its fiduciary duty to our unitholders;
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Penn Octane is not limited in its ability to compete with us and is only obligated to
provide us with the services and personnel required by the Omnibus Agreement;
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under the terms of our partnership agreement, the doctrine of corporate opportunity, or
any analogous doctrine, does not apply to our General Partner or its affiliates (including
Penn Octane) and no such person who acquires knowledge of a potential transaction,
agreement, arrangement or other matter that may be an opportunity for our partnership will
have any duty to communicate or offer such opportunity to us;
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some officers of our General Partner who provide services to us devote time to
affiliates of our General Partner and may be compensated for services rendered to such
affiliates;
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our General Partner has limited its liability and reduced its fiduciary duties, and has
also restricted the remedies available to our unitholders for actions that, without the
limitations, might constitute breaches of fiduciary duty. By purchasing common units,
unitholders will be deemed to have consented to some actions and conflicts of interest that
might otherwise constitute a breach of fiduciary or other duties under applicable law;
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our General Partner determines the amount and timing of asset purchases and sales,
borrowings, issuances of additional partnership securities and reserves, each of which can
affect the amount of cash that is distributed to unitholders;
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our General Partner may cause us to borrow funds in order to permit the payment of cash
distributions;
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our General Partner intends to limit its liability regarding our contractual and other
obligations and, in some circumstances, is entitled to be indemnified by us;
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our General Partner may cause us to purchase common units;
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our General Partner controls the enforcement of obligations owed to us by our General
Partner and its affiliates; and
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our General Partner decides whether to retain separate counsel, accountants or others
to perform services for us.
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Penn Octane is not limited in its ability to compete with us, which could limit our ability to
acquire additional assets or businesses.
Our partnership agreement does not prohibit Penn Octane from owning assets or engaging in
businesses that compete directly or indirectly with us. In addition, Penn Octane may acquire,
develop or dispose of additional oil and natural gas properties or other assets in the future,
without any obligation to offer us the opportunity to purchase or develop any of those assets.
Penn Octane, which controls our General Partner, has the power to appoint and remove the members of
the board of managers of our General Partner.
Because Penn Octane controls our General Partner, it has the ability to elect all of the members of
the board of managers of our General Partner. Our General Partner has control over all decisions
related to our operations. Furthermore, the goals and objectives of Penn Octane and our General
Partner relating to us may not be consistent with those of a majority of the public unitholders.
We are primarily dependent on officers of our General Partner to manage our operations. Failure of
such officers to devote sufficient attention to the management and operation of our business may
adversely affect our financial results and our ability to make distributions to our unitholders.
The officers of our General Partner are primarily responsible for managing our business and
operations. We do not maintain key person life insurance policies on any personnel. Although our
General Partner has arrangements relating to compensation and benefits, our General Partner does
not have any employment contracts or other agreements with such officers binding them to provide
services for any particular term. The loss of the services of any of these individuals, including
Messrs. Bothwell and Manner could have a material adverse effect on our business and our ability to
make distributions to our unitholders.
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Our partnership agreement limits our General Partners fiduciary duties to unitholders and
restricts the remedies available to unitholders for actions taken by our General Partner that might
otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that reduce the fiduciary standards to which our
General Partner would otherwise be held by state fiduciary duty laws. For example, our partnership
agreement:
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permits our General Partner to make a number of decisions in its individual capacity,
as opposed to in
its capacity as our General Partner. This entitles our General Partner to consider only the
interests and factors that it desires, and it has no duty or obligation to give any
consideration to any interest of, or factors affecting, us, our affiliates or any limited
partner. Examples include the exercise of its rights to transfer or vote the units it owns,
the exercise of its registration rights and its determination whether or not to consent to
any merger or consolidation of the partnership or amendment to the partnership agreement;
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provides that our General Partner will not have any liability to us or our unitholders
for decisions made in its capacity as a General Partner so long as it acted in good faith;
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generally provides that affiliated transactions and resolutions of conflicts of
interest not approved by the conflicts committee of the board of managers of our General
Partner acting in good faith and not involving a vote of unitholders must be fair and
reasonable to us, as provided by the partnership agreement. In determining whether a
transaction or resolution is fair and reasonable, our General Partner may consider the
totality of the relationships between the parties involved, including other transactions
that may be particularly advantageous or beneficial to us;
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provides that our General Partner and its officers and managers will not be liable for
monetary damages to us, our limited partners or assignees for any acts or omissions unless
there has been a final and non-appealable judgment entered by a court of competent
jurisdiction determining that the General Partner or its officers and managers acted in bad
faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be presumed that in making
its decision the General Partner or its conflict committee acted in good faith, and in any
proceeding brought by or on behalf of any limited partner or us, the person bringing or
prosecuting such proceeding will have the burden of overcoming such presumption.
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By purchasing a common unit, a unitholder will become bound by the provisions in the partnership
agreement, including the provisions discussed above.
Unitholders have limited voting rights and are not entitled to elect our General Partner or its
managers.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on
matters affecting our business and, therefore, limited ability to influence managements decisions
regarding our business. Unitholders will not elect our General Partner or its board of managers on
an annual or other continuing basis. The board of managers of our General Partner will be chosen by
Penn Octane. Furthermore, if the unitholders are dissatisfied with the performance of our General
Partner, they will have little ability to remove our General Partner. As a result of these
limitations, the price at which the common units will trade could be diminished because of the
absence or reduction of a takeover premium in the trading price.
Even if unitholders are dissatisfied, it would be difficult to remove our General Partner.
The vote of the holders of at least 80% of all outstanding units voting together as a single class
is required to remove the General Partner. Therefore, even if the unitholders are dissatisfied it
would be difficult to remove our General Partner.
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Control of our General Partner may be transferred to a third party without unitholder consent.
Our General Partner may transfer its General Partner interest to a third party for any reason
without the consent of the unitholders. Furthermore, our partnership agreement does not restrict
the ability of Penn Octane, the owner of our General Partner, from transferring all or a portion of
its ownership interest in our General Partner to a third party. The new owner of our General
Partner would then be in a position to replace the board of managers and officers of our General
Partner with its own choices and thereby influence the decisions made by the board of managers and
officers.
We may issue additional units, including units that are senior to the common units, without
unitholder approval, which would dilute the ownership interests of our existing unitholders.
Our partnership agreement does not limit the number of additional partner interests that we may
issue. In addition, we may issue an unlimited number of units that are senior to the common units
in right of distribution, liquidation and voting. The issuance by us of additional common units or
other equity securities of equal or senior rank will have the following effects:
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our unitholders proportionate ownership interest in us will decrease;
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the amount of cash available for distribution on each unit may decrease;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding unit may be diminished; and
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the market price of the common units may decline.
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Our partnership agreement restricts the voting rights of unitholders, other than our General
Partner and its affiliates, owning 20% or more of our common units, which may limit the ability of
significant unitholders to influence the manner or direction of management.
Our partnership agreement restricts unitholders voting rights by providing that any common units
held by a person, entity or group that owns 20% or more of any class of common units then
outstanding, other than our General Partner, its affiliates, their transferees and persons who
acquired such common units with the prior approval of the board of managers of our General Partner,
cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability
of unitholders to call meetings or to acquire information about our operations, as well as other
provisions limiting unitholders ability to influence the manner or direction of management.
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The liability of our unitholders may not be limited if a court finds that unitholder action
constitutes control of our business.
A general partner of a partnership generally has unlimited liability for the obligations of the
partnership, except for those contractual obligations of the partnership that are expressly made
without recourse to the general partner. Our partnership is organized under Delaware law and we
conduct business in a number of other states. The limitations on the liability of holders of
limited partner interests for the obligations of a limited partnership have not been clearly
established in some of the other states in which we do business. Unitholders could be liable for
our obligations as if they were a general partner if:
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a court or government agency determined that we were conducting business in a state but
had not complied with that particular states partnership statute; or
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their right to act with other unitholders to remove or replace the General Partner, to
approve some amendments to our partnership agreement or to take other actions under our
partnership agreement constitute control of our business.
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Unitholders may have liability to repay distributions.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or
distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act,
we may not make a distribution to unitholders if the distribution would cause our liabilities to
exceed the fair value of our assets. Liabilities to partners on account of their partnership
interests and liabilities that are non-recourse to the partnership are not counted for purposes of
determining whether a distribution is permitted. Delaware law provides that for a period of three
years from the date of an impermissible distribution, limited partners who received the
distribution and who knew at the time of the distribution that it violated Delaware law will be
liable to the limited partnership for the distribution amount. A purchaser of common units who
becomes a limited partner is liable for the obligations of the transferring limited partner to make
contributions to the partnership that are known to such purchaser of common units at the time it
became a limited partner and for unknown obligations if the liabilities could be determined from
our partnership agreement.
Unitholders who are not Eligible Holders will not be entitled to receive distributions on or
allocations of income or loss on their common units and their common units will be subject to
redemption.
In order to comply with U.S. laws with respect to the ownership of interests in oil and natural gas
leases on federal lands, we have adopted certain requirements regarding those investors who may own
our common units. As used herein, an Eligible Holder means a person or entity qualified to hold an
interest in oil and natural gas leases on federal lands. As of the date hereof, Eligible Holder
means:
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a citizen of the United States;
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a corporation organized under the laws of the United States or of any state thereof;
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a public body, including a municipality; or
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an association of United States citizens, such as a partnership or limited liability
company, organized under the laws of the United States or of any state thereof, but only if
such association does not have any direct or indirect foreign ownership, other than foreign
ownership of stock in a parent corporation organized under the laws of the United States or
of any state thereof.
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For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may
be acquired and held by aliens only through stock ownership, holding or control in a corporation
organized under the laws of the United States or of any state thereof. Unitholders who are not
persons or entities who meet the requirements to be an Eligible Holder, will not receive
distributions or allocations of income and loss on their common units and they run the risk of
having their common units redeemed by us at the then-current market price. The redemption price
will be paid in cash or by delivery of a promissory note, as determined by our General Partner.
An increase in interest rates may cause the market price of our common units to decline.
Like all equity investments, an investment in our common units is subject to certain risks. In
exchange for accepting these risks, investors may expect to receive a higher rate of return than
would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the
ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed
debt securities may cause a corresponding decline in demand for riskier investments generally,
including yield-based equity investments such as publicly traded limited partner interests. Reduced
demand for our common units resulting from investors seeking other more favorable investment
opportunities may cause the trading price of our common units to decline.
Risks Related to Tax Matters
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well
as our not being subject to a material amount of entity-level taxation by individual states. If the
Internal Revenue Service were to treat us as a corporation for federal income tax purposes or we
were to become subject to additional entity-level taxation for state tax purposes, then our cash
available for distribution would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common units depends largely on
our being treated as a partnership for federal income tax purposes. We have not requested, and do
not plan to request, a ruling from the Internal Revenue Service, which we refer to as the IRS, on
this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain
circumstances for a partnership such as ours to be treated as a corporation for federal income tax
purposes. Although we do not believe based upon our current operations that we will be treated as a
corporation for federal income tax purposes, a change in our business (or a change in current law)
could cause us to be treated as a corporation for federal income tax purposes or otherwise subject
us to taxation as an entity.
If we were treated as a corporation for federal income tax purposes, we would pay federal income
tax on our taxable income at the corporate tax rate, which is currently a maximum of 35% and would
likely pay state income tax at varying rates. Distributions to our unitholders would generally be
taxed again as corporate distributions, and no income, gains, losses or deductions would flow
through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash
available for distribution to our unitholders would be substantially reduced. Therefore, treatment
of us as a corporation would result in a material reduction in the anticipated cash flow and
after-tax return to the unitholders, likely causing a substantial reduction in the value of our
common units.
Current law may change so as to cause us to be treated as a corporation for federal income tax
purposes or otherwise subject us to entity-level taxation. For example, legislation has been
proposed that would eliminate partnership tax treatment for certain publicly traded partnerships.
Although such legislation would not apply to us as currently proposed, it could be amended prior to
enactment in a manner that does apply to us. We are unable to predict whether any of these changes
or other proposals will ultimately be enacted. Any such changes could negatively impact the value
of an investment in our units.
37
In addition, because of widespread state budget deficits and other reasons, several states,
including Texas, are evaluating ways to subject partnerships to entity-level taxation through the
imposition of state income, franchise, margin and other forms of taxation. For example, beginning
in 2008, we have become subject to a new entity level tax on any portion of our income that is
generated in Texas. Specifically, the Texas margin tax is imposed at a maximum effective rate of
0.7% of our gross income that is apportioned to Texas. Imposition of such a tax on us by Texas, or
any other state, will reduce the cash available for distribution to our unitholders.
Our partnership agreement provides that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to additional amounts of entity-level taxation, the
minimum quarterly distribution amount and the target distribution amounts may be adjusted to
reflect the impact of that law on us.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our
units each month based upon the ownership of our units on the first business day of each month,
instead of on the basis of the date a particular unit is transferred. The IRS may challenge this
treatment, which could change the allocation of items of income, gain, loss and deduction among our
unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our
units each month based upon the ownership of our units on the first business day of each month,
instead of on the basis of the date a particular unit is transferred. The use of this method may
not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to
opine as to the validity of this method. If the IRS were to challenge this method or new Treasury
regulations were issued, we may be required to change the allocation of items of income, gain, loss
and deduction among our unitholders.
An IRS contest of our federal income tax positions may adversely affect the market for our common
units, and the cost of any IRS contest will reduce our cash available for distribution to our
unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for
federal income tax purposes or any other matter affecting us. The IRS may adopt positions that
differ from the positions we take. It may be necessary to resort to administrative or court
proceedings to sustain some or all of our counsels conclusions or the positions we take. A court
may not agree with all of our counsels conclusions or positions we take. Any contest with the IRS
may materially and adversely impact the market for our common units and the price at which they
trade. In addition, our costs of any contest with the IRS will be borne indirectly by our
unitholders and our General Partner because the costs will reduce our cash available for
distribution.
Our unitholders may be required to pay taxes on their share of our income even if they do not
receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we will allocate taxable income which
could be different in amount than the cash we distribute, our unitholders may be required to pay
any federal income taxes and, in some cases, state and local income taxes, on their share of our
taxable income even if they receive no cash distributions from us. Our unitholders may not receive
cash distributions from us equal to their share of our taxable income or even equal to the tax
liability that results from that income.
38
Tax gain or loss on disposition of common units could be more or less than expected.
If unitholders sell their common units, they will recognize a gain or loss equal to the difference
between the amount realized and their tax basis in those common units. Because distributions in
excess of unitholders allocable share of our net taxable income decrease their tax basis in their
common units, the amount, if any, of such prior excess distributions with respect to the common
units they sell will, in effect, become taxable income to them if they sell such units at a price
greater than their tax basis in those units, even if the price they receive is less than their
original cost. Furthermore, a substantial portion of the amount realized, whether or not
representing gain, may be taxed as ordinary income due to potential recapture items, including
depletion, intangible drilling costs and depreciation recapture. In addition, because the amount
realized includes a unitholders share of our nonrecourse liabilities, if our unitholders sell
their common units, they may incur a tax liability in excess of the amount of cash they receive
from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may
result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as individual retirement accounts (known as
IRAs), other retirement plans and non-U.S. persons raises issues unique to them. For example,
virtually all of our income allocated to organizations that are exempt from federal income tax,
including IRAs and other retirement plans, will be unrelated business taxable income and will be
taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the
highest applicable effective tax rate, and non-U.S. persons will be required to file United States
federal tax returns and pay tax on their share of our taxable income.
We will treat each purchaser of our common units as having the same tax benefits without regard to
the actual common units purchased. The IRS may challenge this treatment, which could adversely
affect the value of the common units.
Because we cannot match transferors and transferees of common units and because of other reasons,
we will take depletion, depreciation and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to those positions could adversely
affect the amount of tax benefits available to our unitholders. It also could affect the timing of
these tax benefits or the amount of gain from the sale of common units and could have a negative
impact on the value of our common units or result in audit adjustments to our unitholders tax
returns.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month
period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have terminated our partnership for federal income tax purposes if there
is a sale or exchange of 50% or more of the total interests in our capital and profits within a
twelve-month period. For example, an exchange of 50% of our capital and profits could occur if, in
any twelve-month period, holders of our subordinated and common units sell at least 50% of the
interests in our capital and profits. Our termination would, among other things, result in the
closing of our taxable year for all unitholders, which would result in us filing two tax returns
(and unitholders receiving two Schedule K-1s, for one fiscal year. Our termination could also
result in a deferral of depreciation deductions allowable in computing our taxable income. In the
case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the
closing of our taxable year may also result in more than twelve months of our taxable income or
loss being includable in his taxable income for the year of termination. Our termination currently
would not affect our classification as a partnership for federal income tax purposes, but instead,
we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must
make new tax elections and could be subject to penalties if we are unable to determine that a
termination occurred.
39
Unitholders will likely be subject to state and local taxes and tax return filing requirements in
states where they do not live as a result of investing in our common units.
In addition to federal income taxes, our unitholders will likely be subject to other taxes,
including state and local taxes, unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions in which we do business or own
property now or in the future, even if they do not live in any of those jurisdictions. Our
unitholders will likely be required to file foreign, state and local income tax returns and pay
state and local income taxes in some or all of these jurisdictions. Furthermore, our unitholders
may be subject to penalties for failure to comply with those requirements. We currently own assets
and do business in Oklahoma. Oklahoma currently imposes a personal income tax. As we make
acquisitions or expand our business, we may own assets or do business in additional states that
impose a personal income tax or that impose entity level taxes to which we could be subject. It is
our unitholders responsibility to file all United States federal, foreign, state and local tax
returns.
A unitholder whose units are loaned to a short seller to cover a short sale of units may be
considered as having disposed of those units. If so, he would no longer be treated for tax purposes
as a partner with respect to those units during the period of the loan and may recognize gain or
loss from the disposition.
Because a unitholder whose units are loaned to a short seller to cover a short sale of units may
be considered as having disposed of the loaned units, he may no longer be treated for tax purposes
as a partner with respect to those units during the period of the loan to the short seller and the
unitholder may recognize gain or loss from such disposition. Moreover, during the period of the
loan to the short seller, any of our income, gain, loss or deduction with respect to those units
may not be reportable by the unitholder and any cash distributions received by the unitholder as to
those units could be fully taxable as ordinary income. Our counsel has not rendered an opinion
regarding the treatment of a unitholder where common units are loaned to a short seller to cover a
short sale of common units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from loaning their units.
We may adopt certain valuation methodologies that may result in a shift of income, gain, loss and
deduction between the General Partner and the unitholders. The IRS may successfully challenge this
treatment, which could adversely affect the value of our common units.
When we issue additional units or engage in certain other transactions, we will determine the fair
market value of our assets and allocate any unrealized gain or loss attributable to our assets to
the capital accounts of our unitholders and the holders of the incentive distribution rights. Our
methodology may be viewed as understating the value of our assets. In that case, there may be a
shift of income, gain, loss and deduction between certain unitholders and the General Partner,
which may be unfavorable to such unitholders. Moreover, subsequent purchasers of common units may
have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our
tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our
methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and
intangible assets, and allocations of income, gain, loss and deduction between the General Partner
and certain of our unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of
taxable income or loss being allocated to our unitholders. It also could affect the amount of gain
from our unitholders sale of common units and could have a negative impact on the value of the
common units or result in audit adjustments to our unitholders tax returns without the benefit of
additional deductions.
Item 1B. Unresolved Staff Comments.
None.
40
Item 3. 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.
41
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 cash currently
stands, the trial court has ruled that insurance coverage does exist to provide coverage in
the Camacho case.
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.
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. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
42
PART II
Item 5. Market for Registrants Common Equity, Related Unitholder Matters and Issuer Purchases of
Equity Securities.
Rio Vistas common units began trading on the NASDAQ National Market under the symbol RVEP
on October 1, 2004.
The following table sets forth the reported high ask and low bid quotations of the common
units for the periods indicated. Such quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
LOW
|
|
|
HIGH
|
|
|
|
|
|
|
|
|
|
|
The year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
12.06
|
|
|
$
|
17.25
|
|
Second Quarter
|
|
|
9.36
|
|
|
|
13.83
|
|
Third Quarter
|
|
|
8.00
|
|
|
|
13.00
|
|
Fourth Quarter
|
|
|
0.65
|
|
|
|
9.89
|
|
|
|
|
|
|
|
|
|
|
|
|
LOW
|
|
|
HIGH
|
|
|
|
|
|
|
|
|
|
|
The year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.34
|
|
|
$
|
9.54
|
|
Second Quarter
|
|
|
7.80
|
|
|
|
12.37
|
|
Third Quarter
|
|
|
10.50
|
|
|
|
23.00
|
|
Fourth Quarter
|
|
|
10.05
|
|
|
|
17.50
|
|
On March 30, 2009, the closing bid price of the common units as reported on the NASDAQ
National Market was $0.64 per common unit. On March 30, 2009, Rio Vista had 2,762,463 common units
outstanding and approximately 780 holders of record of the common units.
Rio Vista made the following distributions during the years ended December 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
Quarter
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 2006
|
|
|
01/18/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Mar 2007
|
|
|
05/04/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Jun 2007
|
|
|
07/31/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Sep 2007
|
|
|
11/14/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Jun 2005 Jun 2006
Arrearages
|
|
|
12/10/07
|
|
|
$
|
1.25
|
|
|
$
|
2,420,000
|
|
|
$
|
49,000
|
|
Dec 2007
|
|
|
02/14/08
|
|
|
$
|
0.25
|
|
|
$
|
607,000
|
|
|
$
|
12,000
|
|
Mar 2008
|
|
|
05/16/08
|
|
|
$
|
0.25
|
|
|
$
|
629,000
|
|
|
$
|
13,000
|
|
Jun 2008
|
|
|
08/14/08
|
|
|
$
|
0.25
|
|
|
$
|
679,000
|
|
|
$
|
14,000
|
|
The amount of the distributions paid through the June 2008 quarterly distribution represents the
minimum quarterly distribution 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
and December 31, 2008.
Rio Vista does not anticipate making quarterly distributions during the year 2009. (See below
under the heading Distributions of Available Cash).
43
Recent sales of Unregistered Securities
On February 15, 2007, the board of managers of our General Partner approved the grant of options to
purchase a total of 21,250 common units under Rio Vistas 2005 Equity Incentive Plan (2005 Plan).
Of the total number of options granted, 5,000 were issued to an executive officer of our General
Partner and 16,250 were issued to outside managers of our General Partner. The exercise price for
the options is $8.38 per unit, which was the average of the high and low sale prices for Rio Vista
common units as reported by the NASDAQ Stock Market on February 15, 2007. Options granted to the
executive officer vest in equal monthly installments over a period of 36 months from the date of
grant, become fully vested and exercisable upon a change in control event, and expire five years
from the date of grant. Options granted to outside managers are fully vested on the date of grant
and expire five years from the date of grant.
On March 21, 2007, the board of managers of our General Partner approved the grant of an option to
purchase 20,000 common units of Rio Vista under the 2005 Plan to an executive officer of our
General Partner. The exercise price for the options is $7.36 per unit, which was the average of
the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on
March 21, 2007. The options vest in equal monthly installments over a period of 36 months from
the date of grant, become fully vested and exercisable upon a change in control event, and expire
five years from the date of grant.
On June 29, 2007, the board of managers of our General Partner approved the grant of an option to
purchase 75,000 common units of Rio Vista under the 2005 Plan to an executive officer of our
General Partner. The exercise price for the options is $11.21 per unit, which was the average of
the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on
June 29, 2007. The options vest in equal monthly installments over a period of 36 months beginning
January 1, 2007, become fully vested and exercisable upon a change in control event, and expires
five years from the date of grant.
On June 29, 2007, the Board of Managers of our General Partner approved the grant of a restricted
unit bonus of 25,000 common units under the 2005 Plan to an executive officer of our General
Partner. The restricted unit bonus vested as to 8,334 units on July 1, 2007 and an additional
8,333 units on January 1, 2008, and the remaining units vest on July 1, 2008. In connection with
the grant of restricted units, the Board of Managers also approved the payment to the executive
officer of one or more cash bonuses in amounts sufficient, on an after-tax basis, to cover all
taxes payable by the executive officer with respect the award of restricted units to him.
On July 27, 2007, in connection with the employment agreement with an executive of Regional, Rio
Vista agreed to the grant of options to purchase a total of 25,000 common units under the 2005 Plan
to the executive. The options will vest over a two year period.
On August 23, 2007, the board of managers of our General Partner approved the grant of options to
purchase a total of 8,125 common units under the 2005 Plan to outside managers of our General
Partner. The exercise price for the options is $15.15 per unit, which was the average of the high
and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on August 23,
2007. Options granted to outside managers are fully vested on the date of grant and expire five
years from the date of grant.
On November 19, 2007, in connection with the acquisition of the Oklahoma assets, Rio Vista issued a
total of 137,994 common units to the sellers of GO LLC and Penny Petroleum Corp. In addition, on
November 19, 2007, Rio Vista issued the TCW Warrant to TCW see note I to the consolidated financial
statements.
On November 29, 2007, in connection with a private placement, Rio Vista issued a total of 355,556
common units at a price of $11.25 per share to Standard General Fund L.P., Credit Suisse Management
LLC and Structured Finance Americas LLC. The total purchase price of the common units was
$4,000,000.
44
On January 23, 2008, the Board of Managers of our General Partner approved the grant of options to
purchase a total of 16,250 common units under the 2005 Plan to certain outside members of the Board
of Managers of our General Partner. The exercise price for the options is $14.42 per unit, which
was the average of the high and low sale prices for Rio Vista common units as reported by the
NASDAQ National Market on January 23, 2008. Options granted to outside managers are fully vested on
the date of grant and expire five years from the date of grant.
On March 7, 2008, the Board of Managers of our General Partner approved the grant of a unit bonus
of 8,812 common units under the 2005 Plan to an executive officer of our General Partner. The
amount of units granted was based on the average of the high and low sale prices for Rio Vista
common units as reported by the NASDAQ National Market on March 7, 2008.
On March 7, 2008, a total of 61,875 options to acquire common units of Rio Vista were exercised by
holders of such warrants. Total proceeds received from the exercises were $774,000. In addition,
on March 7, 2008, 15,625 options to acquire common units of Rio Vista were exercised by a holder
through the offset of a severance obligation in connection with that employees termination.
On July 23, 2008, a total of 6,378 common units of Rio Vista were issued to CEOcast in connection
with a consulting agreement. Based on the closing price of Rio Vistas common units on July 22,
2008, the total amount recorded as an expense on the issuance date was $80,000.
