RIO VISTA ENERGY PARTNERS LP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2004

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

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)

DELAWARE 20-0153267
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

820 GESSNER ROAD, SUITE 1285, HOUSTON, TEXAS 77024
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (713) 467-8235

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 No X
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---

The number of common units outstanding on November 5, 2004 was 1,910,656.

1

RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
TABLE OF CONTENTS

ITEM PAGE NO.
---- --------

Part I 1. Financial Statements

Independent Certified Public Accountants' Review Report 3

Consolidated Balance Sheets as of December 31, 2003 and
September 30, 2004 (unaudited) 4-5

Unaudited Consolidated Statements of Operations for the three months
and nine months ended September 30, 2003 and 2004 6

Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2004 7

Notes to Consolidated Financial Statements (Unaudited) 8-21

2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22-35

3. Quantitative and Qualitative Disclosures About Market Risk 36

4. Controls and Procedures 36

Part II 1. Legal Proceedings 37

2. Unregistered Sales of Equity Securities and Use of Proceeds 37

3. Defaults Upon Senior Securities 37

4. Submission of Matters to a Vote of Security Holders 37

5. Other Information 37

6. Exhibits and Reports on Form 8-K 37-39

Signatures 40

2

PART I
ITEM 1.

Independent Certified Public Accountants' Review Report
-------------------------------------------------------

To the Board of Managers of Rio Vista GP LLC,
General Partner of Rio Vista Energy Partners L.P.

We have reviewed the consolidated balance sheet of Rio Vista Energy Partners
L.P. and subsidiaries (Rio Vista) as of September 30, 2004, and the related
consolidated statements of operations for the three months and nine months ended
September 2003 and 2004 and the consolidated statements of cash flows for the
nine months ended September 30, 2003 and 2004. These consolidated financial
statements are the responsibility of Rio Vista's management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for it to be
in conformity with United States generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Rio Vista Energy Partners L.P. and subsidiaries as of December 31,
2003; and in our report dated February 6, 2004, we expressed an unqualified
opinion on the consolidated balance sheet. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 2003, is
fairly stated.

The accompanying consolidated financial statements have been prepared assuming
that Rio Vista will continue as a going concern. As discussed in note K to the
consolidated financial statements, conditions exist which raise substantial
doubt about Rio Vista's ability to continue as a going concern including 1) Rio
Vista's dependence on Penn Octane to continue as a going concern and 2)
continued sales to PMI at acceptable volumes and margins to provide sufficient
cash flow to pay Rio Vista's expenses and guarantees of Penn Octane's
obligations assuming Penn Octane's inability to pay such obligations.
Management's plans in regard to these matters are also described in note K. 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
November 12, 2004

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RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

September 30,
December 31, 2004
2003 (Unaudited)
------------- ---------------

Current Assets
Cash $ 2,000 $ 10,000
Trade accounts receivable - 32,000
Due from affiliates - 89,000
Inventories - 195,000
------------- ---------------
Total current assets 2,000 326,000
Property, plant and equipment - net - 14,406,000
Other non-current assets - 12,000
------------- ---------------
Total assets $ 2,000 $ 14,744,000
============= ===============

The accompanying notes and accountants' report are an integral part of these
statements.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND PARTNERS' CAPITAL

September 30,
December 31, 2004
2003 (Unaudited)
------------- ---------------

Current Liabilities
Due to affiliates $ 1,000 $ 2,000
Accounts payable - 21,000
Accrued liabilities - 89,000
------------- ---------------
Total current liabilities 1,000 112,000
Commitments and contingencies - -
Partners' capital 1,000 14,632,000
------------- ---------------
Total liabilities and partners' capital $ 2,000 $ 14,744,000
============= ===============

The accompanying notes and accountants' report are an integral part of these
statements.

5

RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
-------------- -------------- -------------- --------------

Revenues $ - $ - $ - $ -
Cost of goods sold - - - -
-------------- -------------- -------------- --------------
Gross profit - - - -
Selling, general and administrative expenses - - - -
-------------- -------------- -------------- --------------

Operating income - - - -

Other income (expense) - - - -
-------------- -------------- -------------- --------------

Net income $ - $ - $ - $ -
============== ============== ============== ==============

Allocation of net income:
General partners' interest in net income - - - -
Limited partners' interest in net income - - - -
Net income per common unit $ - $ - $ - $ -
============== ============== ============== ==============
Weighted average common units outstanding - 1,910,656 - 1,910,656
============== ============== ============== ==============

The accompanying notes and accountants' report are an integral part of these statements.

6

RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended
------------------------------
September 30, September 30,
2003 2004
-------------- --------------

Cash flows from operating activities:
Net income $ - $ -
Adjustments to reconcile net income to net cash (used in) provided
by operating activities: - -

Changes in current assets and liabilities:
Due to affiliates 1,000 -
-------------- --------------
Net cash provided by operating activities 1,000 -
-------------- --------------
Cash flows from investing activities - -
-------------- --------------

Cash flows from financing activities:
Partners' capital 1,000 -
-------------- --------------
Net cash provided by financing activities 1,000 -
-------------- --------------
Net increase in cash 2,000 -
Cash at beginning of period - 2,000
Cash received from Spin-Off - 8,000
-------------- --------------
Cash at end of period $ 2,000 $ 10,000
============== ==============

Supplemental disclosures of noncash transactions:
Assets transferred in connection with the Spin-Off $ - $ 14,624,000
============== ==============

The accompanying notes and accountants' report are an integral part of these statements.

7

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - ORGANIZATION

Rio Vista Energy Partners L.P. (Rio Vista), a Delaware limited partnership, was
formed by Penn Octane Corporation (Penn Octane) on July 10, 2003 and was a
wholly owned subsidiary of Penn Octane until September 30, 2004, the date that
Penn Octane completed a series of transactions involving (i) the transfer of
substantially all of its owned pipeline and terminal assets in Brownsville,
Texas and Matamoros, Mexico and certain immaterial liabilities (Assets) to Rio
Vista Operating Partnership L.P.(RVOP) (ii) the transfer of its 99.9% interest
in RVOP to Rio Vista and (iii) the distribution of all of its limited
partnership interests 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 Vista's outstanding units. The remaining 2%, which is
the general partner interest, is owned and controlled by Rio Vista GP LLC
(General Partner), a wholly owned subsidiary of Penn Octane. The General
Partner is responsible for the management of Rio Vista.

As a result of the Spin-Off, Rio Vista is engaged in the purchase,
transportation and sale of liquefied petroleum gas (LPG). Rio Vista owns and
operates LPG terminal facilities in Brownsville, Texas (Brownsville Terminal
Facility) and in Matamoros, Tamaulipas, Mexico (Matamoros Terminal Facility) and
approximately 23 miles of pipelines (US - Mexico Pipelines) which connect the
Brownsville Terminal Facility to the Matamoros Terminal Facility. The primary
market for Rio Vista's LPG is the northeastern region of Mexico, which includes
the states of Coahuila, Nuevo Leon and Tamaulipas. Rio Vista's primary customer
for LPG is P.M.I. Trading Limited (PMI). PMI is a subsidiary of Petroleos
Mexicanos, the state-owned Mexican oil company, which is commonly known by its
trade name "PEMEX." PMI is the exclusive importer of LPG into Mexico. The LPG
purchased by PMI from Rio Vista is sold to PEMEX which distributes the LPG
purchased from PMI into the northeastern region of Mexico.

All of Rio Vista's operations will be conducted through, and Rio Vista's
operating assets will be owned by, RVOP. The General Partner is entitled to
receive distributions on its general partner interest as provided for in Rio
Vista's partnership agreement (Agreement). The General Partner has sole
responsibility for conducting Rio Vista's business and for managing Rio Vista's
operations in accordance with the Agreement. The General Partner will not
receive any management fee or other compensation in connection with its
management of Rio Vista's business, but will be entitled to be reimbursed for
all direct and indirect expenses incurred on Rio Vista's behalf.

Rio Vista will purchase LPG from Penn Octane under a long-term supply agreement
(LPG Supply Agreement). The purchase price of the LPG from Penn Octane will be
determined based on the cost of LPG under Penn Octane's LPG supply agreements
with its suppliers, other direct costs related to PMI sales and a formula that
takes into consideration operating costs of Penn Octane and Rio Vista.

Historically, Penn Octane has sold LPG primarily to PMI. Penn Octane has a
long-term lease agreement for approximately 132 miles of pipeline (Leased
Pipeline) which connects ExxonMobil Corporation's (Exxon) King Ranch Gas Plant
in Kleberg County, Texas and Duke Energy's La Gloria Gas Plant in Jim Wells
County, Texas, to Rio Vista's Brownsville Terminal Facility. In addition, Penn
Octane has access to a twelve-inch pipeline which connects Exxon's Viola valve
station in Nueces County, Texas to the inlet of the King Ranch Gas Plant (ECCPL)
as well as existing and other potential propane pipeline suppliers which have
the ability to access the ECCPL. In connection with Penn Octane's lease
agreement for the Leased Pipeline, Penn Octane may access up to 21,000,000
gallons of storage located in Markham, Texas (Markham Storage), as well as other
potential propane pipeline suppliers, via approximately 155 miles of pipeline
located between Markham, Texas and the Exxon King Ranch Gas Plant. Penn
Octane's current long term supply agreements in effect as of July 31, 2004 with
its suppliers in southeast Texas require Penn Octane to purchase minimum
quantities of LPG totaling up to 22,100,000 gallons of LPG per month.

BASIS OF PRESENTATION
- -----------------------

The accompanying consolidated financial statements include Rio Vista and its
United States subsidiaries including RVOP, Rio Vista Operating GP LLC 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.A. de C.V. (Tergas). All
significant intercompany accounts and transactions are eliminated.

8

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - ORGANIZATION - CONTINUED

BASIS OF PRESENTATION - CONTINUED
- -----------------------

The unaudited consolidated balance sheet as of September 30, 2004 and the
unaudited consolidated statements of operations for the three months and nine
months ended September 30, 2003 and 2004 and unaudited consolidated statements
of cash flows for the nine months ended September 30, 2003 and 2004 have been
prepared by Rio Vista without audit. In the opinion of management, the
unaudited consolidated financial statements include all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
unaudited consolidated financial position of Rio Vista as of September 30, 2004,
the unaudited consolidated results of operations for the three months and nine
months ended September 30, 2003 and 2004 and the unaudited consolidated cash
flows for the nine months ended September 30, 2003 and 2004. Rio Vista was
inactive until September 30, 2004, the date of the Spin-Off and operations did
not commence until October 1, 2004. Accordingly, there are no results of
operations during the three months and nine months ended September 30, 2004 and
2003.

Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. These unaudited
consolidated financial statements should be read in conjunction with the
December 31, 2003 and June 30, 2004 consolidated financial statements and notes
thereto included in Rio Vista's Report on Form 10 filed with the Securities and
Exchange Commission on September 16, 2004.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements and which will be
applied in the preparation of future consolidated financial statements are
as follows.

1. INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.

2. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at historical cost. After being
placed into service, assets are depreciated and amortized using the
straight-line method over their estimated useful lives as follows:

LPG terminals, building and leasehold improvements (a) 8 to 19 years
Automobiles 3-5 years
Furniture, fixtures and equipment 3-5 years
Pipelines 30 years

(a) Brownsville Terminal related assets are depreciated over their
estimated useful lives, not to exceed the term of the Pipeline Lease.

Maintenance and repair costs are charged to expense as incurred.

In August 2001 Statement of Financial Accounting Standards (SFAS)
No. 144 (SFAS 144) "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. SFAS 144 supersedes the provisions
of Statement of Financial Accounting Standards No. 121 (SFAS 121)
"Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of". SFAS 144 requires Rio Vista to review
long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the

9

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

2. PROPERTY, PLANT AND EQUIPMENT - CONTINUED

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.

3. INCOME TAXES

Rio Vista is a public limited partnership and is not subject to Federal or
state income taxes.

The foreign subsidiaries are taxed on their income directly by the Mexican
Government. The income/loss of such foreign subsidiaries is included in the
U.S. partnership income tax return of Rio Vista. The holders of the common
units and General Partner Units will be entitled to their proportionate
share of any tax credits resulting from any income taxes paid to the
Mexican Government.

4. INCOME (LOSS) PER COMMON UNIT

Income (loss) 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, giving effect to common
unit equivalents is not presented as it would be antidilutive.

5. 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.

6. 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.

7. 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.

8. UNIT-BASED COMPENSATION

SFAS 123 and SFAS 148, "Accounting for Stock-Based Compensation" and
"Accounting for Stock-Based Compensation-Transition and Disclosure",
establishes financial accounting and reporting standards for stock-based
employee compensation plans and for transactions in which an entity issues
its equity instruments to acquire goods and services from non-employees.

Under the guidance provided by SFAS 123, Rio Vista has elected to continue
to account for employee unit-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) 25, "Accounting for
Stock Issued to Employees", and related Interpretations.

10

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

9. REVENUE RECOGNITION ON SALES OF LPG

Revenues are recorded based on the following criteria:

(1) Persuasive evidence of an arrangement exists and the price is
determined
(2) Delivery has occurred
(3) Collectibility is reasonably assured

Any amounts collected from customers for which the delivery has not
occurred are recorded as an obligation to deliver LPG in the consolidated
balance sheet. Losses, if any, resulting from inventory imbalances from
such sales are recognized currently, and gains, if any, are recognized at
final delivery.

10. FOREIGN CURRENCY TRANSLATION

Rio Vista follows FASB No. 52 "Foreign Currency Translation" in
consolidation of the Rio Vista's Mexican subsidiaries, whose functional
currency is the US dollar. Non monetary balance sheet items and related
revenue and expense are remeasured using historical rates. Monetary balance
sheet items and related revenue and expense are remeasured using exchange
rates in effect at the balance sheet dates.

11. FINANCIAL INSTRUMENTS

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 partner's 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. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003
and is effective for hedging relationships designed after June 30, 2003. At
December 31, 2003 and September 30, 2004 Rio Vista had no derivative
financial instruments.

12. NON-EMPLOYEE UNIT-BASED COMPENSATION

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 SFAS 123 and APB 14 to account for such transactions. SFAS
123 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.

13. 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.

11

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

14. 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, an affiliate of Rio Vista, is a VIE and therefore, its assets,
liabilities and results of operations have been included in the
accompanying consolidated financial statements of Rio Vista.

15. GUARANTEES

In November 2002, the Financial Accounting Standards board issued Financial
Accounting Standards Board Interpretation No. 45 "Guarantor's 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 guarantor's financial
statements.

NOTE C - SPIN-OFF

During September 2003, Penn Octane's Board of Directors and the Independent
Committee of its Board of Directors formally approved the terms of the
Spin-Off and Rio Vista filed a Form 10 registration statement with the
Securities and Exchange Commission. On September 30, 2004 all of Penn
Octane's limited partnership interest in Rio Vista was distributed to Penn
Octane's stockholders. Each stockholder of Penn Octane on September 30,
2004, received one common unit of the limited partnership interest of Rio
Vista for every eight shares of Penn Octane's common stock owned.

As a result of the Spin-Off, Rio Vista owns and operates the LPG,
distribution, transportation and marketing business previously conducted by
Penn Octane. All of the Assets transferred to Rio Vista in connection with
the Spin-Off have been transferred at historical costs and related
accumulated depreciation of Penn Octane at the date of the Spin-Off. Rio
Vista began selling LPG directly to PMI upon the completion of the Spin-Off
and at that time also began purchasing LPG from Penn Octane under the LPG
Supply Agreement.

Penn Octane has control of Rio Vista by virtue of its ownership, management
and related voting control through the ownership and voting control of the
General Partner. Therefore, Rio Vista is accounted for as a subsidiary of
Penn Octane for financial accounting purposes and will continue to be
consolidated by Penn Octane after the Spin-Off.

12

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE D - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

December 31, September 30,
2003 2004
------------- ---------------

Brownsville Terminal Facility
Building $ - $ 173,000
Terminal facilities - 3,631,000
Tank Farm - 374,000
Leasehold improvements - 303,000
Equipment - 226,000
Truck - 26,000
------------- ---------------
- 4,733,000
------------- ---------------
US - Mexico Pipelines and Matamoros Terminal
Facility: (a)

U.S. Pipelines and Rights of Way - 6,775,000
Mexico Pipelines and Rights of Way - 993,000
Matamoros Terminal Facility - 5,876,000
Land - 856,000
------------- ---------------
- 14,500,000
------------- ---------------
Total - 19,233,000
------------- ---------------

Less: accumulated depreciation and amortization - ( 4,827,000)
------------- ---------------

$ - $ 14,406,000
============= ===============

(a) Rio Vista owns, leases, or is in the process of obtaining the land or
rights of way used related to the US-Mexico Pipelines.

Property, plant and equipment, net of accumulated depreciation, includes
$5,820,000 of costs located in Mexico at September 30, 2004.

NOTE E - INVENTORIES

Inventories consist of the following:

December 31, 2003 September 30, 2004
------------------- --------------------
Gallons Cost Gallons Cost
-------- --------- --------- ---------

LPG:
Brownsville Terminal Facility and
Matamoros Terminal Facility - $ - 239,000 $ 195,000
======== ========= ========= =========

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE F - PARTNERS' CAPITAL

COMMON UNITS
-------------

In connection with the Spin-Off, Rio Vista issued 1,910,656 common units to
the holders of Penn Octane common stock as of September 30, 2004.

The common units represent limited partner interests in Rio Vista. The
holders of common units are entitled to participate in Rio Vista's
distributions and exercise the rights or privileges available to limited
partners under the 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 its stockholders. 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 Agreement contains provisions limiting the ability of
holders of common units to call meetings or to acquire information about
Rio Vista's operations, as well as other provisions limiting the holders of
common units ability to influence the manner or direction of management.

GENERAL PARTNER UNITS
-----------------------

The General Partner of Rio Vista owns a 2% general partner interest in Rio
Vista. The General Partner is currently 100% owned by Penn Octane.

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.

OPTIONS AND WARRANTS
----------------------

Rio Vista has no U.S. employees and is managed by its General Partner. Rio
Vista applies APB 25 for warrants granted to employees and managers of the
General Partner and SFAS 123 for warrants issued to acquire goods and
services from non-employees.

GENERAL PARTNER OPTIONS

Penn Octane's 100% general partnership interest in the General Partner is
expected to be decreased to 50% as a result of the exercise by Shore
Capital LLC (Shore Capital) an affiliate of Richard Shore, Jr., President
of Penn Octane and Jerome B. Richter, Chief Executive Officer of Penn
Octane, of options to each acquire 25% of the General Partner (General
Partner Options). Mr. Shore and Mr. Richter are each members of the board
of directors of Penn Octane and the board of managers of the General
Partner. It is anticipated that Mr. Richter and Shore Capital will exercise
their General Partner Options in the near future. The exercise price for
each option is approximately $82,000. Penn Octane will retain voting
control of the General Partner pursuant to a voting agreement.

14

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE F - PARTNERS' CAPITAL - CONTINUED

COMMON UNIT WARRANTS

Holders of unexercised warrants of Penn Octane as of the date of the
Spin-Off received new warrants to purchase common units of Rio Vista to
reflect the transfer of assets from Penn Octane into Rio Vista. As of the
date of the Spin-Off, Penn Octane had 2,542,500 warrants to purchase common
stock outstanding. The number of Rio Vista warrants given to the holders of
Penn Octane warrants as of the date of the Spin-Off was 317,813, determined
by dividing the existing number of warrants of Penn Octane by eight. The
exercise price of the Rio Vista warrants was determined by multiplying the
original exercise price of the existing Penn Octane warrants by 5.05. The
expiration date of the Rio Vista warrants is the same as the existing Penn
Octane warrants.

In connection with Mr. Shore's employment agreement with Penn Octane, Shore
Capital received warrants to acquire 97,415 common units of Rio Vista at
$8.47 per unit. On October 1, 2004 Rio Vista recorded approximately
$350,000 of compensation cost related to these warrants. The warrants are
exercisable beginning on October 1, 2004 and expire on July 10, 2006.

During January 2004, in connection with $1,805,000 of debt obligations of
Penn Octane, Penn Octane agreed to issue 55,125 warrants to purchase Rio
Vista common units and an additional 3,054 warrants in Rio Vista for each
$100,000 of debt obligations outstanding at December 15, 2004 (Rio Vista
Warrants). The Rio Vista Warrants will expire three years from the date of
the Spin-Off and the exercise price will be determined based on a formula
whereby the annualization of the first quarterly distribution will
represent a 20% yield to the exercise price.

DISTRIBUTIONS OF AVAILABLE CASH
----------------------------------

All unitholders, including the General Partner, have the right to receive
distributions of "available cash" as defined in the Agreement from Rio
Vista in an amount equal to 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. The distributions are to be
paid 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 is existing, under any
obligation of Penn Octane which Rio Vista has guaranteed (see note G).

