UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number:
000-50394
Rio Vista Energy Partners L.P.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or Organization)
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20-0153267
(I.R.S. Employer Identification No.)
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1313 E. Alton Gloor Blvd., Suite J, Brownsville, Texas
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78526
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants Telephone Number, Including Area Code:
(956) 831-0886
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Units
Indicate by check mark if the registrant is a well-known seasonal issuer as defined in Rule
405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer or a smaller reporting company. See the definitions of
accelerated filer and large accelerated filer and smaller accelerated filer in Rule 12b-2 of
the Exchange Act.
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
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No
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The aggregate market value of the voting units held by non-affiliates of the Registrant was $
10,452,086 as of June 29, 2007.
The number of Common Units outstanding on March 28, 2008 was 2,515,518.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. This Annual Report contains forward-looking statements that are
subject to a number of risks and uncertainties, many of which are beyond our control, which may
include statements about:
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the volatility of realized natural gas prices;
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the discovery, estimation, development and replacement of oil and natural gas reserves;
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our business and financial strategy;
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our drilling locations;
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technology;
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our cash flow, liquidity and financial position;
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our production volumes;
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our lease operating expenses, general and administrative costs and finding and
development costs;
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the availability of drilling and production equipment, labor and other services;
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our future operating results;
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our prospect development and property acquisitions;
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the marketing of oil and natural gas;
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competition in the oil and natural gas industry and the transportation and terminalling
business;
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the impact of weather and the occurrence of natural disasters such as fires, floods,
hurricanes, earthquakes and other catastrophic events and natural disasters;
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governmental regulation of the oil and natural gas industry and the transportation and
terminalling business;
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required capital expenditures;
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cash distributions and qualified income;
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developments in oil producing and natural gas producing countries; and
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our strategic plans, objectives, expectations and intentions for future operations.
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All of these types of statements, other than statements of historical fact included in this Annual
Report are forward-looking statements. In some cases, forward-looking statements can be identified
by terminology such as may, could, should, expect, plan, project, intend,
anticipate, believe, estimate, predict, potential, pursue, target, continue, the
negative of such terms or other comparable terminology.
The forward-looking statements contained in this Annual Report are largely based on our
expectations, which reflect estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market conditions and other factors.
Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain
and involve a number of risks and uncertainties that are beyond our control. In addition,
managements assumptions about future events may prove to be inaccurate. Management cautions all
readers that the forward-looking statements contained in this Annual Report are not guarantees of
future performance, and we cannot assure any reader that such statements will be realized or the
forward-looking events and circumstances will occur. Actual results may differ materially from
those anticipated or implied in the forward-looking statements due to factors listed in the Risk
Factors section and Managements Discussion and Analysis of Financial Condition and Results of
Operations section and elsewhere in this Annual Report. All forward-looking statements speak only
as of the date of this Annual Report. We do not intend to publicly update or revise any
forward-looking statements as a result of new information, future events or otherwise.
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GLOSSARY OF TERMS
As commonly used in the oil and gas industry and as used in this Annual Report on Form 10-K, the
following terms have the following meanings:
Bbl.
One stock tank barrel or 42 United States gallons liquid volume.
Bcf.
One billion cubic feet.
Bcfe.
One billion cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.
Btu.
One British thermal unit, which is the heat required to raise the temperature of a
one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Development well.
A well drilled within the proved area of an oil or gas reservoir to the depth
of a stratigraphic horizon known to be productive.
Dry hole
or
well.
A well found to be incapable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production would exceed production expenses
and taxes.
Field.
An area consisting of a single reservoir or multiple reservoirs all grouped on or related
to the same individual geological structural feature and/or stratigraphic condition.
FERC.
Federal Energy Regulatory Commission.
Gross acres
or
gross wells.
The total acres or wells, as the case may be, in which a working
interest is owned.
Hp.
Horsepower
MBbls.
One thousand barrels of oil or other liquid hydrocarbons.
Mcf.
One thousand cubic feet.
Mcfe.
One thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one
Bbl of oil, condensate or natural gas liquids.
MMBbls.
One million barrels of oil or other liquid hydrocarbons.
MMBtu.
One million Btus.
MMcf.
One million cubic feet.
MMcf/d.
One MMcf per day.
MMcfe.
One million cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.
MMcfe/d.
One MMcfe per day.
MMMBtu.
One billion Btus.
Net acres
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net wells.
The sum of the fractional working interests owned in gross acres or
gross wells, as the case may be.
NYMEX.
The New York Mercantile Exchange.
Oil.
Crude oil, condensate and natural gas liquids.
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Productive well.
A well that is found to be capable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production exceeds production expenses and
taxes.
Proved developed reserves.
Reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery techniques for supplementing
the natural forces and mechanisms of primary recovery are included in proved developed reserves
only after testing by a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved reserves.
Proved oil and gas reserves are the estimated quantities of gas, natural gas
liquids and oil which geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual arrangements, but not on
escalations based on future conditions. The definition of proved reserves is in accordance with
the Securities and Exchange Commissions definition set forth in Regulation S-X Rule 4-10(a) and
its subsequent staff interpretations and guidance.
Proved undeveloped drilling location.
A site on which a development well can be drilled
consistent with spacing rules for purposes of recovering proved undeveloped reserves.
Proved undeveloped reserves
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PUDs.
Reserves that are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled. Proved reserves for
other undrilled units are claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Estimates for proved undeveloped
reserves are not attributed to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been proved effective by
actual tests in the area and in the same reservoir.
Recompletion.
The completion for production of an existing wellbore in another formation from
that which the well has been previously completed.
Reservoir.
A porous and permeable underground formation containing a natural accumulation of
economically productive oil and/or gas that is confined by impermeable rock or water barriers and
is individual and separate from other reserves.
Standardized Measure.
Standardized Measure, or standardized measure of discounted future net
cash flows relating to proved oil and gas reserve quantities, is the present value of estimated
future net revenues to be generated from the production of proved reserves, determined in
accordance with the rules and regulations of the Securities and Exchange Commission (using prices
and costs in effect as of the date of estimation) without giving effect to non-property related
expenses, such as general and administrative, expenses, debt service and future income tax
expenses or to depreciation, depletion and amortization, and discounted using an annual discount
rate of 10%. Our Standardized Measure does not include future income tax expenses because our
reserves are owned by our subsidiary Rio Vista Penny LLC, which is not subject to income taxes.
Successful well.
A well capable of producing oil and/or gas in commercial quantities.
Undeveloped acreage.
Lease acreage on which wells have not been drilled or completed to a point
that would permit the production of commercial quantities of oil and gas regardless of whether
such acreage contains proved reserves.
Unproved reserves.
Lease acreage on which wells have not been drilled and where it is either
probable or possible that the acreage contains reserves.
Working interest.
The operating interest that gives the owner the right to drill, produce and
conduct operating activities on the property and a share of production.
Workover.
Operations on a producing well to restore or increase production
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PART I
Items 1 and 2. Business and Properties.
Rio Vista Energy Partners L.P. and its consolidated subsidiaries (not including the General
Partner) are hereinafter referred to as Rio Vista. When referring to Rio Vista and using phrases
such as we, our, us, or the Company, our intent is to refer to Rio Vista and its
consolidated subsidiaries as a whole or on a entity basis, depending on the context in which the
statements are made.
General
Rio Vista Energy Partners L.P. (Rio Vista), a Delaware limited partnership, was formed by Penn
Octane Corporation (Penn Octane) on July 10, 2003 and was a wholly owned subsidiary of Penn Octane
until September 30, 2004, the date that Penn Octane completed a series of transactions that (i)
transferred substantially all of its owned pipeline and terminal assets in Brownsville, Texas and
Matamoros, Mexico and certain immaterial liabilities to Rio Vista Operating Partnership L.P.
(RVOP), (ii) transferred Penn Octanes 99.9% interest in RVOP to Rio Vista and (iii) distributed
all of its limited partnership interests (Common Units) in Rio Vista to its common stockholders
(Spin-Off), resulting in Rio Vista becoming a separate public company. The Common Units
represented 98% of Rio Vistas outstanding capital and 100% of Rio Vistas limited partnership
interests. The remaining 2% represented the General Partner interest. The General Partner
interest is solely owned and controlled by Rio Vista GP LLC (General Partner). Our General Partner
is 75% owned by Penn Octane and Penn Octane has 100% voting control over the General Partner
pursuant to a voting agreement with the other owner of the General Partner. Our General Partner is
responsible for the management of Rio Vista. Common unitholders do not participate in the
management of Rio Vista.