On July 23, 2008, the board of managers authorized the issuance and sale by Rio Vista of 197,628 of
Rio Vistas common units to Penn Octane at $10.12 per unit, and Penn Octanes board authorized its
purchase of such Rio Vista units at that price, for an aggregate price of approximately
$2,000,000. The price per unit was the closing price for Rio Vista common units on May 30, 2008
as reported by the NASDAQ National Market (see note M to the consolidated financial statements).
On May 28, 2008, Rio Vista and Strategic Growth International (SGI), entered into a one year
consulting agreement whereby SGI has agreed to provide public relations consulting services. The
agreement could be cancelled after 6 months and was cancelled on October 29, 2008 with an effective
date of December 1, 2008. In connection with the agreement, Rio Vista granted SGI 50,000 warrants
to purchase common units of Rio Vista at an exercise price of $12.00 per common unit. The warrants
cannot be exercised for one year from the date of issuance and the warrants will expire three years
from the date of issuance. Total cost recorded at the grant date was $161,000. As a result of the
aforementioned cancellation, the number of warrants granted was reduced to 25,000.
During June 2008, the Board of Managers of the General Partner of Rio Vista approved an employment
agreement with an officer of the General Partner. Under the terms of the employment agreement, the
officer is entitled to receive a grant of 30,000 restricted common units under Rio Vistas 2005
Equity Incentive Plan in accordance with the following vesting schedule: 5,000 common units after
the officer has been employed for six months, another 5,000 common units after one year of
employment, another 10,000 common units after two years of employment and another 10,000 common
units after three years of employment. The common units were granted on October 17, 2008. Total
compensation cost recorded under the aforementioned grant was approximately $205,000 of which
$34,000 was expensed during the year ended December 31, 2008.
On October 17, 2008, Rio Vista issued an aggregate of 12,939 Rio Vista common units in satisfaction
of all liquidated damages due to Standard General. (see note I to the consolidated financial
statements).
The above issuances were exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof because the issuances did not involve any public offering of securities.
45
Item 6. Selected Financial Data.
Not applicable.
Item 7
.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of Rio Vistas liquidity and capital resources should be read in
conjunction with the consolidated financial statements of Rio Vista and related notes thereto
appearing elsewhere herein. References to specific years preceded by fiscal (e.g. fiscal 2008)
refer to Rio Vistas fiscal year ending December 31.
Overview
Historical Assets and Operations
In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to
TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm,
together with associated improvements, leases, easements, licenses and permits; an LPG sales
agreement; and all of LPG inventory. In December 2007, Rio Vista completed the disposition of its
remaining LPG assets to TransMontaigne, including the U.S. portion of the two pipelines from a
Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along with all associated
rights-of-way and easements; all of the outstanding equity interests in entities owning interests
in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico; and all
of the rights for indirect control of an entity that owns a terminal site in Matamoros, Mexico. As
a result, effective January 1, 2008, Rio Vista no longer operates the assets associated with the
LPG business it had historically conducted.
Current Assets and Operations
In July 2007, Rio Vista acquired Regional and in November 2007, Rio Vista acquired certain oil and
natural gas producing properties and related assets in the State of Oklahoma formerly owned by GM
Oil Properties, Inc., Penny Petroleum Corporation and GO LLC. As a result of these acquisitions in
2007, Rio Vista is now focused on the acquisition, development and production of oil and natural
gas properties and related midstream assets, and the operation and development of Regionals
business consisting of transportation and terminaling. Beginning March 1, 2008, Rio Vista
Operating LLC (Operating) became the operator of the Oklahoma Assets.
The above acquisitions were funded by a combination of debt (new and assumed), private placements
of Rio Vista common units and proceeds from the sale of Rio Vistas LPG related assets. During
November 2007, Rio Vista completed a private placement of common units raising gross proceeds of
$4.0 million (see note I to the consolidated financial statements).
46
Results of Operations
Because of the sale of the LPG sales business during August 2006, which at that time was our sole
business up through the date of the sale, the commencement and sale of our LPG Transportation
business during August 2006 and December 2007, respectively, and our rapid growth through the
acquisitions of Regional and the Oklahoma Assets during 2007, our historical results of operations
and period-to-period comparisons of these results during the years ended 2006, 2007 and 2008 are
not that meaningful or indicative of future results.
The results of operations from continuing operations during the years ended December 2007 and 2008
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 and LPG, which was commenced during August 2006 and was sold on December 31, 2007 (including
all costs associated with operation of the US-Mexico Pipelines and Matamoros Terminal Facility),
ii.) the operation of the Oklahoma Assets, which was acquired during November 2007 and iii.) all
indirect income and expenses of Rio Vista.
Continuing Operations
Year Ended December 31, 2008 Compared With Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2008
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,247,000
|
|
|
$
|
8,573,000
|
|
|
$
|
|
|
|
$
|
1,000
|
|
|
$
|
13,821,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Of Goods Sold
|
|
|
4,322,000
|
|
|
|
6,444,000
|
|
|
|
|
|
|
|
(8,000
|
)
|
|
|
10,758,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
925,000
|
|
|
|
2,129,000
|
|
|
|
|
|
|
|
9,000
|
|
|
|
3,063,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General And
Administrative Expenses
|
|
|
493,000
|
|
|
|
1,167,000
|
|
|
|
|
|
|
|
3,650,000
|
|
|
|
5,310,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of remaining
LPG-related assets
|
|
|
|
|
|
|
|
|
|
|
351,000
|
|
|
|
|
|
|
|
351,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
432,000
|
|
|
|
962,000
|
|
|
|
(351,000
|
)
|
|
|
(3,641,000
|
)
|
|
|
(2,598,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(2,849,000
|
)
|
|
|
(631,000
|
)
|
|
|
|
|
|
|
(178,000
|
)
|
|
|
(3,658,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
Continuing Operations
Before Taxes
|
|
|
(2,410,000
|
)
|
|
|
331,000
|
|
|
|
(351,000
|
)
|
|
|
(3,818,000
|
)
|
|
|
(6,248,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (Benefit) For
Income Taxes
|
|
|
(103,000
|
)
|
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
|
(37,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
|
|
$
|
(2,307,000
|
)
|
|
$
|
265,000
|
|
|
$
|
(351,000
|
)
|
|
$
|
(3,818,000
|
)
|
|
$
|
(6,211,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2007
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
527,000
|
|
|
$
|
3,038,000
|
|
|
$
|
2,341,000
|
|
|
$
|
|
|
|
$
|
5,906,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Of Goods Sold
|
|
|
390,000
|
|
|
|
2,399,000
|
|
|
|
1,971,000
|
|
|
|
45,000
|
|
|
|
4,805,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
137,000
|
|
|
|
639,000
|
|
|
|
370,000
|
|
|
|
(45,000
|
)
|
|
|
1,101,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and
Administrative Expenses
|
|
|
41,000
|
|
|
|
363,000
|
|
|
|
258,000
|
|
|
|
4,008,000
|
|
|
|
4,670,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of remaining
LPG-related assets
|
|
|
|
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
96,000
|
|
|
|
276,000
|
|
|
|
(294,000
|
)
|
|
|
(4,053,000
|
)
|
|
|
(3,975,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(275,000
|
)
|
|
|
(322,000
|
)
|
|
|
(281,000
|
)
|
|
|
(7,000
|
)
|
|
|
(885,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
14,000
|
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Continuing
Operations Before Taxes
|
|
|
(179,000
|
)
|
|
|
(32,000
|
)
|
|
|
(574,000
|
)
|
|
|
(4,058,000
|
)
|
|
|
(4,843,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (Benefit) For
Income Taxes
|
|
|
(4,000
|
)
|
|
|
(51,000
|
)
|
|
|
34,000
|
|
|
|
|
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
|
|
$
|
(175,000
|
)
|
|
$
|
19,000
|
|
|
$
|
(608,000
|
)
|
|
$
|
(4,058,000
|
)
|
|
$
|
(4,822,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
908,000
|
|
|
$
|
|
|
|
|
908,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
1,814,000
|
|
|
|
|
|
|
|
1,814,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
(906,000
|
)
|
|
|
|
|
|
|
(906,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and
Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
183,000
|
|
|
|
2,666,000
|
|
|
|
2,849,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
|
|
|
|
|
|
|
|
(1,089,000
|
)
|
|
|
(2,666,000
|
)
|
|
|
(3,755,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
(354,000
|
)
|
|
|
217,000
|
|
|
|
(137,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Continuing
Operations Before Taxes
|
|
|
|
|
|
|
|
|
|
|
(1,443,000
|
)
|
|
|
(2,448,000
|
)
|
|
|
(3,891,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision For Income Taxes
|
|
|
|
|
|
|
|
|
|
|
37,000
|
|
|
|
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Continuing
Operations
|
|
|
|
|
|
|
|
|
|
|
(1,480,000
|
)
|
|
$
|
(2,448,000
|
)
|
|
$
|
(3,928,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES YEAR ENDED DECEMBER 31, 2008 COMPARED
WITH YEAR ENDED DECEMBER 31, 2007
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,720,000
|
|
|
$
|
5,535,000
|
|
|
$
|
(2,341,000
|
)
|
|
$
|
1,000
|
|
|
$
|
7,915,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Of Goods Sold
|
|
|
3,932,000
|
|
|
|
4,045,000
|
|
|
|
(1,971,000
|
)
|
|
|
(53,000
|
)
|
|
|
5,953,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
788,000
|
|
|
|
1,490,000
|
|
|
|
(370,000
|
)
|
|
|
54,000
|
|
|
|
1,962,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General And
Administrative Expenses
|
|
|
452,000
|
|
|
|
804,000
|
|
|
|
(258,000
|
)
|
|
|
(358,000
|
)
|
|
|
640,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of remaining
LPG-related assets
|
|
|
|
|
|
|
|
|
|
|
(55,000
|
)
|
|
|
|
|
|
|
(55,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
336,000
|
|
|
|
686,000
|
|
|
|
(57,000
|
)
|
|
|
412,000
|
|
|
|
1,377,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(2,574,000
|
)
|
|
|
(309,000
|
)
|
|
|
281,000
|
|
|
|
(171,000
|
)
|
|
|
(2,773,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
7,000
|
|
|
|
(14,000
|
)
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
Before Taxes
|
|
|
(2,231,000
|
)
|
|
|
363,000
|
|
|
|
223,000
|
|
|
|
240,000
|
|
|
|
(1,405,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (Benefit) For
Income Taxes
|
|
|
(99,000
|
)
|
|
|
117,000
|
|
|
|
(34,000
|
)
|
|
|
|
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
|
|
$
|
(2,132,000
|
)
|
|
$
|
246,000
|
|
|
$
|
257,000
|
|
|
$
|
240,000
|
|
|
$
|
(1,389,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES YEAR ENDED DECEMBER 31, 2007 COMPARED
WITH YEAR ENDED DECEMBER 31, 2006
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
$
|
527,000
|
|
|
$
|
3,038,000
|
|
|
|
1,433,000
|
|
|
|
|
|
|
|
4,998,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Of Goods Sold
|
|
|
390,000
|
|
|
|
2,399,000
|
|
|
|
157,000
|
|
|
|
45,000
|
|
|
|
2,991,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
137,000
|
|
|
|
639,000
|
|
|
|
1,276,000
|
|
|
|
(45,000
|
)
|
|
|
2,007,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General And
Administrative Expenses
|
|
|
41,000
|
|
|
|
363,000
|
|
|
|
75,000
|
|
|
|
1,342,000
|
|
|
|
1,821,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of remaining
LPG-related assets
|
|
|
|
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
96,000
|
|
|
|
276,000
|
|
|
|
795,000
|
|
|
|
(1,387,000
|
)
|
|
|
(220,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(275,000
|
)
|
|
|
(322,000
|
)
|
|
|
73,000
|
|
|
|
(224,000
|
)
|
|
|
(748,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
14,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Continuing
Operations Before Taxes
|
|
|
(179,000
|
)
|
|
|
(32,000
|
)
|
|
|
869,000
|
|
|
|
(1,610,000
|
)
|
|
|
(952,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(Benefit) For Income
Taxes
|
|
|
(4,000
|
)
|
|
|
(51,000
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
(58,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
|
|
$
|
(175,000
|
)
|
|
|
19,000
|
|
|
|
872,000
|
|
|
|
(1,610,000
|
)
|
|
|
(894,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquired during November 2007
|
|
(b)
|
|
Acquired during July 2007
|
|
(c)
|
|
Business commenced in August 2006 and sold December 31, 2007
|
50
Year Ended December 31, 2008 Compared With Year Ended December 31, 2007
Revenues.
Revenues for the year ended December 31, 2008 were $13.8 million and includes the
results of Regional and the Oklahoma Assets for the twelve months during 2008. Revenues during the
year ended December 31, 2007 were $5.9 million and includes the results of Regional for the period
July 28, 2007 to December 31, 2007, the results of the Oklahoma Assets for the period November 19,
2007 to December 31, 2007 and the results of the LPG transportation for the full twelve months.
The results for the two periods are not comparative since each period contains different business
operations for different periods of time.
During the year ended December 31, 2006, there were only revenues from August 22, 2006, the
date that the LPG Transportation business commenced, through December 31, 2006. All revenues prior
to August 22, 2006 were derived from Rio Vistas LPG sales business and were reclassified as
discontinued operations.
Cost of goods sold.
Cost of goods sold for the year ended December 31, 2008 was $10.8 million
and includes the results of Regional and the Oklahoma Assets for the twelve months during 2008.
Cost of goods sold during the year ended December 31, 2007 were $4.8 million and includes the costs
of goods sold of Regional for the period July 28, 2007 to December 31, 2007, the cost of goods sold
of the Oklahoma Assets for the period November 19, 2007 to December 31, 2007 and the cost of goods
sold of the LPG transportation for the full twelve months. The results for the two periods are not
comparative since each period contains different business operations for different periods of time.
During the year ended December 31, 2006, cost of goods sold consisted of those costs
associated with operation of the US Mexico Pipelines and Matamoros Terminal Facility. All costs
associated with Rio Vistas LPG sales business prior to its sale, except for costs associated with
the US Mexico Pipelines and Matamoros Terminal Facility, which were used for Rio Vistas LPG
transportation business, were reclassified as discontinued operations.
Selling, general and administrative expenses.
Selling, general and administrative expenses
were $5.3 million for the year ended December 31, 2008. Excluding the selling, general and
administrative expenses associated with the acquisitions or sales of Regional, the Oklahoma Assets
and/or the LPG Transportation business, the remaining selling, general and administrative expenses
were associated with corporate related activities. These selling, general and administrative costs
were $3.6 million during the year ended December 31, 2008 compared with $4.0 million during the
year ended December 31, 2007. These costs were comprised of indirect selling, general and
administrative expenses directly incurred by Rio Vista or allocated by Penn Octane to Rio Vista in
accordance with the Omnibus Agreement. The costs consisted 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. Salary related costs 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.
Liquidity and Capital Resources
General
As a result of the disposition of the LPG-related businesses in 2006 and 2007 and the acquisition
of Regionals business and the Oklahoma Assets, Rio Vistas sources of operating cash flows are
expected to be derived from the operations of Regional and from the revenues received from the
Oklahoma Assets. Although the operations of Regional are expected to be profitable, the cash flows
of Regional are subject to payments required under the RZB 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.
51
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 Loan Agreement (see below). Accordingly, Rio
Vista may be unable to obtain additional financing collateralized by those assets.
At December 31, 2008, Rio Vista had a working capital deficit of approximately $36 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 entitle 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 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.
52
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. Rio Vista made the
following distributions during the years ended December 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Quarter
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
|
Dec 2006
|
|
|
01/18/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Mar 2007
|
|
|
05/04/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Jun 2007
|
|
|
07/31/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Sep 2007
|
|
|
11/14/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Jun 2005 Jun
2006 Arrearages
|
|
|
12/10/07
|
|
|
$
|
1.25
|
|
|
$
|
2,420,000
|
|
|
$
|
49,000
|
|
Dec 2007
|
|
|
02/14/08
|
|
|
$
|
0.25
|
|
|
$
|
607,000
|
|
|
$
|
12,000
|
|
Mar 2008
|
|
|
05/16/08
|
|
|
$
|
0.25
|
|
|
$
|
629,000
|
|
|
$
|
13,000
|
|
Jun 2008
|
|
|
08/14/08
|
|
|
$
|
0.25
|
|
|
$
|
679,000
|
|
|
$
|
14,000
|
|
The amount of the distributions paid through the June 2008 quarterly distribution represents the
minimum quarterly distribution 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 and
December 31, 2008.
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,
(7.25% at December 31, 2007), 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 extends the maturity date of the RZB Note through 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.
53
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.
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.
54
On September 29, 2009, 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 principal
payment and interest payment due) and other requirements pursuant to the TCW Credit Facility until
April 13, 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.
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 December 31, 2008, the net book value Oklahoma Assets were approximately $36.1 million. As a
result of a foreclosure, based on December 31, 2008 balances, Rio Vista would record a loss related
to the Oklahoma Assets which could approximate $7.8 million. The exercise by TCW of any amount
under the TCW Warrant would reduce the amount of the recordable loss by a corresponding amount.
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.
55
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. 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. For the period of July 28, 2007 through December 31, 2007 and the year
ended December 31, 2008, $37,000 and $72,000, respectively, of the discount was amortized.
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 the earlier of (1) the six (6) month anniversary of the Richter Note Payable, which date
was extended to November 15, 2008 or (ii) the sale of all or substantially all of the assets of Rio
Vista. The Richter Note Payable was not paid on November 15, 2008. Rio Vista and Mr. Richter are
negotiating an extension of the due date. The Richter Note Payable accrues interest at an annual
rate of 8 percent (8%). Proceeds from the Richter Note Payable were used for working capital.
Leases
Norfolk Southern Leases
On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern
Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection
with Regionals existing operations at Regionals facilities in Hopewell, Virginia. The lease
includes the right to maintain existing warehouses, storage tanks for handling petroleum and
chemical products, and necessary appurtenances. The lease term was January 1, 2003 through
December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30
days written notice. Rent is $1,500 per month subject to adjustment based on inflation.
56
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.
Other
Regional has several leases for parking and other facilities which are short term in nature and
can be terminated by the lessors or Regional upon giving 60 days notice of cancellation.
Agreements
Gas Service and Sales Agreements
GO entered into an agreement with Clearwater Enterprises, LLC (Clearwater) to provide monthly
services in relationship to the Brooken system pipeline. In accordance with terms of the agreement,
Clearwater would 1) receive pipeline nominations from the various shippers on the Brooken system.
2) allocate volumes to the wellhead based upon the volumes delivered to the Brooken interconnect 3)
prepare gathering and compression fee invoices on behalf of the Company 4) prepare pipeline
imbalance and cashout statements. The monthly gathering management fee for these services is
$3,000. The agreement is month to month unless and until terminated by either party upon 30 days
notice.
Substantially all of the gas sales are made to Clearwater. These gas sales are governed by an
agreement that expires in 2009 and continues yearly thereafter, until canceled by either party
within thirty day notice.
During March 2008, certain of the Clearwater agreements were amended to name Rio Vista Operating
LLC as the contracting party based on Rio Vista Operating LLCs assumption of operations of the oil
and gas properties.
Gas Compression Agreements
GO entered into a one year lease agreement with Hanover Compression Limited Partnership for the use
of a compressor. The lease is dated October 11, 2006 and is guaranteed for a minimum of twelve
months and continues monthly until cancelled by either party with 30 day notice. Minimum base
lease payments of $11,000 plus taxes and are due monthly. The base amount is subject to
semi-annual adjustments.
MV entered into a Gas Compression Master Service Agreement with USA Compression Partners, LP on
November 1, 2007. This agreement replaces an earlier agreement for gas compression services. The
agreement provides for monthly payments of approximately $17,000 per month through August 31, 2009.
57
Consulting Agreement
During November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting agreement
whereby Mr. Richter shall served as a special advisor to the board of directors of Penn Octane and
the board of managers of the General Partner and provided the following services (Services) to both
Penn Octane and Rio Vista: assistance with the sale of all or part of their LPG assets, assistance
with other transactions (including restructurings) involving the companies as mutually agreed by
the parties and such other services that the companies may reasonably request.
In consideration of the Services rendered by Mr. Richter to the companies, Penn Octane and Rio
Vista paid the following fees (Fees) to Mr. Richter: an amount equal to two percent (2%) of
(i) the net proceeds, as defined, to the companies resulting from a sale of assets to a third
party, and (ii) the net proceeds, as defined, to the companies from sales of LPG to PMI for any
calendar month in which such sales exceed the volumes pursuant to the previous agreement with PMI.
Amounts expensed pursuant to (i) above (see note D) were $138,000 and have been paid to Mr.
Richter.
Mr. Richters consulting agreement expired on November 14, 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. The provisions of the Consulting Agreement
are effective as of November 15, 2006 (Effective Date). 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. For the years ended December 31,
2007 and 2008, Rio Vista expenses approximately $317,000 and $325,000, respectively in connection
with the Consulting Agreement. In addition, in connection with the Regional transaction, JBR
Capital earned a fee of $180,000 which fee was expensed. The initial term of the Consulting
Agreement was six months and continues to renew for additional six-month terms unless terminated
by either party at least 30 days before the end of each term.
58
CEOcast Agreement
Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc. (CEOcast)
whereby CEOcast agreed to render investor relations services to Rio Vista. Under the terms of the
CEOcast agreement, CEOcast received cash fees of $7,500 per month and Rio Vista agreed to issue to
CEOcast (a) 1,399 of Rio Vistas fully-paid, non-assessable common units (Common Units) and (b)
$75,000 worth of Common Units on March 31, 2008 based on a calculation of units as more fully
described in the consulting agreement. The delivery of any Common Units was to be made at the
soonest practical date after March 31, 2008, based on the best efforts of Rio Vista. In accordance
with the Agreement, during April 2008, Rio Vista provided notice to CEOcast that it would not renew
the Agreement upon the expiration in July 2008. In connection with the CEOcast agreement, on July
23, 2008, Rio Vista issued to CEOcast a total of 6,378 Common Units. Based on the closing price of
Rio Vista Common Units as of July 23, 2008, the date that the units were issued to CEOcast, Rio
Vista recorded additional expense of $80,000 associated with the issuance of the common units.
Strategic Growth International
On May 28, 2008, Rio Vista and SGI entered into a one year consulting agreement whereby SGI agreed
to provide public relations consulting services. The agreement could be cancelled after 6 months
and was cancelled on October 29, 2008 with an effective date of December 1, 2008. In connection
with the agreement, Penn Octane and Rio Vista were each required to pay monthly fees of $9,000 per
month. In addition, under the agreement between Rio Vista and SGI, Rio Vista granted SGI 50,000
warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common unit. The
warrants cannot be exercised for one year from the date of issuance and the warrants will expire
three years from the date of issuance. As a result of the cancellation, the number of warrants
issued was reduced to 25,000.
Employment Agreement
During June 2008, the Board of Managers of the General Partner approved an employment agreement
with an officer of the General Partner. Under the terms of the employment agreement, the officer
is entitled to receive a grant of 30,000 restricted common units under Rio Vistas 2005 Equity
Incentive Plan in accordance with the following vesting schedule: 5,000 common units after the
officer has been employed for six months, another 5,000 common units after one year of employment,
another 10,000 common units after two years of employment and another 10,000 common units after
three years of employment. The common units were granted on October 17, 2008. Total compensation
cost recorded under the aforementioned grant was approximately $205,000 of which $34,000 was
expensed during the year ended December 31, 2008.
Asphalt Agreement
On November 30, 2000, Regional entered into a Storage and Product Handling Agreement with a
customer with an effective date of December 1, 2000 (Asphalt Agreement). The Asphalt Agreement
provides for the pricing, terms and conditions under which the customer will purchase terminal
services and facility usage from Regional for the storage and handling of the customers asphalt
products. The Asphalt Agreement was amended on October 15, 2002 with an effective date of December
1, 2002 (Amended Asphalt Agreement). The term of the Amended Asphalt Agreement is five years with
an option by the customer for an additional five-year renewal term, which the customer exercised in
July 2007. After the additional five-year term, the Amended Asphalt Agreement renews automatically
for successive one-year terms unless terminated upon 120 days advance written notice by either
party. The annual fee payable to Regional for the initial five-year term of the Amended Asphalt
Agreement is approximately $500,000, payable in equal monthly installments, subject to adjustments
for inflation and certain facility improvements. In exchange for the annual fee, Regional agrees
to provide minimum annual throughput of 610,000 net barrels per contract year, with additional
volume to be paid on a per barrel basis. During the term of the amended Asphalt Agreement,
Regional agrees to provide three storage tanks and certain related equipment to the customer on an
exclusive basis as well as access to Regionals barge docking facility.
59
Fuel Oil Agreement
On November 16, 1998, Regional entered into a Terminal Agreement with a customer with an
effective date of November 1, 1998, as amended on April 5, 2001, October 11, 2001 and August 1,
2003 (Fuel Oil Agreement). The Fuel Oil Agreement provides for the pricing, terms and
conditions under which Regional will provide terminal facilities and services to the customers
for the delivery of fuel oil. The agreement renews automatically for successive one-year terms
unless terminated upon 365 days advance written notice by either party. Pursuant to the
agreement, as amended, Regional agrees to provide three storage tanks, certain related pipelines
and equipment, and at least two tractor tankers to the customer on an exclusive basis, as well
as access to Regionals
barge docking facility. In exchange for use of Regionals facilities and services, the customer
pays an annual tank rental amount of approximately $300,000 plus a product transportation fee
calculated on a per gallon basis, each subject to annual adjustment for inflation. Regional
agrees to deliver a minimum daily quantity of fuel oil on behalf of the customer.
Private Placements
On March 7, 2008, the Board of Managers of the General Partner Rio Vista approved the grant of a
unit bonus of 8,812 common units under Rio Vistas 2005 Equity Incentive Plan to an executive
officer of the General Partner. The amount of units granted was based on the average of the high
and low sale prices for Rio Vista common units as reported by the NASDAQ National Market on
March 7, 2008.
On March 7, 2008, a total of 61,875 options to acquire common units of Rio Vista were exercised by
holders of such warrants. Total proceeds received from the exercises were $774,000. In addition,
on March 7, 2008, 15,625 options to acquire common units of Rio Vista were exercised by a holder
through the offset of a severance obligation in connection with that employees termination.
On July 23, 2008, a total of 6,378 common units of Rio Vista were issued to CEOcast in connection
with a consulting agreement. Based on the closing price of Rio Vistas common units on July 22,
2008, the total amount recorded as an expense on the issuance date was $80,000.