Cash distributions from Rio Vista will be shared by the holders of the
common units and the General Partner Units as described in the Agreement
based on a formula whereby the General Partner will receive
disproportionately more distributions per unit than the holders of the
common units as annual cash distributions exceed certain milestones.

15

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G - COMMITMENTS AND CONTINGENCIES

CREDIT FACILITY, LETTERS OF CREDIT AND OTHER

Rio Vista's LPG purchases are financed entirely by Penn Octane through its
credit facility with RZB Finance, LLC (RZB).

As of September 30, 2004, Penn Octane had a $15,000,000 credit facility
(see below) with RZB for demand loans and standby letters of credit (RZB
Credit Facility) to finance Penn Octane's purchases of LPG and gasoline and
diesel fuel (Fuel Products) in connection with Penn Octane's fuel sales
business. The RZB Credit facility is an uncommitted facility under which
the letters of credit have an expiration date of no more than 90 days and
the facility is reviewed annually at March 31. As a result of the financing
provided to Rio Vista by Penn Octane, Rio Vista has agreed to guarantee
Penn Octane's obligations with respect to the RZB Credit Facility. In
connection with Rio Vista's guaranty, Rio Vista granted RZB a security
interest and assignment in any and all of Rio Vista's accounts, inventory,
real property, buildings, pipelines, fixtures and interests therein or
relating thereto, including, without limitation, the lease with the
Brownsville Navigation District of Cameron County (District) for the land
on which Rio Vista's Brownsville Terminal Facility is located, and has
entered into leasehold deeds of trust, security agreements, financing
statements and assignments of rent. Under the RZB Credit Facility, Rio
Vista may not permit to exist any subsequent lien, security interest,
mortgage, charge or other encumbrance of any nature on any of its
properties or assets, except in favor of RZB, without the consent of RZB.
In connection with the LPG Supply Agreement, Penn Octane and Rio Vista have
agreed to share the financing costs related to Penn Octane's purchase of
LPG under the RZB Credit Facility.

Under the RZB Credit Facility, Penn Octane is required to pay a fee with
respect to each letter of credit thereunder in an amount equal to the
greater of (i) $500, (ii) 2.5% of the maximum face amount of such letter of
credit, or (iii) such higher amount as may be agreed to between Penn Octane
and RZB. Any loan amounts outstanding under the RZB Credit Facility shall
accrue interest at a rate equal to the rate announced by the JPMorgan Chase
Bank as its prime rate (4.5% at September 30, 2004) plus 2.5%. Pursuant to
the RZB Credit Facility, RZB has sole and absolute discretion to limit or
terminate its participation in the RZB Credit Facility and to refrain from
making any loans or issuing any letters of credit thereunder. RZB also has
the right to demand payment of any and all amounts outstanding under the
RZB Credit Facility at any time. The General Partner's Chairman has
personally guaranteed all of Penn Octane's and Rio Vista's payment
obligations with respect to the RZB Credit Facility.

Effective November 12, 2004 the RZB Credit Facility was increased to
$20,000,000.

Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista
is required to maintain net worth of a minimum of $9,000,000 ($10,000,000
effective November 12, 2004).

Under the terms of the RZB Credit Facility, all cash from Rio Vista's LPG
sales are deposited directly into a restricted cash account under the
direction of RZB to pay down all obligations of Penn Octane arising under
the RZB Credit Facility. Accordingly, Rio Vista only receives net proceeds
from the restricted cash account when the amounts of collateral provided by
Penn Octane and Rio Vista exceed all liabilities under outstanding letters
of credit issued on behalf of Penn Octane, at the sole discretion of RZB.
Historically RZB has not unduly withheld net proceeds from Penn Octane and
Rio Vista does not expect that RZB will unduly withhold net proceeds from
Rio Vista. Upon the release of Rio Vista's net proceeds from Rio Vista's
restricted cash account, Rio Vista will then be required to pay any
remaining amounts due Penn Octane, if any, for the supply of LPG and other
allocated or direct expenses.

16

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED

TAX OBLIGATIONS OF PENN OCTANE RESULTING FROM THE SPIN-OFF

Rio Vista has agreed to indemnify Penn Octane for a period of three years
from the fiscal year end that includes the date of the Spin-Off for any
federal income tax liabilities resulting from the Spin-Off in excess of
$2,500,000. Penn Octane does not believe that it has a federal income tax
in connection with the Spin-Off in excess of $2,500,000. However, the
Internal Revenue Service (IRS) may review Penn Octane's federal income tax
returns and challenge positions that it may take with respect to the
Spin-Off.

PARTNERSHIP TAX TREATMENT

Rio Vista is not a taxable entity (see below) and incurs no federal income
tax liability. Instead, each unitholder of Rio Vista is required to take
into account that unitholder's share of items of income, gain, loss and
deduction of Rio Vista in computing that unitholder's 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 unitholder's
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".

No ruling has been or will be sought from the IRS and the IRS has made no
determination as to Rio Vista's classification as a partnership for federal
income tax purposes or whether Rio Vista's operations generate a minimum of
90% of "qualifying income" under Section 7704 of the Code.

If Rio Vista were classified as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception or
otherwise, Rio Vista's items of income, gain, loss and deduction would be
reflected only on Rio Vista's tax return rather than being passed through
to Rio Vista's unitholders, and Rio Vista's net income would be taxed at
corporate rates.

17

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED

PARTNERSHIP TAX TREATMENT - CONTINUED

If Rio Vista were 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 Vista's 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 Vista's
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 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.

OTHER

Rio Vista is a newly-created entity and is not currently a party to any
litigation. Pursuant to the Omnibus Agreement, Penn Octane has agreed to
indemnify Rio Vista for claims related to the Assets arising from events or
conditions occurring or existing before completion of the Spin-Off.

LONG-TERM DEBT

Long-term debt of Penn Octane guaranteed by Rio Vista and on which certain
of its assets are pledged totaled $1,805,000 at July 31, 2004. This debt is
due on December 15, 2005. Interest is payable quarterly at a rate of 16.5%
per annum.

GUARANTEES AND ASSETS PLEDGED ON CERTAIN OF PENN OCTANE'S OBLIGATIONS

The dollar amounts of Penn Octane's obligations for which Rio Vista
guarantees and/or for which Rio Vista's asset are pledged total $11,927,000
at July 31, 2004 based on Penn Octane's most recently filed Form 10-K and
were as follows:

LPG and fuel products trade payables $ 7,433,000
Long-term debt $ 1,805,000
Lines of credit $ 2,689,000

Current assets of Penn Octane pledged in favor of Penn Octane's credit
facility total $13,700,000 at July 31, 2004 and were as follows:

Accounts receivable $ 6,207,000
Restricted cash $ 5,860,000
Inventory ($195,000 relates to the transferred Assets) $ 1,633,000

Rio Vista's property, plant and equipment and inventory, with a net book
value at September 30, 2004 of approximately $14,600,000 are pledged to Penn
Octane's creditors.

18

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED

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.

NOTE H - CONTRACTS

LPG SALES TO PMI

For the months of October 2004 and November 2004, Rio Vista and PMI entered
into a monthly agreements for the minimum sale of 11,050,000 gallons of
LPG. Prior to the Spin-Off, during the period April 1, 2004 through
September 30, 2004, Penn Octane entered into monthly agreements for the
minimum sale of 11,050,000 gallons - 13,000,000 gallons of LPG.

PMI has primarily used the Matamoros Terminal Facility to load LPG
purchased from Penn Octane prior to the Spin-Off and from Rio Vista,
subsequent thereto, for distribution by truck in Mexico. Rio Vista will
continue to use the Brownsville Terminal Facility in connection with LPG
delivered by railcar to other customers, storage and as an alternative
terminal in the event the Matamoros Terminal Facility cannot be used.

LPG SUPPLY AGREEMENT

Under the LPG Supply Agreement, Penn Octane will supply all of Rio Vista's
LPG requirements in connection with its LPG sales obligations to PMI. The
purchases will be at fluctuating prices. The purchase price of the LPG from
Penn Octane will be determined based on the cost of LPG under Penn Octane's
LPG supply agreements with its suppliers, other direct costs related to PMI
sales and a formula that takes into consideration operating costs of Penn
Octane and Rio Vista. Rio Vista expects the aggregate costs per gallon to
purchase LPG (less any applicable adjustments) to be below the aggregate
sales prices per gallon of LPG sold to PMI. Based on Penn Octane's existing
LPG supply agreements, Penn Octane can sell to Rio Vista up to 22,100,000
gallons of LPG per month. The Leased Pipeline's capacity is estimated to be
between 25,000,000 and 30,000,000 gallons per month.

NOTE I - RELATED PARTY TRANSACTIONS

The General Partner has a legal duty to manage Rio Vista in a manner
beneficial to Rio Vista's unitholders. This legal duty originates in
statutes and judicial decisions and is commonly referred to as a
"fiduciary" duty. Because the General Partner is owned by Penn Octane,
subject to the options of Shore Capital and Mr. Richter to each acquire up
to 25% of the limited liability company interests of the General Partner,
Penn Octane's 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 Agreement limits the liability and reduces the fiduciary duties of the
General Partner to the unitholders. The Agreement also restricts the
remedies available to unitholders for actions that might otherwise
constitute breaches of the General Partner's fiduciary duty.

19

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED

INTERCOMPANY PURCHASE AGREEMENT FOR LPG

Penn Octane entered into the LPG Supply Agreement with Rio Vista pursuant
to which Rio Vista has agreed to purchase all of its LPG requirements for
sales which utilize the assets transferred to Rio Vista by Penn Octane to
the extent Penn Octane is able to supply such LPG requirements. The LPG
Supply Agreement further provides that Rio Vista has no obligation to
purchase LPG from Penn Octane to the extent the distribution of such LPG to
Rio Vista's customers would not require the use of any of the assets Penn
Octane contributed to Rio Vista or Penn Octane ceases to have the right to
access the Seadrift pipeline.

OMNIBUS AGREEMENT

In connection with the Spin-Off, Penn Octane entered into an Omnibus
Agreement with Rio Vista and its subsidiaries that governs, among other
things, indemnification obligations among the parties to the agreement,
related party transactions, 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, the term material agreements means 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 such amendment would
adversely affect the unitholders of Rio Vista. The Omnibus Agreement has an
initial term of five years that automatically renews for successive
five-year terms and, other than the indemnification provisions, will
terminate if Rio Vista is no longer an affiliate of Penn Octane.