Our principal executive offices are located at 1313 Alton Gloor, Suite J, Brownsville, Texas 98526,
and our telephone number is (956) 831-0886. Our website is located at
http://www.riovistaenergy.com.
Historical Assets and Operations
From inception until 2007, Rio Vista was focused on the operation of the assets acquired from Penn
Octane, including a liquefied petroleum gas, or LPG, terminal facility in Matamoros, Mexico and
approximately 23 miles of pipelines connecting the Matamoros Terminal Facility to an LPG terminal
facility in Brownsville, Texas.
In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to
TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm,
together with associated improvements, leases, easements, licenses and permits; an LPG sales
agreement; and all of LPG inventory. In December 2007, Rio Vista completed the disposition of its
remaining LPG assets to TransMontaigne, including the U.S. portion of the two pipelines from a
Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along with all associated
rights-of-way and easements; all of the outstanding equity interests in entities owning interests
in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico; and all
of the rights for indirect control of an entity that owns a terminal site in Matamoros, Mexico. As
a result, effective January 1, 2008, Rio Vista no longer operates the assets acquired from Penn
Octane or conducts the businesses it had historically conducted.
Current Assets and Operations
In July 2007, Rio Vista acquired Regional Enterprises, Inc. (Regional), and in November 2007, Rio
Vista acquired certain oil and natural gas producing properties and related assets in the State of
Oklahoma formerly owned by GM Oil Properties, Inc., Penny Petroleum Corporation and GO LLC. The
businesses and assets we acquired in 2007 are described further below under the subheadings
Regional Enterprises and Oklahoma assets. As a result of these acquisitions in 2007, Rio Vista
is now focused on the acquisition, development and production of oil and natural gas properties and
related midstream assets, and the operation and development of Regionals business consisting of
transportation and terminalling.
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Regional Enterprises
In July 2007, Rio Vista acquired the business of Regional Enterprises, Inc., a Virginia
corporation. The principal business of Regional is storage, transportation and railcar
transloading of bulk liquids, including chemical and petroleum products owned by its
customers.
Regionals principal facilities are located on the James River in Hopewell, Virginia, where it
receives bulk chemicals and petroleum products from ships and barges into approximately
10,000,000 gallons of available storage. Regional also receives product from a rail spur which
is capable of receiving 14 rail cars at any one time for transloading of chemical and
petroleum liquids for delivery throughout the mid-Atlantic region.
Regional utilizes its fleet of 32 tractors and 50 trailers to distribute the various products it
receives as well as to perform direct hauling operations on behalf of its customers.
Transportation
. Regional transports a broad range of hazardous and non-hazardous liquid products,
including the following: aluminum sulfate solution, sulfuric acid, sodium hydroxide, hydrogen
peroxide, ferric chloride, ferric sulfate, hypochlorite solution, hydrochloric acid, ferrous
chloride and aqua ammonia. Regionals transportation services are primarily for the most part
short-haul in nature, with an estimated 85% of Regionals deliveries being made within 150 miles of
its Hopewell, Virginia terminal. Virtually all of Regionals transportation services are provided
within the states of Virginia, North Carolina, South Carolina, Georgia, Tennessee, Maryland,
Pennsylvania and Delaware.
Regional currently has a fleet of approximately 50 trailers units and 32 tractors dedicated to its
transportation services. The majority of tankers are constructed of stainless steel, with 11 being
rubber or chlorobutyl lined, which enables them to carry the toughest corrosives. The tanker fleet
also includes four aluminum-constructed tanks, which are equipped with vapor recovery. Rio Vista
believes that this extensive inventory of tankers enables Regional to service the majority of its
customers needs. The tractor fleet consists of late model, Western Star and Mack units.
Storage
. Regionals Hopewell facility has a total of 15 tanks, six of which have capacities in
excess of one million gallons; of these 15 tanks, 13 tanks are for customer utilization. These
tanks have a combined storage capacity of 10.4 million gallons. As of December 31, 2007, Regional
had five vacant tanks with a combined storage capacity of .5 millions gallons.
Regionals loading dock is parallel to the main shipping channel with berthing dolphin clusters
approximately 210 feet in length. Two six-inch and one ten-inch steel pipelines service the various
tanks. All of the tanks are constructed of carbon steel, both insulated and bare skin and some with
internal walls lined and unlined. Several tanks and all of the associated piping are equipped with
heat via either heat transfer (hot oil) or steam. As of December 31, 2007, Regional stored the
following products: two grades of asphalt, asphalt additive, sodium hydroxide and #2 oil.
Regional receives the products it stores by ship, barge, rail and truck. The products Regional
stores are owned by its customers. Certain customers for whom Regional provides storage services
also use Regionals transportation services.
There is approximately 2.25 acres of undeveloped acreage at Regionals Hopewell facility, which
could be used to accommodate additional construction of up to an additional 4.2 million gallons of
storage capacity.
Transloading
. Regional provides transloading services utilizing its rail siding and off-loading
facilities to transfer products from railcars to tanker trucks. Open rail access to the Norfolk
Southern and CSX rail lines offers competitive rail economics and flexibility for Regionals
customers. Customers who utilize Regionals transloading services typically do so because either
their own rail service is at full capacity or Regionals strategic location provides them with an
important distribution point not available in their own distribution system. Transloading products,
either from storage tanks or tankers, in railcar quantities provides a logistical pricing advantage
over long-haul transportation in tanker trucks. Steam heat and compressed air is available at each
railcar spot.
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Regional has two transloading facilities. Regional leases siding tracks and 14 railcar slots at its
Hopewell, Virginia facility, with Norfolk Southern conducting switching operations. As of December
31, 2007, Regional had four vacant slots but anticipates acquiring an additional 900 feet of track,
which would result in 16 additional rail slots. Regional also has a transloading facility in
Johnson City, Tennessee, where it leases siding tracks and six railcar slots. Switching operations
for the Johnson City, Tennessee facility are provided by East Tennessee Railway, which services
tracks over which both the CSX and Norfolk Southern railroads operate.
Headquarters Facility
. Regional has approximately 2,000 square feet of office facilities at its
Hopewell, Virginia headquarters from which it provides most of its management, administrative and
marketing operations.
Customers
. For the fiscal year period ended December 31, 2007, General Chemical Corporation
accounted for approximately 14% of Regionals revenues, with no other individual customer
accounting for more than 10% of Regionals revenues.
Competition
. The terminalling and transportation industry is highly competitive. We encounter
strong competition from other independent operators and from companies in acquiring equipment and
securing trained personnel. Many of these competitors have financial and technical resources and
staffs substantially larger than ours. As a result, our competitors may be able to bid for
contracts at rates which are more attractive to customers than our financial or human resources
permit.
We are also affected by competition for availability of specialized equipment. Certain trucking
equipment, including tankers, require significant lead time and possible higher prices to obtain.
Accordingly, we may not be able to bid for additional business which require equipment not
currently available to us.
Employees
. As of December 31, 2007, Regional had a total of approximately 51 full- and part-time
employees, consisting of 26 drivers, 14 terminal operators, three mechanics and 14 office staff.
Environmental and Regulatory
. Regional is a licensed contract or common carrier and holds permits
with the Hopewell wastewater treatment facility for treatment and disposal of its wastewater
generated through rainwater runoff and tanker washing operations. Regional is subject to various
laws and regulations, including those relating to labor, maritime, transportation, environment and
motor carrier.
Tax Structure
. Regionals assets and operations are conducted within a C-Corp for federal income
tax purposes, as many of its activities are not considered Qualified Income. Rio Vista intends
to explore options regarding the reorganization of some or all of its assets that produce
qualifying income into a more efficient tax structure.
Other
. Regional qualifies as a small business contractor and vendor capable of storing,
transporting and supplying bulk chemical and petroleum products on behalf of U.S. government
agencies. Regional intends to seek contracts with the Department of Defense and the Defense Energy
Support Center based on the proximity of its Hopewell facilities to multiple U.S. military bases.
Oklahoma assets
In November 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary of
Rio Vista completed the purchase of assets from G M Oil Properties, Inc., an Oklahoma corporation
(GM Oil) and Penny Petroleum Corporation, an Oklahoma corporation (Penny Petroleum) pursuant to
which we acquired real and personal property interests in certain oil and gas properties located in
Haskell, McIntosh and Pittsburg counties in Oklahoma, including all of the outstanding capital
stock of MV Pipeline Company (MV), an Oklahoma corporation.
The total purchase price for the GM Assets was paid by assumption of the TCW Credit Facility in the
amount of $16.75 million (including $0.25 million of unpaid interest included in the TCW Credit
Facility) plus payment of additional accrued but unpaid interest in the amount of $0.34 million.