On July 23, 2008, the board of managers authorized the issuance and sale by Rio Vista of 197,628 of
Rio Vistas common units to Penn Octane at $10.12 per unit, and Penn Octanes board authorized its
purchase of such Rio Vista units at that price, for an aggregate price of approximately
$2,000,000. The price per unit was the closing price for Rio Vista common units on May 30, 2008
as reported by the NASDAQ National Market (see note L to the consolidated financial statements).
On October 17, 2008, Rio Vista issued an aggregate of 12,939 Rio Vista common units in satisfaction
of all liquidated damages due to Standard General. (see note I to the consolidated financial
statements).
Unit Warrants
On January 23, 2008, the board of managers of the General Partner approved the grant of options to
purchase a total of 16,250 common units under the 2005 Plan to certain outside members of the
board of managers of the General Partner. The exercise price for the options is $14.42 per unit,
which was the average of the high and low sale prices for Rio Vista common units as reported by
the NASDAQ National Market on January 23, 2008. Options granted to outside managers are fully
vested on the date of grant and expire five years from the date of grant. These issuances were
exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof because
the issuances do not involve any public offering of securities.
60
On May 28, 2008, Rio Vista and Strategic Growth International (SGI), entered into a one year
consulting agreement whereby SGI has agreed to provide public relations consulting services. The
agreement could be cancelled after 6 months and was cancelled on October 29, 2008 with an
effective date of December 1, 2008. In connection with the agreement, Rio Vista granted SGI
50,000 warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common
unit. The warrants cannot be exercised for one year from the date of issuance and the warrants
will expire three years from the date of issuance. Total cost recorded at the grant date was
$161,000. As a result of the aforementioned cancellation, the number of warrants granted was
reduced to 25,000.
Related Party Transactions
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 authorized the issuance and
sale by Rio Vista of 197,628 of Rio Vistas common units to Penn Octane at $10.12 per unit, and
Penn Octanes board authorized its purchase of such Rio Vista units at that price, for an aggregate
price of approximately $2.0 million. Thereafter, Rio Vistas officers continued to formulate a
plan of ongoing compliance with Rule 4450(a)(3) on terms satisfactory to NASDAQ, and notified
NASDAQ regarding the proposed issuance of its units. Rio Vista also filed a listing of additional
units notification with NASDAQ (LAS) based on its intention to go forward with the proposed
purchase and sale. Following further discussions with NASDAQ, at board meetings on July 15, 2008,
the board of managers and the board of directors of Penn Octane confirmed their desire to implement
promptly the previously authorized purchase and sale, and the companies agreed to complete the
transaction, subject to NASDAQ approval of Rio Vistas LAS. On July 23, 2008, after the period of
review for the LAS passed, the common units were issued to Penn Octane.
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 ended
December 31, 2007 and 2008 and has a deficit in working capital. Currently, all revenues generated
from the Oklahoma Assets are held as collateral against the TCW Credit Facility. The TCW Credit
Facility, $150,000 of the Moores Note, the RZB Note, the Sellers Note Regional and the Richter Note Payable
total approximately $31.3 million and are all classified as current liabilities. In addition, as a
result of extensions, the TCW Credit Facility and the RZB Note will expire during April 2009,
unless further extended. In the event such obligations are not satisfactorily restructured or
further extended, the TCW Credit Facility and/or the RZB Note will be
due immediately (see note G to the consolidated financial statements).
The TCW Credit Facility and RZB Note are collateralized by the Oklahoma Assets and the Regional
assets, respectively.
61
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 the future. 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 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 restructure the TCW Credit Facility and the RZB Note and 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, raise additional debt and/or equity
financing, reduce its general and administrative and other operating expenses and sell assets.
Off-Balance Sheet Arrangements
Rio Vista does not have any off-balance sheet arrangements.
Recently Issued Financial Accounting Standards
In February 2007, SFAS No. 159 The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FAS 115, was issued, which allows entities to choose, at
specified election dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that items fair value in subsequent reporting periods must be
recognized in current earnings. SFAS No. 159 also establishes presentation and disclosure
requirements designed to draw comparison between entities that elect different measurement
attributes for similar assets and liabilities. SFAS No. 159 is effective for us on January 1,
2008. Rio Vista does not expect the adoption of SFAS No. 159 to have a material impact on its
consolidated results of operations, cash flows or financial position.
62
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 financial statements issued for
fiscal years beginning after December 15, 2008. 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 fiscal years and interim periods beginning after November 15, 2008. Rio Vista
does not expect the adoption of the new accounting standard to have an impact on Rio Vistas
financial statements.
In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No.162 (SFAS No. 162), The Hierarchy of Generally Accepted Accounting Principles. SFAS
No. 162 identifies the sources of accounting principles and framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the U.S. The hierarchy
guidance provided by SFAS No. 162 did not have a significant 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. Rio Vista
believes that the following reflect the more critical accounting policies that affect its financial
position and results of operations.
Impairment of long-lived assets
The determination of whether impairment has occurred is based on
an estimate of undiscounted cash flows attributable to assets in future periods. If impairment has
occurred, the amount of the impairment loss recognized will be determined by estimating the fair
value of the assets and recording a loss if the fair value is less than the carrying value.
Assessments of impairment are subject to managements judgments and based on estimates that
management is required to make.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of
identifiable net assets associated with acquisition transactions. Rio Vista has adopted the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (FASB 142). Under FASB 142, goodwill is not amortized. Rio Vista is required to make at
least an annual test of the fair value of the intangible to determine if impairment has occurred.
Rio Vista performs an annual impairment test for goodwill in the fourth quarter of each calendar
year.
63
Depreciation and amortization expenses
Property, plant and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization rates are based on
managements estimate of the future utilization and useful lives of the assets. Should the nature
of Rio Vistas business change our future utilization and useful lives of depreciable and
amortizable assets may also change. This could result in increases or decreases in depreciation
and amortization expense compared with historical amounts.
Unit-based compensation
Rio Vista utilizes unit-based awards as a form of compensation for
employees, officers and managers of our General Partner and to non-employees for goods and services
and to acquire or extend debt. Effective January 1, 2006, Rio Vista adopted the provisions of SFAS
No. 123(R), Share-Based Payment (SFAS 123R) using the modified prospective transition method.
Under this method, previously reported amounts should not be restated to reflect the provisions of
SFAS 123R. SFAS 123R requires Rio Vista to record compensation expense for all awards granted
after the date of adoption, and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. 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.
Allowance for doubtful accounts
The carrying value of trade accounts receivable is based on
estimated fair value. The determination of fair value is subject to managements judgments and is
based on estimates that management is required to make. Those estimates are made based on the
creditworthiness of customers and payment history. Rio Vista has made no provisions for doubtful
accounts since its inception.
We account for oil and gas properties by the successful efforts method. Leasehold acquisition
costs are capitalized when incurred. If proved reserves are found on an undeveloped property,
leasehold cost is transferred to proved properties. Under this method of accounting, costs
relating to the development of proved areas are capitalized when incurred.
Depreciation and depletion of producing oil and gas properties is recorded based on units of
production. Unit rates are computed for unamortized drilling and development costs using proved
developed reserves and for acquisition costs using all proved reserves. SFAS No. 19,
Financial
Accounting and Reporting for Oil and Gas Producing Companies (SFAS 19) requires that acquisition
costs of proved properties be amortized on the basis of all proved reserves, developed and
undeveloped, and that capitalized development costs (wells and related equipment and facilities) be
amortized on the basis of proved developed reserves. As more fully described in the Supplementary
Oil and Gas Data (Unaudited) in Item 8. Financial Statements and Supplementary Data, our proved
reserves at December 31, 2008 were estimated by an independent petroleum engineering firm, Lee
Keeling and Associates, Inc.
Geological, geophysical, annual lease rentals and dry hole costs on oil and gas properties relating
to unsuccessful wells are charged to expense as incurred.
Upon sale or retirement of complete fields of depreciable or depleted property, the book value
thereof, less proceeds or salvage value, is charged or credited to income. On sale or retirement
of an individual well, the proceeds are credited to accumulated depreciation and depletion.
64
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
,
we assess proved oil and gas properties for possible impairment when events or circumstances
indicate that the recorded carrying value of the properties may not be recoverable. We recognize
an impairment loss as a result of a triggering event and when the estimated undiscounted future
cash flows from a property are less than the carrying value. If an impairment is indicated, the
cash flows are discounted at a rate approximate to our cost of capital and compared to the carrying
value for determining the amount of the impairment loss to record. Estimated future cash flows are
based on managements expectations for the future and include estimates of oil and gas reserves and
future commodity prices and operating costs. Downward revisions in estimates of reserve quantities
or expectations of falling commodity prices or rising operating costs could result in a reduction
in undiscounted future cash flows and could indicate property impairment.
Unproved properties that are individually insignificant are amortized and assessed for impairment
on a property-by-property basis. If considered impaired, costs are charged to expense when such
impairment is deemed to have occurred.
Rio Vistas estimates of proved reserves are based on the quantities of oil and gas that
engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from
established reservoirs in the future under current operating and economic parameters. Lee Keeling
and Associates, Inc. prepared a reserve and economic evaluation of all our properties on a
well-by-well basis as of December 31, 2008.
Reserves and their relation to estimated future net cash flows impact our depletion and impairment
calculations. As a result, adjustments to depletion and impairment are made concurrently with
changes to reserve estimates. Our reserve estimates and the projected cash flows derived from
those estimates are prepared in accordance with SEC guidelines. The accuracy of our reserve
estimates is a function of many factors including the following: the quality and quantity of
available data, the interpretation of that data, the accuracy of various mandated economic
assumptions and the judgments of the individuals preparing the estimates.
Rio Vistas proved reserve estimates are a function of many assumptions, all of which could deviate
significantly from actual results. As such, reserve estimates may materially vary from the
ultimate quantities of gas, natural gas liquids and oil eventually recovered.
Gas and oil production revenue and related natural gas liquids revenue are recognized based on
actual volumes of gas, oil, and natural gas liquids sold to purchasers. Sales require delivery of
the product to the purchaser, passage of title, and probability of collection of purchaser amounts
owed. Gas and oil production revenue and related natural gas liquids revenue are reported net of
royalties. Rio Vista uses the sales method of accounting for gas imbalances. Gas imbalances
result from the gas volumes sold by Rio Vista from a property being different from its actual
entitled volumes. Under the sales method, revenues are recognized based on actual volumes of gas
sold. The volumes sold may differ from the entitled volumes. Direct operating expenses are
recognized on an accrual basis and consist of costs required to operate gas and oil properties,
product transportation expenses, and production and property taxes.
65
Gas revenues are recognized based on actual volumes of gas purchased from third-party producers and
sold to customers. Sales are recorded only upon the delivery of the product to the purchaser,
passage of title, and collectability is reasonably assured. Losses, if any, resulting from
imbalances from such sales are recognized currently, and gains, if any, are recognized at final
delivery.
Oil and gas is sold by Rio Vista on a monthly basis. Virtually all of Rio Vistas contracts
pricing provisions are tied to a market index, with certain adjustments based on, among other
factors, whether a well delivers to a gathering or transmission line, quality of oil and gas, and
prevailing supply and demand conditions, so that the price of the oil and gas fluctuate to remain
competitive with other available oil and gas suppliers.
We use forward sales contracts to minimize the variability of cash flow from our oil and gas
production by reducing our exposure to price fluctuations. Currently, these transactions consist
of fixed price contracts. We account for these activities pursuant to SFAS 133. This statement
establishes accounting and reporting standards requiring that derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded at fair market value and
included in the balance sheet as assets or liabilities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
66
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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|
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PAGE NO.
|
Rio Vista Energy Partners L.P.
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|
|
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68
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69
|
|
|
|
|
|
71
|
|
|
|
|
|
72
|
|
|
|
|
|
73
|
|
|
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|
|
74
|
|
67
Report of Independent Registered Public Accounting Firm
To the Board of Managers of Rio Vista GP LLC,
General Partner of Rio Vista Energy Partners L.P.
We have audited the accompanying consolidated balance sheets of Rio Vista Energy Partners L.P. and
its subsidiaries (Rio Vista) as of December 31, 2007 and 2008, and the related consolidated
statements of operations, Partners Capital, and cash flows for each of the two years in the period
ended December 31, 2008. These financial statements are the responsibility of Rio Vistas
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rio Vista as of December 31, 2007 and
2008, and the consolidated results of their operations and their consolidated cash flows for each
of the two years in the period ended December 31, 2008 in conformity with United States generally
accepted accounting principles.
We have also audited Schedule II of Rio Vista for each of the two years in the period ended
December 31, 2008. In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
The accompanying consolidated financial statements have been prepared assuming that Rio Vista will
continue as a going concern. As discussed in note O to the consolidated financial statements,
conditions exist which raise substantial doubt about Rio Vistas ability to continue as a going
concern including 1) Rio Vistas ability to generate sufficient cash flow to pay its expenses and
its current debt obligations as they become due and 2) Rio Vistas dependence on Penn Octane to
continue as a going concern. Managements plans in regard to these matters are also described in
note O. 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 continue in existence.
/s/ BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
April 3, 2009
68
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,450,000
|
|
|
$
|
292,000
|
|
Restricted cash
|
|
|
26,000
|
|
|
|
|
|
Trade accounts receivable (less
allowance for doubtful accounts of $0 at
2007 and 2008)
|
|
|
1,446,000
|
|
|
|
1,662,000
|
|
Deferred tax assets
|
|
|
|
|
|
|
99,000
|
|
Prepaid expenses and other current assets
|
|
|
408,000
|
|
|
|
584,000
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,330,000
|
|
|
|
2,637,000
|
|
Oil and gas properties and related
equipment (successful efforts method)
net
|
|
|
26,197,000
|
|
|
|
28,243,000
|
|
Property, plant and equipment net
|
|
|
12,762,000
|
|
|
|
12,414,000
|
|
Other non-current assets
|
|
|
|
|
|
|
14,000
|
|
Goodwill
|
|
|
5,121,000
|
|
|
|
5,121,000
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
49,410,000
|
|
|
$
|
48,429,000
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
69
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED BALANCE SHEETS CONTINUED
December 31,
LIABILITIES AND PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
3,361,000
|
|
|
$
|
25,594,000
|
|
Short-term debt
|
|
|
5,493,000
|
|
|
|
5,575,000
|
|
Due to Penn Octane Corporation, net
|
|
|
347,000
|
|
|
|
778,000
|
|
Accounts payable
|
|
|
2,086,000
|
|
|
|
2,451,000
|
|
Taxes payable
|
|
|
618,000
|
|
|
|
921,000
|
|
Accrued liabilities
|
|
|
1,476,000
|
|
|
|
2,852,000
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,381,000
|
|
|
|
38,171,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities, net of discount
|
|
|
21,250,000
|
|
|
|
150,000
|
|
Deferred income taxes
|
|
|
3,238,000
|
|
|
|
2,909,000
|
|
Partners Capital
|
|
|
|
|
|
|
|
|
Common units
|
|
|
11,310,000
|
|
|
|
7,054,000
|
|
General Partners equity
|
|
|
231,000
|
|
|
|
145,000
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
11,541,000
|
|
|
|
7,199,000
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital
|
|
$
|
49,410,000
|
|
|
$
|
48,429,000
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
70
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
Revenues
|
|
$
|
5,906,000
|
|
|
$
|
13,821,000
|
|
Cost of goods sold
|
|
|
4,805,000
|
|
|
|
10,758,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,101,000
|
|
|
|
3,063,000
|
|
Selling, general and administrative expenses and other
|
|
|
|
|
|
|
|
|
Legal and professional fees
|
|
|
1,516,000
|
|
|
|
1,579,000
|
|
Salaries and payroll related expenses
|
|
|
1,444,000
|
|
|
|
1,767,000
|
|
Other
|
|
|
1,710,000
|
|
|
|
1,964,000
|
|
Loss on sale
of remaining LPG-related assets
|
|
|
406,000
|
|
|
|
351,000
|
|
|
|
|
|
|
|
|
|
|
|
5,076,000
|
|
|
|
5,661,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
(3,975,000
|
)
|
|
|
(2,598,000
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(885,000
|
)
|
|
|
(3,658,000
|
)
|
Interest income
|
|
|
17,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(4,843,000
|
)
|
|
|
(6,248,000
|
)
|
Benefit for income taxes
|
|
|
21,000
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,822,000
|
)
|
|
$
|
(6,211,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to the partners
|
|
$
|
(4,822,000
|
)
|
|
$
|
(6,211,000
|
)
|
Less General Partners interest in net loss
|
|
|
(96,000
|
)
|
|
|
(124,000
|
)
|
|
|
|
|
|
|
|
Net loss allocable to the common units
|
|
$
|
(4,726,000
|
)
|
|
$
|
(6,087,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common unit
|
|
$
|
(2.40
|
)
|
|
$
|
(2.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding
|
|
|
1,971,799
|
|
|
|
2,599,168
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
71
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Units
|
|
|
General
|
|
|
Partners
|
|
|
|
Units
|
|
|
Amount
|
|
|
Partner
|
|
|
Capital
|
|
Balance as of December 31, 2006
|
|
|
1,910,656
|
|
|
|
14,739,000
|
|
|
|
301,000
|
|
|
|
15,040,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(4,726,000
|
)
|
|
|
(96,000
|
)
|
|
|
(4,822,000
|
)
|
Issuance of equity
|
|
|
518,550
|
|
|
|
5,664,000
|
|
|
|
116,000
|
|
|
|
5,780,000
|
|
Cost associated with issuance of equity
|
|
|
|
|
|
|
(294,000
|
)
|
|
|
(6,000
|
)
|
|
|
(300,000
|
)
|
Cash distribution to partners
|
|
|
|
|
|
|
(4,342,000
|
)
|
|
|
(89,000
|
)
|
|
|
(4,431,000
|
)
|
Beneficial conversion feature
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
Unit based compensation
|
|
|
|
|
|
|
245,000
|
|
|
|
4,000
|
|
|
|
249,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
2,429,206
|
|
|
$
|
11,311,000
|
|
|
$
|
230,000
|
|
|
$
|
11,541,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(6,087,000
|
)
|
|
|
(124,000
|
)
|
|
|
(6,211,000
|
)
|
Issuance of equity
|
|
|
333,257
|
|
|
|
3,476,000
|
|
|
|
72,000
|
|
|
|
3,548,000
|
|
Registration costs
|
|
|
|
|
|
|
(308,000
|
)
|
|
|
(6,000
|
)
|
|
|
(314,000
|
)
|
Cash distribution to partners
|
|
|
|
|
|
|
(1,916,000
|
)
|
|
|
(39,000
|
)
|
|
|
(1,955,000
|
)
|
Contribution from the General Partner
|
|
|
|
|
|
|
116,000
|
|
|
|
2,000
|
|
|
|
118,000
|
|
Unit-based compensation
|
|
|
|
|
|
|
436,000
|
|
|
|
9,000
|
|
|
|
445,000
|
|
Other
|
|
|
|
|
|
|
26,000
|
|
|
|
1,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
2,762,463
|
|
|
$
|
7,054,000
|
|
|
$
|
145,000
|
|
|
$
|
7,199,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
72
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,822,000
|
)
|
|
$
|
(6,211,000
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
1,129,000
|
|
|
|
2,158,000
|
|
Unit-based payment expense
|
|
|
343,000
|
|
|
|
479,000
|
|
Amortization of loan discount related to detachable warrants issued
|
|
|
37,000
|
|
|
|
72,000
|
|
Beneficial conversion
|
|
|
7,000
|
|
|
|
18,000
|
|
Loss on sale
of remaining LPG-related assets
|
|
|
406,000
|
|
|
|
351,000
|
|
Gain on sale
of assets
|
|
|
|
|
|
|
(20,000
|
)
|
Other
|
|
|
|
|
|
|
(25,000
|
)
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(169,000
|
)
|
|
|
(216,000
|
)
|
Prepaid and other current assets
|
|
|
110,000
|
|
|
|
(5,000
|
)
|
Trade accounts payable
|
|
|
2,083,000
|
|
|
|
365,000
|
|
Due to/from Penn Octane Corporation, net
|
|
|
1,587,000
|
|
|
|
431,000
|
|
Accrued and
other liabilities
|
|
|
(237,000
|
)
|
|
|
1,166,000
|
|
U.S. and foreign taxes payable
|
|
|
215,000
|
|
|
|
303,000
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
689,000
|
|
|
|
(1,134,000
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(137,000
|
)
|
|
|
(3,858,000
|
)
|
Proceeds from the sale of the remaining LPG-related assets
|
|
|
9,187,000
|
|
|
|
|
|
Costs to acquire Regional Enterprises, Inc.
|
|
|
(8,399,000
|
)
|
|
|
|
|
Costs to acquire Oklahoma assets
|
|
|
(10,070,000
|
)
|
|
|
|
|
Other non-current assets
|
|
|
11,000
|
|
|
|
(14,000
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,408,000
|
)
|
|
|
(3,872,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment on TransMontaigne Note
|
|
|
(1,000,000
|
)
|
|
|
|
|
Issuance of equity, net
|
|
|
3,704,000
|
|
|
|
2,774,000
|
|
Cash distributions to partners
|
|
|
(4,431,000
|
)
|
|
|
(1,955,000
|
)
|
Issuance of debt
|
|
|
10,000,000
|
|
|
|
|
|
Capital contribution
|
|
|
|
|
|
|
118,000
|
|
Payment of debt
|
|
|
|
|
|
|
(350,000
|
)
|
Short-term debt
|
|
|
|
|
|
|
1,575,000
|
|
Cost of registration
|
|
|
|
|
|
|
(314,000
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,273,000
|
|
|
|
1,848,000
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(446,000
|
)
|
|
|
(3,158,000
|
)
|
Cash at beginning of period
|
|
|
3,896,000
|
|
|
|
3,450,000
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
3,450,000
|
|
|
$
|
292,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,287,000
|
|
|
$
|
3,468,000
|
|
|
|
|
|
|
|
|
U.S. and foreign taxes
|
|
$
|
30,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash transactions:
|
|
|
|
|
|
|
|
|
Notes issued in acquisition
|
|
$
|
1,500,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Units issued in acquisition
|
|
$
|
1,500,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
TCW Credit Facility
|
|
$
|
18,700,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Unit based compensation
|
|
$
|
249,000
|
|
|
$
|
445,000
|
|
|
|
|
|
|
|
|
Units issued for compensation and penalties
|
|
$
|
280,000
|
|
|
$
|
774,000
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
|
|
$
|
7,000
|
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
Exchange of assets for note reduction
|
|
$
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
73
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets
to TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank
farm, together with associated improvements, leases, easements, licenses and permits; an LPG
sales agreement; and all LPG inventory (Rio Vista Restated PSA). In December 2007, Rio Vista
completed the disposition of its remaining LPG assets to TransMontaigne, including the U.S.
portion of the two pipelines from a Brownsville, Texas terminal owned by TransMontaigne to the
U.S. border, along with all associated rights-of-way and easements; all of the outstanding equity
interests in entities owning interests in the portion of the two pipelines that extend from the
U.S. border to Matamoros, Mexico; and all of the rights for indirect control of an entity that
owns a terminal site in Matamoros, Mexico. As a result, effective January 1, 2008, Rio Vista no
longer operates the assets associated with the LPG business it had historically conducted.
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.
74
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A ORGANIZATION Continued
The above acquisitions were funded by a combination of debt (new and assumed), private placements
of Rio Vista common units and proceeds from the sale of Rio Vistas LPG related assets. During
November 2007, Rio Vista completed a private placement of common units raising gross proceeds of
$4,000,000 (see Note I).
Basis of Presentation
The accompanying consolidated financial statements include Rio Vista and its United States
subsidiaries including RVOP, Rio Vista Operating GP LLC, Rio Vista Penny LLC, GO, MV Pipeline
Company (MV), Operating, Regional, and Penn Octane International, L.L.C., and its Mexican
subsidiaries, Penn Octane de Mexico, S. de R.L. de C.V. (PennMex) and Termatsal, S. de R.L. de
C.V. (Termatsal) and its consolidated affiliate, Tergas, S. de R.L. de C.V. (Tergas). The
Mexican subsidiaries were sold on December 31, 2007. All significant intercompany accounts and
transactions are eliminated.
In accordance with the guidance of the SEC Staff Accounting Bulletin No. 108 which Rio Vista
adopted in September 2006, Rio Vista corrected an immaterial misstatements in its December 31,
2007 financial statements related to errors in the over accrual of interest expense, legal
expense and under expensed insurance expense in the net amount of $79,000 and a net overstatement
on the consolidated balance sheet in the amount of $79,000.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of
the accompanying consolidated financial statements are as follows.
1.
Inventories
Inventories were stated at the lower of cost or market. Cost was determined on the first-in,
first-out method.
2.
Oil and Gas Properties
Rio Vista accounts for oil and gas properties by the successful efforts method. Leasehold
acquisition costs are capitalized. If proved reserves are found on an undeveloped property,
leasehold costs are transferred to proved properties. Under this method of accounting, costs
relating to the development of proved areas are capitalized when incurred.
Depreciation and depletion of producing oil and gas properties is recorded based on units of
production. Unit rates are computed for unamortized drilling and development costs using proved
developed reserves and for unamortized acquisition costs using all proved reserves. Statement of
Financial Accounting Standards (SFAS) No. 19, as amended, Financial Accounting and Reporting by
Oil and Gas Producing Companies (SFAS 19) requires that acquisition costs of proved properties
be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized
development costs (wells and related equipment and facilities) be amortized on the basis of
proved developed reserves.
Proved reserves are estimated by an independent petroleum engineering firm and are subject to
future revisions based on availability of additional information.
75
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
2.
Oil and Gas Properties Continued
Geological, geophysical, annual lease rentals and exploratory dry hole costs on oil and gas
properties relating to unsuccessful exploratory wells are charged to expense as incurred.
Upon sale or retirement of complete fields of depreciable or depleted property, the book value
thereof, less proceeds or salvage value, is charged or credited to income. On sale or retirement
of an individual well the proceeds are credited to accumulated depreciation and depletion.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, Rio Vista assess proved oil and gas properties for possible impairment when events or
circumstances indicate that the recorded carrying value of the properties may not be recoverable
(see note B4).
Unproved properties are assessed for impairment on a property-by-property basis. If considered
impaired, costs are charged to expense when such impairment is deemed to have occurred. Rio
Vista has no unproved properties at December 31, 2008.
3. Contracts and Derivative Instruments
Rio Vista seeks to enter into contracts for the future sale of a portion of its existing
production based on favorable price levels. As of December 31, 2008, these transactions were in
the form of contracts to sell a certain amount of production at a fixed price. Rio Vista marks
these contracts to market if losses are anticipated on the contracts.