NOTE J - MEXICAN OPERATIONS

Under current Mexican law, foreign ownership of Mexican entities involved
in the distribution of LPG or the operation of LPG terminal facilities is
prohibited. Foreign ownership is permitted in the transportation and
storage of LPG. Mexican law also provides that a single entity is not
permitted to participate in more than one of the defined LPG activities
(transportation, storage or distribution). PennMex has a transportation
permit and Termatsal owns, leases, or is in the process of obtaining the
land or rights of way used in the construction of the Mexican portion of
the US-Mexico Pipelines, and owns the Mexican portion of the assets
comprising the US-Mexico Pipelines and the Matamoros Terminal Facility. Rio
Vista's consolidated Mexican affiliate, Tergas, S.A. de C.V. (Tergas), has
been granted the permit to operate the Matamoros Terminal Facility and Rio
Vista relies on Tergas' permit to continue its delivery of LPG at the
Matamoros Terminal Facility. Rio Vista pays Tergas its actual cost for
distribution services at the Matamoros Terminal Facility plus a small
profit.

Through Rio Vista's operations in Mexico and the operations of the Mexican
subsidiaries and Tergas, a consolidated affiliate, Rio Vista is subject to
the tax laws of Mexico which, among other things, require that Rio Vista
comply with transfer pricing rules, the payment of income, asset and ad
valorem taxes, and possibly taxes on distributions in excess of earnings.
In addition, distributions to foreign entities, including dividends and
interest payments may be subject to Mexican withholding taxes.

20

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE J - MEXICAN OPERATIONS - CONTINUED

During July 2003, Penn Octane acquired an option to purchase Tergas, which
is 95% owned by Vicente Soriano, an employee of Penn Octane, and the
remaining balance owned by Abelardo Mier, a consultant of Penn Octane, for
a nominal price of approximately $5,000.

NOTE K - 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 is dependent on Penn Octane's ability to deliver adequate
quantities of LPG at an acceptable price for ultimate sale to PMI, to
provide credit to Rio Vista for such purchases and to provide management of
its operations. Currently, Rio Vista's only source of revenue is from sales
of LPG to PMI and it operates under month to month sales agreements with
PMI. Since April 1, 2004, through the date of the Spin-Off, Penn Octane had
also been operating under month to month sales agreements with PMI. The
monthly volumes of LPG sold by Penn Octane to PMI since April 1, 2004 has
been materially less than historical levels.

Rio Vista has guaranteed certain of Penn Octane's obligations.
Substantially all of Rio Vista's and Penn Octane's assets are pledged or
committed to be pledged as collateral on $1,805,000 of Penn Octane's
existing debt and the RZB Credit Facility, and therefore, both Rio Vista
and Penn Octane maybe unable to obtain additional financing collateralized
by those assets. Penn Octane's Report of Independent Certified Public
Accountants on the consolidated financial statements of Penn Octane at July
31, 2004 contains an explanatory paragraph which describes an uncertainty
about Penn Octane's ability to continue as a going concern. In addition,
Penn Octane's ability to obtain cash from operations or additional debt or
equity financing may be limited which could subject the Rio Vista's assets
to foreclosure by Penn Octane's creditors.

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 Penn Octane to
continue as a going concern and continued sales of LPG to PMI at acceptable
volumes and margins to provide sufficient cash flow to pay Rio Vista's
expenses and guarantees of Penn Octane's obligations assuming Penn Octane's
inability to pay such obligations. The consolidated balance sheet does not
include any adjustments related to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that
might be necessary should Rio Vista be unable to continue in existence.

To provide Rio Vista with the ability it believes necessary to continue in
existence, management is negotiating with PMI to increase LPG sales at
acceptable monthly volumes and margins. In addition, management is taking
steps to diversify Rio Vista's operations to reduce dependency on sales of
LPG.

21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of Rio Vista's 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 2004) refer to Rio Vista's
fiscal year ending December 31.

FORWARD-LOOKING STATEMENTS

The statements contained in this Quarterly Report that are not historical
facts are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements may be identified by the use of forward-looking
terms such as "believes," "expects," "may," "will", "should" or "anticipates" or
by discussions of strategy that inherently involve risks and uncertainties. From
time to time, we have made or may make forward-looking statements, orally or in
writing. These forward-looking statements include statements regarding
anticipated future revenues, sales, LPG supply, operations, demand, competition,
capital expenditures, the deregulation of the LPG market in Mexico, the
operations of the US - Mexico Pipelines, the Matamoros Terminal Facility, other
upgrades to Rio Vista's facilities, foreign ownership of LPG operations,
short-term obligations and credit arrangements, guarantees, cash distributions,
Qualified Income, Penn Octane, the Spin-Off and other statements regarding
matters that are not historical facts, and involve predictions which are based
upon a number of future conditions that ultimately may prove to be inaccurate.
Actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Factors
that may cause or contribute to such differences include those discussed in Rio
Vista's Form 10 filed with the Securities and Exchange Commission, as well as
those discussed elsewhere in this Quarterly Report. These factors may not
include all material risks facing Rio Vista.

OVERVIEW

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 involving (i) the
transfer of substantially all of its owned pipeline and terminal assets in
Brownsville, Texas and Matamoros, Mexico and certain immaterial liabilities (the
"Assets") to Rio Vista Operating Partnership L.P. ("RVOP") (ii) the transfer of
its 99.9% interest in RVOP to Rio Vista and (iii) the distribution of all of its
limited partnership interests in Rio Vista to its common stockholders (the
"Spin-Off"), resulting in Rio Vista becoming a separate public company. The
Common Units represented 98% of Rio Vista's outstanding units. The remaining
2%, which is the general partner interest, is owned and controlled by Rio Vista
GP LLC (the "General Partner"), a wholly owned subsidiary of Penn Octane. The
General Partner is responsible for the management of Rio Vista.

As a result of the Spin-Off, Rio Vista is engaged in the purchase,
transportation and sale of liquefied petroleum gas ("LPG"). Rio Vista owns
and operates terminal facilities in Brownsville, Texas (the "Brownsville
Terminal Facility") and in Matamoros, Tamaulipas, Mexico (the "Matamoros
Terminal Facility") and approximately 23 miles of pipelines (the "US - Mexico
Pipelines") which connect the Brownsville Terminal Facility to the Matamoros
Terminal Facility. The primary market for Rio Vista's LPG is the northeastern
region of Mexico, which includes the states of Coahuila, Nuevo Leon and
Tamaulipas.

Rio Vista believes it has a competitive advantage in the supply of LPG for
the northeastern region of Mexico because of Rio Vista's pipeline and terminal
facilities and its long term LPG supply agreement with Penn Octane which allow
Rio Vista to bring supplies of LPG close to consumers of LPG in major cities in
that region. Rio Vista's primary customer for LPG is P.M.I. Trading Limited
("PMI"). PMI is a subsidiary of Petroleos Mexicanos, the state-owned Mexican
oil company, which is commonly known by its trade name "PEMEX." PMI is the
exclusive importer of LPG into Mexico. The LPG purchased by PMI from Rio Vista
is sold to PEMEX which distributes the LPG purchased from PMI into the
northeastern region of Mexico.

22

All of Rio Vista's operations will be conducted through, and Rio Vista's
operating assets will be owned by, RVOP. The General Partner is entitled to
receive distributions on its general partner interest as provided for in Rio
Vista's partnership agreement (the "Agreement"). The General Partner has sole
responsibility for conducting Rio Vista's business and for managing Rio Vista's
operations in accordance with the Agreement. The General Partner will not
receive any management fee or other compensation in connection with its
management of Rio Vista's business, but will be entitled to be reimbursed for
all direct and indirect expenses incurred on Rio Vista's behalf.

Rio Vista will purchase LPG from Penn Octane under a long-term supply
agreement (the "LPG Supply Agreement"). The purchase price of the LPG from Penn
Octane will be determined based on the cost of LPG under Penn Octane's LPG
supply agreements with its suppliers, other direct costs related to PMI sales
and a formula that takes into consideration operating costs of Penn Octane and
Rio Vista.

Rio Vista provides products and services through a combination of
fixed-margin and fixed-price contracts. Costs included in cost of goods sold,
other than the purchase price of LPG, may affect actual profits from sales,
including costs relating to transportation, storage, leases and maintenance.

Historically, Penn Octane has sold LPG primarily to PMI. Penn Octane has a
long-term lease agreement for approximately 132 miles of pipeline (the "Leased
Pipeline") which connects ExxonMobil Corporation's ("Exxon") King Ranch Gas
Plant in Kleberg County, Texas and Duke Energy's La Gloria Gas Plant in Jim
Wells County, Texas, to Rio Vista's Brownsville Terminal Facility. In addition,
Penn Octane has access to a twelve-inch pipeline which connects Exxon's Viola
valve station in Nueces County, Texas to the inlet of the King Ranch Gas Plant
(the "ECCPL"), as well as existing and other potential propane pipeline
suppliers which have the ability to access the ECCPL. In connection with Penn
Octane's lease agreement for the Leased Pipeline, Penn Octane may access up to
21.0 million gallons of storage located in Markham, Texas (the "Markham
Storage"), as well as other potential propane pipeline suppliers, via
approximately 155 miles of pipeline located between Markham, Texas and the Exxon
King Ranch Gas Plant. Penn Octane's current long term supply agreements in
effect as of July 31, 2004 with its suppliers in southeast Texas require Penn
Octane to purchase minimum quantities of LPG totaling up to 22.1 million
gallons of LPG per month.

LPG SALES

As of September 30, 2004, Rio Vista had not commenced operations.
Beginning October 1, 2004, Rio Vista began selling LPG to PMI under a monthly
sales agreement. The monthly sales agreements provides for minimum LPG volumes
of approximately 11.1 million gallons in October and November 2004. The
following table shows Penn Octane's historical volumes sold to PMI in gallons
and average sales price for its fiscal years ended July 31, 2003 and 2004.

2003 2004
------ ------

Volume Sold

LPG (millions of gallons) - PMI 211.1 197.9

Average sales price

LPG (per gallon) - PMI $ 0.63 $ 0.72

23

RECENT TRENDS. Since April 2004, PMI had contracted with Penn Octane and
Rio Vista for volumes which were significantly lower than amounts purchased by
PMI from Penn Octane in similar periods during previous years. See Liquidity
and Capital Resources - Sales to PMI below. Rio Vista believes that the
reduction of volume commitments is based on additional LPG production by PEMEX
being generated from the Burgos Basin field in Reynosa, Mexico, an area within
the proximity of Rio Vista's Mexican terminal facilities. Although Rio Vista is
not aware of the total amount of LPG actually being produced by PEMEX from the
Burgos Basin, it is aware that PEMEX has constructed and is operating two new
cryogenic facilities at the Burgos Basin which it believes may have a capacity
of producing up to 12 million gallons of LPG per month. Rio Vista also believes
that PEMEX is intending to install two additional cryogenic facilities, with
similar capacity, to be operational in early 2006. Rio Vista is not aware of
the capacity at which the current cryogenic facilities are being operated.
Furthermore, Rio Vista is not aware of the actual gas reserves of the Burgos
Basin or the gas quality, each of which could significantly impact LPG
production amounts. Rio Vista still believes that its LPG supplies are
competitive with the necessary US imports of LPG by PEMEX and that the LPG
volumes which are actually produced from the Burgos Basin would not eliminate
the need for US LPG imports by PEMEX and that LPG volumes produced from the
Burgos Basin would be more economically suited for distribution to points
further south in Mexico rather than Rio Vista's strategic zone.