The TCW Credit Facility is payable to the TCW Noteholders and is administered by TAMCO as agent
pursuant to the TCW Credit Facility. No cash or equity consideration was paid to GM Oil or its
shareholders as part of the purchase price of the GM Assets.
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In addition, in November 2007, Rio Vista GO, LLC (Rio Vista GO) an indirect, wholly-owned
subsidiary of Rio Vista, acquired all of the membership interests of GO, LLC, an Oklahoma limited
liability company (GO). GO operates an oil and gas pipeline business located in Haskell and
Pittsburg counties in Oklahoma.
The total purchase price for the acquisition of the Oklahoma assets was approximately $33.0 million
consisting of a cash payment in the amount of $10.0 million, including $3.0 million from the TCW
Credit Facility, which included acquisition fees and other assumed liabilities of $1.9 million, the
issuance of $1.5 million of common units, the issuance of a $500,000 short-term convertible note,
and the assumption the TCW Credit Facility with a balance of $21.7 million including $2.0 million
payment to TCW to obtain the credit facility. In December 2008, the TCW Credit Facility will
convert to an eight-year amortizing loan with a fixed interest rate of 10.5%.
Exploration and Production Assets
. The Oklahoma assets include approximately 15,100 net acres
located in McIntosh, Haskell and Pittsburg counties in Oklahoma. The Oklahoma assets also include a
25% participation interest on 4,800 acres owned by Concorde Resources. These assets represent a
majority interest in 93 wells that we now operate and 20 non-operated wells in the Booch Sand,
Hartshorne Cold Bed Methane, Georgias Fork and Spiro formations.
Gathering
. The Oklahoma assets also include a wholly-owned and operated 25-mile Brooken pipeline
that gathers natural gas from several properties located in Haskell and Pittsburg counties, as well
as MVs wholly-owned and operated 40-mile pipeline that receives natural gas from leases in the
Texanna area north of Lake Eufaula and delivers product to the ONEOK intrastate pipeline in
McIntosh County, Oklahoma. The pipeline consists of 40 miles of Class I pipelines, a low-pressure
gas gathering system and a 3,000 horsepower central compressor station with a capacity of 50 MMcf
per day.
Proved Reserves.
Our proved reserves at December 31, 2007 were 35.6 Bcf, all of which were gas.
Approximately 12.8 Bcf were classified as proved developed, with a total Standardized Measure value
of $41.3 million. At December 31, 2007, we operated 103 wells, or 81.1%, of our 127 productive
wells. Our average proved reserves-to-production ratio, or average reserve life, is approximately
66.1 years, based on our December 31, 2007 reserve report and annualized production of current
production levels.
Core Operating Areas
The long-lived proved producing
properties are principally comprised of majority interests in 103
operated wells and 24 non-operated wells located on either side of Lake Eufaula in the Crouch
Area, the Texanna Area, the Brooken Area and the Canadian Area with production derived
primarily from the Booch sand, Hartshorne Coal Bed Methane reservoirs. We also derive a smaller
portion of our reserves from the Georges Fork and Spiro reservoirs. Rio Vista estimates that it
has an average revenue interest of approximately 75% in these leased interests. Characteristics of
our reservoirs are as follows:
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Acreage surrounding Lake Eufaula has net sand thickness of 25 feet
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Land surrounding the edges and underneath Lake Eufaula has locations
with net sand thickness up to 200 feet
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Well potential: 5-10 thin, up to 5 thick wells, 800 MMcf 4 Bcf per
well
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Hartshorne coal bed methane:
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Coal thickness contours ranging from a minimum of 2 feet to over 4 feet
in select areas
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Well potential: 90-100 vertical, 5-10 horizontal, 250 900 MMcf per
well
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The following diagram illustrates the location of the principal fields and pipeline facilities
associated with the Oklahoma assets.
T
exanna
. The Texanna Area, which is located on the north side of Lake Eufaula, is the area where
there has been a significant amount of Booch operating history. Historically, over 200 Bcf has
been produced from this formation in this area. Our current proved reserves in this region are
based on a second Booch formation which overlays the original Booch formation. In addition there
is current production from Hartshorne formations.
Crouch.
The Crouch Area, which is located on the north side of Lake Eufaula, immediately north of
the Texanna Area currently produces from the Booch, Georges Fork, Spiro, Hartshorne and Cromwell
formations.
The Texanna and Crouch Areas are located with our MV Pipeline gathering system. The MV pipeline
gathers natural gas from leases in the Texanna and Crouch Areas north of Lake Eufaula and delivers
to the ONEOK Gas Transportation, LLC (Oneok) intrastate pipeline in McIntosh County. The MV
Pipeline is 40 miles in length, Class I, low-pressure gas gathering system and is joined to a 3,000
hp central compressor station with capacity of 50 MMcf/d. This gathering system was originally
constructed in 1984, upgraded in 1998 and 2 new compressors were added during 2006.
All of our production associated with the MV Pipeline and Brooken Pipeline (see below) is sold to
Clearwater Enterprises LLC (Clearwater). The price we receive (excluding the impact of hedges) is
based on the Oneok monthly index price (MV Pipeline production) or the Centerpoint Energy Gas
Transmission (CEGT) index less fuel, gathering and compression. The Oneok and CEGT indexes
historically trade at an approximate 10% discount to the NYMEX monthly averages.
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Brooken.
The Brooken Area is located on the south side of Lake Eufaula at the intersection of
Haskell, McIntosh and Pittsburg counties. Our proven reserves in this are primarily relate to the
Booch sand, and Hartshorne Coal Bed Methane formations. All of the production in this area is
gathered by our Brooken pipeline gathering system. The Brooken pipeline is 25 miles long and has a
capacity of 10 MMcf/d. The Brooken Pipeline was originally constructed in 1992. All of the
production on the Brooken Pipeline connects to the Centerpoint Energy Field Services gathering
system and is sold by Clearwater based on the monthly CEGT index less fuel, gathering, and
compression.
We also perform limited gas gathering activities for third-parties which utilize our Brooken
pipeline system. The fee charged to third-party producers is set by contract and ranges from $0.70
to $0.75 per Mcf plus line loss and any compressor fuel. We aggregate these volumes with our
production and sell all the gas through our meters to the same purchasers. These revenues are
collected and distributed to the third-party producers in the normal course of our revenue
distribution cycle. We do not take any commodity risk associated with third party gas as we buy and
sell this production on similarly posted indexes which provide a guaranteed fixed margin. Most of
our gas gathering lines are not subject to United States Department of Transportation (US DOT)
safety regulations.
Canadian.
The Canadian Area is located southwest of the Brooken Area. It is an area characterized
by horizontal drilling for the Hartshorne coal beds. These wells typically produce at
significantly higher rates and higher ultimate reserve recovery than the wells in the vertical
drilling areas. The cost for the horizontal wells is about three times greater than drilling a
vertical well for the same Hartshorne target. Most of the wells currently producing in this area
are operated by third parties. All of the wells operated and non-operated feed into third party
gathering systems. All of the production from this area is sold under sales agreements which
provide for prices that are tied to the CEGT monthly and/or beginning of month indexes, less fuel,
gathering, compression and marketing fees.
Drilling Activity
We intend to concentrate our drilling activity on lower risk, development properties. The number,
types, and location of wells we drill will vary depending on our capital budget, the cost of each
well, anticipated production and the estimated recoverable reserves attributable to each well. We
did not commence development activities on our Oklahoma assets until January 2008. Currently, we
are funded to complete a planned deep test, upgrade of existing infrastructure and workovers on
various existing wells which we expect to complete during the second quarter of 2008. We currently
require additional funding to allow us to complete the remainder of our development program. The
following details our current development plan for the upcoming annual period which is based on our
ability to obtain additional funding.
|
|
|
|
|
Formation
|
|
Number of Wells
|
|
|
|
|
|
|
Coal Vertical
|
|
|
36
|
|
Coal Horizontal
|
|
|
7
|
|
Booch Vertical
|
|
|
5
|
|
Booch Horizontal
|
|
|
3
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
We currently estimate that the cost to drill a new vertical well will be approximately $170,000,
and the cost to drill a new horizontal well will be approximately $600,000.
The information should not be considered indicative of future performance, nor should it be assumed
that there is necessarily any correlation between the number of productive wells drilled,
quantities of reserves found or economic value. Productive wells are those that produce commercial
quantities of oil and gas, regardless of whether they generate a reasonable rate of return. The
ability for us to develop a portion or all of the above wells is contingent on our having adequate
capital on hand.