Rio Vista has adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
which requires that all derivative financial instruments be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either recognized periodically
in income or partners capital (as a component of comprehensive income), depending on whether
the derivative is being used to hedge changes in fair value or cash flows. In April 2003, the
FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments and hedging activities. As of December 31, 2008, Rio Vista had no
derivative financial instruments.
4.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. After being placed into service,
assets are depreciated using the straight-line method over their estimated useful lives as
follows:
|
|
|
|
|
Terminal Facility and improvements
|
|
530 years
|
Pipelines
|
|
30 years
|
Automotive equipment
|
|
520 years
|
Machinery and equipment
|
|
510 years
|
Office equipment
|
|
310 years
|
Maintenance and repair costs are charged to expense as incurred.
76
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
4.
Property, Plant and Equipment Continued
In August 2001 Statement SFAS No. 144 was issued. SFAS No. 144 supersedes the provisions of
Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of. SFAS No. 144 requires Rio Vista to review
long-lived assets and certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is
determined that an impairment has occurred, the amount of the impairment is charged to
operations.
5.
Income Taxes
Rio Vista is a public limited partnership and is not subject to federal or state income
taxes. However, some of Rio Vistas operating subsidiaries are subject to foreign and U.S.
corporate income taxes as follows:
Rio Vistas U.S. corporate subsidiaries account for deferred taxes in accordance with SFAS
109, Accounting for Income Taxes. Under the liability method specified therein, deferred tax
assets and liabilities are determined based on the difference between the financial statement and
tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in deferred tax
assets and liabilities. The principal types of differences between assets and liabilities for
financial statement and income tax purposes are asset cost basis differences and depreciation.
Mexican subsidiaries:
Rio Vistas Mexican subsidiaries were taxed on their income directly by the Mexican government
and file their own separate income tax returns in Mexico. Rio Vistas Mexican subsidiaries
elected pass-through treatment for U.S. income tax purposes. Accordingly, the income/loss of
Rio Vistas Mexican subsidiaries was included in the U.S. partnership income tax return of Rio
Vista. The holders of the common units and General Partner interest were entitled to their
proportionate share of any tax credits resulting from any income taxes paid to the Mexican
government. The Mexican subsidiaries were disposed of in December 2007.
Regional and MV:
Regional and MV are taxed as U.S. corporations. A valuation allowance is provided when it is
determined that it is more likely than not that a portion of a deferred tax asset balance will
not be realized. Prior to November 1, 2004, Regional used the cash basis of accounting for
determining taxable income and MV uses the cash basis of accounting for determining taxable
income.
6. (
Loss) Income Per Common Unit
Net (loss) income per common unit is computed on the weighted average number of common units
outstanding in accordance with SFAS 128, Earnings Per Share. During periods in which Rio
Vista incurs losses from continuing operations, giving effect to common unit equivalents is not
included in the computation as it would be antidilutive.
77
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
7.
Cash Equivalents
For purposes of the cash flow statement, Rio Vista considers cash in banks and securities
purchased with a maturity of three months or less to be cash equivalents.
8.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires Rio Vista to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
9.
Fair Value of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of
fair value information about financial instruments, whether or not recognized on the balance
sheet, for which it is practicable to estimate the value. SFAS 107 excludes certain financial
instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts are
not intended to represent the underlying value of Rio Vista. The carrying amounts of cash and
cash equivalents, current receivables and payables approximate fair value because of the
short-term nature of these instruments. Notes payable bear market rates of interest.
10.
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 $249,000 ($0.12 per common unit) and $445,000 ($0.17 per common
unit) for the years ended December 31, 2007 and 2008, respectively, under the fair-value
provisions of SFAS 123R.
78
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
11.
Revenue Recognition
LPG Transportation Fees and Regional:
Rio Vista recorded revenue only upon the actual gallons of LPG delivered to its customers at
either the Matamoros Terminal Facility or Brownsville Terminal Facility at the agreed upon price
per gallon.
Rio Vista recorded revenue under its LPG Transportation Agreement (see Note D) when gallons of
LPG were delivered to customers designated by TransMontaigne at the Matamoros Terminal Facility.
Regional records revenue for storage, transportation and transloading as the services are
performed and delivery occurs.
Revenues for LPG transportation fees and Regional are recorded based on the following criteria:
|
(1)
|
|
Persuasive evidence of an arrangement existed and the price is determined
|
|
|
(2)
|
|
Delivery occurred
|
|
|
(3)
|
|
Collectability is reasonably assured
|
Oil & Gas Revenues:
Sales of Natural Gas
Gas and oil production revenue and related natural gas liquids revenue are recognized based on
actual volumes of gas, oil, and natural gas liquids sold to purchasers. Sales require delivery
of the product to the purchaser, passage of title, and probability of collection of purchaser
amounts owed. Gas and oil production revenue and related natural gas liquids revenue are
reported net of royalties. Rio Vista uses the sales method of accounting for gas imbalances.
Gas imbalances result from the gas volumes sold by Rio Vista from a property being different from
its actual entitled volumes. Under the sales method, revenues are recognized based on actual
volumes of gas sold. The volumes sold may differ from the entitled volumes. Direct operating
expenses are recognized on an accrual basis and consist of costs required to operate gas and oil
properties, product transportation expenses, and production and property taxes.
Gas revenues are recognized based on actual volumes of gas purchased from third party producers
and sold to customers. Sales are recorded only upon the delivery of the product to the purchaser,
passage of title, and collectability is reasonably assured. Losses, if any, resulting from
imbalances from such sales are recognized currently, and gains, if any, are recognized at final
delivery.
Oil and gas is sold by Rio Vista on a monthly basis. Virtually all of the Companys contracts
pricing provisions are tied to a market index, with certain adjustments based on, among other
factors, whether a well delivers to a gathering or transmission line, quality of oil and gas, and
prevailing supply and demand conditions, so that the price of the oil and gas fluctuate to remain
competitive with other available oil and gas suppliers.
Gathering fees
Gas gathering fees are recorded as the services are performed and delivery has occurred and
collectibility is reasonably assured.
79
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
12.
Foreign Currency Translation
Rio Vista followed FASB No. 52 Foreign Currency Translation in consolidation of the Mexican
subsidiaries, whose functional currency was the US dollar. Non monetary balance sheet items and
related revenue and expense were remeasured using historical rates. Monetary balance sheet
items and related revenue and expense were remeasured using exchange rates in effect at the
balance sheet dates.
13.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current
presentation.
14.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are accounted for at fair value. Trade accounts receivable do not
bear interest and are short-term in nature. An allowance for doubtful accounts for trade
accounts receivable is established when the fair value is less than the carrying value. Trade
accounts receivable are charged to the allowance when it is determined that collection is
remote.
15.
Consolidation of Variable Interest Entities
During 2004, Rio Vista adopted Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Entities (FIN 46), which was amended by FIN 46R. This
interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of variable interest entities (VIE) that do not
have sufficient equity investment at risk to permit the entity to finance its activities without
additional subordinated financial support. FIN 46R requires the beneficiary of a VIE to
consolidate in its financial statements the assets, liabilities and results of operations of the
VIE. Tergas, a former affiliate of Rio Vista, was a VIE and therefore, its assets, liabilities
and results of operations were included in the accompanying consolidated financial statements
of Rio Vista for the year ended December 31, 2007.
16.
Guarantees
In November 2002, the Financial Accounting Standards board issued Financial Accounting Standards
Board Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others (FIN 45). This interpretation requires
guarantors to disclose certain information about guarantees of indebtedness of others. In
addition, under certain circumstances, those guarantees may result in such debts being recorded
in the guarantors financial statements.
80
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
17.
Environmental Matters
Rio Vista is subject to various federal, state and local laws and regulations relating to the
protection of the environment. Rio Vista has established procedures for the ongoing evaluation of
its operations, to identify potential environmental exposures and to comply with regulatory
policies and procedures.
Rio Vista accounts for environmental contingencies in accordance with SFAS No. 5 Accounting for
Contingencies. Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition caused by past
operations, and do not contribute to current or future revenue generation, are expensed.
Liabilities for environmental contingencies are recorded when environmental assessments and/or
clean-ups are probable and the costs can be reasonably estimated. Rio Vista maintains insurance
which may cover in whole or in part certain types of environmental contingencies. For the year
ended December 31, 2008, Rio Vista had no environmental contingencies requiring specific
disclosure or the recording of a liability.
18.
Asset Retirement Obligations
Rio Vista accounts for asset retirement obligations in accordance with SFAS No. 143, Accounting
for Asset Retirement Obligations (SFAS 143). In accordance with SFAS 143, estimated asset
retirement costs are recognized when the obligation is incurred, and are amortized over proved
developed reserves using the units of production method. Asset retirement costs are estimated by
Rio Vista using existing regulatory requirements and anticipated future inflation rates. Rio
Vista had no estimated asset retirement obligations at December 31, 2008.
19.
Segment Information
Rio Vista reports segment information in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131). Under SFAS 131, all publicly
traded companies are required to report certain information about the operating segments,
products, services and geographical areas in which they operate and their major customers.
Operating segments are components of Rio Vista for which separate financial information is
available that is evaluated regularly by management in deciding how to allocate resources and
assess performance. This information is reported on the basis that it is used internally for
evaluating segment performance. Rio Vista operates as two business segments: Transportation and
Terminaling business and the Oil and Gas business (see note Q).
20.
Fair Value
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (SFAS 157), which establishes a framework for reporting fair value and
expands disclosures about fair value measurements, SFAS 157 was effective for Rio Vista on
January 1, 2008, with the exception that the applicability of SFAS 157s fair value measurement
requirements to nonfinancial assets and liabilities that are not required or permitted to be
recognized or disclosed at fair value on a recurring basis has been delayed by the FASB for one
year.
81
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
21.
Business Combinations
In December 2007, the FASB released Statement of Financial Accounting Standards No. 141(R),
Business Combinations (revised 2007) (SFAS 141(R)), which changes many well-established business
combination accounting practices and significantly affects how acquisition transactions are
reflected in the financial statements. Additionally, SFAS 141(R) will affect how companies
negotiate and structure transactions, model financial projections of acquisitions and
communicate to unitholders. SFAS 141(R) must be applied prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008.
Under SFAS 141(R), contingent consideration or earn outs will be recorded at their fair value at
the acquisition date. Except in bargain purchase situations, contingent considerations
typically will result in additional goodwill being recognized. Contingent consideration
classified as an asset or liability will be adjusted to fair value at each reporting date
through earnings until the contingency is resolved.
These estimates are subject to change upon the finalization of the valuation of certain assets
and liabilities and may be adjusted in accordance with SFAS 141(R).
In accordance with SFAS 141(R), acquisition transaction costs, such as certain investment
banking fees, due diligence costs and attorney fees are to be recorded as a reduction of
earnings in the period they are incurred. Prior to the effective date, SFAS 141(R), acquisition
transaction costs were included in the cost of the acquired business.
22.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of
identifiable net assets associated with acquisition transactions. Rio Vista has adopted the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (FASB 142). Under FASB 142, goodwill is not amortized. Rio Vista is required to make at
least an annual test of the fair value of the intangible to determine if impairment has occurred.
Rio Vista performs an annual impairment test for goodwill in the fourth quarter of each calendar
year.
82
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 J for the
warrants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(4,726,000
|
)
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(4,726,000
|
)
|
|
|
1,971,799
|
|
|
$
|
(2.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(6,087,000
|
)
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(6,087,000
|
)
|
|
|
2,599,168
|
|
|
$
|
(2.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
83
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D DISPOSITIONS
SALE OF LPG ASSETS / DISCONTINUED OPERATIONS
On August 22, 2006, Rio Vista completed the sale and assignment to TransMontaigne of certain LPG
assets, including the Brownsville Terminal Facility, the refined products tank farm and
associated leases, and LPG inventory, wherever located (collectively, the Brownsville Terminal
Assets) and assignment of the 2006 PMI agreement (Brownsville Terminal Assets and the 2006 PMI
agreement collectively, the Rio Vista Sold Assets) pursuant to an amended and restated purchase
and sale agreement (Rio Vista Restated PSA). The Rio Vista Restated PSA replaced the previous
purchase and sale agreement entered into between Rio Vista and TransMontaigne on August 15, 2005.
Rio Vista retained its owned pipelines located in the United States, including land, leases and
rights of way and 100% of the outstanding stock of its Mexican subsidiaries. Rio Vistas Mexican
subsidiaries and consolidated affiliate own pipelines in Mexico and the Matamoros Terminal
Facility, including land and rights of way (collectively, the Retained Assets).
Also on August 22, 2006, Penn Octane completed the sale and assignment to TransMontaigne of all
of Penn Octanes LPG assets, including assignment of the lease of its leased pipeline (Leased
Pipeline) and the Exxon Supply Contract (Penn Octane Sold Assets) pursuant to an amended and
restated purchase and sale agreement (Penn Octane Restated PSA). The terms of the Penn Octane
Restated PSA were substantially similar to the original purchase and sale agreement entered into
between Penn Octane and TransMontaigne on August 15, 2005. Penn Octane retained assets related
to its Fuel Sales Business, and its interest in the General Partner.
Under the Rio Vista Restated PSA and the related transportation agreement between Rio Vista and
TransMontaigne dated August 22, 2006 (LPG Transportation Agreement), TransMontaigne agreed to
exclusively use the services and Retained Assets of Rio Vista on a fee basis for purposes of
transportation of LPG to be delivered into northeastern Mexico and/or LPG sold pursuant to the
existing PMI agreement. Rio Vista agreed not to transport LPG through Rio Vistas Retained
Assets in Mexico except on behalf of TransMontaigne, subject to certain conditions.
TransMontaigne agreed to use the Retained Assets pursuant to the LPG Transportation Agreement
which began on August 22, 2006 and ran for the term of the existing PMI agreement between
TransMontaigne and PMI, as extended from time to time thereafter. Rio Vista received a fee for
all LPG transported on behalf of TransMontaigne through the Retained Assets. In addition, under
the Rio Vista Restated PSA and the related pipeline services agreement between Rio Vista and
TransMontaigne dated August 22, 2006 (U.S. Pipeline Services Agreement), TransMontaigne agreed to
provide routine and non-routine operation and maintenance services, as defined, for the U.S.
portion only of Rio Vistas pipelines between Brownsville, Texas and Matamoros, Mexico.
TransMontaigne agreed to provide the routine services at its sole cost and expense. For the
non-routine services, Rio Vista agreed to reimburse TransMontaigne for all costs actually
incurred in performing the services and all materials and supplies provided in connection with
such services, plus 15%.
84
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D DISPOSITION Continued
SALE OF LPG ASSETS / DISCONTINUED OPERATIONS Continued
The sale of the Rio Vista Sold Assets constituted a disposal of a business in accordance with FAS
144. Accordingly, the financial statements reflect the results associated with the Sold Assets
prior to the sale as discontinued operations in the accompanying financial statements. Costs
related to the Retained Assets, consisting of depreciation expense and the expenses related to
the US-Mexico Pipelines and Matamoros Terminal Facility have been included in costs of goods sold
since these costs have continued to be incurred in connection with the LPG Transportation
Agreement.
SALE OF REMAINING LPG ASSETS
On December 27, 2007, RVOP and RVOPs wholly-owned subsidiary, Penn Octane International, LLC,
entered into a definitive Purchase and Sale Agreement (the Purchase and Sale Agreement) with a
wholly-owned subsidiary (TMOC Corp.) and two affiliates (TLP MEX L.L.C. and RAZORBACK L.L.C.) of
TransMontaigne Partners L.P. (collectively, TLP) regarding TLPs acquisition of RVOPs remaining
liquefied petroleum gas (LPG) assets. The Purchase and Sale Agreement was effective as of
December 26, 2007. The transaction closed on December 31, 2007. The Purchase and Sale Agreement
was executed pursuant to the letter of intent between RVOP and TLP dated September 12, 2007 and
amended December 4, 2007.
Pursuant to the Purchase and Sale Agreement, subject to its terms and conditions, TLP agreed to
purchase from RVOP: (a) the United States portion of the two pipelines from the Brownsville,
Texas terminal owned by TLP to the United States border (the US Pipelines) with all associated
rights-of-way and easements (the US Easements); (b) all of the outstanding equity interests of
PennMex, which holds the Mexican energy regulatory commission (CRE) permit, and Termatsal, which
owns the portion of the two pipelines that extend from the US border to Matamoros, Mexico
(the Mexican Pipelines); and (c) all of RVOPs rights for indirect control of Tergas, which owns
the Matamoros, Mexico terminal site (the Mexican Terminal). PennMex and Termatsal are 100% owned
subsidiaries of RVOP and Tergas is an affiliate of RVOP, and each of the three companies
(collectively, the Included Subsidiaries) is organized under the laws of Mexico. The US
Pipelines, the US Easements, the Included Subsidiaries, the Mexican Pipelines and the Mexican
Terminal, are collectively referred to as the LPG Assets.
The total purchase price for the LPG Assets was $10,825,000, subject to adjustment as provided in
the Purchase and Sale Agreement. TLP previously paid to RVOP deposits totaling $8,000,000 (the
Deposits) which was credited to the purchase price at closing. The remaining $2,825,000 was paid
at closing, subject to adjustments and less a holdback of $500,000 (Holdback) as security for
RVOPs indemnification obligations under the Purchase and Sale Agreement. In addition, RVOPs
existing $1,000,000 promissory note (the Existing Loan) payable to TransMontaigne Product
Services Inc. (TPSI), an affiliate of TLP, was paid from the proceeds at closing. Prior to the
execution of the Purchase and Sale Agreement, and until the closing, RVOP provided LPG
transportation services to TLP or its affiliates under the terms of an LPG Transportation
Agreement with TPSI.
85
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D DISPOSITION Continued
SALE OF REMAINING LPG ASSETS Continued
On December 31, 2008, Rio Vista received a claim from TransMontaigne related to the Holdback
diligence deductions and working capital adjustment, 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 December 31, 2008, Rio
Vista has provided a charge of $351,000 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.
In connection with the sale of the LPG Assets to TLP, RVOP and TPSI agreed to terminate the
LPG Transportation Agreement and the U.S. Pipeline Service Agreement as of such closing date.
NOTE E ACQUISITIONS
REGIONAL
On July 27, 2007, Rio Vista entered into an Agreement and Plan of Merger (Merger Agreement) with
Regional Enterprises, Inc., a Virginia corporation (New Regional), Regional Enterprizes, Inc., a
Virginia corporation (Old Regional), the shareholders of Old Regional and W. Gary Farrar, Jr.
The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a
merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista
(the Regional Acquisition). The principal business of Regional is storage, transportation and
railcar transloading of bulk liquids, including chemical and petroleum products owned by its
customers. The total consideration pursuant to the Merger Agreement was $9,000,000, of which Rio
Vista paid $8,000,000 in cash, less certain working capital and other adjustments and subject to
certain amounts held in escrow, with the remaining $1,000,000 to be paid in four equal semiannual
installments beginning six months from the date of the Regional Acquisition (Sellers
Note-Regional). Under the terms of the Merger Agreement, Rio Vista was entitled to net working
capital of Old Regional of $500,000, subject to adjustments. Under the terms of the Merger
Agreement, a total of $1,500,000 was placed into escrow to secure certain indemnification
obligations of the former shareholders of Old Regional. Rio Vista funded the Regional Acquisition
through a loan of $5,000,000 (RZB Note) from RZB Finance LLC (RZB) and the remaining amounts due
at closing were paid from available working capital. (see Note G).
Regionals principal facilities are located on the James River in Hopewell, Virginia, where it
receives bulk chemicals and petroleum products from ships and barges into approximately
10,400,000 gallons of available storage. Regional also receives product from a rail spur which is
capable of receiving 15 rail cars at any one time for transloading of chemical and petroleum
liquids for delivery throughout the mid-Atlantic region.
Regional utilizes its fleet of 32 tractors and 48 tankers to distribute the various products it
receives as well as to perform direct hauling operations on behalf of its customers.
For the fiscal year ended December 31, 2008, Suffolk Sales, General Chemical Corporation and
Kemira Chemicals Canada Inc. accounted for approximately 14% 10% and 12% of Regionals revenues,
respectively, and approximately 19%, 8% and 10% of Regionals accounts receivable, respectively,
with no other individual customer accounting for more than 10% of Regionals revenues and
accounts receivable.
86
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E ACQUISITIONS Continued
REGIONAL
Continued
The accompanying consolidated balance sheet includes goodwill in the amount of $5,121,000
resulting from the acquisition.
OKLAHOMA ASSETS
On November 19, 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary
of
Rio Vista, entered into a Note Purchase Agreement, Promissory Notes, Security Agreement, Common
Unit Purchase Warrant and related agreements with TCW Asset Management Company (TAMCO) as agent
and TCW Energy Fund X investors as holders (the TCW Noteholders) (TAMCO and the TCW Noteholders
collectively, TCW) in connection with a first lien senior credit facility (the TCW Credit
Facility) between TCW and Rio Vista Penny. The purpose of the TCW Credit Facility was to provide
financing of the acquisition of certain of the assets of GM Oil Properties, Inc., an Oklahoma
corporation (GM Oil) and assets of Penny Petroleum Corporation, an Oklahoma corporation (Penny
Petroleum) by Rio Vista Penny and the acquisition of the membership interests of GO, by Rio Vista
GO LLC (Rio Vista GO), an indirect, wholly-owned subsidiary of Rio Vista. The assets of GM Oil,
Penny Petroleum and GO are collectively referred to as the Oklahoma assets.
GM Oil Properties Inc.
On November 19, 2007, Rio Vista Penny completed the purchase of assets from GM Oil pursuant to
the Asset Purchase Agreement between Rio Vista Penny and GM Oil dated as of October 1, 2007, as
amended on November 16, 2007 (the Amended GM Agreement). The assets acquired pursuant to the
Amended GM Agreement consist of the real and personal property interests of GM Oil in certain oil
and gas properties located in Haskell, McIntosh and Pittsburg counties in Oklahoma, including
approximately 33.33% of the outstanding capital stock of MV (collectively, the GM Assets). The
total purchase price for the GM Assets was paid by assumption of the TCW Credit Facility in the
amount of $16,750,000 (including $250,000 of unpaid interest included in the TCW Credit Facility
plus payment of additional accrued but unpaid interest in the amount of $340,000). The TCW Credit
Facility is payable to the TCW Noteholders and is administered by TAMCO as agent pursuant to the
TCW Credit Facility. No cash or equity consideration was paid to GM Oil or its shareholders as
part of the purchase price of the GM Assets.
Penny Petroleum Corporation
On November 19, 2007, Rio Vista Penny completed the purchase of assets from Penny Petroleum
pursuant to the Asset Purchase Agreement between Rio Vista Penny, Penny Petroleum and Gary Moores
(a shareholder of Penny Petroleum), dated as of October 1, 2007, as amended on October 25 and
November 16, 2007 (the Amended Penny Agreement). The assets acquired pursuant to the Amended
Penny Agreement consisted of the real and personal property interests of Penny Petroleum in
certain oil and gas properties located in McIntosh, Pittsburg and Haskell counties in Oklahoma,
including approximately 66.66% of the outstanding capital stock of MV (collectively, the Penny
Assets).
The total purchase price paid for the Penny Assets was $7,400,000, consisting of cash, a
promissory note and equity interests in Rio Vista. The cash portion of the purchase price was
$6,400,000, together with a promissory note with the principal amount of $500,000 bearing
interest at 7% per annum (the Moores Note) payable to Gary Moores on May 19, 2008. 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 equity portion of the purchase price was paid by delivery of 45,998 common
units of Rio Vista (the Penny Units).
87
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E ACQUISITIONS Continued
OKLAHOMA
ASSETS
Continued
GO LLC
On November 19, 2007, Rio Vista GO completed the purchase of membership interests of GO pursuant
to the Membership Interest Purchase and Sale Agreement between Rio Vista GO, GO, Outback
Production Inc. (Outback) (the owner of all of the outstanding membership interests of GO), and
Gary Moores and Bill Wood (each a shareholder of Outback), dated as of October 2, 2007, as
amended on November 16, 2007 (the Amended GO Agreement). The total purchase price paid for the
membership interests of GO was $4,000,000, consisting of cash and equity interests in Rio Vista.
The cash portion of the purchase price was $3,000,000. The equity portion of the purchase price
was paid by delivery of 91,996 common units of Rio Vista (the GO Units) to Gary Moores and Bill
Wood.
On the date the GO Registration Statement is declared effective by the SEC (the Registration
Date), if the closing price of Rio Vistas common units as reported by the NASDAQ National Market
(the Registration Date Price) is less than 80% of $10.87 (the Minimum Price), Rio Vista GO will
deliver to Outback either (i) additional common units of Rio Vista (the Additional GO Units) in
such number as necessary so that the total value of the GO Units and the Additional GO Units, in
each case based on the Registration Date Price, is at least 80% of the value of the Purchase
Price Units based on the Minimum Price or (ii) additional cash (the Additional Cash) in such
amount as necessary so that the total value of the GO Units, based on the Registration Date
Price, together with the Additional Cash, is at least 80% of the value of the GO Units based on
the Minimum Price. In lieu of delivery of Additional GO Units or Additional Cash to supplement
the GO Units, Rio Vista GO has the alternate option to pay the entire value of the GO Units based
on the Minimum Price in cash (the All Cash Payment). Upon delivery of the All Cash Payment to the
seller, all GO Units shall be returned to Rio Vista GO and/or cancelled by Rio Vista.
NOTE F PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
Oklahoma:
|
|
|
|
|
|
|
|
|
Pipelines and equipment
|
|
$
|
6,756,000
|
|
|
$
|
7,417,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional:
|
|
|
|
|
|
|
|
|
Land
|
|
|
237,000
|
|
|
|
237,000
|
|
Terminal and improvements
|
|
|
3,825,000
|
|
|
|
4,084,000
|
|
Automotive equipment
|
|
|
2,438,000
|
|
|
|
2,644,000
|
|
|
|
|
|
|
|
|
|
|
|
6,500,000
|
|
|
|
6,965,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,256,000
|
|
|
|
14,382,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(494,000
|
)
|
|
|
(1,968,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
12,762,000
|
|
|
$
|
12,414,000
|
|
|
|
|
|
|
|
|
88
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F PROPERTY, PLANT AND EQUIPMENT Continued
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 $1,071,000 and
$1,489,000 for the years ended December 31, 2007 and 2008, respectively.