During June 2004, Valero L.P., a U.S. limited partnership ("Valero") began
operation of a newly constructed LPG terminal facility in Nuevo Laredo, Mexico
and a newly constructed pipeline connecting the terminal facility in Nuevo
Laredo, Mexico to existing pipelines which connect directly to Valero Energy
Corporation's Corpus Christi, Texas and Three Rivers, Texas refineries. Valero
has contracted with PMI under a five year agreement to deliver approximately 6.3
million gallons (of which 3.2 million gallons were previously delivered by truck
from Three Rivers, Texas) of LPG per month. Valero has also indicated that it
intends to increase capacity of its Nuevo Laredo terminal to 10.1 million
gallons per month. Rio Vista believes that if Valero intends to maximize
capacity of these facilities, then it would be required to obtain additional LPG
supplies from major LPG hubs located in Corpus Christi and Mont Belvieu, Texas.
Accordingly, Rio Vista believes that any additional supplies over amounts
currently available to the Mexican market through Valero's system could be more
expensive than Rio Vista's currently available supplies and delivery systems.

During 2004, a pipeline operated by El Paso Energy between Corpus Christi,
Texas and Hidalgo County, Texas was closed. Historically these facilities had
supplied approximately 5.0 million gallons of LPG per month to Rio Vista's
strategic zone. Rio Vista is not aware of any future plans for these
facilities.

During 2003, PMI constructed and began operations of a refined products
cross border pipeline connecting a pipeline running from PEMEX's Cadereyta
Refinery in Monterey, Mexico to terminal facilities operated by Transmontagne,
Inc., in Brownsville, Texas. Transmontagne is a U.S. corporation. The
pipeline crosses the US-Mexico border near the proximity of Rio Vista's
pipelines. In connection with the construction of the pipeline, PMI was
required to obtain an easement from Rio Vista for an approximate 21.67 acre
portion of the pipeline. Under the terms of the easement, PMI has warranted
that it will not transport LPG through October 15, 2017.

RESULTS OF OPERATIONS

Rio Vista did not commence operations until October 1, 2004 and accordingly
did not have any results of operations prior to that period.

24

LIQUIDITY AND CAPITAL RESOURCES

General. Rio Vista commenced operations on October 1, 2004 and only had
nominal cash funds at the time of the Spin-Off. Rio Vista pays all of its
direct costs and expenses, and Rio Vista will reimburse Penn Octane for cost and
expenses paid by Penn Octane on behalf of Rio Vista. As discussed below, Rio
Vista's sells LPG to PMI and purchases the LPG from Penn Octane. Rio Vista's
LPG Supply Agreement with Penn Octane provides that it will pay Penn Octane for
LPG purchased upon receipt of the proceeds from sales to PMI. Rio Vista intends
to distribute any "available cash" as defined in the Agreement to its
unitholders on a quarterly basis.

Dependency on Penn Octane. Rio Vista is dependent on Penn Octane's ability
to deliver adequate quantities of LPG at an acceptable price for ultimate sale
to PMI, to provide credit to Rio Vista for such purchases and to provide
management of its operations. In addition, substantially all of Rio Vista's and
Penn Octane's assets are pledged or committed to be pledged as collateral on
$1.8 million of Penn Octane's existing debt and the RZB Credit Facility and
therefore, both Rio Vista and Penn Octane maybe unable to obtain additional
financing collateralized by those assets.

Guarantees and Assets Pledged on Certain of Penn Octane's Obligations. Rio
Vista has agreed to guarantee certain of Penn Octane's obligations to creditors
and all of Rio Vista's assets are pledged as collateral for those obligations of
Penn Octane to such creditors. In addition, Rio Vista has agreed to indemnify
Penn Octane for a period of three years from the fiscal year end that includes
the date of the Spin-Off for any federal income tax liabilities resulting from
the Spin-Off in excess of $2.5 million. Consequently, Rio Vista may be unable
to obtain financing using these pledged assets as collateral and Rio Vista's
inability to borrow on these assets may adversely affect Rio Vista's results of
operations and ability to make distributions to its unitholders. Rio Vista may
also be prohibited from making any distributions to unit holders if it would
cause an event of default, or if an event of default is existing, under Penn
Octane's revolving credit facilities, or any other covenant which may exist
under any other credit arrangement or other regulatory requirement at the time.

The following is a discussion of the guaranteed obligations:

RZB OBLIGATION

Rio Vista's LPG purchases are financed entirely by Penn Octane through its
credit facility with RZB Finance, LLC ("RZB"). As of September 30, 2004, Penn
Octane had a $15.0 million credit facility (see below) with RZB for demand loans
and standby letters of credit (the "RZB Credit Facility") to finance Penn
Octane's purchases of LPG and gasoline and diesel fuel ("Fuel Products") in
connection with Penn Octane's fuel sales business. The RZB Credit facility is
an uncommitted facility under which the letters of credit have an expiration
date of no more than 90 days and the facility is reviewed annually at March 31.
As a result of the financing provided to Rio Vista by Penn Octane, Rio Vista has
agreed to guarantee Penn Octane's obligations with respect to the RZB Credit
Facility. In connection with Rio Vista's guaranty, Rio Vista granted RZB a
security interest and assignment in any and all of Rio Vista's accounts,
inventory, real property, buildings, pipelines, fixtures and interests therein
or relating thereto, including, without limitation, the lease with the
Brownsville Navigation District of Cameron County (the "District") for the land
on which Rio Vista's Brownsville Terminal Facility is located, and has entered
into leasehold deeds of trust, security agreements, financing statements and
assignments of rent. Under the RZB Credit Facility, Rio Vista may not permit to
exist any subsequent lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in favor of
RZB, without the consent of RZB. In connection with the LPG Supply Agreement,
Penn Octane and Rio Vista have agreed to share the financing costs related to
Penn Octane's purchase of LPG under the RZB Credit Facility.

25

Under the RZB Credit Facility, Penn Octane is required to pay a fee with
respect to each letter of credit thereunder in an amount equal to the greater of
(i) $500, (ii) 2.5% of the maximum face amount of such letter of credit, or
(iii) such higher amount as may be agreed to between Penn Octane and RZB. Any
loan amounts outstanding under the RZB Credit Facility shall accrue interest at
a rate equal to the rate announced by the JPMorgan Chase Bank as its prime rate
(4.5% at September 30, 2004) plus 2.5%. Pursuant to the RZB Credit Facility,
RZB has sole and absolute discretion to limit or terminate its participation in
the RZB Credit Facility and to refrain from making any loans or issuing any
letters of credit thereunder. RZB also has the right to demand payment of any
and all amounts outstanding under the RZB Credit Facility at any time. The
General Partner's Chairman has personally guaranteed all of Penn Octane's and
Rio Vista's payment obligations with respect to the RZB Credit Facility.

Effective November 12, 2004 the RZB Credit Facility was increased to $20.0
million.

Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista
is required to maintain net worth of a minimum of $9.0 million ($10.0 million
effective November 12, 2004).

Under the terms of the RZB Credit Facility, all cash from Rio Vista's LPG
sales are deposited directly into a restricted cash account under the direction
of RZB to pay down all obligations of Penn Octane arising under the RZB Credit
Facility. Accordingly, Rio Vista only receives net proceeds from the restricted
cash account when the amounts of collateral provided by Penn Octane and Rio
Vista exceed all liabilities under outstanding letters of credit issued on
behalf of Penn Octane, at the sole discretion of RZB. Historically RZB has not
unduly withheld net proceeds from Penn Octane and Rio Vista does not expect that
RZB will unduly withhold net proceeds from Rio Vista. Upon the release of Rio
Vista's net proceeds from Rio Vista's restricted cash account, Rio Vista will
then be required to pay any remaining amounts due Penn Octane, if any, for the
supply of LPG and other allocated or direct expenses.

Penn Octane may need to increase its credit facility for increases in
quantities of LPG and fuel products purchased and/or to finance future price
increases of LPG and fuel products. Rio Vista relies on Penn Octane's ability
to allocate credit limits under the RZB Credit Facility to purchase quantities
of LPG. However there can be no assurance that Penn Octane will have available
and/or continue to provide sufficient credit limits for Rio Vista's required
purchases of LPG.

LONG-TERM DEBT

Long-term debt of Penn Octane guaranteed by Rio Vista and on which certain
of its assets are pledged totaled $1.8 million at July 31, 2004. This debt is
due on December 15, 2005. Interest is payable quarterly at a rate of 16.5% per
annum.

OBLIGATIONS AND ASSETS PLEDGED

The dollar amounts of Penn Octane obligations, which Rio Vista is
guaranteeing and/or for which Rio Vista's assets are pledged total $11.9 million
at July 31, 2004, based on Penn Octane's most recently filed Form 10-K, and were
as follows (in millions):
LPG and fuel products trade payables $ 7.4
Long-term Debt $ 1.8
Lines of credit $ 2.7

Current assets of Penn Octane pledged in favor of Penn Octane's credit
facility total $13.7 million at July 31, 2004 and were as follows (in millions):
Accounts receivable $ 6.2
Restricted cash $ 5.9
Inventory ($195,000 relates to the transferred Assets) $ 1.6

Rio Vista's property, plant, equipment and inventory with a net book value
at September 30, 2004 of approximately $14.6 million are pledged to Penn
Octane's creditors.

26

The following is a summary of Rio Vista's estimated minimum contractual
obligations as of September 30, 2004.

PAYMENTS DUE BY PERIOD
(AMOUNTS IN MILLIONS)
----------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ------ ---------- ------- ------- --------

Long-Term Debt Obligations $ - $ - $ - $ - $ -
Operating Leases .2 .1 .1 - -
LPG Purchase Obligations - - - - -
Other Long-Term Obligations - - - - -
------ ---------- ------- ------- --------
Total Contractual Cash Obligations $ .2 $ .1 $ .1 $ - $ -
====== ========== ======= ======= ========

The following is a summary of Rio Vista's estimated minimum commercial
obligations as of September 30, 2004, based on Penn Octane's most recently filed
Form 10-K as of July 31, 2004.