6
As shown in the tables below, as of December 31, 2007, we had 69 proved undeveloped drilling
locations (specific drilling locations as to which our independent engineering firm, Lee Keeling
and Associates, Inc., assigned proved undeveloped reserves as of such date). We have also
identified 5 additional unproved drilling locations (specific drilling locations as to which Lee
Keeling and Associates, Inc. has not assigned any proved reserves) on acreage that we have under
existing leases. As successful development wells frequently result in the reclassification of
adjacent lease acreage from unproved to proved, we expect that a significant number of our unproved
drilling locations will be reclassified as proved drilling locations prior to the actual drilling
of these locations.
GAS RESERVES BY FIELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
GAS RESERVES-MCF
|
|
FIELD
|
|
WELLS
|
|
|
GROSS
|
|
|
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROOKEN
|
|
|
22
|
|
|
|
20,575,326
|
|
|
|
9,127,757
|
|
CANADIAN
|
|
|
9
|
|
|
|
5,436,924
|
|
|
|
2,151,826
|
|
TEXANNA
|
|
|
38
|
|
|
|
15,183,172
|
|
|
|
11,542,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL UNDEVELOPED
|
|
|
69
|
|
|
|
41,195,422
|
|
|
|
22,822,523
|
|
GAS RESERVES BY RESERVOIR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
GAS RESERVES-MCF
|
|
RESERVOIR
|
|
WELLS
|
|
|
GROSS
|
|
|
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOOCH
|
|
|
8
|
|
|
|
6,098,291
|
|
|
|
4,608,974
|
|
HARTSHORNE COAL
|
|
|
61
|
|
|
|
35,097,131
|
|
|
|
18,213,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
UNDEVELOPED
|
|
|
69
|
|
|
|
41,195,422
|
|
|
|
22,822,523
|
|
Oil and Natural Gas Prices
Our natural gas production is sold to purchasers based on the local monthly index price, which
typically is approximately 90% of the NYMEX monthly average gas prices less any direct costs for
transportation, fuel and shrinkage. We recoup certain of the transportation costs paid for fees
related to our own gathering systems.
We enter into hedging arrangements in the form of guaranteed future price contracts to reduce the
impact of commodity price volatility on our cash flow from operations. By removing the price
volatility from a significant portion of our oil and gas production, we have mitigated, but not
eliminated, the potential effects of fluctuating oil and gas prices on our cash flow from
operations for those periods. We have entered into sales contracts for substantially all of our
production on wells which we operate through March 2009.
7
Oil and Gas Data
Proved Reserves
Proved oil and gas reserves are the estimated quantities of oil and gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date
the estimate is made. Prices include consideration of changes in existing prices provided by
contractual arrangements, but not escalations based on future conditions. For additional
information regarding estimates of oil and gas reserves, including estimates of proved and proved
developed reserves, the standardized measure of discounted future cash flows and the changes in
discounted future cash flows, see Supplementary Oil and Gas Data (Unaudited) in Item 8. Financial
Statements and Supplementary Data.
The following table presents our estimated net proved oil and gas reserves and the present value of
our estimated proved reserves at December 31, 2007, based on the reserve report prepared by Lee
Keeling and Associates, Inc. The Standardized Measure values shown in the table are not intended to
represent the market value of our estimated oil and gas reserves at such dates.
|
|
|
|
|
|
|
December
|
|
|
|
31, 2007
|
|
Reserve Data:
|
|
|
|
|
Estimated net proved reserves:
|
|
|
|
|
Gas (Bcf)
|
|
|
35.588
|
|
Oil (MMbls)
|
|
|
0.0
|
|
Total (Bcfe)
|
|
|
35.588
|
|
Proved developed (Bcfe)
|
|
|
12.766
|
|
Proved undeveloped (Bcfe)
|
|
|
22.822
|
|
Proved developed reserves as a % of total proved reserves
|
|
|
35.87
|
%
|
Standardized Measure (in millions) (1)
|
|
$
|
41.272
|
|
Representative Gas Price per MCF(2):
|
|
$
|
5.03
|
|
|
|
|
(1)
|
|
Does not give effect to hedging related contracts
|
|
(2)
|
|
Rio Vista sells its production based on monthly average index prices and therefore the price
of gas used to determine the Standardized Measure was based on the monthly weighted average
price received by Rio Vista for all its production during December 2007 regardless of whether
Rio Vista was the operator. The weighted average price excludes any impact associated with
hedges in effect during the period.
|
8
Breakdown of Gas Sales December 2007
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
|
|
|
Realized (a)
|
|
|
Gas Production
|
|
|
|
(MCF)
|
|
|
(MCF)
|
|
|
|
|
|
|
|
|
|
|
Total Operated Wells
|
|
$
|
5.19
|
|
|
|
31,905
|
|
Total Non-operated Wells
|
|
$
|
4.35
|
|
|
|
7,566
|
|
|
|
|
|
|
|
|
Weighted Average Price Realized
|
|
$
|
5.03
|
|
|
|
39,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relevant Indexes (b)
|
|
|
|
|
|
|
|
|
NYMEX December 2007
|
|
$
|
7.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oneok December 2007 Index
|
|
$
|
6.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEGT Index Daily Average December 2007
|
|
$
|
6.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEGT Index December 2007
|
|
$
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Ignores impact of hedging contracts and includes fuel, compression, gathering charges and marketing
|
|
(b)
|
|
Excludes fuel, compression, gathering and marketing charges
|
The data in the above tables are estimates. Oil and gas reserve engineering is inherently a
subjective process of estimating underground accumulations of oil and gas that cannot be measured
exactly. The accuracy of any reserve estimate is a function of the quality of available data and
engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary
from the quantities of oil and gas that are ultimately recovered.
9
These reserve estimates are reviewed internally by management, with final approval by our Chairman
of the Board. The process performed by Lee Keeling and Associates, Inc. to estimate the
December 31, 2007 reserve amounts included their preparation of our estimated reserve quantities,
future producing rates, future net revenue and the present value of such future net revenue. The
independent engineering firm also prepared our estimates with respect to reserve categorization,
using the definitions for proved reserves set forth in Regulation S-X Rule 4-10 (a) and subsequent
Securities and Exchange Commission (SEC) staff interpretations and guidance. In the conduct of
their preparation of the reserve estimates, Lee Keeling and Associates, Inc. independently verified
the accuracy and completeness of information and data furnished by the Company with respect to
ownership interests, oil and gas production, well test data, historical costs of operation and
development, product prices, and any agreements relating to current and future operations of the
properties and sales of production. However, if in the course of their work, something came to
their attention which brought into question the validity or sufficiency of any such information or
data, they did not rely on such information or data until they had satisfactorily resolved their
questions relating thereto. Their estimates of reserves conform to the guidelines of the SEC,
including the criteria of reasonable certainty, as it pertains to expectations about the
recoverability of reserves in future years, under existing economic and operating conditions. We
have not filed reserve estimates with any Federal authority or agency.
Future prices received for production may vary, perhaps significantly, from the prices assumed for
purposes of our estimate of Standardized Measure. The Standardized Measure shown should not be
construed as the market value of the reserves at the date shown. The 10% discount factor used to
calculate Standardized Measure, which is required by Statement of Financial Accounting Standard
(SFAS) No. 69,
Disclosures about Oil and Gas Producing Activities,
is not necessarily the most
appropriate discount rate. The Standardized Measure, no matter what discount rate is used, is
materially affected by assumptions as to timing of future production, which may prove to be
inaccurate.
Production and Price History
The following table sets forth information regarding net production of oil and gas and certain
price information for the period indicated, which is the period during which we owned the Oklahoma
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operated
|
|
|
Non-Operated
|
|
|
|
|
|
|
Wells
|
|
|
Wells
|
|
|
Total
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas production (Mcf)
|
|
|
64,391
|
|
|
|
15,905
|
|
|
|
80,296
|
|
Oil production (MBbls)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production (Mcfe)
|
|
|
64,391
|
|
|
|
15,905
|
|
|
|
80,296
|
|
Average daily production (Mcfe/d)
|
|
|
1,056
|
|
|
|
260
|
|
|
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Realized Prices
(1),(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
$
|
5.33
|
|
|
$
|
4.23
|
|
|
$
|
5.11
|
|
Oil (Bbl)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total (Mcfe)
|
|
$
|
5.33
|
|
|
$
|
4.23
|
|
|
$
|
5.11
|
|
|
|
|
(1)
|
|
Includes the effect of realized prices from hedging contracts.
|
|
(2)
|
|
The final NYMEX settled price for December 2007 was $7.20 (Mcf) before fuel, gathering
and compression.
|
10
Productive Wells
The following table sets forth information relating to the productive wells in which we owned a
working interest as of December 31, 2007. Productive wells consist of producing wells and wells
capable of production, including gas wells awaiting pipeline connections to commence deliveries.