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
Costs incurred in oil and gas property development for the year ended December 31, 2008 are
presented below:
|
|
|
|
|
Development costs of leased properties:
|
|
$
|
2,549,000
|
|
Capitalized pipeline infrastructure costs:
|
|
$
|
568,000
|
|
Development costs include costs incurred to gain access to and prepare development well
locations for drilling, to drill and equip development wells and to provide facilities to
extract, treat and gather oil and gas.
Rio Vista capitalizes costs related to drilling and development of oil and gas properties for
specific activities related to drilling its wells, which includes site preparation, drilling
labor, meter installation, pipeline connection and site reclamation.
89
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G DEBT OBLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
RZB Note
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Moores Note
|
|
|
493,000
|
|
|
|
|
|
Richter Note Payable
|
|
|
|
|
|
|
575,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,493,000
|
|
|
$
|
5,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCW Credit Facility
|
|
$
|
23,689,000
|
|
|
$
|
24,700,000
|
|
Sellers Note Regional
|
|
|
922,000
|
|
|
|
744,000
|
|
Moores Note
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
24,611,000
|
|
|
|
25,744,000
|
|
Less current portion
|
|
|
3,361,000
|
|
|
|
25,594,000
|
|
|
|
|
|
|
|
|
|
|
$
|
21,250,000
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
Maturities of long-term debt are as follows:
|
|
|
|
|
2009
|
|
$
|
25,594,000
|
|
2010
|
|
|
150,000
|
|
2011
|
|
|
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
$
|
25,744,000
|
|
|
|
|
|
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, (7.25% at December 31, 2007), 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.
90
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G DEBT OBLIGATIONS Continued
RZB Note Continued
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 extends the maturity date of the RZB Note through
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.
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. In addition, in
connection with the Second Amended Moores Note, Gary Moores agreed to dismiss the Civil Action.
91
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G DEBT OBLIGATIONS Continued
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 the earlier of (1) the six (6) month anniversary of the Richter Note
Payable, which date was extended to November 15, 2008 or (ii) the sale of all or substantially
all of the assets of Rio Vista. The Richter Note Payable was not paid on November 15, 2008. Rio
Vista and Mr. Richter are negotiating an extension of the due date. The Richter Note Payable
accrues interest at an annual rate of 8 percent (8%). Proceeds from the Richter Note Payable
were used for working capital.
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.
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.
92
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G DEBT OBLIGATIONS Continued
TCW Credit Facility Continued
On September 29, 2008, Rio Vista Penny entered into a First Amendment to the Note Purchase
Agreement (First TCW Amendment) with TCW. Under the terms of the First TCW Amendment, TCW
agreed to fund Rio Vista Penny an additional $1,000,000 under the TCW Credit Facility for certain
APOD costs as described in the First TCW Amendment. In addition, under the terms of the First TCW
Amendment, the interest rate under the TCW Credit Facility increased from 10.5% per annum to
12.5% per annum beginning July 1, 2008. 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 principal payment
and interest payment due) and other requirements pursuant to the TCW Credit Facility until April
13, 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 period of July 28, 2007 through December 31, 2007
and the year ended December 31, 2008, $37,000 and $72,000, respectively, of the discount was
amortized.
Beneficial Conversion Features
In connection with the issuance of the Moores Note and TCW Credit Facility, Rio Vista recorded a
beneficial conversion feature as interest expense and debt discount for the difference between
the carrying amount of the debt obligations and the estimated fair value of the common units to
be issued upon conversion in the amount of $25,000. The amortization of the debt discount
totaled approximately $7,000 and $18,000 for the years ended December 31, 2007 and 2008,
respectively.
93
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets
and liabilities for Regional and MV were as follows at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2008
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Depreciation
|
|
$
|
|
|
|
$
|
1,180,000
|
|
|
$
|
66,000
|
|
|
$
|
2,096,000
|
|
Asset basis differences
|
|
|
|
|
|
|
1,973,000
|
|
|
|
143,000
|
|
|
|
1,022,000
|
|
Accrued Expenses
|
|
|
4,000
|
|
|
|
85,000
|
|
|
|
55,000
|
|
|
|
|
|
Net operating loss carryforward
|
|
|
87,000
|
|
|
|
|
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,000
|
|
|
|
3,238,000
|
|
|
|
308,000
|
|
|
|
3,118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
91,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
3,238,000
|
|
|
$
|
308,000
|
|
|
$
|
3,118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2008
|
|
|
Net Deferred Tax Assets (Current)
|
|
$
|
|
|
|
$
|
99,000
|
|
Net Deferred Tax Assets (Non-Current)
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities (Current)
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities (Non-Current)
|
|
$
|
3,238,000
|
|
|
$
|
2,909,000
|
|
Tax Expense for Regional, MV, and the Mexican entities was as
follows at:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Current Tax Expense
|
|
$
|
125,000
|
|
|
$
|
312,000
|
|
State Tax Expense
|
|
|
23,000
|
|
|
|
37,000
|
|
Deferred Tax Benefit
|
|
|
(203,000
|
)
|
|
|
(386,000
|
)
|
Mexican Tax Expense
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(21,000
|
)
|
|
$
|
(37,000
|
)
|
|
|
|
|
|
|
|
Net operating loss carryforwards for MV Pipeline expire in the following tax years:
|
|
|
|
|
2027
|
|
$
|
63,000
|
|
2028
|
|
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,000
|
|
|
|
|
|
U.S. and State income taxes were entirely associated with the taxable subsidiaries of Rio Vista,
Regional, MV, and the Mexican entities.
Rio Vista established a valuation allowance on its deferred tax assets in 2007 reducing them to
the value management felt was more likely than not to be realized.
94
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H INCOME TAXES Continued
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an Interpretation of SFAS No. 109 (FIN 48). FIN
48 clarifies the accounting for uncertainty in tax positions recognized in a companys financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of the tax position taken or expected to be taken in a tax return. Rio Vista adopted
FIN 48 effective January 1, 2007.
The tax years that remain open to examination are 2003 2008 for foreign jurisdictions, and
2004-2008 for domestic entities.
Rio Vistas Mexican subsidiaries incurred income tax expense in Mexico on their taxable
income. The Mexican subsidiaries were sold in December 2007 (see note D). Although Rio
Vista no longer owns its Mexican subsidiaries, adjustments by the taxing authorities for the
years open to examination are subject to the indemnification provision of the purchase
agreement entered into with TransMontaigne.
A reconciliation of the U.S. Federal statutory tax rate to Rio Vistas effective tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
Net loss from continuing operations
|
|
$
|
(4,843,000
|
)
|
|
$
|
(6,248,000
|
)
|
Financial statement income taxed at partner level
|
|
|
4,682,000
|
|
|
|
6,003,000
|
|
|
|
|
|
|
|
|
Loss from Regional and MV
|
|
|
(161,000
|
)
|
|
|
(245,000
|
)
|
Income tax benefit at statutory rate (38%)
|
|
|
(61,000
|
)
|
|
|
(93,000
|
)
|
|
|
|
|
|
|
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Mexican taxes
|
|
|
34,000
|
|
|
|
|
|
Permanent differences and other
|
|
|
6,000
|
|
|
|
56,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
(21,000
|
)
|
|
$
|
(37,000
|
)
|
|
|
|
|
|
|
|
Rio Vista is taxed as a partnership under Code Section 701 of the Internal Revenue Code. All of
Rio Vistas subsidiaries except for Regional and MV are taxed at the partner level, therefore,
Rio Vista has no U.S. income tax expense or liability. The Partnerships significant basis
differences between the tax bases and the financial statement bases of its assets and
liabilities are the cost basis and depreciation differences of the depreciable assets and
deferred compensation costs on unexercised warrants. The net reversal of cost basis and
depreciation differences vary considerably from limited partner to limited partner due to
allocations under Section 734 and 743 of the Internal Revenue Code. The deferred compensation
cost for tax purposes is $700,000. Compensation expense may or may not be recognized for tax
purposes depending on the exercise of related warrants prior to their expiration.
95
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL
Common Units
On June 29, 2007, the Board of Managers of the General Partner approved the grant of a
restricted unit bonus of 25,000 common units under Rio Vistas 2005 Equity Incentive Plan to
an executive officer of the General Partner. The restricted unit bonus vested as to 8,334
units on July 1, 2007, an additional 8,333 units on January 1, 2008, and an additional 8,333
units on July 1, 2008. In connection with the grant of restricted units, the Board of
Managers also approved the payment to the executive officer of one or more cash bonuses in
amounts sufficient, on an after-tax basis, to cover all taxes payable by the executive
officer with respect to the award of restricted units granted to him. Total compensation
recorded under the aforementioned grant of units as they vested totaled $280,000.
On November 19, 2007, in connection with the acquisition of the Oklahoma assets, Rio Vista issued
a total of 137,994 common units of Rio Vista to the sellers of GO and Penny Petroleum.
During June 2008, the Board of Managers of the General Partner of Rio Vista approved an
employment agreement with an officer of the General Partner. Under the terms of the employment
agreement, the officer is entitled to receive a grant of 30,000 restricted common units under Rio
Vistas 2005 Equity Incentive Plan in accordance with the following vesting schedule: 5,000
common units after the officer has been employed for six months, another 5,000 common units after
one year of employment, another 10,000 common units after two years of employment and another
10,000 common units after three years of employment. The common units were granted on October
17, 2008. Total compensation cost recorded under the aforementioned grant was approximately
$205,000 of which $34,000 was expensed during the year ended December 31, 2008.
Private Placement of Common Units
On November 29, 2007, Rio Vista and Rio Vista GP LLC (Rio Vista GP), entered into a Unit Purchase
Agreement with Standard General Fund L.P., Credit Suisse Management LLC and Structured Finance
Americas LLC (collectively, Purchasers) dated effective as of November 29, 2007 (the Unit
Purchase Agreement). Pursuant to the terms of the Unit Purchase Agreement, Rio Vista agreed to
sell, and the Purchasers agreed to purchase, a total of 355,556 common units of Rio Vista (Common
Units) at a price of $11.25 per unit in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended (Securities Act). The total purchase price
of the Common Units was $4,000,000. Rio Vista agreed to pay expenses of counsel to the Purchasers
in an amount not to exceed $100,000. Rio Vista used the net proceeds from the sale of the Common
Units for general working capital purposes, including repayment of indebtedness. Rio Vista agreed
not to offer or sell any of its equity securities (including equity securities of subsidiaries)
for a period of 12 months following the closing date without first offering such securities to
the Purchasers, which shall have the right to purchase up to 30% of such securities.
96
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL Continued
Private Placement of Common Units Continued
On December 3, 2007, Rio Vista and Standard General entered into a Registration Rights Agreement
(Registration Rights Agreement) pursuant to which Rio Vista agreed to provide to the Purchasers
registration rights with respect to the Common Units. Pursuant to the Registration Rights
Agreement, Rio Vista agreed to file, within 90 days after the closing date for the sale of the
Common Units, a shelf registration statement under the Securities Act to permit the public resale
of the Common Units from time to time, including resale on a delayed or continuous basis as
permitted by Rule 415 under the Securities Act. Rio Vista agreed to use its best efforts to cause
the registration statement to become effective on or before the date of filing of Rio Vistas
Annual Report on Form 10-K for the year ended December 31, 2007 but no later than April 14, 2008.
On February 13, 2008, Rio Vista filed a Form S-3 with the SEC. On August 1, 2008, the Form S-3
was declared effective. Rio Vista was required to pay liquidated damages to the holders of the
Common Units for the period of time that the registration statement was not declared effective
beginning April 14, 2008 as to all of the Common Units. In general, the amount of such damages
equaled 1% of the purchase price of the unregistered Common Units for each period of 30 days for
which such units remained unregistered. Rio Vista recorded a charge for liquidated damages of
$144,000 and in lieu of a cash payment, Rio Vista agreed to issue additional common units, at a
discount of 5% to the average closing price for such units as reported by the NASDAQ National
Market for the 10 trading days immediately preceding each thirty day delay in the S-3 becoming
effective. On October 17, 2008, Rio Vista issued an aggregate of 12,939 Rio Vista common units
in satisfaction of all liquidated damages due.
On March 7, 2008, the Board of Managers of the General Partner Rio Vista approved the grant of a
unit bonus of 8,812 common units under Rio Vistas 2005 Equity Incentive Plan to an executive
officer of the General Partner. The amount of units granted was based on the average of the high
and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on March 7,
2008.
On March 7, 2008, a total of 61,875 options to acquire common units of Rio Vista were exercised
by holders of such warrants. Total proceeds received from the exercises were $774,000. In
addition, on March 7, 2008, 15,625 options to acquire common units of Rio Vista were exercised by
a holder through the offset of a severance obligation in connection with that employees
termination.
On July 23, 2008, a total of 6,378 common units of Rio Vista were issued to CEOcast in connection
with a consulting agreement. Based on the closing price of Rio Vistas common units on July 22,
2008, the total amount recorded as an expense on the issuance date was $80,000.
On July 23, 2008, the board of managers authorized the issuance and sale by Rio Vista
of 197,628 of Rio Vistas common units to Penn Octane at $10.12 per unit, and Penn Octanes board
authorized its purchase of such Rio Vista units at that price, for an aggregate price of
approximately $2,000,000. The price per unit was the closing price for Rio Vista common units
on May 30, 2008 as reported by the Nasdaq Global Market (see note M).
97
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL Continued
Private Placement of Common Units Continued
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 holders of common units ability to
influence the manner or direction of management.
General Partner Interest
The General Partner of Rio Vista owns a 2% General Partner interest in Rio Vista. On July 1,
2006, Penn Octanes 100% interest in the General Partner was decreased to 50% as a result of the
exercise by Shore Capital LLC (Shore Capital), an affiliate of Mr. Richard Shore Jr., former
president of Penn Octane and former chief executive officer of Rio Vista, and by Mr. Jerome B.
Richter, of options to each acquire 25% of the General Partner (General Partner Options). The
exercise price for each option was approximately $82,000. Mr. Richters option was amended to
permit payment of the exercise price by surrender of Penn Octane common stock having a fair
market value equal to the exercise price. Mr. Richter paid the exercise price for his option by
surrender of 136,558 shares of Penn Octane common stock. In connection with the exercise of the
General Partner Options, Penn Octane retained voting control of the General Partner pursuant to
a voting agreement with each of Shore Capital and Mr. Richter. In December 2006, Shore Capital
transferred its interest in the General Partner to Shore Trading LLC, an affiliated entity
(Shore Trading). Shore Trading was also a party to the voting agreement with Penn Octane.
On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading
that provided Penn Octane with the option to purchase the 25% interest in the General Partner
held by Shore Trading. Penn Octane exercised its option on July 19, 2007 and acquired the 25%
interest for a total cost of $1,400,000.
The General Partner generally has unlimited liability for the obligations of Rio Vista, such as
its debts and environmental liabilities, except for those contractual obligations of Rio Vista
that are expressly made without recourse to the General Partner.
98
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL Continued
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. Rio
Vista made the following distributions during the years ended December 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
|
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Quarter
Ended
|
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
|
Dec 2006
|
|
|
01/18/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Mar 2007
|
|
|
05/04/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Jun 2007
|
|
|
07/31/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Sep 2007
|
|
|
11/14/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Jun 2005 Jun
2006 Arrearages
|
|
|
12/10/07
|
|
|
$
|
1.25
|
|
|
$
|
2,420,000
|
|
|
$
|
49,000
|
|
Dec 2007
|
|
|
02/14/08
|
|
|
$
|
0.25
|
|
|
$
|
607,000
|
|
|
$
|
12,000
|
|
March 2008
|
|
|
05/16/08
|
|
|
$
|
0.25
|
|
|
$
|
629,000
|
|
|
$
|
13,000
|
|
June 2008
|
|
|
08/14/08
|
|
|
$
|
0.25
|
|
|
$
|
679,000
|
|
|
$
|
14,000
|
|
Rio Vista has not declared a distribution for the quarters ended September 30, 2008 and December
31, 2008.
NOTE J 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.
99
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
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 December 31, 2008, 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.
On February 15, 2007, the board of managers of the General Partner approved the grant of options
to purchase a total of 21,250 common units under the 2005 Plan. Of the total number of options
granted, 5,000 were issued to an executive officer of the General Partner and 16,250 were issued
to outside managers of the General Partner. The exercise price for the options is $8.38 per
unit, which was the average of the high and low sale prices for Rio Vista common units as
reported by the NASDAQ National Market on February 15, 2007. Options granted to the executive
officer vest in equal monthly installments over a period of 36 months from the date of grant,
become fully vested and exercisable upon a change in control event, and expire five years from
the date of grant. Options granted to outside managers are fully vested on the date of grant
and expire five years from the date of grant. Total compensation to be recorded under the
aforementioned grant of option as they vest totals approximately $51,000.
On March 21, 2007, the board of managers of the General Partner approved the grant of an option
to purchase 20,000 common units of Rio Vista under the 2005 Plan to an executive officer of the
General Partner. The exercise price for the options is $7.36 per unit, which was the average of
the high and low sale prices for Rio Vista common units as reported by the NASDAQ National
Market on March 21, 2007. The options vest in equal monthly installments over a period of 36
months from the date of grant, become fully vested and exercisable upon a change in control
event, and expire five years from the date of grant. Total compensation to be recorded under
the aforementioned grant of options as they vest totals approximately $44,000.
100
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
Equity Incentive Plan Continued
On June 15, 2007, in connection with the Board Consulting Agreement with Mr. Richard R.
Canney (see note K), Rio Vista granted Mr. Canney an option to purchase 26,963 common units of
Rio Vista. The exercise price for the option is $11.14 per unit, which was the average of the
high and low sale prices as reported by the NASDAQ National Market on June 15, 2007. The Board
Consulting Agreement was terminated by Mr. Canney effective September 30, 2007 resulting in the
termination of the option.
On June 29, 2007, the board of managers of the General Partner Rio Vista approved the grant of
an option to purchase 75,000 common units of Rio Vista under the 2005 Plan to an executive
officer of the General Partner. The exercise price for the options is $11.21 per unit, which was
the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ
National Market on June 29, 2007. The unit option vests in equal monthly installments over a
period of 36 months beginning January 1, 2007, becomes fully vested and exercisable upon a
change in control event, and expires five years from the date of grant. Total compensation to
be recorded under the aforementioned grant of options as they vest totals $294,000.
In connection with the employment agreement with an executive of Regional, Rio Vista granted
options to purchase a total of 25,000 common units under the 2005 Plan to the executive. The
exercise price for the options is $16.66 per unit, which was the average of the high and low
sale prices for Rio Vista common units as reported by the NASDAQ National Market on July 27,
2007. The options vest over a two year period.
On August 23, 2007, the board of managers of the General Partner approved the grant of options
to purchase a total of 8,125 common units under the 2005 Plan to outside managers of the General
Partner. The exercise price for the options is $15.15 per unit, which was the average of the
high and low sale prices for Rio Vista common units as reported by the NASDAQ National Market on
August 23, 2007. Options granted to outside managers are fully vested on the date of grant and
expire five years from the date of grant. Total compensation to be recorded under the
aforementioned grant of options as they vest totals approximately $58,000.
On January 23, 2008, the board of managers of the General Partner approved the grant of options
to purchase a total of 16,250 common units under the 2005 Plan to certain outside members of the
board of managers of the General Partner. The exercise price for the options is $14.42 per unit,
which was the average of the high and low sale prices for Rio Vista common units as reported by
the NASDAQ National Market on January 23, 2008. Options granted to outside managers are fully
vested on the date of grant and expire five years from the date of grant.
On May 28, 2008, Rio Vista and Strategic Growth International (SGI), entered into a one year
consulting agreement whereby SGI agreed to provide public relations consulting services. The
agreement could be cancelled after 6 months and was cancelled on October 29, 2008 with an
effective date of December 1, 2008. In connection with the agreement, Rio Vista granted SGI
50,000 warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common
unit. The warrants cannot be exercised for one year from the date of issuance and the warrants
will expire three years from the date of issuance. Total cost recorded at the grant date was
$161,000. As a result of the aforementioned cancellation, the number of warrants granted was
reduced to 25,000.
101
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
Equity Incentive Plan Continued
The amount of total compensation not yet recognized as of December 31, 2008 was $120,000. Such
amounts will be recognized over the remaining life of the grants.
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 years ended December 31, 2007
and 2008.
A summary of the status of Rio Vistas warrants for the years ended December 31, 2007 and 2008
and changes during the years ending on these dates are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Warrants
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
209,719
|
|
|
$
|
10.64
|
|
|
|
349,094
|
|
|
$
|
10.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
149,375
|
|
|
|
11.42
|
|
|
|
66,250
|
|
|
|
12.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(61,875
|
)
|
|
|
12.51
|
|
Expired
|
|
|
(10,000
|
)
|
|
|
13.23
|
|
|
|
(171,802
|
)
|
|
|
10.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
349,094
|
|
|
|
10.90
|
|
|
|
181,667
|
|
|
|
11.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at end of year
|
|
|
254,663
|
|
|
|
|
|
|
|
146,685
|
|
|
|
|
|
The intrinsic value of warrants exercised during the year ended December 31, 2007 and 2008 was
$0.00 and $123,000, respectively.
The following table depicts the weighted-average exercise price and weighted average fair value
of warrants granted during the years ended December 31, 2007 and 2008, by the relationship of
the exercise price of the warrants granted to the market price on the grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
For warrants granted
|
|
|
For warrants granted
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
Exercise price compared to
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
market price on grant date
|
|
Fair Value
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Exercise Price
|
|
|
Equals market price
|
|
$
|
4.30
|
|
|
$
|
11.42
|
|
|
$
|
6.22
|
|
|
$
|
14.42
|
|
Exceeds market price
|
|
|
|
|
|
|
|
|
|
|
3.23
|
|
|
|
12.00
|
|
Less than market price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in the year
ended December 31, 2007, dividend yield of 12.5%, 13.0%, 9.3%, 6.1% and 6.5%; expected
volatility of 81.9%, 82.2%, 80.8%, 84.1% and 84.4%; risk-free interest rate of 4.25%, 4.64%,
4.72%, 4.72% and 4.94%; and expected life of 5 years.
102
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
Equity Incentive Plan Continued
The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in the year
ended December 31, 2008, dividend yield of 6.9%, 10.0%; expected volatility of 82.1%, 82.6%;
risk-free interest rate of 2.91%, 3.52; and expected life of 3 to 5 years.
The following table summarizes information about the warrants outstanding at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
|
|
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
Outstanding at
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable at
|
|
|
Average
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
2008
|
|
|
Life
|
|
|
Price
|
|
|
2008
|
|
|
Price
|
|
|
$5.00 to $12.42
|
|
|
143,750
|
|
|
|
3.20 years
|
|
|
$
|
10.37
|
|
|
|
108,768
|
|
|
$
|
10.43
|
|
|
$12.51 to $16.66
|
|
|
37,917
|
|
|
|
3.85
|
|
|
|
15.38
|
|
|
|
37,917
|
|
|
|
15.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,667
|
|
|
|
3.34
|
|
|
$
|
11.41
|
|
|
|
146,685
|
|
|
$
|
11.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of nonvested warrants as of December 31, 2008 and changes
during the year ended December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant-
|
|
Nonvested warrants
|
|
Shares
|
|
|
Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2008
|
|
|
88,130
|
|
|
$
|
11.67
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(41,689
|
)
|
|
|
11.57
|
|
Forfeited
|
|
|
(11,459
|
)
|
|
|
16.66
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
34,982
|
|
|
$
|
10.17
|
|
|
|
|
|
|
|
|
|
NOTE K 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.
103
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES
Continued
Legal Proceedings
Continued
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 cash currently
stands, the trial court has ruled that insurance coverage does exist to provide coverage in
the Camacho case.
104
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K 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.
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. 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.
105
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES
Continued
Leases
Norfolk Southern Leases
On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern
Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection
with Regionals existing operations at Regionals facilities in Hopewell, Virginia. The lease
includes the right to maintain existing warehouses, storage tanks for handling petroleum and
chemical products, and necessary appurtenances. The lease term was January 1, 2003 through
December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30
days written notice. Rent is $1,500 per month subject to adjustment based on inflation.
On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk
Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land
which is utilized in connection with Regionals existing operations at Regionals facilities in
Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding
lease began on August 21, 2003 and continues until terminated by either party with 30 days
written notice. Rent is $4,875 per year, payable in advance.
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.
Other
Regional has several leases for parking and other facilities which are short term in nature and
can be terminated by the lessors or Regional upon giving sixty days notice of cancellation.
Rio Vista Energy Partners L.P. entered into a lease for office space for administrative
purposes in Plano, Texas starting August 2008 for a period of 37 months. Rent of $7,000
plus utilities is payable each month. Future rents are $84,000 for year ended 2009 and 2010
and $56,000 for the year ended 2011.
Rent expense for all operating leases was $83,000 and $75,000 for the years ended December 31,
2007 and 2008, respectively.
106
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Agreements
Asphalt Agreement
On November 30, 2000, Regional entered into a Storage and Product Handling Agreement with a
customer with an effective date of December 1, 2000 (Asphalt Agreement). The Asphalt Agreement
provides for the pricing, terms and conditions under which the customer will purchase terminal
services and facility usage from Regional for the storage and handling of the customers asphalt
products. The Asphalt Agreement was amended on October 15, 2002 with an effective date of
December 1, 2002 (Amended Asphalt Agreement). The term of the Amended Asphalt Agreement is five
years with an option by the customer for an additional five-year renewal term, which the
customer exercised in July 2007. After the additional five-year term, the Amended Asphalt
Agreement renews automatically for successive one-year terms unless terminated upon 120 days
advance written notice by either party. The annual fee payable to Regional for the initial
five-year term of the Amended Asphalt Agreement is approximately $500,000, payable in equal
monthly installments, subject to adjustments for inflation and certain facility improvements.
In exchange for the annual fee, Regional agrees to provide minimum annual throughput of 610,000
net barrels per contract year, with additional volume to be paid on a per barrel basis. During
the term of the amended Asphalt Agreement, Regional agrees to provide three storage tanks and
certain related equipment to the customer on an exclusive basis as well as access to Regionals
barge docking facility.
Fuel Oil Agreement
On November 16, 1998, Regional entered into a Terminal Agreement with a customer with an
effective date of November 1, 1998, as amended on April 5, 2001, October 11, 2001 and August 1,
2003 (Fuel Oil Agreement). The Fuel Oil Agreement provides for the pricing, terms and
conditions under which Regional will provide terminal facilities and services to the customers
for the delivery of fuel oil. The agreement renews automatically for successive one-year terms
unless terminated upon 365 days advance written notice by either party. Pursuant to the
agreement, as amended, Regional agrees to provide three storage tanks, certain related pipelines
and equipment, and at least two tractor tankers to the customer on an exclusive basis, as well
as access to Regionals barge docking facility. In exchange for use of Regionals facilities
and services, the customer pays an annual tank rental amount of approximately $300,000 plus a
product transportation fee calculated on a per gallon basis, each subject to annual adjustment
for inflation. Regional agrees to deliver a minimum daily quantity of fuel oil on behalf of the
customer.