AMOUNT OF COMMITMENT EXPIRATION
PER PERIOD
(AMOUNTS IN MILLIONS)
------------------------------------------------------
Commercial Total Amounts Less than 1 - 3 4 - 5 Over
Commitments Committed 1 Year Years Years 5 Years
----------- -------------- ---------- ------- ------ ---------

Lines of Credit $ - $ - $ - $ - $ -
Standby Letters of Credit - - - - -
Guarantees 17.9 16.1 1.8 - -
Standby Repurchase Obligations N/A N/A N/A N/A N/A
Other Commercial Commitments N/A N/A N/A N/A N/A
-------------- ---------- ------- ------ ---------
Total Commercial Commitments $ 17.9 $ 16.1 $ 1.8 $ - $ -
============== ========== ======= ====== =========

If Penn Octane's cash flow from operations is not adequate to satisfy such
payment of liabilities and obligations and/or tax liabilities when due and Rio
Vista is unable to satisfy its guarantees and /or tax agreement, Penn Octane
and/or Rio Vista may be required to pursue additional debt and/or equity
financing. In such event, Penn Octane's and Rio Vista's management do not
believe that Penn Octane and/or Rio Vista would be able to obtain such financing
from traditional commercial lenders. In addition, there can be no assurance
that such additional financing will be available on terms attractive to Penn
Octane and/or Rio Vista or at all. If additional financing is available through
the sale of Penn Octane's and/or Rio Vista's equity and/or other securities
convertible into equity securities through public or private financings,
substantial and immediate dilution may occur. There is no assurance that Rio
Vista would be able to raise any additional capital if needed. If additional
financing cannot be accomplished and Rio Vista is unable to pay its liabilities
and obligations when due or to restructure certain of Penn Octane's liabilities
and obligations, Rio Vista may suffer material adverse consequences to its
business, financial condition and results of operations.

Income Taxes. Rio Vista has agreed to indemnify Penn Octane for a period
of three years from this fiscal year end that includes the date of the Spin-Off
for any federal income tax liabilities resulting from the Spin-Off in excess of
$2.5 million. Penn Octane does not believe that it has a federal income tax in
connection with the Spin-Off in excess of $2.5 million. However, the Internal
Revenue Service (the "IRS") may review Penn Octane's federal income tax returns
and challenge positions that it may take with respect to the Spin-Off.

27

Partnership Tax Treatment. Rio Vista is not a taxable entity (see below)
and incurs no federal income tax liability. Instead, each unitholder of Rio
Vista is required to take into account that unitholder's share of items of
income, gain, loss and deduction of Rio Vista in computing that unitholder's
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
unitholder's 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" (the "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".

No ruling has been or will be sought from the IRS and the IRS has made no
determination as to Rio Vista's classification as a partnership for federal
income tax purposes or whether Rio Vista's operations generate a minimum of 90%
of "qualifying income" under Section 7704 of the Code.

If Rio Vista were classified as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception or otherwise,
Rio Vista's items of income, gain, loss and deduction would be reflected only on
Rio Vista's tax return rather than being passed through to Rio Vista's
unitholders, and Rio Vista's net income would be taxed at corporate rates.

If Rio Vista were 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 Vista's 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 Vista's 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 Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects 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.

Distributions of Available Cash. All unitholders, including the General
Partner, have the right to receive distributions of "available cash" as defined
in the Agreement from Rio Vista in an amount equal to 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. The distributions are
to be paid 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 is existing, under any obligation of
Penn Octane which Rio Vista has guaranteed (see note G to the unaudited
consolidated financial statements).

Cash distributions from Rio Vista will be shared by the holders of the
common units and the General Partner Units as described in the Agreement based
on a formula whereby the General Partner will receive disproportionately more
distributions per unit than the holders of the common units as annual cash
distributions exceed certain milestones.

28

Rio Vista's ability to make distributions may be impacted by sales to PMI
at acceptable volumes and margins, payments from its guarantees, costs and
expenses and the inability to obtain additional financing on its pledged assets.
Although Penn Octane is not required to do so, to the extent that Penn Octane
has sufficient cash to do so, it intends to lend amounts to Rio Vista to meet
the minimum distributions. If Rio Vista's revenues and other sources of
liquidity after its quarterly distributions are not adequate to satisfy such
payment obligations of Penn Octane and/or Penn Octane does not have the
necessary cash to loan to Rio Vista, Rio Vista may be required to reduce or
eliminate the quarterly distributions to unitholders and/or Penn Octane and/or
Rio Vista may be required to raise additional funds to avoid foreclosure.
However, 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.

Increased expenses. As a result of the Spin-Off, Rio Vista estimates that
operating expenses will increase by approximately $450,000 on an annual basis as
a result of additional public company and income tax preparation costs related
to Rio Vista.

Sales to PMI. On March 31, 2004, Penn Octane's sales agreement with PMI
(the "Contract") expired. During the months of April 2004 through September
2004, Penn Octane and PMI entered into monthly agreements for the sale of LPG
("Monthly 2004 Contracts"). During the months of October 2004 and November
2004, Rio Vista and PMI entered into Monthly 2004 Contracts. Under the terms of
the Monthly 2004 Contracts for April, May and June, the minimum amount of LPG to
be purchased per month by PMI was 13.0 million gallons. Under the terms of the
Monthly 2004 Contracts for July, August and September, the minimum amount of LPG
to be purchased per month by PMI was 11.7 million gallons. Under the terms of
the Monthly 2004 Contracts for October and November, the minimum amount of LPG
to be purchased per month by PMI is 11.1 million gallons. During the months of
April 2004, May 2004, June 2004, July 2004, August 2004, September 2004 and
October 2004, the actual amount of LPG purchased by PMI was approximately 13.1
million gallons, 13.4 million gallons, 13.8 million gallons, 12.3 million
gallons, 12.4 million gallons, 11.8 million gallons and 10.9 million gallons,
respectively.

Rio Vista continues to negotiate for the extension and/or renewal of the
LPG contract with PMI. There is no assurance that the LPG contract with PMI
will be extended and/or renewed, and if so, that the terms will be more or less
favorable than those of the most recent Monthly 2004 Contracts. Until the terms
of a new long-term contract are reached, Rio Vista expects to enter into
additional monthly agreements similar to the Monthly 2004 Contracts.

Rio Vista believes that PMI's reduction of volume commitments for April
2004 through November 2004 is based on additional LPG production by PEMEX being
generated from the Burgos Basin field in Reynosa, Mexico, an area within the
proximity of Rio Vista's Mexican terminal facilities. In the event the volume
of LPG sold to PMI by Rio Vista under the month-to-month agreements declines
below the current level of approximately 11.0 million gallons, assuming margins
remain unchanged, Rio Vista would suffer material adverse consequences to its
business, financial condition and results of operations to the extent that Penn
Octane is unable to obtain additional favorable price and/or volume concessions
from LPG suppliers. Penn Octane is attempting to obtain additional price
and/or volume concessions from its LPG suppliers to lower costs. If Penn Octane
is unsuccessful in lowering its costs to offset a decline in volumes below 11.0
million gallons per month and/or Rio Vista is forced to accept similar or lower
prices for sales to PMI, the results of operations of Rio Vista may be adversely
affected. Rio Vista may not have sufficient cash flow or available credit to
absorb such reductions in gross profit.

PMI has primarily used the Matamoros Terminal Facility to load LPG
purchased from Penn Octane prior to the Spin-Off and from Rio Vista, subsequent
thereto, for distribution by truck in Mexico. Rio Vista will continue to use
the Brownsville Terminal Facility in connection with LPG delivered by railcar to
other customers, storage and as an alternative terminal in the event the
Matamoros Terminal Facility cannot be used.

Seasonality. Rio Vista's gross profit will be dependent on sales volume of
LPG to PMI, which fluctuates in part based on the seasons. The demand for LPG
is strongest during the winter season.

29

LPG Supply Agreements. Under the LPG Supply Agreement, Penn Octane will
supply all of Rio Vista's LPG requirements in connection with its LPG sales
obligations to PMI. The purchases will be at fluctuating prices. The purchase
price of the LPG from Penn Octane will be determined based on the cost of LPG
under Penn Octane's LPG supply agreements with its suppliers, other direct costs
related to PMI sales and a formula that takes into consideration operating costs
of Penn Octane and Rio Vista. Rio Vista expects the aggregate costs per gallon
to purchase LPG (less any applicable adjustments) to be below the aggregate
sales prices per gallon of LPG sold to PMI. Rio Vista believes that its LPG
Supply Agreement with Penn Octane provides it with an advantage over competitors
in the supply of LPG to PMI based on Penn Octane's adequate volumes and price
provided for in its agreements with its LPG suppliers, and Penn Octane's Leased
Pipeline which brings the LPG directly to Rio Vista's Brownsville Terminal
Facility from those suppliers. Based on Penn Octane's existing LPG supply
agreements, Penn Octane can sell to Rio Vista up to 22.1 million gallons of LPG
per month. The Leased Pipeline's capacity is estimated to be between 25 million
and 30 million gallons per month.

Mexican Operations. Under current Mexican law, foreign ownership of
Mexican entities involved in the distribution of LPG or the operation of LPG
terminal facilities is prohibited. Foreign ownership is permitted in the
transportation and storage of LPG. Mexican law also provides that a single
entity is not permitted to participate in more than one of the defined LPG
activities (transportation, storage or distribution). PennMex has a
transportation permit and Termatsal owns, leases, or is in the process of
obtaining the land or rights of way used in the construction of the Mexican
portion of the US-Mexico Pipelines, and owns the Mexican portion of the assets
comprising the US-Mexico Pipelines and the Matamoros Terminal Facility. Rio
Vista's consolidated Mexican affiliate, Tergas, S.A. de C.V. ("Tergas"), has
been granted the permit to operate the Matamoros Terminal Facility and Rio Vista
relies on Tergas' permit to continue its delivery of LPG at the Matamoros
Terminal Facility. Rio Vista pays Tergas its actual cost for distribution
services at the Matamoros Terminal Facility plus a small profit.

Through Rio Vista's operations in Mexico and the operations of the Mexican
subsidiaries and Tergas, a consolidated affiliate, Rio Vista is subject to the
tax laws of Mexico which, among other things, require that Rio Vista comply with
transfer pricing rules, the payment of income, asset and ad valorem taxes, and
possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign entities, including dividends and interest payments may
be subject to Mexican withholding taxes.