Gross wells refers to the total number of producing wells in which we have an interest, and net
wells refers to the sum of our fractional revenue interests owned in gross wells.
GAS RESERVES BY FIELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
BROOKEN
|
|
|
36
|
|
|
|
4,999
|
|
|
|
6,006,618
|
|
|
|
4,174,503
|
|
|
|
69.50
|
%
|
CANADIAN
|
|
|
13
|
|
|
|
574
|
|
|
|
2,609,128
|
|
|
|
921,040
|
|
|
|
35.30
|
%
|
CROUCH AREA
|
|
|
47
|
|
|
|
6,620
|
|
|
|
1,948,277
|
|
|
|
1,532,132
|
|
|
|
78.64
|
%
|
OTHER
|
|
|
7
|
|
|
|
2,242
|
|
|
|
823,395
|
|
|
|
598,181
|
|
|
|
72.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
DEVELOPED
|
|
|
103
|
|
|
|
14,435
|
|
|
|
11,387,418
|
|
|
|
7,225,856
|
|
|
|
63.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
BROOKEN
|
|
|
12
|
|
|
|
217
|
|
|
|
676,765
|
|
|
|
591,026
|
|
|
|
87.33
|
%
|
CANADIAN
|
|
|
6
|
|
|
|
199
|
|
|
|
4,037,242
|
|
|
|
4,037,242
|
|
|
|
100.00
|
%
|
CROUCH AREA
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
OTHER
|
|
|
4
|
|
|
|
160
|
|
|
|
912,843
|
|
|
|
912,843
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
DEVELOPED
|
|
|
24
|
|
|
|
576
|
|
|
|
5,626,850
|
|
|
|
5,541,111
|
|
|
|
98.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
BROOKEN
|
|
|
48
|
|
|
|
5216
|
|
|
|
6,683,383
|
|
|
|
4,765,529
|
|
|
|
71.30
|
%
|
CANADIAN
|
|
|
19
|
|
|
|
773
|
|
|
|
6,646,370
|
|
|
|
4,958,282
|
|
|
|
74.60
|
%
|
CROUCH AREA
|
|
|
49
|
|
|
|
6620
|
|
|
|
1,948,277
|
|
|
|
1,532,132
|
|
|
|
78.64
|
%
|
OTHER
|
|
|
11
|
|
|
|
2402
|
|
|
|
1,736,238
|
|
|
|
1,511,024
|
|
|
|
87.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
DEVELOPED
|
|
|
127
|
|
|
|
15011
|
|
|
|
17,014,268
|
|
|
|
12,766,967
|
|
|
|
75.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
GAS RESERVES BY RESERVOIR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
BOOCH
|
|
|
30
|
|
|
|
6,072
|
|
|
|
4,417,886
|
|
|
|
2,886,823
|
|
|
|
65.34
|
%
|
HARTSHORNE COAL
|
|
|
26
|
|
|
|
723
|
|
|
|
5,819,203
|
|
|
|
3,494,322
|
|
|
|
60.05
|
%
|
GEORGES FORK
|
|
|
33
|
|
|
|
4,939
|
|
|
|
253,504
|
|
|
|
199,803
|
|
|
|
78.82
|
%
|
SPIRO
|
|
|
8
|
|
|
|
1,721
|
|
|
|
467,526
|
|
|
|
359,883
|
|
|
|
76.98
|
%
|
OTHER
|
|
|
6
|
|
|
|
980
|
|
|
|
429,299
|
|
|
|
285,025
|
|
|
|
66.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
DEVELOPED
|
|
|
103
|
|
|
|
14,435
|
|
|
|
11,387,418
|
|
|
|
7,225,856
|
|
|
|
63.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-OPERATED
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
BOOCH
|
|
|
12
|
|
|
|
217
|
|
|
|
676,765
|
|
|
|
591,026
|
|
|
|
87.33
|
%
|
HARTSHORNE COAL
|
|
|
12
|
|
|
|
359
|
|
|
|
4,950,085
|
|
|
|
4,950,085
|
|
|
|
100.00
|
%
|
GEORGES FORK
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
SPIRO
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
OTHER
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
DEVELOPED
|
|
|
24
|
|
|
|
576
|
|
|
|
5,626,850
|
|
|
|
5,541,111
|
|
|
|
98.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
|
NET
|
|
|
GAS RESERVES-MCF
|
|
|
NET REVENUE
|
|
|
|
WELLS
|
|
|
ACRES
|
|
|
GROSS
|
|
|
NET
|
|
|
INTERESTS
|
|
BOOCH
|
|
|
42
|
|
|
|
6289
|
|
|
|
5,094,651
|
|
|
|
3,477,849
|
|
|
|
68.26
|
%
|
HARTSHORNE COAL
|
|
|
38
|
|
|
|
1082
|
|
|
|
10,769,288
|
|
|
|
8,444,407
|
|
|
|
78.41
|
%
|
GEORGES FORK
|
|
|
33
|
|
|
|
4939
|
|
|
|
253,504
|
|
|
|
199,803
|
|
|
|
78.82
|
%
|
SPIRO
|
|
|
8
|
|
|
|
1721
|
|
|
|
467,526
|
|
|
|
359,883
|
|
|
|
76.98
|
%
|
OTHER
|
|
|
6
|
|
|
|
980
|
|
|
|
429,299
|
|
|
|
285,025
|
|
|
|
66.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROVED
DEVELOPED
|
|
|
127
|
|
|
|
15011
|
|
|
|
17,014,268
|
|
|
|
12,766,967
|
|
|
|
75.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed and Undeveloped Acreage
The following table sets forth information as of December 31, 2007, relating to our leasehold
acreage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
Undeveloped
|
|
|
Total
|
|
|
|
Acreage
|
|
|
Acreage
|
|
|
Acreage
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
Operated
|
|
|
18,640
|
|
|
|
14,435
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,640
|
|
|
|
14,435
|
|
Non-operated
|
|
|
2,880
|
|
|
|
576
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,880
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,520
|
|
|
|
15,011
|
|
|
|
0
|
|
|
|
0
|
|
|
|
21,520
|
|
|
|
15,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Oil and Gas Operational Overview
We seek to be the operator of wells in which we have an interest. Effective March 1, 2008, Rio
Vista Penny LLC became the operator of the wells which were previously operated, under a transition
operating agreement, by the predecessor entity, GM Oil Properties Inc., from the date of
acquisition of the Oklahoma assets through February 29, 2008. As operator, we design and manage
the drilling and enhancement activities and supervise operation and maintenance activities on a
day-to-day basis. In connection with the acquisition of the Oklahoma assets, we obtained a
completion and drilling rig, and we currently have a consulting arrangement with an outside third
party to supervise certain aspects of our drilling operations. We plan to enter contracts for
additional third-party drilling rigs as needed to carry out our planned 2008 drilling program. Our
own personnel are able to operate our own drilling rig. In addition, we employ drilling,
production and reservoir engineers, geologists and other specialists who work to improve production
rates, increase reserves and lower the cost of operating our oil and gas properties.
As it is customary in the oil and gas industry, we initially conduct only a cursory review of the
title to our properties on which we do not have proved reserves. Prior to the commencement of
drilling operations on those properties, we conduct a thorough title examination and perform
curative work with respect to significant defects. To the extent title opinions or other
investigations reflect title defects on those properties; we are typically responsible for curing
any title defects at our expense prior to commencing drilling operations. Prior to completing an
acquisition of producing gas leases, we perform title reviews on the most significant leases and,
depending on the materiality of properties, we may obtain a title opinion or review previously
obtained title opinions. As a result, we have obtained title opinions on a significant portion of
our oil and gas properties and believe that we have satisfactory title to our producing properties
in accordance with standards generally accepted in the oil and gas industry. Our oil and gas
properties are subject to customary royalty and other interests, liens for current taxes and other
burdens which we believe do not materially interfere with the use of or affect our carrying value
of the properties.
Seasonal weather conditions and lease stipulations can limit our drilling and producing activities
and other operations in Oklahoma, and, as a result, we perform the majority of our drilling during
the summer months in these areas. These seasonal anomalies can pose challenges for meeting our
well drilling objectives and increase competition, for equipment, supplies and personnel during the
spring and summer months, which could lead to employee shortages, increased costs or delays in
operations. The demand for gas typically decreases during the summer months and increases during
the winter months. Seasonal anomalies such as mild winters or hot summers sometimes lessen this
fluctuation. In addition, certain gas users utilize gas storage facilities and purchase some of
their anticipated winter requirements during the summer. This can also lessen seasonal demand
fluctuations.