Gas Service and Sales Agreements
GO entered into an agreement with Clearwater Enterprises, LLC (Clearwater) to provide monthly
services in relationship to the Brooken system pipeline. In accordance with terms of the
agreement, Clearwater would i) receive pipeline nominations from the various shippers on the
Brooken system. ii) allocate volumes to the wellhead based upon the volumes delivered to the
Brooken interconnect iii) prepare gathering and compression fee invoices on behalf of the Company
iv) prepare pipeline imbalance and cashout statements. The monthly gathering management fee for
these services is $3,000. The agreement is month to month unless and until terminated by either
party upon 30 days notice.
For
the year ended December 31, 2008, approximately 68% of our gas
production was sold through Clearwater and approximately 22% was sold
to Unimark, LLC. In addition, approximately 82% of the oil and gas
segment trade accounts receivables were from Clearwater. These gas sales are governed by an
agreement that expires in 2009 and continues yearly thereafter, until canceled by either party
within thirty day notice.
107
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Agreements Continued
Gas Compression Agreements
GO entered into a one year lease agreement with Hanover Compression Limited Partnership for the
use of a compressor. The lease is dated October 11, 2006 and is guaranteed for a minimum of
twelve months and continues monthly until cancelled by either party with 30 day notice. Minimum
base lease payments of $11,000 plus taxes and are due monthly. The base amount is subject to
semi-annual adjustments.
MV entered into a Gas Compression Master Service Agreement with USA Compression Partners, LP on
November 1, 2007. This agreement replaces an earlier agreement for gas compression services.
The agreement provides for monthly payments of approximately $17,000 per month through August 31,
2009.
Consulting Agreement
During November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting agreement
whereby Mr. Richter shall served as a special advisor to the board of directors of Penn
Octane and the board of managers of the General Partner and provided the following services
(Services) to both Penn Octane and Rio Vista: assistance with the sale of all or part of
their LPG assets, assistance with other transactions (including restructurings) involving
the companies as mutually agreed by the parties and such other services that the companies
may reasonably request.
In consideration of the Services rendered by Mr. Richter to the companies, Penn Octane and
Rio Vista paid the following fees (Fees) to Mr. Richter: an amount equal to two percent
(2%) of (i) the net proceeds, as defined, to the companies resulting from a sale of assets
to a third party, and (ii) the net proceeds, as defined, to the companies from sales of LPG
to PMI for any calendar month in which such sales exceed the volumes pursuant to the
previous agreement with PMI. Amounts expensed pursuant to (i) above (see note D) were
$138,000 and have been paid to Mr. Richter.
Mr. Richters consulting agreement expired on November 14, 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. The provisions of the Consulting
Agreement are effective as of November 15, 2006 (Effective Date). 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. For the
years ended December 31, 2007 and 2008, Rio Vista expensed approximately $317,000 and $325,000,
respectively in connection with the Consulting Agreement. In addition, in connection with the
Regional transaction, JBR Capital earned a fee of $180,000 which fee was expensed. The initial
term of the Consulting Agreement was six months and continues to renew for additional six-month
terms unless terminated by either party at least 30 days before the end of each term.
108
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Richard R. Canney
On June 15, 2007, Penn Octane and Rio Vista entered into the Board Consulting Agreement regarding
consulting services to be rendered by Mr. Canney to Penn Octane and to Rio Vista. Pursuant to
the Board Consulting Agreement, Mr. Canney has agreed to assist Penn Octane and Rio Vista with
the potential acquisition and disposition of assets, obtaining financing, other transactions, and
recommending candidates for management and board service. In exchange for these services, Penn
Octane and Rio Vista paid Mr. Canney a combined total monthly fee of $12,500, inclusive of all
fees payable in connection with Mr. Canneys services as a director and chairman of the board of
Penn Octane and Rio Vista, retroactive to November 1, 2006. The monthly fee was paid equally by
Penn Octane and Rio Vista. During August 2007, Mr. Canney provided notice to Rio Vista of the
termination of the Board Consulting Agreement effective September 30, 2007.
CEOcast
Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc.
(CEOcast) whereby CEOcast agreed to render investor relations services to Rio Vista. Under the
terms of the CEOcast agreement, CEOcast received cash fees of $7,500 per month and Rio Vista
agreed to issue to CEOcast (a) 1,399 of Rio Vistas fully-paid, non-assessable common units
(Common Units) and (b) $75,000 worth of Common Units on March 31, 2008 based on a calculation of
units as more fully described in the consulting agreement. The delivery of any Common Units was
to be made at the soonest practical date after March 31, 2008, based on the best efforts of Rio
Vista. In accordance with the Agreement, during April 2008, Rio Vista provided notice to CEOcast
that it would not renew the Agreement upon the expiration in July 2008. In connection with the
CEOcast agreement, on July 23, 2008, Rio Vista issued to CEOcast a total of 6,378 Common Units.
Based on the closing price of Rio Vista Common Units as of July 23, 2008, the date that the units
were issued to CEOcast, Rio Vista recorded additional expense of $80,000 associated with the
issuance of the common units.
Strategic Growth International
On May 28, 2008, Rio Vista and SGI entered into a one year consulting agreement whereby SGI
agreed to provide public relations consulting services. The agreement could be cancelled after 6
months and was cancelled on October 29, 2008 with an effective date of December 1, 2008. In
connection with the agreement, Rio Vista was required to pay monthly fees of $9,000 per month.
In addition, under the agreement between Rio Vista and SGI, Rio Vista granted SGI 50,000 warrants
to purchase common units of Rio Vista at an exercise price of $12.00 per common unit. The
warrants cannot be exercised for one year from the date of issuance and the warrants will expire
three years from the date of issuance. As a result of the cancellation, the number of warrants
issued was reduced to 25,000.
Concentrations of Credit Risk
Financial instruments that potentially subject Rio Vista to credit risk include cash balances at
banks which at times exceed the federal deposit insurance.
109
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K 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.
110
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L OIL AND GAS SALES CONTRACTS
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.
At December 31, 2008, Rio Vista had the following contracts in place:
|
|
|
|
|
Date
|
|
Terms
|
-
|
|
January 2009 March 2009:
|
|
1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)
|
-
|
|
January 2009 March 2009:
|
|
0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)
|
The contracts in place at December 31, 2008 covered substantially all of Rio Vistas current
production.
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 M 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.
111
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M 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.
Under the terms of the Omnibus Agreement, Penn Octane charged Rio Vista $686,000 and $762,000
for expenses during the years ended December 31, 2007 and 2008, respectively.
112
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N 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 December 31, 2008.
NOTE O 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 ended December 31, 2007 and 2008 and has a deficit in working capital.
Currently, all revenues generated from the Oklahoma Assets are held as collateral against
the TCW Credit Facility. The TCW Credit Facility, $150,000 of the Moores Note, the RZB
Note, the Sellers Note Regional and the Richter Note Payable total approximately
$31,319,000 and are all classified as current liabilities. In addition, as a result of
extensions, the TCW Credit Facility and the RZB Note will expire during April 2009, unless
further extended. In the event such obligations are not satisfactorily restructured or
further extended, the TCW Credit Facility and/or the RZB Note 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.
113
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O REALIZATION OF ASSETS Continued
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 restructure the TCW Credit Facility and the RZB Note and 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, raise additional
debt and/or equity financing, reduce its general and administrative and other operating
expenses and sell assets.
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited)
(A)
|
|
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities
|
Costs incurred in oil and gas property acquisition and development are presented below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Property acquisition costs:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
26,255
|
|
|
$
|
|
|
Unproved
|
|
|
|
|
|
|
|
|
Development costs
|
|
|
|
|
|
|
2,549
|
|
Gas compression and pipelines
|
|
|
|
|
|
|
568
|
|
|
|
|
|
|
|
|
Total costs incurred
|
|
$
|
26,255
|
|
|
$
|
3,117
|
|
|
|
|
|
|
|
|
Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a
property. 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 include site preparation, drilling labor,
meter installation, pipeline connection and site reclamation. There were no drilling and
development costs during the year ended December 31, 2007 (acquisition of Oklahoma Assets occurred
in November 2007).
114
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited)
(B)
|
|
Oil and Gas Capitalized Costs
|
Aggregate capitalized costs related to oil and gas production activities with applicable
accumulated depreciation, depletion and amortization are presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Proved properties:
|
|
|
|
|
|
|
|
|
Leasehold, equipment and drilling
|
|
$
|
26,255
|
|
|
$
|
28,962
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(58
|
)
|
|
|
(719
|
)
|
|
|
|
|
|
|
|
Net capitalized costs
|
|
$
|
26,197
|
|
|
$
|
28,243
|
|
|
|
|
|
|
|
|
(C)
|
|
Results of Oil and Gas Producing Activities
|
The results of operations for oil and gas producing activities (excluding corporate overhead
and interest costs) are presented below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$
|
396
|
|
|
$
|
4,506
|
|
Gain (loss) on oil and gas derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas sales
|
|
|
396
|
|
|
|
4,506
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Production costs
|
|
|
212
|
|
|
|
2,503
|
|
Depreciation, depletion and amortization
|
|
|
58
|
|
|
|
669
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
270
|
|
|
|
3,172
|
|
|
|
|
|
|
|
|
Results of operations for oil and gas
producing activities (excluding
corporate overhead and interest costs)
|
|
$
|
126
|
|
|
$
|
1,334
|
|
|
|
|
|
|
|
|
Production costs include those costs incurred to operate and maintain productive wells and
related equipment, including such costs as labor, repairs, maintenance, materials, supplies,
fuel consumed, insurance and other production taxes. In addition, production costs include
administrative expenses applicable to support equipment associated with these activities.
115
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited) Continued
(D)
|
|
Net Proved Oil and Gas Reserves
|
The net proved reserves of oil and gas of Rio Vista have been estimated by an independent
petroleum engineering firm, Lee Keeling and Associates, Inc., at December 31, 2007 and 2008.
These reserve estimates have been prepared in compliance with the SEC rules based on
year-end prices. An analysis of the change in estimated net quantities of oil and gas
reserves, as reported December 31, 2007 and current estimates as of December 31, 2008 are
shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Gas (Bcf)
|
|
|
Oil (MMbls)
|
|
|
Total (Bcfe)
|
|
Net Proved developed and undeveloped reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
35.589
|
|
|
|
|
|
|
|
35.589
|
|
Revisions of previous estimates
|
|
|
(13.979
|
)
|
|
|
|
|
|
|
(13.979
|
)
|
Extensions and discoveries
|
|
|
1.405
|
|
|
|
|
|
|
|
1.405
|
|
Production
|
|
|
(.521
|
)
|
|
|
|
|
|
|
(.521
|
)
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
22.494
|
|
|
|
|
|
|
|
22.494
|
|
|
|
|
|
|
|
|
|
|
|
Net Proved developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
12.766
|
|
|
|
|
|
|
|
12.766
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
8.082
|
|
|
|
|
|
|
|
8.082
|
|
|
|
|
|
|
|
|
|
|
|
(E)
|
|
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating
to Proved Reserves Continued
|
Summarized in the following table is information for Rio Vista with respect to the standardized
measure of discounted future net cash flows relating to proved reserves as estimated by an
independent petroleum engineering firm, Lee Keely and Associates, Inc., at December 31, 2007 and
2008. Future cash inflows are computed by applying year-end prices relating to Rio Vistas
proved reserves to the year-end quantities of those reserves. Future production, development,
site restoration and abandonment costs are derived based on current costs assuming continuation
of existing economic conditions. There are no future income tax expenses because Rio Vista is a
nontaxable entity.
116
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited) Continued
(E)
|
|
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating
to Proved Reserves Continued
|
The following represents changes in the standard measure of discounted future net cash
flows estimated during the year ended December 31, 2008 from the December 31, 2007 estimated
amounts (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash inflows
|
|
$
|
80,979
|
|
|
$
|
179,015
|
|
|
$
|
(98,036
|
)
|
Future production costs
|
|
|
(31,338
|
)
|
|
|
(63,693
|
)
|
|
|
32,355
|
|
Future development costs
|
|
|
(8,831
|
)
|
|
|
(10,891
|
)
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash flows before
income taxes
|
|
$
|
40,810
|
|
|
$
|
104,431
|
|
|
$
|
(63,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future net cash flows
before income, taxes,
discounted at 10%
|
|
$
|
13,304
|
|
|
$
|
41,272
|
|
|
$
|
(27,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future net gas price (Mcf)
|
|
$
|
3.60
|
|
|
$
|
5.03
|
|
|
$
|
(1.43
|
)
|
|
|
|
|
|
|
|
|
|
|
It is necessary to emphasize that the data presented should not be viewed as representing the
expected cash flow from, or current value of, existing proved reserves since the computations
are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot
be measured with precision and their estimation requires many judgmental determinations and
frequent revisions. The required projection of production and related expenditures over time
requires further estimates with respect to pipeline availability, rates of demand and
governmental control. Actual future prices and costs are likely to be substantially different
from the current prices and costs utilized in the computation of reported amounts. Any analysis
or evaluation of the reported amounts should give specific recognition to the computational
methods utilized and the limitations inherent therein.
117
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q 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 the years ended December 31, 2008
and 2007. The LPG Transportation segment commenced August 22, 2006 and the oil and gas segment
commenced November 19, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
Terminaling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
8,573,000
|
|
|
|
5,247,000
|
|
|
|
13,820,000
|
|
Interest expense
|
|
|
931,000
|
|
|
|
2,849,000
|
|
|
|
3,780,000
|
|
Interest income
|
|
|
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Depreciation and amortization
|
|
|
996,000
|
|
|
|
1,145,000
|
|
|
|
2,141,000
|
|
Segment gross profit
|
|
|
2,129,000
|
|
|
|
925,000
|
|
|
|
3,054,000
|
|
Segment assets
|
|
|
11,891,000
|
|
|
|
36,239,000
|
|
|
|
48,130,000
|
|
Segment liabilities
|
|
|
4,465,000
|
|
|
|
28,623,000
|
|
|
|
33,088,000
|
|
Expenditure for segment assets
|
|
|
463,000
|
|
|
|
3,451,000
|
|
|
|
3,914,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
$
|
13,820,000
|
|
|
|
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
$
|
13,821,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit (loss) for reportable
segments
|
|
|
|
|
|
|
3,054,000
|
|
|
|
|
|
Other gross
profits (loss)
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
(5,661,000
|
)
|
|
|
|
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
(3,658,000
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
$
|
(6,248,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
|
48,130,000
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
299,000
|
|
|
|
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
$
|
48,429,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q SEGMENT INFORMATION Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
Terminaling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
5,379,000
|
|
|
|
527,000
|
|
|
|
5,906,000
|
|
Interest expense
|
|
|
603,000
|
|
|
|
275,000
|
|
|
|
878,000
|
|
Interest income
|
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
Depreciation and amortization
|
|
|
1,033,000
|
|
|
|
96,000
|
|
|
|
1,129,000
|
|
Segment gross profit (loss)
|
|
|
1,009,000
|
|
|
|
137,000
|
|
|
|
1,146,000
|
|
Segment assets
|
|
|
13,881,000
|
|
|
|
35,368,000
|
|
|
|
49,249,000
|
|
Segment liabilities
|
|
|
6,391,000
|
|
|
|
21,604,000
|
|
|
|
27,995,000
|
|
Expenditure for segment assets
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
$
|
5,906,000
|
|
|
|
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
$
|
5,906,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit (loss) for reportable
segments
|
|
|
|
|
|
|
1,146,000
|
|
|
|
|
|
Other gross
profit (loss)
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
(5,076,000
|
)
|
|
|
|
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
(885,000
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
17,000
|
|
|
|
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
$
|
(4,843,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
|
49,249,000
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
161,000
|
|
|
|
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
$
|
49,410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A(T). Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that
information required to be disclosed in our reports under the Securities Exchange Act of 1934, as
amended (Exchange Act), such as this Form 10-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).
During 2007 and the first three months of 2008, our General Partners accounting department
consisted of only the controller, an accounting clerk, who worked solely with our Fuel Products
business, and the chief financial officer. In late 2006, our General Partners chief executive
officer resigned and the chief financial officer assumed both the duties of the chief executive
officer and the chief financial officer. Prior to his departure, the former chief executive officer
provided some additional controls over financial reporting and accounting, although the internal
control environment was still limited. Thus, the material weakness was compounded when the chief
financial officer began functioning in a dual capacity beginning in 2006. In March 2008, the
accounting clerk resigned. Such a limited number of financial and accounting personnel makes
segregation of duties difficult.
In November 2007, we acquired the Oklahoma Assets and began accounting for the entities owning
those assets and conducting those operations. We have only one accountant in Oklahoma who performs
almost all accounting functions related to those assets and operations under the supervision of the
chief financial officer until May 2008 and thereafter under the supervision of a newly hired (see
following paragraph) assistant to the chief financial officer. Regional, which was acquired in
July 2007, has sufficient accounting personnel to provide adequate internal controls over financial
reporting for that subsidiarys separate financial statements, but such personnel are not involved
directly with consolidated financial reporting of the Company.
In May 2008, Penn Octane hired an assistant to the chief financial officer to provide additional
assistance with internal accounting responsibilities and financial reporting related to the
Oklahoma Assets and the entities owning those assets and conducting those operations. The newly
hired assistant has previous oil and gas experience. In June 2008, our General Partner hired a
vice president, who is primarily responsible for overseeing the operations of our oil and gas
properties. Despite the additional personnel, our General Partners internal control environment
is limited in such a manner that there is less than the desired internal control over financial
reporting and accounting, except as it relates to Regional and therefore, a system of checks and
balances is lacking. As a result of this material weakness, our management concluded that our
disclosure controls and procedures were not effective as of December 31, 2008.
120
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 immediately be able to take additional steps to improve its internal control
over financial reporting. In particular, 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.
During the year ended December 31, 2008, there were no other changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
We believe our consolidated financial statements included in this Annual Report on Form 10-K 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.
Managements Report on Internal Control Over Financial Reporting
Management of the General Partner is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Rio Vistas internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America (GAAP). Rio Vistas internal control over financial reporting includes
those policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of Rio Vista;
|
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of Rio Vista are being
made only in accordance with authorizations of management and
directors of Rio Vista; and
|
|
|
|
|
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of Rio Vistas assets
that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness
of Rio Vistas internal control over financial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on its assessment and those criteria, management concluded that the Rio Vistas disclosure
controls and procedures over financial reporting were not effective as of December 31, 2008.
This annual report does not include an attestation report of Rio Vistas registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by Rio Vistas registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit Rio Vista to provide only managements report
in this annual report.
Item 9B. Other Information
None.
121
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Rio Vista does not have directors, managers or officers. The board of managers and officers of Rio
Vista GP LLC, the General Partner of Rio Vista (General Partner), a subsidiary of Penn Octane,
perform all management functions for Rio Vista. Officers of the General Partner are appointed by
its board of managers. The officers of the General Partner are paid directly by Penn Octane.
Other than distributions attributable to its General Partner interest and incentive distribution
rights, the General Partner does not receive a management fee or other compensation in connection
with its management of Rio Vistas business. Pursuant to the Omnibus Agreement, Penn Octane is
entitled to receive reimbursement for all direct and indirect expenses it or the General Partner
incurs on Rio Vistas behalf, including general and administrative expenses. The indirect expenses
include an allocation of the salaries and benefit costs related to employees (including executive
officers) of Penn Octane who provide services to Rio Vista based on actual time spent performing
services between Penn Octane and the General Partner. The General Partner has sole responsibility
for conducting Rio Vistas business and for managing Rio Vistas operations.
Set forth below is certain information concerning the board of managers and executive officers of
the General Partner:
Managers of Rio Vista GP LLC
The following table shows information for the board of managers of the General Partner. The
members of the General Partners conflicts committee, audit committee and compensation committee
are Murray J. Feiwell, Richard R. Canney and Douglas G. Manner.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manager
|
Name of Manager
|
|
|
Age
|
|
|
Position with the General Partner
|
|
Since
|
|
Douglas G. Manner
|
|
|
53
|
|
|
Manager and Chairman of the Board
|
|
|
2004
|
|
|
Richard R. Canney
|
|
|
54
|
|
|
Manager
|
|
|
2004
|
|
|
Murray J. Feiwell
|
|
|
71
|
|
|
Manager
|
|
|
2004
|
|
|
Bruce I. Raben
|
|
|
55
|
|
|
Manager
|
|
|
2008
|
|
|
Nicholas J. Singer
|
|
|
29
|
|
|
Manager
|
|
|
2008
|
|
All managers hold office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Douglas G. Manner
was elected as a member of the board of managers of the General Partner in August
2004. Mr. Manner was a former CEO of Westside Energy Corporation, an oil and gas company based in
Texas until June 2008. Prior to joining Westside Energy Corporation, Mr. Manner was the Senior
Vice President and Chief Operating Officer of Kosmos Energy, LLC, a private oil and gas exploration
company. Prior to Kosmos Energy, Mr. Manner served as President and Chief Operating Officer of
White Stone Energy since August 2002. For the two years prior to joining White Stone Energy, Mr.
Manner was Chairman and Chief Executive Officer of Mission Resources and Chairman of the Board of
one of Missions predecessor companies, Bellwether Exploration. Prior to joining Bellwether, Mr.
Manner was employed by Ryder Scott Petroleum Engineers for fifteen years and by Gulf Canada
Resources Limited. Mr. Manner is a member of the board of directors of Blizzard Energy, Inc., an
oil and gas company based in Alberta, Canada; Resolute Energy Inc., an oil and gas company based in
Alberta, Canada and Cordero Energy Inc., an oil and gas company based in Alberta, Canada. Mr.
Manner holds a B.S. degree in mechanical engineering from Rice University. In January 2008, Mr.
Manner was also elected to the board of directors of Penn Octane Corporation, an affiliate of Rio
Vista.
122
Richard R. Canney
was elected as a member of the board of managers of the General Partner in
August 2004. Since 1997, Mr. Canney has been employed in the mergers and acquisitions and new
ventures division of Shell Oil Company in Houston, Texas. Prior to joining Shell, Mr. Canney was
a Director and Managing Partner of Corporacion Mercantil Internacional, S.A. de C.V. in Mexico
City. From 1994 to 1996, Mr. Canney was a professor of finance at Instituto Tecnologico Autonomo
de Mexico in Mexico City. Mr. Canney earned a Masters of Business Administration from the
University of Chicago in June 1989. Mr. Canney is also Chairman of the Board of Penn Octane.
Murray J. Feiwell
was elected as a member of the board of managers of the General Partner in
August 2004. From 1986 until January 1, 2007, Mr. Feiwell served as President and Chief Executive
Officer of Feiwell & Hannoy, P.C., a law firm located in Indianapolis, Indiana, that specializes
in general civil practice, bankruptcy and creditors rights, real estate and foreclosure, general
business and commercial law. From 1997 until January 1, 2007, Mr. Feiwell also served as
President and Chief Executive Officer of Statewide Title Company, a title company located in
Indianapolis, Indiana. Mr. Feiwell earned a J.D. from the University of Michigan in 1963. Mr.
Feiwell retired from the practice of law on January 1, 2007.
Bruce I. Raben
was elected as a member of the board of managers of the General Partner in January
2008. Mr. Raben is a founding Partner of Hudson Capital Advisors, LLC, a provider of investment
banking advisory, placement and capital raising services formed in 2004. From 1979 until 1990,
Mr. Raben worked at Drexel Burnham Lambert, an investment banking firm. From 1990 through 1995, he
was an executive vice president with Jeffries & Company, an investment banking firm. From 1995
until 2002, Mr. Raben served as a managing director of CIBC World Markets, an investment banking
firm. He continued to serve as a consultant to CIBC in 2003. Mr. Raben has previously served on
the boards of numerous public and private companies. Mr. Raben currently serves as a member of the
Board of Directors of Penn Octane.
Nicholas J. Singer
was elected as a member of the board of managers of the General Partner in
January 2008. Mr. Singer is a Co-Managing Member of Standard General Management LLC, an
investment management firm based in New York City. Before joining Standard General Management LLC
in 2007, Mr. Singer was a Founding Partner at Cyrus Capital Partners during 2005 and 2006. Prior
to joining Cyrus Capital Partners, he was a senior research analyst and principal at Och-Ziff
Capital Management from 2002 until 2005. Concurrent with his election to the board of managers of
Rio Vista, Mr. Singer was also elected to the board of directors of Penn Octane.
Information Regarding The Board Of Managers
The business of Rio Vista is managed under the direction of the board of managers of Rio Vista GP
LLC. The board conducts its business through meetings of the board and its committees. During
2008, the board held eight meetings, and the audit committee held
four meetings. No member of the
board attended less than 75% of the meetings of the board and committees of which he was a member.
The board of managers currently consists of five members, none of whom are members of the
management of either Rio Vista GP LLC or Penn Octane. The board has determined that all of its
managers, Messrs. Manner, Canney, Feiwell, Raben and Singer, meet the independence requirements
under the rules of the NASDAQ National Market. As a result, although not required by NASDAQ
rules applicable to limited partnerships, the majority of the board of managers is comprised of
independent managers.
Communication with the Board of Managers
Unitholders and other interested parties may communicate with the board of managers or the
Chairman of the Board of our General Partner by sending written communication in an envelope
addressed to Board of Managers or Chairman of the Board of Managers in care of Company
Secretary, Rio Vista Energy Partners L.P., 1313 E. Alton Gloor Blvd., Suite J, Brownsville, TX
78526.
123
Audit Committee
Our General Partners audit committee (Audit Committee) consists of Mr. Canney (Chairman), Mr.
Feiwell, and Mr. Manner. Mr. Canney and Mr. Manner are considered audit committee financial
experts as defined in applicable rules of the Securities and Exchange Commission. The board has
determined that all three members of the audit committee meet the audit committee independence
requirements under the rules of the NASDAQ National Market. The board of managers has adopted a
written charter for the audit committee, which is available on Rio Vistas website of
http://www.riovistaenergy.com
.
The audit committee reviews and reports to the board on various auditing and accounting matters,
including the quality, objectivity and performance of Rio Vistas internal and external
accountants and auditors, the adequacy of its financial controls and the reliability of financial
information reported to the public. The audit committee met four times in 2008.