During July 2003, Penn Octane acquired an option to purchase Tergas, which
is 95% owned by Vicente Soriano, an employee of Penn Octane, and the remaining
balance owned by Abelardo Mier, a consultant of Penn Octane, for a nominal
price of approximately $5,000.

Deregulation of the LPG Industry in Mexico. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Articulo 27 Constitutional en el Ramo
del Petroleo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Organica del
Petroleos Mexicanos y Organismos Subsidiarios (the Organic Law of Petroleos
Mexicanos and Subsidiary Entities (the "Organic Law")). Under Mexican law and
related regulations, PEMEX is entrusted with the central planning and the
strategic management of Mexico's petroleum industry, including importation,
sales and transportation of LPG. In carrying out this role, PEMEX controls
pricing and distribution of various petrochemical products, including LPG.

Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in the defined LPG activities related to transportation and storage. However,
foreign entities are prohibited from participating in the distribution of LPG in
Mexico. Upon Deregulation, Mexican entities will be able to import LPG into
Mexico. Under Mexican law, a single entity is not permitted to participate in
more than one of the defined LPG activities (transportation, storage and
distribution). Rio Vista expects to sell LPG directly to independent Mexican
distributors as well as PMI upon Deregulation. Rio Vista anticipates that the
independent Mexican distributors will be required to obtain authorization from
the Mexican government for the importation of LPG upon Deregulation prior to
entering into contracts with Rio Vista.

30

During July 2001, the Mexican government announced that it would begin to
accept applications from Mexican companies for permits to allow for the
importation of LPG pursuant to provisions already provided for under existing
Mexican law.

In connection with the above, in August 2001, Tergas received a one year
permit from the Mexican government to import LPG. During September 2001, the
Mexican government decided to delay the implementation of Deregulation and asked
Tergas to defer use of the permit and as a result, Penn Octane did not sell LPG
to distributors other than PMI. In March 2002, the Mexican government again
announced its intention to issue permits for free importation of LPG into Mexico
by distributors and others beginning August 2002, which was again delayed. To
date the Mexican government has continued to delay implementation of
Deregulation. Tergas' permit to import LPG expired during August 2002. Tergas
intends to obtain a new permit when the Mexican government again begins to
accept applications. As a result of the foregoing, it is uncertain as to when,
if ever, Deregulation will actually occur and the effect, if any, it will have
on Rio Vista. However, should Deregulation occur, it is Rio Vista's intention
to sell LPG directly to distributors in Mexico as well as to PMI.

The point of sale for LPG which flows through the US-Mexico Pipelines for
delivery to the Matamoros Terminal Facility is the United States-Mexico border.
For LPG delivered into Mexico, PMI is the importer of record.

Partners' Capital. Rio Vista's beginning capital was contributed by Penn
Octane to Rio Vista's operating partnership in the form of assets consisting
primarily of terminal assets located in Brownsville, Texas, and Matamoros,
Mexico, as well as the pipelines connecting these terminal facilities. The
contribution to Rio Vista was recorded at Penn Octane's historical cost of such
assets on the date of the Spin-Off ($14.6 million).

COMMON UNITS

In connection with the Spin-Off, Rio Vista issued 1,910,656 common units to
the holders of Penn Octane common stock as of September 30, 2004.

The common units represent limited partner interests in Rio Vista. The
holders of common units are entitled to participate in Rio Vista's distributions
and exercise the rights or privileges available to limited partners under the
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 its
stockholders. 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 Agreement contains provisions limiting the ability of
holders of common units to call meetings or to acquire information about Rio
Vista's operations, as well as other provisions limiting the holders of common
units ability to influence the manner or direction of management.

GENERAL PARTNER UNITS

The General Partner of Rio Vista owns a 2% general partner interest in Rio
Vista. The General Partner is currently 100% owned by Penn Octane.

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.

31

OPTIONS AND WARRANTS

Rio Vista has no U.S. employees and is managed by its General Partner. Rio
Vista applies APB 25 for warrants granted to employees and managers of the
General Partner and SFAS 123 for warrants issued to acquire goods and services
from non-employees.

GENERAL PARTNER OPTIONS. Penn Octane's 100% general partnership interest
in the General Partner is expected to be decreased to 50% as a result of the
exercise by Shore Capital LLC (Shore Capital) an affiliate of Richard Shore,
Jr., President of Penn Octane, and Jerome B. Richter, Chief Executive Officer of
Penn Octane, of options to each acquire 25% of the General Partner (General
Partner Options). Mr. Shore and Mr. Richter are each members of the board of
directors of Penn Octane and the board of managers of the General Partner. It
is anticipated that Mr. Richter and Shore Capital will exercise their General
Partner Options in the near future. The exercise price for each option is
approximately $82,000. Penn Octane will retain voting control of the General
Partner pursuant to a voting agreement.

COMMON UNIT WARRANTS. Holders of unexercised warrants of Penn Octane as of
the date of the Spin-Off received new warrants to purchase common units of Rio
Vista to reflect the transfer of assets from Penn Octane into Rio Vista. As of
the date of the Spin-Off, Penn Octane had 2,542,500 warrants to purchase common
stock outstanding. The number of Rio Vista warrants given to the holders of
Penn Octane warrants as of the date of the Spin-Off was 317,813, determined by
dividing the existing number of warrants of Penn Octane by eight. The exercise
price of the Rio Vista warrants was determined by multiplying the original
exercise price of the existing Penn Octane warrants by 5.05. The expiration
date of the Rio Vista warrants is the same as the existing Penn Octane warrants.

In connection with Mr. Shore's employment agreement with Penn Octane, Shore
Capital received warrants to acquire 97,415 common units of Rio Vista at $8.47
per unit. On October 1, 2004 Rio Vista recorded approximately $350,000 of
compensation cost related to these warrants. The warrants are exercisable
beginning on October 1, 2004 and expire on July 10, 2006.

During January 2004, in connection with $1.8 million of debt obligations of
Penn Octane, Penn Octane agreed to issue 55,125 warrants to purchase Rio Vista
common units and an additional 3,054 warrants in Rio Vista for each $100,000 of
debt obligations outstanding at December 15, 2004 (Rio Vista Warrants). The Rio
Vista Warrants will expire three years from the date of the Spin-Off and the
exercise price will be determined based on a formula whereby the annualization
of the first quarterly distribution will represent a 20% yield to the exercise
price.

The Spin-Off. During September 2003, Penn Octane's Board of Directors and
the Independent Committee of its Board of Directors formally approved the terms
of the Spin-Off and Rio Vista filed a Form 10 registration statement with the
Securities and Exchange Commission. On September 30, 2004 all of Penn Octane's
limited partnership interest in Rio Vista was distributed to Penn Octane's
stockholders. Each stockholder of Penn Octane on September 30, 2004, received
one common unit of the limited partnership interest of Rio Vista for every eight
shares of Penn Octane's common stock owned.

As a result of the Spin-Off, Rio Vista owns and operates the LPG,
distribution, transportation and marketing business previously conducted by Penn
Octane. All of the Assets transferred to Rio Vista in connection with the
Spin-Off have been transferred at historical costs and related accumulated
depreciation of Penn Octane at the date of the Spin-Off. Rio Vista began
selling LPG directly to PMI upon the completion of the Spin-Off and at that time
also began purchasing LPG from Penn Octane under the LPG Supply Agreement.

Penn Octane has control of Rio Vista by virtue of its ownership,
management, and related voting control through the ownership and voting control
of the General Partner. Therefore, Rio Vista is accounted for as a subsidiary
of Penn Octane for financial accounting purposes and will continue to be
consolidated by Penn Octane after the Spin-Off.

32

INTERCOMPANY PURCHASE AGREEMENT FOR LPG

Penn Octane entered into the LPG Supply Agreement with Rio Vista pursuant
to which Rio Vista has agreed to purchase all of its LPG requirements for sales
which utilize the assets transferred to Rio Vista by Penn Octane to the extent
Penn Octane is able to supply such LPG requirements. The LPG Supply Agreement
further provides that Rio Vista has no obligation to purchase LPG from Penn
Octane to the extent the distribution of such LPG to Rio Vista's customers would
not require the use of any of the assets Penn Octane contributed to Rio Vista or
Penn Octane ceases to have the right to access the Seadrift pipeline.

OMNIBUS AGREEMENT

In connection with the Spin-Off, Penn Octane entered into an Omnibus
Agreement with Rio Vista and its subsidiaries that governs, among other things,
indemnification obligations among the parties to the agreement, related party
transactions, 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, the term material agreements means 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 such 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.

TRANSFERRED ASSETS

The following assets of Penn Octane were transferred to the operating
subsidiary of Rio Vista on September 30, 2004:

Brownsville Terminal Facilities
US Mexico Pipelines, including various rights of way and land obtained in
connection with operation of US Pipelines between Brownsville Terminal
Facility and the US Border
Inventory located in storage tanks and pipelines located in Brownsville
(and extending to storage and pipelines located in assets held by the
Mexican subsidiaries)
Contracts and Leases (assumed and/or assigned):
Lease Agreements:
Port of Brownsville:
LPG Terminal Facility
Tank Farm Lease
US State Department Permit
Other licenses and permits in connection with ownership and operation
of the US pipelines between Brownsville and US border
Investment in Subsidiaries:
Penn Octane de Mexico, S. de R.L. de C.V., consisting primarily of a
permit to transport LPG from the Mexican Border to the Matamoros
Terminal Facility
Termatsal, S. de R.L. de C.V., consisting primarily of land, LPG
terminal facilities, Mexican pipelines and rights of way, and
equipment used in the transportation of LPG from the Mexican
border to the Matamoros terminal facility and various LPG
terminal equipment
Penn Octane International LLC
Option to acquire Tergas, S.A. de C.V.

33

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 is dependent on Penn Octane's ability to deliver adequate
quantities of LPG at an acceptable price for ultimate sale to PMI, to provide
credit to Rio Vista for such purchases and to provide management of its
operations. Currently, Rio Vista's only source of revenue is from sales of LPG
to PMI and it operates under month to month sales agreements with PMI. Since
April 1, 2004, through the date of the Spin-Off, Penn Octane had also been
operating under month to month sales agreements with PMI. The monthly volumes
of LPG sold by Penn Octane to PMI since April 1, 2004 has been materially less
than historical levels.