Employees
At December 31, 2007, Rio Vista did not employ any personnel in connection with operation of
the Oklahoma assets. Beginning March 1, 2008, Rio Vista Operating LLC became the operator of the
Oklahoma assets and employs approximately six employees, consisting of four field workers and two
office staff personnel as of such date.
Principal Customers
From the date of acquisition through December 31, 2007, 66.2% of our gas production was sold
through Clearwater Enterprises LLC (Clearwater). Clearwater in turns sells our production to
retail customers within proximity of our gathering system. We believe that if we were to lose
Clearwater as a customer, we would be able to sell our production to other customers under similar
sales terms.
Competition
The oil and gas industry is highly competitive. We encounter strong competition from other
independent operators and from major oil companies in acquiring properties, contracting for
drilling equipment and securing trained personnel. Many of these competitors have financial and
technical resources and staffs substantially larger than ours. As a result, our competitors may be
able to pay more for desirable leases, or to evaluate, bid for and purchase a greater number of
properties or prospects, than our financial or human resources permit.
13
We are also affected by competition for drilling rigs and the availability of related equipment.
In the past, the oil and gas industry has experienced shortages of drilling rigs, equipment, pipe
and personnel, which has delayed development drilling and has caused significant price increases.
We are unable to predict when, or if, such shortages may occur or how they would affect our
drilling program.
Competition is also strong for attractive oil and gas producing properties, undeveloped leases and
drilling rights, and we cannot guarantee that we will be able to compete satisfactorily when
attempting to make further acquisitions.
Environmental Matters and Regulation
We believe that our properties and operations are in compliance with applicable environmental laws
and regulations, and our operations to date have not resulted in any material environmental
liabilities. To protect against potential environmental risk, we typically obtain Phase I
environmental assessments of any properties to be acquired prior to completing each acquisition.
General.
Our operations are subject to stringent federal, state and local laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental
protection. Our operations are subject to the same environmental laws and regulations as other
companies in the oil and gas industry. These laws and regulations may:
|
|
|
require the acquisition of various permits before drilling commences;
|
|
|
|
|
require the installation of expensive pollution control equipment;
|
|
|
|
|
restrict the types, quantities and concentration of various substances
that can be released into the environment in connection with drilling and production
activities;
|
|
|
|
|
limit or prohibit drilling activities on lands lying within wilderness,
wetlands and other protected areas;
|
|
|
|
|
require remedial measures to prevent pollution from former operations,
such as pit closure and plugging of abandoned wells;
|
|
|
|
|
impose substantial liabilities for pollution resulting from our
operations; and
|
|
|
|
|
with respect to operations affecting federal lands or leases, require
preparation of a Resource Management Plan, an Environmental Assessment, and/or an
Environmental Impact Statement.
|
14
These laws, rules and regulations may also restrict the rate of oil and gas production below the
rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases
the cost of doing business and consequently affects profitability. In addition, Congress and
federal and state agencies frequently revise environmental laws and regulations, and any changes
that result in more stringent and costly waste handling, disposal and clean-up requirements for the
oil and gas industry could have a significant impact on our operating costs. We believe that we
substantially comply with all current applicable environmental laws and regulations and that our
continued compliance with existing requirements will not have a material adverse impact on our
financial condition and results of operations. However, we cannot predict how future environmental
laws and regulations may impact our properties or operations. For the year ended December 31,
2007, we did not incur any material capital expenditures for installation of remediation or
pollution control equipment at any of our facilities. We are not aware of any environmental issues
or claims that will require material capital expenditures during 2008 or that will otherwise have a
material impact on our financial position or results of operations.
Environmental laws and regulations that have a material impact on the oil and gas industry include
the following:
National Environmental Policy Act.
Oil and gas production activities on federal lands are subject
to the National Environmental Policy Act (NEPA). NEPA requires federal agencies, including the
Department of Interior, to evaluate major agency actions having the potential to significantly
impact the environment. In the course of such evaluations, an agency will typically prepare an
Environmental Assessment to assess the potential direct, indirect and cumulative impacts of a
proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement
that may be made available for public review and comment. All of our current development and
production activities, as well as proposed development plans, on federal lands require governmental
permits that are subject to the requirements of NEPA. This process has the potential to delay the
development of oil and gas projects.
Resource Conservation and Recovery Act.
The Resource Conservation and Recovery Act (RCRA), and
comparable state statutes, regulate the generation, transportation, treatment, storage, disposal
and cleanup of hazardous wastes and the disposal of non-hazardous wastes. Under the auspices of
the Environmental Protection Agency (EPA), individual states administer some or all of the
provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling
fluids, produced waters and most of the other wastes associated with the development and production
of oil, gas or geothermal energy constitute solid wastes, which are regulated under the less
stringent non-hazardous waste provisions, but there is no guarantee that the EPA or individual
states will not adopt more stringent requirements for the handling of non-hazardous wastes or
recategorize some non-hazardous wastes as hazardous for future regulation.
We believe that we are currently in substantial compliance with the requirements of RCRA and
related state and local laws and regulations, and that we hold all necessary and up-to-date
permits, registrations and other authorizations to the extent that our operations require them
under such laws and regulations. Although we do not believe the current costs of managing our
wastes as they are presently classified to be significant, any legislative or regulatory
reclassification of oil and gas development and production wastes could increase our costs to
manage and dispose of such wastes.
Comprehensive Environmental Response, Compensation and Liability Act.
The Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), also known as the Superfund law,
imposes joint and several liability, without regard to fault or legality of conduct, on persons who
are considered to be responsible for the release of a hazardous substance into the environment.
These persons include the owner or operator of the site where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substance at the site. Under CERCLA,
such persons may be liable for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the costs of certain health
studies. In addition, it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the hazardous substances
released into the environment.
15
We currently own, lease, or operate numerous properties that have been used for oil and gas
development and production for many years. Although we believe we have utilized operating and
waste disposal practices that were standard in the industry at the time, hazardous substances,
wastes or hydrocarbons may have been released on or under the properties owned or leased by us, or
on or under other locations, including off-site locations, where such substances have been taken
for disposal. In addition, some of these properties have been operated by third parties or by
previous owners or operators whose treatment and disposal of hazardous substances, wastes or
hydrocarbons was not under our control. These properties and the substances disposed or released
on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be
required to remove previously disposed substances and wastes, remediate contaminated property or
perform remedial plugging or pit closure operations to prevent future contamination.
Water Pollution Control Act.
The Federal Water Pollution Control Act, also known as the
Clean Water Act, and analogous state laws impose restrictions and strict controls on the discharge
of pollutants, including produced waters and other oil and gas wastes, into waters of the United
States. The discharge of pollutants into regulated waters is prohibited, except in accordance with
the terms of a permit issued by the Environmental Protection Agency (EPA) or the relevant state.
The Clean Water Act also prohibits the discharge of dredge and fill material in regulated waters,
including wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers.
Federal and state regulatory agencies can impose administrative, civil and criminal penalties for
non-compliance with discharge permits or other requirements of the federal Clean Water Act and
analogous state laws and regulations. We believe we are in substantial compliance with the
requirements of the Clean Water Act.
Clean Air Act.
The Clean Air Act, and associated state laws and regulations, regulate emissions
of various air pollutants through the issuance of permits and the imposition of other
requirements. In addition, the EPA has developed, and continues to develop, stringent regulations
governing emissions of toxic air pollutants at specified sources. Some of our new facilities may
be required to obtain permits before work can begin, and existing facilities may be required to
incur capital costs in order to comply with new emission limitations. These regulations may
increase the costs of compliance for some facilities, and federal and state regulatory agencies can
impose administrative, civil and criminal penalties for non-compliance. We believe that we are in
substantial compliance with the requirements of the Clean Air Act.
Oil Pollution Act.
The Federal Oil Pollution Act (OPA) requires owners and operators of
facilities that could be the source of an oil spill into waters of the U.S. (a term defined to
include rivers, creeks, wetlands and coastal waters) to adopt and implement plans and procedures to
prevent any such oil spill. OPA also requires affected facility owners and operators to
demonstrate that they have at least $35 million in financial resources to pay the costs of cleaning
up an oil spill and to compensate any parties damaged by an oil spill. Such financial assurances
may be increased to as much as $150 million if a formal assessment indicates such an increase is
warranted.