Compensation Committee
Rio Vista GP LLC has a compensation committee composed of managers whom the board has determined
to be independent consisting of Messrs. Canney, Feiwell and Manner. The board of managers has
adopted a written charter for the compensation committee.
Conflicts Committee
Rio Vistas partnership agreement provides for a conflicts committee composed of the managers whom
the board of mangers of the General Partner has determined to be independent. The conflicts
committee reviews and makes recommendations relating to potential conflicts of interest between
Rio Vista and its subsidiaries, on the one hand, and the General Partner and its affiliates
(including Penn Octane), on the other hand. The members of the conflicts committee are
Messrs. Feiwell, Canney, and Manner.
Executive Officers of the General Partner
The names of the General Partners executive officer and certain information about him are set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
Name of Executive Officer
|
|
|
Age
|
|
|
Position with General Partner
|
|
Since
|
|
|
|
|
|
|
|
|
|
|
|
Ian T. Bothwell
|
|
|
49
|
|
|
Acting Chief Executive
Officer, Acting President,
Vice President, Treasurer,
Chief Financial Officer and
Assistant Secretary
|
|
|
2003
|
|
Ian T. Bothwell
was elected Treasurer of the General Partner in 2003. In 2004, Mr. Bothwell was
elected to serve as Chief Financial Officer, Vice President and Assistant Secretary of the General
Partner. He was elected Vice President, Treasurer, Chief Financial Officer, and Assistant
Secretary of Penn Octane in October 1996. In November 2006, he was appointed Acting Chief
Executive Officer and Acting President of the General Partner and of Penn Octane. He also served as
a director of Penn Octane from March 1997 until July 2004. Since July 1993, Mr. Bothwell has been
a principal of Bothwell & Asociados, S.A. de C.V., a Mexican management consulting and financial
advisory company that was founded by Mr. Bothwell in 1993 and specializes in financing
infrastructure projects in Mexico. Mr. Bothwell also serves as Chief Executive Officer of B & A
Eco-Holdings, Inc., a company originally formed to purchase certain of Penn Octanes compressed
natural gas assets.
Code of Business Conduct
The General Partner has adopted a code of conduct that applies to the General Partners executive
officers, including its principal executive officer, principal financial officer and principal
accounting officer. This code charges the executive officers of the General Partner with
responsibilities regarding honest and ethical conduct, the preparation and quality of the
disclosures in the documents and reports Rio Vista files with the SEC and compliance with
applicable laws, rules and regulations.
124
Compliance under Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the General Partners managers and executive officers,
and persons who own more than 10% of a registered class of Rio Vistas equity securities, to file
initial reports of ownership and reports of changes in ownership with the SEC. Such persons are
required by the SEC to furnish Rio Vista with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of Forms 3, 4 and 5 filed with the SEC, Rio Vista believes that
all managers and officers of the General Partner and 10% unitholders of Rio Vista complied with
such filing requirements.
Item 11. Executive Compensation.
Rio Vista does not have any directors, managers or officers. The board of managers and officers of
the General Partner perform all management functions for Rio Vista. Officers of the General
Partner are appointed by its board of managers. The officers of the General Partner currently
hold the same positions as the officers of Penn Octane. All officers of the General Partner are
paid directly by Penn Octane. Pursuant to the Omnibus Agreement, Penn Octane is entitled to
receive reimbursement for all direct and indirect expenses it or the General Partner incurs on Rio
Vistas behalf, including general and administrative expenses. The direct expenses include the
salaries and benefit costs related to employees of Penn Octane who provide services to Rio Vista.
The General Partner has sole discretion in determining the amount of these expenses.
Compensation from Penn Octane
The table below sets forth a summary of compensation paid for the last three years to those
employees of Penn Octane who served as the General Partners Chief Executive Officer, Chief
Financial Officer and its other three most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 for the year ended December 31, 2008. The General Partner had
only one such person. The General Partners executive officers are paid by Penn Octane. The
services rendered by the executive officers to the General Partner are provided pursuant to the
terms of the Omnibus Agreement for which Rio Vista pays Penn Octane for its allocable portion of
general and administrative expenses incurred by Penn Octane, including expenses for services
rendered by Penn Octane employees, for the benefit of Rio Vista.
Penn Octanes compensation to executive management was administered by the compensation committee
of the board of directors of Penn Octane. As of December 31, 2008, the compensation committee of
Penn Octane was comprised of three directors, each of whom are outside directors. The compensation
committee who reports to the board of directors of Penn Octane on all compensation matters
concerning Penn Octanes executive officers, including Penn Octanes Chief Executive Officers,
Chief Financial Officer and Penn Octanes other executive officers (collectively, with the Chief
Executive Officer and Chief Financial Officer, the Named Executive Officers). In determining
annual compensation, including bonus, and other incentive compensation to be paid to the Named
Executive Officers, the compensation committee considers several factors, including overall
performance of the Named Executive Officers (measured in terms of financial performance of Penn
Octane, opportunities provided to Penn Octane, responsibilities, quality of work and/or tenure with
Penn Octane), and considers other factors, including retention and motivation of the Named
Executive Officers and the overall financial condition of Penn Octane. The Named Executive
Officers receive compensation in the form of cash and Penn Octane equity.
Compensation from Rio Vista
The compensation committee of the General Partner does not approve the cash or equity compensation
paid by Penn Octane to the Named Executive Officers. The compensation committee of the General
Partner has the ability to recommend the issuance of equity instruments of Rio Vista or other
compensation to the Named Executive Officers in connection with their service to Rio Vista.
125
Summary Compensation Table
The following table sets forth annual and all other compensation to Mr. Bothwell, our General
Partners only executive officer in 2006, 2007 and 2008, for services rendered in all capacities
to both Penn Octane and Rio Vista and its subsidiaries during each of the periods indicated.
This information includes the dollar values of base salaries, bonus awards, the number of stock
awards granted and certain other compensation, if any, whether paid or deferred. Rio Vista does
not grant stock appreciation rights or other long-term compensation plans for employees.
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Changes in
|
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Pension Value
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and Nonqualified
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Non-Equity
|
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|
Deferred
|
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|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Awards ($)
|
|
|
Awards ($)
|
|
|
Compensation ($)
|
|
|
Earnings ($)
|
|
|
Compensation ($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian T. Bothwell
|
|
|
2008
|
|
|
|
220,000
|
|
|
|
156,000
|
(6)
|
|
|
237,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613,000
|
|
Acting Chief Executive
|
|
|
2007
|
|
|
|
219,000
|
|
|
|
58,000
|
|
|
|
93,000
|
(4)
|
|
|
309,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
88,000
|
(3)
|
|
|
767,000
|
|
Officer, Acting President,
|
|
|
2006
|
|
|
|
180,000
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
Chief
Financial Officer, Vice-President, Treasurer and Assistant Secretary
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Mr. Bothwell was appointed Acting President and Acting Chief Executive Officer of Penn
Octane and the General Partner in November 2006.
|
|
(2)
|
|
Represents warrants to purchase 180,000 shares of common stock of Penn Octane valued
using SFAS 123(R) granted on June 29, 2007, exercise price of $0.70 and vest over 36
months.
|
|
(3)
|
|
Represents warrants to purchase 100,000 common units of Rio Vista valued using SFAS
123(R) (see note J to the consolidated financial statements).
|
|
(4)
|
|
Represents 8,334 common units granted.
|
|
(5)
|
|
Represents 16,666 common units granted.
|
|
(6)
|
|
Represents bonus accrued, not paid.
|
Neither Penn Octane nor the General Partner has an employment agreement with Mr. Bothwell.
126
Outstanding Equity Awards at December 31, 2008
The following table sets forth the number of options outstanding as of December 31, 2008 for the
General Partners sole executive officer. Mr. Bothwell did not hold any stock awards at December
31, 2008.
Option Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Unearned Options
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
Price ($)
|
|
|
Date
|
|
|
Ian T. Bothwell
|
|
|
3,128
|
|
|
|
|
|
|
|
1,872
|
|
|
|
8.38
|
|
|
|
2/14/2012
|
|
Ian T. Bothwell
|
|
|
11,890
|
|
|
|
|
|
|
|
8,110
|
|
|
|
7.36
|
|
|
|
3/20/2012
|
|
Ian T. Bothwell
|
|
|
50,000
|
|
|
|
|
|
|
|
25,000
|
|
|
|
11.21
|
|
|
|
6/28/2012
|
|
Termination and Change in Control
Rio Vistas 2005 Equity Incentive Plan and the associated form of option agreement provide for
acceleration of vesting of outstanding options in connection with the following events: a merger
or consolidation in which Rio Vista and/or the General Partner is not the surviving entity; the
sale, transfer or other disposition of at least 75% of the total assets of Rio Vista and/or the
General Partner; the complete liquidation or dissolution of Rio Vista and/or the General Partner;
a reverse merger in which Rio Vista and/or the General Partner is the surviving entity but (i)
the Common Units outstanding immediately prior to such merger are converted or exchanged into
other property by virtue of the merger, or (ii) in which securities possessing more than 50% of
the total combined voting power of Rio Vistas and/or the General Partners outstanding
securities are transferred to persons different from those who held such securities immediately
prior to such merger; the acquisition by any person of beneficial ownership of securities
possessing more than 50% of the total combined voting power of Rio Vistas and/or the General
Partners outstanding securities; or a change in the composition of the board of managers of the
General Partner over a period of 12 months or less such that a majority of the managers ceases,
by reason of one or more contested elections for manager, to be comprised of individuals who are
continuing managers (as defined in the form of option agreement).
In the event of a change in control, Mr. Bothwells unvested warrants would immediately vest. The exercise price of the warrants held Mr. Bothwell at December 31, 2008
were out of the money. Accordingly the benefit to Mr. Bothwell in the event of a change in
control, would be zero.
127
Compensation of Managers
The following table lists all compensation to managers during the year ended December 31, 2008.
Manager Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
Fee Earned
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
All Other
|
|
|
|
|
|
|
or Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Deferred
|
|
|
Compen-
|
|
|
|
|
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Com-pensation
|
|
|
Compensation
|
|
|
sation
|
|
|
Total
|
|
Name
|
|
($)
(1)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Earnings
|
|
|
($)
|
|
|
($)
|
|
|
Douglas G. Manner
(4)
|
|
|
50,000
|
|
|
|
|
|
|
|
15,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
Murray J. Feiwell
(5)
|
|
|
40,000
|
|
|
|
|
|
|
|
12,000
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,000
|
|
Richard R. Canney
(6)
|
|
|
40,000
|
|
|
|
|
|
|
|
12,000
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,000
|
|
Nicholas J. Singer
|
|
|
39,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,000
|
|
Bruce I. Raben
|
|
|
39,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,000
|
|
|
|
|
(1)
|
|
Amounts represent fees paid for the quarter ended March 2008 and amounts earned for the
quarters ended June 30, 2008,
September 30, 2008 and December 31, 2008.
|
|
(2)
|
|
Amounts represent warrants to purchase 6,250 common units of Rio Vista valued using SFAS
123(R).
|
|
(3)
|
|
Amounts represent warrants to purchase 5,000 common units of Rio Vista valued using SFAS
123(R).
|
|
(4)
|
|
14,375 warrants to purchase common units of Rio Vista as of December 31, 2008.
|
|
(5)
|
|
12,500 warrants to purchase common units of Rio Vista as of December 31, 2008.
|
|
(6)
|
|
13,750 warrants to purchase common units of Rio Vista as of December 31, 2008.
|
On April 10, 2007, the board of managers of the General Partner approved a form of Chairman
Services Agreement and Manager Services Agreement. Pursuant to these agreements, the non-employee
chairman of the board of managers of the General Partner receives annual cash compensation of
$50,000, payable quarterly, and an annual grant of options to purchase 6,250 of our common units.
Other non-employee managers of our General Partner receive annual cash compensation of $40,000,
payable quarterly, and an annual grant of options to purchase 5,000 of our common units.
128
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder
Matters.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of common units of Rio Vista beneficially owned as of
March 30, 2009 by each person known by Rio Vista to own beneficially more than 5% of the
outstanding common units of Rio Vista (Common Units).
|
|
|
|
|
|
|
|
|
|
|
Amount and
|
|
|
|
|
|
|
Nature of
|
|
|
|
|
|
|
Beneficial
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Ownership
(1)
|
|
|
Percent of Class
|
|
|
Jerome B. Richter
|
|
|
603,722
|
(2)
|
|
|
21.85
|
%
|
335 Tomahawk Drive,
Palm Desert, CA 92211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCW Asset Management Company
|
|
|
400,000
|
(5)
|
|
|
12.65
|
%
|
865 South Figueroa Street, Suite 1800
Los Angeles, CA 90017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swank Group, LLC, Swank Energy Income
|
|
|
264,447
|
(3)
|
|
|
9.57
|
%
|
Advisors, L.P. and Jerry V. Swank
3300 Oak Lawn Ave., Suite 650,
Dallas, TX 75219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard General L.P.,
|
|
|
217,493
|
(4)
|
|
|
7.87
|
%
|
Standard General Fund, L.P., Soohyung Kim
and Nicholas J. Singer
650 Madison Avenue, 26
th
Floor
New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn Octane Corporation
|
|
|
197,628
|
(6)
|
|
|
7.15
|
%
|
77-530 Enfield Lane, Bldg D
Palm Desert, CA 92211
|
|
|
|
|
|
|
|
|
129
|
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Common units which are purchasable
under warrants which are currently exercisable, or which will become exercisable no later than 60 days after
March 30, 2009, are deemed outstanding for computing the percentage of the person holding such warrants but are
not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote and
subject to community property laws where applicable, the persons named in the table have sole voting and
investment power with respect to all common units shown as beneficially owned by them.
|
|
(2)
|
|
Includes 4,730 common units owned by Mr. Richters spouse.
|
|
(3)
|
|
Swank Group, LLC serves as the General Partner of Swank Energy Income Advisors, L.P. (Advisor) and may direct the
Advisor to direct the vote and disposition of the 264,447 common units of Rio Vista held by the Cushing Fund,
L.P and/or Swank MLP Conveyance Fund, L.P (collectively, Swank Funds). The Advisor is the General Partner of the
Swank Funds. The principal of Swank Group, LLC, Mr. Jerry V. Swank, may direct the vote and disposition of the
264,447 common units of Rio Vista held by the Swank Funds.
|
|
(4)
|
|
Standard General, Mr. Kim and Mr. Singer do not directly own any of the common units. By reason of the
provisions of Rule 13d-3 of the Securities Exchange Act of 1934, each of Standard General, Mr. Kim and Mr. Singer
may be deemed to own beneficially 217,493 common units (constituting approximately 7.87% of the common units
outstanding). Each of Standard General, Mr. Kim and Mr. Singer disclaim direct beneficial ownership of any of
the securities.
|
|
(5)
|
|
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 30, 2009, the outstanding balance owing under the TCW Credit Facility was
approximately $24,700,000 plus accrued interest from September 29, 2008. In connection with the execution of the
TCW Waiver on February 28, 2009, TCW agreed that it would not exercise its right to purchase more than 400,000
common units of Rio Vista pursuant to the TCW Warrant (subject to adjustment as provided for in the TCW Warrant)
without providing at least 62 days prior written notice to Rio Vista. As a result, the amount of beneficial
ownership reflected herein is based on what TCW is able to exercise of the TCW Warrant as of March 30, 2009. The
TCW Waiver expires on April 13, 2009. If the TCW Waiver is not extended and/or additional restrictions
concerning the exercise of the TCW Warrant are not made, TCW would then be able to exercise up to full amount of
the TCW Warrant. Based on an exercise price of $0.70 per common unit of Rio Visa (90% of the 20-day average
trading price of Rio Vista preceding March 30, 2009) and the ability to convert $24,700,000 of indebtedness
pursuant to the Note Purchase Agreement, TCW could acquire up to 35,285,714 common units of Rio Vista.
|
|
(6)
|
|
Penn Octane Corporation is the owner of a 75% interest in the General Partner of Rio Vista (100% voting interest).
|
130
The following table sets forth the number of common units of Rio Vista beneficially owned as of
March 30, 2009 by each manager of the General Partner, each Named Executive Officer, and all
managers and Named Executive Officers as a group. The address of each person in the table below is
c/o Rio Vista Energy Partners L.P., 1313 E. Alton Gloor Blvd., Suite J, Brownsville, Texas 78526.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
|
|
|
|
|
Beneficial
|
|
|
|
|
Name of Beneficial Owner
|
|
Ownership
(1)
|
|
|
Percent of Class
|
|
|
|
|
|
|
|
|
|
|
Nicholas J. Singer
|
|
|
217,493
|
(2)
|
|
|
7.87
|
%
|
Ian T. Bothwell
|
|
|
118,488
|
(3)
|
|
|
4.17
|
%
|
Murray J. Feiwell
|
|
|
20,635
|
(4)
|
|
|
*
|
|
Douglas G. Manner
|
|
|
19,375
|
(5)
|
|
|
*
|
|
Richard R. Canney
|
|
|
13,750
|
(6)
|
|
|
*
|
|
Bruce I. Raben
|
|
|
5,735
|
|
|
|
*
|
|
All Managers and Named
Executive Officers as a
group (6 persons)
|
|
|
395,476
|
(7)
|
|
|
13.72
|
%
|
|
|
|
*
|
|
Less than 1%
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with respect to
securities. Common units which are purchasable under warrants which are currently exercisable,
or which will become exercisable no later than 60 days after March 30, 2009, are deemed
outstanding for computing the percentage of the person holding such warrants but are not
deemed outstanding for computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the persons named in the
table have sole voting and investment power with respect to all common units shown as
beneficially owned by them.
|
|
(2)
|
|
Standard General, Mr. Kim and Mr. Singer do not directly own any of the common units. By
reason of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, each of
Standard General, Mr. Kim and Mr. Singer may be deemed to own beneficially 217,493 common
units (constituting approximately 7.87% of the common units outstanding). Each of Standard
General, Mr. Kim and Mr. Singer disclaim direct beneficial ownership of any of the securities.
|
|
(3)
|
|
Includes 79,876 common units issuable upon exercise of common unit purchase warrants
exercisable within 60 days from March 30, 2009.
|
|
(4)
|
|
Includes 12,500 common units issuable upon exercise of common unit purchase warrants
exercisable within 60 days from March 30, 2009.
|
|
(5)
|
|
Includes 14,375 common units issuable upon exercise of common unit purchase warrants
exercisable within 60 days from March 30, 2009.
|
|
(6)
|
|
Includes 13,750 common units issuable upon exercise of common unit purchase warrants
exercisable within 60 days from March 30, 2009.
|
|
(7)
|
|
Includes 120,501 common units issuable upon exercise of common unit purchase warrants
exercisable within 60 days from March 30, 2009.
|
131
Equity Compensation Plans
The following table provides information concerning Rio Vistas equity compensation plans as of
December 31, 2008
(2)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
remaining available for
|
|
|
|
Number of securities to
|
|
|
exercise price of
|
|
|
future issuance under
|
|
|
|
be issued upon exercise
|
|
|
outstanding options,
|
|
|
equity compensation
|
|
|
|
of outstanding options,
|
|
|
warrants and rights
|
|
|
plans (excluding securities
|
|
|
|
warrants and rights
|
|
|
(per unit)
|
|
|
reflected in column (a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation
plans approved by
security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
(1)
|
|
|
181,667
|
|
|
$
|
11.41
|
|
|
|
389,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
181,667
|
|
|
$
|
11.41
|
|
|
|
389,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Under the terms of the partnership agreement and applicable rules of the NASDAQ National
Market, no approval by the unitholders of Rio Vista was required.
|
|
(2)
|
|
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 of the General
Partner. 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 of the General Partner. 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.
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132
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
General Partner Options
The General Partner of Rio Vista owns a 2% General Partner interest in Rio Vista. On July 1, 2006,
Penn Octanes 100% interest in the General Partner was decreased to 50% as a result of the exercise
by Shore Capital LLC (Shore Capital), an affiliate of Mr. Richard Shore Jr., former president of
Penn Octane and former chief executive officer of Rio Vista, and by Mr. Jerome B. Richter, of
options to each acquire 25% of the General Partner (General Partner Options). The exercise price
for each option was approximately $82,000. Mr. Richters option was amended to permit payment of
the exercise price by surrender of Penn Octane common stock having a fair market value equal to the
exercise price. Mr. Richter paid the exercise price for his option by surrender of 136,558 shares
of Penn Octane common stock. In connection with the exercise of the General Partner Options, Penn
Octane retained voting control of the General Partner pursuant to a voting agreement with each of
Shore Capital and Mr. Richter. In December 2006, Shore Capital transferred its interest in the
General Partner to Shore Trading LLC, an affiliated entity (Shore Trading). Shore Trading is also
a party to the voting agreement with Penn Octane.
On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading that
provided Penn Octane with the option to purchase the 25% interest in the General Partner held by
Shore Trading. Penn Octane exercised its option on July 19, 2007 and acquired the 25% interest
for a total cost of $1,400,000.
Consulting Agreement
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. The provisions of the Consulting Agreement
are effective as of November 15, 2006 (Effective Date). 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. For the years ended December 31,
2007 and 2008, Rio Vista expensed approximately $317,000 and $325,000, respectively, in connection
with the Consulting Agreement. In addition, in connection with the Regional transaction, JBR
Capital earned a fee of $180,000 which fee was expensed. The initial term of the Consulting
Agreement was six months and continues to renew for additional six-month terms unless terminated by
either party at least 30 days before the end of each term.
Private Placement of Common Units
On November 29, 2007, Rio Vista and Rio Vista GP LLC (Rio Vista GP), entered into a Unit Purchase
Agreement with Standard General Fund L.P., Credit Suisse Management LLC and Structured Finance
Americas LLC (collectively, Purchasers) dated effective as of November 29, 2007 (the Unit Purchase
Agreement). Pursuant to the terms of the Unit Purchase Agreement, Rio Vista agreed to sell, and the
Purchasers agreed to purchase, a total of 355,556 common units of Rio Vista (Common Units) at a
price of $11.25 per share in a private placement exempt from the registration requirements of the
Securities Act of 1933, as amended (Securities Act). The total purchase price of the Common Units
is $4,000,000. Rio Vista agreed to pay expenses of counsel to the Purchasers in an amount not to
exceed $100,000. Rio Vista used the net proceeds from the sale of the Common Units for general
working capital purposes, including repayment of indebtedness. Rio Vista agreed not to offer or
sell any of its equity securities (including equity securities of subsidiaries) for a period of
12 months following the closing date without first offering such securities to the Purchasers,
which shall have the right to purchase up to 30% of such securities. The Unit Purchase Agreement
contains customary representations, warranties and covenants of the parties and is subject to
customary conditions to closing, including approval for listing of the Common Units on the NASDAQ
National Market.
133
On November 19, 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary
of Rio Vista, entered into a Note Purchase Agreement, Promissory Notes, Security Agreement, Common
Unit Purchase Warrant and related agreements with TCW Asset Management Company (TAMCO) as agent and
TCW Energy Fund X investors as holders (the TCW Noteholders) (TAMCO and the TCW Noteholders
collectively, TCW) in connection with a first lien senior credit facility (the TCW Credit Facility)
between TCW and Rio Vista Penny. The purpose of the TCW Credit Facility was to provide financing of
the acquisition of certain of the assets of GM Oil Properties, Inc., an Oklahoma corporation (GM
Oil) and assets of Penny Petroleum Corporation, an Oklahoma corporation (Penny Petroleum) by Rio
Vista Penny and the acquisition of the membership interests of GO, by Rio Vista GO LLC (Rio Vista
GO), an indirect, wholly-owned subsidiary of Rio Vista. The assets of GM Oil, Penny Petroleum and
GO are collectively referred to as the Oklahoma assets.
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 December 31, 2008, the outstanding balance owing under the TCW Credit Facility was
approximately $24,700,000 plus accrued interest since September 29, 2008.
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.
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 with Penn Octane
Pursuant to the Omnibus Agreement, Penn Octane is entitled to reimbursement for all direct and
indirect expenses it or the General Partner incurs on Rio Vistas behalf, including general and
administrative expenses.
134
Under the Omnibus Agreement, Penn Octane provides the General Partner with corporate staff and
support services in connection with its management and operation of the assets of Rio Vista. These
services include management and centralized corporate functions, such as accounting, treasury,
engineering, information technology, insurance, administration of employee benefit and incentive
compensation plans and other corporate services. Penn Octane is reimbursed for the costs and
expenses it incurs in rendering these services using a percentage calculated based on the time
spent by Penn Octanes employees on Rio Vistas business. Each Penn Octane employee involved with
Rio Vista activities accounts for his or her time each month related to Rio Vista as a percentage
of his or her total time worked. The General Partner calculates the general and administrative
expenses that are allocated to Rio Vista using the cumulative percentage. Administrative and
general expenses directly associated with providing services to Rio Vista (such as legal and
accounting services) are not included in the above allocation of indirect costs; such expenses are
charged directly to Rio Vista.
Distributions
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 its incentive distribution rights. During 2008, Rio Vista made
$39,103 of distributions to the General Partner.
Indemnification Agreement
On April 10, 2007, the Board of Managers of the General Partner approved a form of Indemnification
Agreement for the managers and officers of the General Partner. The agreement provides for
indemnification against liabilities in the event of legal proceedings brought by a third party or
by or in the right of the General Partner. The agreement also provides for advancement of expenses
to an indemnified manager or officer.
Manager Independence
The board of managers is currently composed of five members, none of whom are members of the
management of either Rio Vista GP LLC or Penn Octane. The board has determined that all five of
its managers, Messrs. Canney, Feiwell, Raben, Singer and Manner, meet the independence
requirements under the rules of the NASDAQ National Market. As a result, although not required
by NASDAQ rules applicable to limited partnerships, the majority of the board of managers is
comprised of independent managers.
The Companys audit committee (Audit Committee) consists of Mr. Canney (Chairman), Mr. Feiwell,
and Mr. Manner. The board has determined that all three members of the audit committee meet the
audit committee independence requirements under the rules of the NASDAQ Stock Market.
135
Item 14. Principal Accountant Fees and Services.
Rio Vista has been billed as follows for the professional services of Burton McCumber & Cortez,
L.L.P. rendered during the years ended December 31, 2007 and 2008:
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2007
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2008
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Audit Fees
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$
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540,000
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$
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630,000
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Audit Related Fees
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$
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118,000
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(1)
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$
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Tax Fees
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$
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44,000
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(2)
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$
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89,000
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All Other Fees
(3)
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$
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4,000
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$
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9,000
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(1)
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Represents fees related to the LPG asset sale.