Rio Vista has guaranteed certain of Penn Octane's obligations. Substantially
all of Rio Vista's and Penn Octane's assets are pledged or committed to be
pledged as collateral on $1.8 million of Penn Octane's existing debt and the RZB
Credit Facility, and therefore, both Rio Vista and Penn Octane maybe unable to
obtain additional financing collateralized by those assets. Penn Octane's
Report of Independent Certified Public Accountants on the consolidated financial
statements of Penn Octane at July 31, 2004 contains an explanatory paragraph
which describes an uncertainty about Penn Octane's ability to continue as a
going concern. In addition, Penn Octane's ability to obtain cash from
operations or additional debt or equity financing may be limited which could
subject the Rio Vista's assets to foreclosure by Penn Octane's creditors.

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 Penn Octane to continue as a going concern and
continued sales of LPG to PMI at acceptable volumes and margins to provide
sufficient cash flow to pay Rio Vista's expenses and guarantees of Penn Octane's
obligations assuming Penn Octane's inability to pay such obligations. The
consolidated balance sheet does not include any adjustments related to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should Rio Vista be unable
to continue in existence.

To provide Rio Vista with the ability it believes necessary to continue in
existence, management is negotiating with PMI to increase LPG sales at
acceptable monthly volumes and margins. In addition, management is taking steps
to diversify Rio Vista's operations to reduce dependency on sales of LPG.

IMPACT OF INFLATION

Inflation in the United States has been relatively low in recent years and did
not have a material impact on the consolidated financial statements of Rio
Vista. However, inflation remains a factor in the United States economy and
could increase Rio Vista's cost to acquire or replace property, plant and
equipment as well as our labor and supply costs.

ENVIRONMENTAL MATTERS

Rio Vista's operations are subject to environmental laws and regulations adopted
by various governmental authorities in the jurisdictions in which these
operations are conducted. Under the omnibus agreement, Penn Octane will
indemnify Rio Vista for five years after the completion of the Spin-Off against
certain potential environmental liabilities associated with the assets it
contributed to Rio Vista relating to events or conditions that existed before
the completion of the Spin-Off.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

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, an affiliate of Rio Vista, is a VIE
and therefore, its assets, liabilities and results of operations have been
included in the accompanying consolidated financial statements of Rio Vista.

34

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 those consolidated financial statements,
"Summary of Significant Accounting Policies". Rio Vista believes that the
following reflect the more critical accounting policies that affect the
financial position and results of operations.

Revenues recognition - Rio Vista expects in the future to enter into sales
agreements to sell LPG for future delivery. Rio Vista will not record sales
until the LPG is delivered to the customer.

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
management's judgments and based on estimates that management is required
to make.

Depreciation and amortization expenses - Property, plant and equipment are
carried at cost less accumulated depreciation and amortization.
Depreciation and amortization rates are based on management's estimate of
the future utilization and useful lives of the assets.

Stock-based compensation - Rio Vista accounts for stock-based compensation
using the provisions of ABP 25 (intrinsic value method), which is permitted
by SFAS 123. The difference in net income, if any, between the intrinsic
value method and the method provided for by SFAS 123 (fair value method) is
required to be disclosed in the financial statements on an annual and
interim basis as a result of the issuance of SFAS 148.

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 management's judgments and is based on estimates that
management is required to make.

STATEMENT BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS.

The unaudited consolidated financial statements included in this filing on
Form 10-Q have been reviewed by Burton McCumber & Cortez, L.L.P., independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Burton McCumber &
Cortez, L.L.P. commenting on their review, accompanies the unaudited
consolidated financial statements included in Item 1 of Part I.

35

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

To the extent that Rio Vista maintains quantities of LPG inventory in
excess of commitments for quantities of undelivered LPG and/or has commitments
for undelivered LPG in excess of inventory balances, Rio Vista is exposed to
market risk related to the volatility of LPG prices. In the event that
inventory balances exceed commitments for undelivered LPG, during periods of
falling LPG prices, Rio Vista may sell excess inventory to customers to reduce
the risk of these price fluctuations. In the event that commitments for
undelivered LPG exceed inventory balances, Rio Vista may purchase contracts
which protect it against future price increases of LPG.

Rio Vista does not maintain quantities of LPG inventory in excess of
quantities actually ordered by PMI. Therefore, Rio Vista has not currently
entered into and does not currently expect to enter into any arrangements in the
future to mitigate the impact of commodity price risk.

Rio Vista does not have any debt. Trade accounts receivable from PMI and
Rio Vista's trade and other accounts payable do not bear interest. Penn
Octane's credit facility with RZB for which Rio Vista is responsible for some of
the costs does not bear interest since generally no cash advances are made to
Rio Vista or Penn Octane by RZB. Fees paid to RZB for letters of credit are
based on a fixed schedule as provided in Penn Octane's agreement with RZB.
Therefore, Rio Vista currently has limited, if any, interest rate risk.

Rio Vista routinely converts U.S. dollars into Mexican pesos to pay
terminal operating costs and income taxes. Such costs are expected to be less
than $1 million per year and Rio Vista expects such costs will remain at less
than $1 million in any year. Rio Vista does not maintain Mexican peso bank
accounts with other than nominal balances. Therefore, Rio Vista has limited, if
any, risk related to foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES.

The General Partner's management, including the principal executive officer
and principal financial officer, conducted an evaluation of Rio Vista's
disclosure controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended, as of the end
of the period. Based on their evaluation, Penn Octane's principal executive
officer and principal accounting officer concluded that Rio Vista's disclosure
controls and procedures are effective.

There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in Rio Vista's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph above.

36

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

See note F to the accompanying unaudited consolidated financial
statements, for information concerning certain sales of securities.

The above transactions were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof because the
issuance did not involve any public offering of securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

The following persons were elected to the following offices of the
general partner effective September 30, 2004:

Name Office
------------------ ----------------------------------------------------------------

Jerome B. Richter Chairman of the Board
Richard Shore, Jr. Chief Executive Officer and President
Charles Handly Chief Operating Officer and Executive Vice President
Ian T. Bothwell Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary
Jerry L. Lockett Vice President and Secretary

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits.

THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

Exhibit No.
- -----------

2.1* Distribution Agreement dated September 16, 2004 by and among Penn Octane
Corporation, Rio Vista Energy Partners L.P. and Subsidiaries.

3.1* Certificate of Limited Partnership of Rio Vista Energy Partners L.P. filed July 10, 2003

3.2* First Amended and Restated Limited Partnership Agreement of Rio Vista Energy Partners
L.P. dated September 16, 2004

3.3* Certificate of Limited Partnership of Rio Vista Operating Partnership L.P.

3.4* First Amended and Restated Limited Partnership Agreement of Rio Vista Operating
Partnership L.P. dated September 16, 2004

3.5* Certificate of Formation of Rio Vista GP LLC

37

3.6* Rio Vista GP LLC Amended and Restated Limited Liability Company Agreement dated
as of September 16, 2004

3.7* Certificate of Formation of Rio Vista Operating GP LLC filed July 10, 2003

3.8* Limited Liability Company Agreement of Rio Vista Operating GP LLC dated July 10,
2003

3.9 Amendment of Certificate of Limited Partnership of Rio Vista Energy Partners L.P. filed
September 17, 2003

3.10 Amendment to Certificate of Limited Partnership of Rio Vista Operating Partnership
L.P.

4.1* Specimen Unit Certificate for Common Units (contained in Exhibit 3.2)

10.1* Contribution, Conveyance and Assumption Agreement entered into as of 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.

10.2* Omnibus Agreement entered into as of 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.

10.3* Purchase Contract made and entered into effective as of October 1, 2004 by and between
Penn Octane Corporation and Rio Vista Operating Partnership L.P.

10.4* Form of Unit Purchase Option between Penn Octane Corporation and Shore Capital LLC

10.5* Form of Unit Purchase Option between Penn Octane Corporation and Jerome B. Richter

10.6* Rio Vista Energy Partners L.P. Unit option Agreement dated July 10, 2003 granted to
Shore Capital LLC.

10.7* Forms of Warrants to Purchase Common Units to be issued to Penn Octane warrant
holders.

10.8* Form of RVGP Voting Agreement by and among Rio Vista GP LLC, Penn Octane
Corporation and the members of Rio Vista GP LLC.

10.9 Conveyance Agreement effective September 30, 2004 from Penn Octane Corporation in
favor of Rio Vista Operating Partnership L.P.

10.10 Amendment No. 1 to Omnibus Agreement entered into as of 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.

10.11 Lease dated October 20, 1993 between Brownsville Navigation District of Cameron
County, Texas and Registrant with respect to Penn Octane's land lease rights, including
related amendment to the Lease dated as of February 11, 1994 and Purchase Agreement.

10.12 Lease Amendment dated May 7, 1997 between Registrant and Brownsville Navigation
District of Cameron County, Texas.

10.13 Assignment of Easements from Penn Octane to Rio Vista Operating Partnership L.P. dated
September 15, 2004.

10.14 Assignment of lease No. "2823" dated September 15, 2004 between Penn Octane
Corporation and Rio Vista Operating Partnership L.P.

10.15 Assignment of lease No. "3165" dated September 15, 2004 between Penn Octane
Corporation and Rio Vista Operating Partnership L.P.

38

10.16 Assignment of lease No. "3154" dated September 15, 2004 between Penn Octane
Corporation and Rio Vista Operating Partnership L.P.

10.17 Guaranty & Agreement between Rio Vista Energy Partners L.P. and RZB Finance LLC
dated as of September 15, 2004.

10.18 Guaranty & Agreement between Rio Vista Operating Partnership L.P. and RZB Finance
LLC dated as of September 15, 2004.

10.19 General Security Agreement between Rio Vista Energy Partners L.P. and RZB Finance
LLC dated as of September 15, 2004.

10.20 General Security Agreement between Rio Vista Operating Partnership L.P. and RZB
Finance LLC dated as of September 15, 2004.

10.21 Form of Amendment to Promissory Note (the "Note") of Penn Octane Corporation (the
"Company") due December 15, 2003, and related agreements and instruments dated
January 13, 2004, between the Company and the holders of the Notes.

31.1 Certification Pursuant to Rule 13a-14(a) / 15d - 14(a) of the Exchange Act

31.2 Certification Pursuant to Rule 13a-14(a) / 15d - 14(a) of the Exchange Act

32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002

* Incorporated by reference to the corresponding exhibit filed with Rio
Vista's registration statement on Form 10 filed August 26, 2004 and
amended Form 10 filed on September 16, 2004 (SEC File No. 000-50394)

39

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.

RIO VISTA ENERGY PARTNERS L.P.

November 22, 2004 By: /s/ Ian T. Bothwell
--------------------------------------
Ian T. Bothwell
Treasurer (principal accounting and
financial officer) of Rio Vista GP
LLC, General Partner of Rio Vista
Energy Partners L.P.

40