Other Laws and Regulation.
The Kyoto Protocol to the United Nations Framework Convention on
Climate Change (the Protocol) became effective in February 2005. Under the Protocol, participating
nations are required to implement programs to reduce emissions of certain gases, typically referred
to as greenhouse gases, that are suspected of contributing to global warming. The United States is
not currently a participant in the Protocol, and Congress has resisted recent proposed legislation
directed at reducing greenhouse gas emissions. However, there has been support in various regions
of the country for legislation that requires reductions in greenhouse gas emissions, and some
states have already adopted legislation addressing greenhouse gas emissions from various sources,
primarily power plants. The oil and gas industry is a direct source of certain greenhouse gas
emissions, namely carbon dioxide and methane, and future restrictions on such emissions could
impact our future operations. Our operations are not adversely impacted by current state and local
climate change initiatives and, at this time, it is not possible to accurately estimate how
potential future laws or regulations addressing greenhouse gas emissions would impact our business.
16
Other Regulation of the Oil and Gas Industry
The oil and gas industry is extensively regulated by numerous federal, state and local
authorities. Legislation affecting the oil and gas industry is under constant review for amendment
or expansion, which frequently increases the regulatory burden. In addition, numerous departments
and agencies, both federal and state, are authorized by statute to issue rules and regulations
binding on the oil and gas industry and its individual members, some of which carry substantial
penalties for failure to comply. Although the regulatory burden on the oil and gas industry
increases our cost of doing business and, consequently, affects our profitability, these burdens do
not affect us any differently or to any greater or lesser extent than they affect other companies
in the industry with similar types, quantities and locations of production.
Legislation continues to be introduced in Congress, and development of regulations continues in the
Department of Homeland Security and other agencies concerning the security of industrial
facilities, including oil and gas facilities. Our operations may be subject to such laws and
regulations. Presently, it is not possible to accurately estimate the costs we would incur to
comply with any such facility security laws or regulations, but such expenditures could be
substantial.
Drilling and Production.
Our operations are subject to various types of regulation at the federal,
state and local levels. These types of regulation include requiring permits for the drilling of
wells, drilling bonds and reports concerning operations. Most states, and some counties and
municipalities, in which we operate regulate one or more of the following:
|
|
|
the location of wells;
|
|
|
|
|
the method of drilling and casing wells;
|
|
|
|
|
rates of production from wells;
|
|
|
|
|
the surface use and restoration of properties upon which wells are
drilled;
|
|
|
|
|
the plugging and abandoning of wells; and
|
|
|
|
|
notice to surface owners and other third parties.
|
State laws regulate the size and shape of drilling and spacing of units or proportion of units
governing the pooling of oil and gas properties. Some states allow forced pooling or integration
of tracts to facilitate development while other states rely on voluntary pooling of lands and
leases. In some instances, forced pooling or unitization may be implemented by third parties and
may reduce our interest in the unitized properties. In addition, state conservation laws establish
maximum rates of production from oil and gas wells, prohibit the venting or flaring of gas and
impose requirements regarding the ratability of production. These laws and regulations may limit
the amount of oil and gas we can produce from our wells or limit the number of wells or the
locations at which we can drill. Moreover, each state typically imposes a production or severance
tax with respect to the production and sale of oil, gas and natural gas liquids within its
jurisdiction.
17
Oil and Gas Transportation and Pricing.
The availability, terms and cost of transportation
significantly affect sales of oil and gas. The interstate transportation and sale of oil and gas
are subject to federal regulation, primarily by the FERC, including regulation of the terms,
conditions and rates for interstate transportation, storage and various other matters. Federal and
state regulations govern the price and terms for access to oil and gas pipeline transportation.
The FERCs regulations for interstate oil and gas transmission in some circumstances may also
affect the intrastate transportation of oil and gas.
Although oil and gas prices are currently unregulated, Congress historically has been active in the
area of oil and gas regulation. We cannot predict whether new legislation to regulate oil and gas
operations might be proposed, what proposals, if any, might actually be enacted by Congress or the
various state legislatures, and what effect, if any, the proposals might have on the operations of
the underlying properties.
Rio Vista Employees
Rio Vista has no employees. At December 31, 2007, Rio Vistas subsidiaries employed personnel in
connection with the operation of their businesses as described above. The business of Rio Vista
is managed by the General Partner. Penn Octane employs all persons, other than Rio Vistas
employees referred to herein, including executive officers, necessary for the operation of Rio
Vistas business.
18
Item 1A. Risk Factors
Limited partner interests are inherently different from capital stock of a corporation, although
many of the business risks to which we are subject are similar to those that would be faced by a
corporation engaged in a similar business. The following are some of the important factors that
could affect our business, financial condition or results of operations and our actual results
could differ materially from estimates contained in our forward-looking statements. We may
encounter risks in addition to those described below. Additional risks and uncertainties not
currently known to us, or that we currently deem to be immaterial, may also adversely impair or
offset our business results of operation, financial condition and prospects.
Risks Related to Our Business
We may not have sufficient cash flow from operations to make the quarterly distribution on our
common units following establishment of cash reserves and payment of fees and expenses, including
reimbursement of expenses to our
General Partner
.
We may not have sufficient available cash each quarter to make the quarterly distribution of $0.25
per unit or any other amount. Under the terms of our partnership agreement, the amount of cash
otherwise available for distribution will be reduced by our operating expenses and the amount of
any cash reserve our General Partner establishes to provide for the proper conduct of our business,
meet any of our obligations arising from any of our debt instruments, or other agreements, comply
with applicable law, and provide funds for distributions to our unitholders and to our General
Partner for any one or more of the next four quarters.
The amount of cash we actually generate will depend upon numerous factors related to our business
that may be beyond our control, including, among other things, the risks described in these Risk
Factors. In addition, the actual amount of cash that we will have available for distribution will
depend on other factors, including:
|
|
|
the level of our capital expenditures;
|
|
|
|
|
our ability to make borrowings under our revolving credit facilities, if any, to make
distributions;
|
|
|
|
|
limitations on our subsidiaries ability to make distributions to us under the TCW
credit facility, as discussed under Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations;
|
|
|
|
|
sources of cash used to fund acquisitions;
|
|
|
|
|
debt service requirements and restrictions on distributions contained in our existing
and future debt agreements;
|
|
|
|
|
interest payments;
|
|
|
|
|
fluctuations in our working capital needs;
|
|
|
|
|
general and administrative expenses, including expenses we will incur as a result of
being a public company;
|
|
|
|
|
cash settlement of commodity derivative contracts;
|
|
|
|
|
timing and collectibility of receivables; and
|
|
|
|
|
the amount of cash reserves, which we expect to be substantial, established by our
General Partner for the proper conduct of our business.
|
19
Our estimate of the minimum EBITDA necessary for us to make a distribution on all units at the
target distribution rate for each of the four quarters ending December 31, 2008 is based on
assumptions that are inherently uncertain and are subject to significant business, economic,
financial, legal, regulatory and competitive risks and uncertainties that could cause actual
results to differ materially from those estimated.
Our estimate of the minimum EBITDA necessary for us to make a distribution on all units at the
target distribution rate for each of the four quarters ending December 31, 2008 is based on our
managements calculations, and we have not received an opinion or report on it from any independent
accountants. This estimate is based on assumptions about development, production, oil and natural
gas prices, settlements under commodity derivative contracts, capital expenditures, expenses,
borrowings and other matters that are inherently uncertain and are subject to significant business,
economic, financial, legal, regulatory and competitive risks and uncertainties that could cause
actual results to differ materially from those estimated. If any of these assumptions prove to have
been inaccurate, our actual results may differ materially from those set forth in our estimates,
and we may be unable to make all or part of the initial quarterly distribution on our units.
Our oil and natural gas reserves naturally decline, and we will be unable to sustain distributions
at the level of our estimated initial quarterly distribution without making accretive acquisitions
or substantial capital expenditures that maintain or grow our asset base.
Our future oil and natural gas reserves, production volumes, cash flow and ability to make
distributions depend on our success in developing and exploiting our current reserves efficiently
and finding or acquiring additional recoverable reserves economically. We may not be able to
develop, find or acquire additional reserves to replace our current and future production at
acceptable costs, which would adversely affect our business, financial condition and results of
operations and reduce cash available for distribution.
Because our oil and natural gas properties are a depleting asset, we will need to make substantial
capital expenditures to maintain and grow our asset base, which will reduce our cash available for
distribution. Because the timing and amount of these capital expenditures fluctuate each quarter,
we expect to reserve substantial amounts of cash each quarter to finance these expenditures over
time. We may use the reserved cash to reduce indebtedness until we make the capital expenditures.