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(2)
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Represents fees related to the Mexican subsidiaries.
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(3)
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Represents fees billed for tax compliance, tax advice and tax planning services.
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The General Partners audit committee approves the engagement of our independent auditor to perform
audit-related services. The audit committee does not formally approve specific amounts to be spent
on non-audit related services which in the aggregate do not exceed amounts to be spent on
audit-related services. In determining the reasonableness of audit fees, the audit committee
considers historical amounts paid and the scope of services to be performed. The audit committee
has determined that the professional services rendered by our accountants are compatible with
maintaining the principal accountants independence. The audit committee gave prior approval to
all audit services in 2007 and 2008.
136
PART IV
Item 15. Exhibits and Financial Statement Schedules
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a.
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Financial Statements and Financial Statement Schedules.
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The following documents are filed as part of this report:
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(1)
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Consolidated Financial Statements:
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Rio Vista Energy Partners L.P.
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Report of Independent Public Accounting Firm
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Consolidated Balance Sheet as of December 31, 2007 and 2008
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Consolidated
Statements of Operations for each of the two years in the period ended December 31, 2008
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Consolidated Statement of Partners Capital for each of the two years in the period
ended December 31, 2008
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Consolidated Statements of Cash Flows for each of the two years in the period ended
December 31, 2008
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Notes to Consolidated Financial Statements
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(2)
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Financial Statement Schedules:
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Schedule II Valuation and Qualifying Accounts
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b. Exhibits.
137
The following Exhibits are incorporated by reference to previously filed reports, as
noted:
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Exhibit No.
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2.1
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Distribution Agreement, dated September 16, 2004,
by and among Penn Octane Corporation, Rio Vista
Energy Partners L.P. and its Subsidiaries.
(Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26,
2004, SEC File No. 000-50394).
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2.2
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Amended and Restated Purchase and Sale Agreement,
dated August 15, 2006, by and between Rio Vista
Operating Partnership L.P. and TransMontaigne
Product Services Inc. (Incorporated by reference to
Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006, filed on November
20, 2006, SEC File No. 000-50394).
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2.3
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Agreement and Plan of Merger, dated July 27, 2007,
by and among Rio Vista Energy Partners L.P.,
Regional Enterprises, Inc., Regional Enterprizes,
Inc. (also known as Regional Enterprises, Inc.);
the shareholders; and W. Gary Farrar, Jr..
(Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30,
2007, filed on August 20, 2007, SEC File No.
000-50394).
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2.4
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Articles of Merger of Regional Enterprises, Inc.
and Regional Enterprizes, Inc., dated July 27 2007.
(Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007, filed on August 20, 2007, SEC File
No. 000-50394).
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2.5
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Asset Purchase Agreement, dated October 1, 2007, by
and between Rio Vista Penny LLC and G M Oil
Properties, Inc. (Incorporated by reference to
Rio Vistas Current Report on Form 8-K, filed on
November 26, 2007, SEC File No. 000-50394).
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2.6
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Amendment to Asset Purchase Agreement, dated
November 16, 2007, by and between Rio Vista Penny
LLC and G M Oil Properties, Inc. (Incorporated by
reference to Rio Vistas Current Report on Form
8-K, filed on November 26, 2007, SEC File No.
000-50394).
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2.7
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Asset Purchase Agreement, dated as of October 1,
2007, by and between Rio Vista Penny LLC, Penny
Petroleum Corporation and Gary Moores.
(Incorporated by reference to Rio Vistas Current
Report on Form 8-K, filed on November 26, 2007, SEC
File No. 000-50394).
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2.8
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Amendment to Asset Purchase Agreement, dated
October 25, 2007, by and among Rio Vista Energy
Partners L.P., Rio Vista Penny LLC, Penny Petroleum
Corporation and Gary Moores. (Incorporated by
reference to Rio Vistas Current Report on Form
8-K, filed on November 26, 2007, SEC File No.
000-50394).
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2.9
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Second Amendment to Asset Purchase Agreement, dated
November 16, 2007, by and among Rio Vista Energy
Partners L.P., Rio Vista Penny LLC, Penny Petroleum
Corporation and Gary Moores. (Incorporated by
reference to Rio Vistas Current Report on Form
8-K, filed on November 26, 2007, SEC File No.
000-50394).
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2.10
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Stock Purchase Agreement, dated October 2, 2007, by
and between Rio Vista GO, GO LLC, Outback
Production Inc., Gary Moores and Bill Wood.
(Incorporated by reference to Rio Vistas Current
Report on Form 8-K, filed on November 26, 2007, SEC
File No. 000-50394).
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2.11
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Amendment to Membership Interest Purchase and Sale
Agreement, dated November 16, 2007, by and between
Rio Vista Energy Partners L.P., Rio Vista GO LLC,
Outback Production Inc., GO LLC, and Gary Moores
and Bill Wood. (Incorporated by reference to Rio
Vistas Current Report on Form 8-K, filed on
November 26, 2007, SEC File No. 000-50394).
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2.12
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Purchase and Sale Agreement, dated December 26, 2007, by and among
Rio Vista Operating Partnership L.P., Penn Octane International,
LLC, TMOC Corp., TLP MEX L.L.C. and RAZORBACK L.L.C.
(Incorporated by reference to Rio Vistas Current Report on Form
8-K, filed on January 3, 2008, SEC File No. 000-50394).
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138
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Exhibit No.
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3.1
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Certificate of Limited Partnership of Rio Vista Energy Partners
L.P., filed July 10, 2003. (Incorporated by reference to Rio
Vistas Registration Statement on Form 10, filed August 26, 2004,
SEC File No. 000-50394).
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3.2
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Amendment of Certificate of Limited Partnership of Rio Vista Energy
Partners L.P., filed September 17, 2003. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed on November 22, 2004, SEC
File No. 000-50394).
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3.3
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First Amended and Restated Limited Partnership Agreement of Rio
Vista Energy Partners L.P., dated September 16, 2004.
(Incorporated by reference to Rio Vistas Registration Statement on
Form 10, filed August 26, 2004, SEC File No. 000-50394).
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3.4
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First Amendment to the First Amended and Restated Agreement of
Limited Partnership of Rio Vista Energy Partners L.P., dated
October 26, 2005. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005, filed on November 21, 2005, SEC File No. 000-50394).
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3.5
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Certificate of Formation of Rio Vista GP LLC. (Incorporated by
reference to Rio Vistas Registration Statement on Form 10, filed
August 26, 2004, SEC File No. 000-50394).
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3.6
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Rio Vista GP LLC Amended and Restated Limited Liability Company
Agreement, dated September 16, 2004. (Incorporated by reference to
Rio Vistas Registration Statement on Form 10, filed August 26,
2004, SEC File No. 000-50394).
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3.7
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First Amendment to Amended and Restated Limited Liability Company
Agreement of Rio Vista GP LLC, dated October 2, 2006.
(Incorporated by reference to Rio Vistas Annual Report on Form
10-K for the year ended December 31, 2005, filed on April 6, 2006,
SEC File No. 000-50394).
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4.1
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Specimen Unit Certificate for Common Units. (Incorporated by
reference to Rio Vistas Registration Statement on Form 10, filed
August 26, 2004, SEC File No. 000-50394).
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4.2
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Forms of Warrants to Purchase Common Units to be issued to Penn
Octane warrant holders. (Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26, 2004, SEC File
No. 000-50394).
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10.1
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Contribution, Conveyance and Assumption Agreement, dated September
16, 2004, by and among Penn Octane Corporation, Rio Vista GP LLC,
Rio Vista Energy Partners L.P., Rio Vista Operating GP LLC and Rio
Vista Operating Partnership L.P. (Incorporated by reference to Rio
Vistas Registration Statement on Form 10, filed August 26, 2004,
SEC File No. 000-50394).
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10.2
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Omnibus Agreement, dated September 16, 2004, by and among Penn
Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners,
L.P. and Rio Vista Operating Partnership L.P. (Incorporated by
reference to Rio Vistas Registration Statement on Form 10, filed
August 26, 2004, SEC File No. 000-50394).
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10.3
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Amendment No. 1 to Omnibus Agreement, dated September 16, 2004, by
and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista
Energy Partners L.P. and Rio Vista Operating Partnership L.P.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, filed on November
22, 2004, SEC File No. 000-50394).
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10.4
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Purchase Contract, dated October 1, 2004, by and between Penn
Octane Corporation and Rio Vista Operating Partnership L.P.
(Incorporated by reference to Rio Vistas Registration Statement on
Form 10, filed August 26, 2004, SEC File No. 000-50394).
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139
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Exhibit No.
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10.5
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Form of Unit Purchase Option between Penn Octane Corporation and
Shore Capital LLC. (Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26, 2004, SEC File
No. 000-50394).
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10.6
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Form of Unit Purchase Option between Penn Octane Corporation and
Jerome B. Richter. (Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26, 2004, SEC File
No. 000-50394).
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10.7
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Rio Vista Energy Partners L.P. Unit Option Agreement, dated July
10, 2003, granted to Shore Capital LLC. (Incorporated by reference
to Rio Vistas Registration Statement on Form 10, filed August 26,
2004, SEC File No. 000-50394).
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10.8
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Form of RVGP Voting Agreement by and among Rio Vista GP LLC, Penn
Octane Corporation and the members of Rio Vista GP LLC.
(Incorporated by reference to Rio Vistas Registration Statement on
Form 10, filed August 26, 2004, SEC File No. 000-50394).
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10.9
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Conveyance Agreement, dated September 30, 2004 from Penn Octane
Corporation in favor of Rio Vista Operating Partnership L.P.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, filed on November
22, 2004, SEC File No. 000-50394).
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10.10
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Guaranty & Agreement between Rio Vista Energy Partners L.P. and RZB
Finance LLC, dated September 15, 2004. (Incorporated by reference
to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, filed on November 22, 2004, SEC File No.
000-50394).
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10.11
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Guaranty & Agreement, dated September 15, 2004, between Rio Vista
Operating Partnership L.P. and RZB Finance LLC. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed on November 22, 2004, SEC
File No. 000-50394).
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10.12
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General Security Agreement, dated September 15, 2004, between Rio
Vista Energy Partners L.P. and RZB Finance LLC. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed on November 22, 2004, SEC
File No. 000-50394).
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10.13
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General Security Agreement, dated September 15, 2004, between Rio
Vista Operating Partnership L.P. and RZB Finance LLC.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, filed on November
22, 2004, SEC File No. 000-50394).
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10.14
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*
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Rio Vista Energy Partners L.P. 2005 Equity Incentive Plan
(Incorporated by reference to Rio Vistas Annual Report on Form
10-K for the year ended December 31, 2004, filed on April 12, 2005,
SEC File No. 000-50394).
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10.15
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Promissory Note, dated August 15, 2005, between Rio Vista Operating
Partnership L.P. and TransMontaigne Product Services Inc.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2005, filed on August 19,
2005, SEC File No. 000-50394).
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10.16
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|
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Security Agreement, dated August 15, 2005, between Rio Vista
Operating Partnership L.P. and TransMontaigne Product Services Inc.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2005, filed on August 19,
2005, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.17
|
|
|
Amended and Restated Consulting Agreement, dated November 15, 2005,
by and among Penn Octane Corporation, Rio Vista Energy Partners and
Jerome B. Richter. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005, filed on November 21, 2005, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.18
|
|
|
Unit Purchase Option, dated February 6, 2007, between Shore Trading LLC and Penn
Octane Corporation. (Incorporated by reference to Rio Vistas Annual Report on Form 10-K
for the year ended December 31, 2006, filed on April 17, 2007, SEC File No. 000-50394).
|
140
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|
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|
|
Exhibit No.
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|
|
|
|
|
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10.19
|
|
|
Consent to Transfer of Units, Acknowledgement of Representation, and Waiver of
Conflicts, dated February 6, 2007, by and among Penn Octane Corporation, Rio Vista GP LLC
and Shore Trading LLC. (Incorporated by reference to Rio Vistas Annual Report on Form
10-K for the year ended December 31, 2006, filed on April 17, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.20
|
|
|
Consulting Agreement entered into on March 5, 2007, with an effective date of
November 15, 2006 by and between Penn Octane Corporation and Rio Vista Energy Partners
L.P. and JBR Capital Resources, Inc. (Incorporated by reference to Rio Vistas Annual
Report on Form 10-K for the year ended December 31, 2006, filed on April 17, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.21
|
|
|
Letter Agreement, dated March 5, 2007, by and between Penn Octane Corporation, Rio
Vista Energy Partners L.P. and JBR Capital Resources, Inc. (Incorporated by reference to
Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2006, filed on
April 17, 2007, SEC File No. 000-50394).
|
|
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|
|
|
|
10.22
|
*
|
|
Form of Rio Vista GP LLC Chairman Services Agreement. (Incorporated by reference to
Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2006, filed on
April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.23
|
*
|
|
Form of Rio Vista GP LLC Managers Services Agreement. (Incorporated by reference to
Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2006, filed on
April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.24
|
*
|
|
Form of Rio Vista GP LLC Manager and Officer Indemnification Agreement. (Incorporated
by reference to Rio Vistas Annual Report on Form 10-K for the year ended December 31,
2006, filed on April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.25
|
*
|
|
Form of Nonqualified Unit Option Agreement under the 2005 Rio Vista Energy
Partners L.P. Equity Incentive Plan. (Incorporated by reference to Rio Vistas Annual
Report on Form 10-K for the year ended December 31, 2006, filed on April 17, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.26
|
|
|
Consulting Agreement, dated November 1, 2006, by and among Penn Octane Corporation
And Rio Vista Energy Partners L.P. and Ricardo Rodriguez Canney. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended June 30,
2007, filed on August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.27
|
|
|
Consulting Agreement, dated July 2, 2007, by and between Rio Vista Energy
Partners, L.P. and CEOcast, Inc. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
141
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|
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|
|
Exhibit No.
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|
|
|
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|
|
10.28
|
|
|
Employment and Non-Competition Agreement, dated July 27, 2007, by and between
Regional Enterprises, Inc. and W. Gary Farrar, III. (Incorporated by reference to Rio
Vistas Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on
August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.29
|
|
|
Escrow Agreement, dated July 27, 2007, by and among Rio Vista Energy Partners
L.P., Regional Enterprises, Inc., W. Gary Farrar, Jr., and First Capital Bank.
(Incorporated by reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007, filed on August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.30
|
|
|
Loan Agreement, dated July 26, 2007, by and between Rio Vista Energy Partners
L.P., and RZB Finance LLC (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.31
|
|
|
Guaranty and Agreement, dated July 26, 2007, by and between Regional Enterprises,
Inc., and RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.32
|
|
|
Guaranty and Agreement, dated July 26, 2007, by and between Penn Octane
Corporation, and RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.33
|
|
|
Guaranty and Agreement, dated July 26, 2007, by and between Rio Vista Operating
Partnership L.P. and RZB Finance LLC Dated As Of July 26, 2007. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended June 30,
2007, filed on August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.34
|
|
|
$5,000,000 Promissory Note, dated July 26, 2007, issued by Rio Vista Energy
Partners L.P. to RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.35
|
|
|
General Security Agreement, dated July 26, 2007, by and between RZB Finance LLC
and Regional Enterprises, Inc. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.36
|
|
|
Pledge Agreement, dated July 26, 2007, by and between: Rio Vista Energy Partners
L.P., and RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.37
|
|
|
First Amendment to Line Letter, dated July 26, 2007, by and between RZB Finance
LLC and Penn Octane Corporation. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.38
|
|
|
Debt Assumption Agreement, dated July 26, 2007, by and between Rio Vista Energy
Partners L.P. and Regional Enterprises, Inc. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20,
2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.39
|
|
|
$5,000,000 Debt Assumption Note, dated July 26, 2007, issued by Regional
Enterprises, Inc. to Rio Vista Energy Partners L.P. (Incorporated by reference to Rio
Vistas Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on
August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.40
|
|
|
$2,500,000 Promissory Note, dated July 26, 2007, issued by Regional Enterprises,
Inc. to Rio Vista Energy Partners L.P. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20,
2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.41
|
|
|
Environmental Indemnity Agreement, dated July 26, 2007, by and between Regional
Enterprises, Inc. and RZB Finance LLC. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20,
2007, SEC File No. 000-50394).
|
142
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.42
|
|
|
Reaffirmation of Security Agreements, dated July 26, 2007, by and among Rio Vista
Energy Partners L.P., Penn Octane Corporation Rio Vista Operating Partnership L.P., and
RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.43
|
|
|
Binding Letter of Intent, dated September 12, 2007, by and between TransMontaigne
Partners L.P. and Rio Vista Operating Partnership L.P. (Incorporated by reference to Rio
Vistas Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed on
November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.44
|
|
|
Restated and Amended Promissory Note, dated September 12, 2007, by and between Rio
Vista Operating Partnership L.P. and TransMontaigne Product Services, Inc. (Incorporated
by reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, filed on November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.45
|
|
|
Restated and Amended Security Agreement, dated September 12, 2007, by and among
Rio Vista Operating Partnership, L.P., TransMontaigne Product Services, Inc. and
TransMontaigne Partners L.P. (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007, filed on November 19, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.46
|
|
|
First Priority Equity Interest Pledge Agreement, dated September 12, 2007, by and
among Rio Vista Operating Partnership, L.P., Penn Octane International, LLC,
TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P., with the
acknowledgment of Penn Octane de Mexico, S. de R.L. de C.V. (Incorporated by reference to
Rio Vistas Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed
on November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.47
|
|
|
First Priority Equity Interest Pledge Agreement, dated September 12, 2007, by and
among Rio Vista Operating Partnership, L.P., Penn Octane International, LLC,
TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P., with the
acknowledgment of Termatsal, S. de R.L. de C.V. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed on November
19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.48
|
|
|
Assignment Agreement, dated September 12, 2007, by and among Rio Vista Operating
Partnership, L.P., TransMontaigne Partners L.P. and TransMontaigne Product Services, Inc.
(Incorporated by reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007, filed on November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.49
|
|
|
Unit Purchase Agreement, dated November 29, 2007, by and among Rio Vista Energy
Partners L.P., Rio Vista GP LLC, Standard General Fund L.P., Credit Suisse Management LLC
and Structured Finance Americas LLC. (Incorporated by reference to Rio Vistas Current
Report on Form 8-K, filed on December 4, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.50
|
|
|
Registration Rights Agreement, dated December 3, 2007, by and among Rio Vista
Energy Partners L.P., Rio Vista GP LLC, Standard General Fund L.P., Credit Suisse
Management LLC and Structured Finance Americas LLC. (Incorporated by reference to Rio
Vistas Current Report on Form 8-K, filed on December 4, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.51
|
|
|
Note Purchase Agreement between Rio Vista Penny LLC, TCW Asset Management
Company and TCW Energy Fund X Investors dated November 19, 2007. (Incorporated by
reference to Rio Vistas Annual Report on Form 10-K for the year ended December 31,
2007, filed on April 15, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.52
|
|
|
Guaranty made as of November 19, 2007 by Rio Vista Eco LLC, Rio Vista GO LLC,
GO LLC and MV Pipeline Company in favor of TCW Asset Management Company as
administrative agent for Holders. (Incorporated by reference to Rio Vistas Annual
Report on Form 10-K for the year ended December 31, 2007, filed on April 15, 2008,
SEC File No. 000-50394).
|
143
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.53
|
|
|
Security Agreement dated as of November 19, 2007 by Rio Vista Penny LLC in
favor of TCW Asset Management Company, as administrative agent. (Incorporated by
reference to Rio Vistas Annual Report on Form 10-K for the year ended December 31,
2007, filed on April 15, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.54
|
|
|
Assumption Agreement dated November 19, 2007 by and among GM Oil Properties,
Inc., Rio Vista Penny LLC, TCW Asset Management Company, as administrative agent and
the holders party to the Note Purchase Agreement. (Incorporated by reference to Rio
Vistas Annual Report on Form 10-K for the year ended December 31, 2007, filed on
April 15, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.55
|
|
|
Rio Vista Energy Partners L.P. Common Unit Purchase Warrant issued to TCW
Energy Funds X Holdings, L.P. (Incorporated by reference to Rio Vistas Annual Report
on Form 10-K for the year ended December 31, 2007, filed on April 15, 2008, SEC File
No. 000-50394).
|
|
|
|
|
|
|
10.56
|
|
|
Promissory note dated November 19, 2007 issued by Rio Vista to Gary Moores.
(Incorporated by reference to Rio Vistas Annual Report on Form 10-K for the year
ended December 31, 2007, filed on April 15, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.57
|
|
|
First Amendment to Note Purchase Agreement dated as of September 29, 2008 by
and among Rio Vista Penny LLC, TCW Asset Management Company, and the Holders party to
the Original Note Purchase Agreement. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on
November 17, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.58
|
|
|
Amended and Restated Management Services Agreement, dated and effective as of
September 29, 2008, is made by and among Rio Vista Operating LLC, Rio Vista Energy
Partners L.P., and Rio Vista Penny LLC. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on
November 17, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.59
|
|
|
Promissory Note dated April 15, 2008 between Rio Vista Energy Partners L.P.
and Jerome B. Richter. (Incorporated by reference to Rio Vistas Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008, filed on November 17, 2008, SEC
File No. 000-50394).
|
144
The following Exhibits are filed as part of this report:
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.60
|
|
|
Amendment to Promissory note dated June 27, 2008 issued by Rio Vista to Gary
Moores.
|
|
|
|
|
|
|
10.61
|
|
|
Second Amendment to Promissory note dated January 20, 2009 issued by Rio
Vista to Gary Moores.
|
|
|
|
|
|
|
10.62
|
|
|
Second Amendment to Loan Agreement dated as of July 2008 between RZB Finance
LLC and Rio Vista.
|
|
|
|
|
|
|
10.63
|
|
|
Third Amendment to Loan Agreement dated as of December 2008 between RZB
Finance LLC and Rio Vista.
|
|
|
|
|
|
|
10.64
|
|
|
Fourth Amendment to Loan Agreement dated as of February 28, 2009 between RZB
Finance LLC and Rio Vista.
|
|
|
|
|
|
|
10.65
|
|
|
Fifth Amendment to Loan Agreement dated as of March 31, 2009 between RZB
Finance LLC and Rio Vista.
|
|
|
|
|
|
|
10.66
|
|
|
Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated December 30, 2008 between Rio Vista Penny LLC and TCW Asset
Management Company.
|
|
|
|
|
|
|
10.67
|
|
|
Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated February 28, 2009 between Rio Vista Penny LLC and TCW Asset
Management Company.
|
|
|
|
|
|
|
10.68
|
|
|
Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated March 23, 2009 between Rio Vista Penny LLC and TCW Asset
Management Company.
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
23.1
|
|
|
Consent of Burton McCumber & Cortez, L.L.P.
|
|
|
|
|
|
|
23.2
|
|
|
Consent of Lee Keeling and Associates, Inc.
|
|
|
|
|
|
|
31.1
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
|
|
|
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|
31.2
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
|
|
|
|
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|
32
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the
Sarbanes Oxley
Act of 2002
|
|
|
|
*
|
|
indicates management contract or compensatory plan or arrangement.
|
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 E. Alton Gloor Blvd., Suite J,
Brownsville, TX 78526.
145
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
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Balance at
|
|
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Charged to
|
|
|
|
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|
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|
|
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|
|
Beginning of
|
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|
Costs and
|
|
|
Charged to
|
|
|
|
|
|
|
Balance at End
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Other Accounts
|
|
|
Deductions
|
|
|
of Period
|
|
|
|
|
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|
Year ended
December 31, 2008
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
146
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
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|
|
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|
|
RIO VISTA ENERGY PARTNERS L.P.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
RIO VISTA GP LLC, GENERAL PARTNER
|
|
|
|
|
|
|
|
|
|
April 14, 2009
|
|
By:
|
|
/s/ Ian T. Bothwell
Ian T. Bothwell
|
|
|
|
|
|
|
Acting Chief Executive Officer, Acting
|
|
|
|
|
|
|
President, Vice-President, Chief Financial
|
|
|
|
|
|
|
Officer, Treasurer and Assistant Secretary
|
|
|
|
|
|
|
(Principal, Executive, Financial and Accounting
Officer)
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Each capacity refers to the signers position with Rio Vista GP LLC, the General
Partner of the registrant.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
Ian T. Bothwell
Acting Chief Executive Officer,
Acting President,
Vice-President,
Chief Financial
Officer, Treasurer and
Assistant Secretary (Principal,
Executive, Financial and
Accounting Officer)
|
|
April 14, 2009
|
|
|
|
|
|
|
|
Richard R. Canney Manager
|
|
April 14, 2009
|
|
|
|
|
|
|
|
Murray J. Feiwell Manager
|
|
April 14, 2009
|
|
|
|
|
|
|
|
Douglas G. Manner Manager
|
|
April 14, 2009
|
|
|
|
|
|
|
|
Nicholas J. Singer Manager
|
|
April 14, 2009
|
|
|
|
|
|
|
|
Bruce I. Raben Manager
|
|
April 14, 2009
|
147
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
|
|
|
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10.60
|
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|
Amendment to Promissory note dated June 27, 2008 issued by Rio Vista to Gary
Moores.
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|
|
|
|
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10.61
|
|
|
Second Amendment to Promissory note dated January 20, 2009 issued by Rio
Vista to Gary Moores.
|
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|
|
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10.62
|
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|
Second Amendment to Loan Agreement dated as of July 2008 between RZB Finance
LLC and Rio Vista.
|
|
|
|
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10.63
|
|
|
Third Amendment to Loan Agreement dated as of December 2008 between RZB
Finance LLC and Rio Vista.
|
|
|
|
|
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10.64
|
|
|
Fourth Amendment to Loan Agreement dated as of February 28, 2009 between RZB
Finance LLC and Rio Vista.
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|
|
|
|
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10.65
|
|
|
Fifth Amendment to Loan Agreement dated as of March 31, 2009 between RZB
Finance LLC and Rio Vista.
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10.66
|
|
|
Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated December 30, 2008 between Rio Vista Penny LLC and TCW Asset
Management Company.
|
|
|
|
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10.67
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|
Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated February 28, 2009 between Rio Vista Penny LLC and TCW Asset
Management Company.
|
|
|
|
|
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10.68
|
|
|
Letter agreement to extend payments and other requirements pursuant to Note
Purchase Agreement dated March 23, 2009 between Rio Vista Penny LLC and TCW Asset
Management Company.
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21
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Subsidiaries of the Registrant
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23.1
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Consent of Burton McCumber & Cortez, L.L.P.
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23.2
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Consent of Lee Keeling and Associates, Inc.
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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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*
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indicates management contract or compensatory plan or arrangement.
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148