Over a longer period of time, if we do not set aside sufficient cash reserves or make sufficient
expenditures to maintain our asset base, we will be unable to make distributions at the current
level from cash generated from operations and would therefore expect to reduce our distributions.
If our reserves decrease and we do not reduce our distribution, then a portion of the distribution
may be considered a return of part of a unitholders investment in us as opposed to a return on
investment. Also, if we do not make sufficient growth capital expenditures, we will be unable to
expand our business operations and will therefore be unable to raise the level of future
distributions.
To fund our substantial capital expenditures, we will be required to use cash generated from our
operations, additional borrowings or the issuance of additional equity or debt securities, or some
combination thereof, which may limit our ability to make distributions at the then-current
distribution rate.
The use of cash generated from operations to fund capital expenditures will reduce cash available
for distribution to our unitholders. Our ability to obtain bank financing or to access the capital
markets for future equity or debt offerings may be limited by our financial condition at the time
of any such financing or offering and the covenants in our existing debt agreements, as well as by
adverse market conditions resulting from, among other things, general economic conditions and
contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for
necessary future capital expenditures could have a material adverse effect on our business, results
of operations, financial condition and ability to make distributions.
20
Even if we are successful in obtaining the necessary funds, the terms of such financings could
limit our ability to make distributions to our unitholders, either directly or indirectly. For
example, our existing credit facility with TCW prohibits our Oklahoma subsidiaries from making any
distributions to us until December 2008 and thereafter, limits those distributions to 75% of
defined available cash flow. If we are not able to receive sufficient operating cash from our
subsidiaries, our ability to make distributions to our unitholders at the then-current distribution
rate could be adversely affected.
In addition, incurring additional debt may significantly increase our interest expense and
financial leverage. Issuing additional common units may result in significant unitholder dilution
thereby increasing the aggregate amount of cash required to maintain the then-current distribution
rate. Any of these events could limit our ability to make distributions at the then-current
distribution rate.
We may not make cash distributions during periods when we record net income.
The amount of cash we have available for distribution depends primarily on our cash flow, including
cash from financial reserves, working capital or other borrowings, and not solely on profitability,
which will be affected by non-cash items. As a result, we may make cash distributions during
periods when we record losses and may not make cash distributions during periods when we record net
income.
Oil and natural gas prices are very volatile. A decline in commodity prices will cause a decline in
our cash flow from operations, which may force us to reduce our distributions or cease paying
distributions altogether.
The oil and natural gas markets are very volatile, and we cannot predict future oil and natural gas
prices. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes
in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond our control, such as:
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our ability to make borrowings under our revolving credit facilities, if any, to make
distributions;
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domestic and foreign supply of and demand for oil and natural gas;
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weather conditions;
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overall domestic and global economic conditions;
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political and economic conditions in oil and natural gas producing countries, including
those in the Middle East and South America;
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actions of the Organization of Petroleum Exporting Countries, or OPEC, and other
state-controlled oil companies relating to oil price and production controls;
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impact of the U.S. dollar exchange rates on oil and natural gas prices;
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technological advances affecting energy consumption and energy supply;
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domestic and foreign governmental regulations and taxation;
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the impact of energy conservation efforts;
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the proximity, capacity, cost and availability of oil and natural gas pipelines and
other transportation facilities;
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the availability of refining capacity; and
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the price and availability of alternative fuels.
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21
Our revenue, profitability and cash flow depend upon the prices of and demand for oil and natural
gas, and a drop in prices can significantly affect our financial results and impede our growth. In
particular, declines in commodity prices will:
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negatively impact the value of our reserves, because declines in oil and natural gas
prices would reduce the amount of oil and natural gas that we can produce economically;
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reduce the amount of cash flow available for capital expenditures;
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limit our ability to borrow money or raise additional capital; and
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impair our ability to make distributions.
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If we raise our distribution levels in response to increased cash flow during periods of relatively
high commodity prices, we may not be able to sustain those distribution levels during subsequent
periods of lower commodity prices.
An increase in the differential between the NYMEX or other benchmark prices of oil and natural gas
and the wellhead price we receive could significantly reduce our cash available for distribution
and adversely affect our financial condition.
The prices that we receive for our oil and natural gas production sometimes trade at a discount to
the relevant benchmark prices, such as NYMEX, that are used for calculating commodity derivative
positions. The difference between the benchmark price and the price we receive is called a
differential. We cannot accurately predict oil and natural gas differentials. Increases in the
differential between the benchmark price for oil and natural gas and the wellhead price we receive
could significantly reduce our cash available for distribution and adversely affect our financial
condition.
Future price declines may result in a write-down of our asset carrying values, which could have a
material adverse effect on our results of operations and limit our ability to borrow and make
distributions.
Declines in oil and natural gas prices may result in our having to make substantial downward
adjustments to our estimated proved reserves. If this occurs, or if our estimates of development
costs increase, production data factors change or development results deteriorate, accounting rules
may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and
natural gas properties for impairments. If we incur impairment charges in the future, it could have
a material adverse effect on our results of operations in the period incurred and on our ability to
borrow funds under our revolving credit facility, which in turn may adversely affect our ability to
make cash distributions to our unitholders.
22
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a counterparty may not perform its obligation under the applicable derivative
instrument; and
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there may be a change in the expected differential between the underlying commodity
price in the derivative instrument and the actual price received, which may result in
payments to our derivative counterparty that are not accompanied by our receipt of higher
prices from our production in the field.
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Our commodity derivative contract activities could result in financial losses or could reduce our
income, which may adversely affect our ability to make distributions to our unitholders.
To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the
prices of oil and natural gas, we may in the future enter into derivative
arrangements for a significant portion of our oil and natural gas production that could result in
both realized and unrealized commodity derivative losses. The extent of our commodity price
exposure is related largely to the effectiveness and scope of our derivative activities. For
example, the derivative instruments we utilize are based on posted market prices, which may differ
significantly from the actual crude oil, natural gas and NGL prices we realize in our operations.
Our actual future production may be significantly higher or lower than we estimate at the time we
enter into derivative transactions for such period. If the actual amount is higher than we
estimate, we will have greater commodity price exposure than we intended. If the actual amount is
lower than the nominal amount that is subject to our derivative financial instruments, we might be
forced to satisfy all or a portion of our derivative transactions without the benefit of the cash
flow from our sale or purchase of the underlying physical commodity, resulting in a substantial
diminution of our liquidity. As a result of these factors, our derivative activities may not be as
effective as we intend in reducing the volatility of our cash flows, and in certain circumstances
may actually increase the volatility of our cash flows. In addition, our derivative activities are
subject to the following risks:
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a counterparty may not perform its obligation under the applicable derivative
instrument; and
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there may be a change in the expected differential between the underlying commodity
price in the derivative instrument and the actual price received, which may result in
payments to our derivative counterparty that are not accompanied by our receipt of higher
prices from our production in the field.
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Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any
material inaccuracies in these reserve estimates or underlying assumptions will materially affect
the quantities and present value of our reserves.
It is not possible to measure underground accumulations of oil or natural gas in an exact way. Oil
and natural gas reserve engineering requires subjective estimates of underground accumulations of
oil and natural gas and assumptions concerning future oil and natural gas prices, future production
levels and operating and development costs. In estimating our level of oil and natural gas
reserves, we and our independent reserve engineers make certain assumptions that may prove to be
incorrect, including assumptions relating to the level of oil and natural gas prices, future
production levels, capital expenditures, operating and development costs, the effects of regulation
and availability of funds. If these assumptions prove to be incorrect, our estimates of reserves,
the economically recoverable quantities of oil and natural gas attributable to any particular group
of properties, the classifications of reserves based on risk of recovery and our estimates of the
future net cash flows from our reserves could change significantly.
Our Standardized Measure is calculated using prices and costs in effect as of the date of
estimation, less future development, production and income tax expenses, and discounted to reflect
the timing of future net revenue in accordance with the rules and regulations of the SEC. Over
time, we may make material changes to reserve estimates to take into account changes in our
assumptions and the results of actual development and production.
The reserve estimates we make for fields that do not have a lengthy production history are less
reliable than estimates for fields with lengthy production histories. A lack of production history
may contribute to inaccuracy in our estimates of proved reserves, future production rates and the
timing of development expenditures.
The Standardized Measure of our estimated proved reserves is not necessarily the same as the
current market value of our estimated proved oil and natural gas reserves. We base the estimated
discounted future net cash flows from our estimated proved reserves on prices and costs in effect
on the day of estimate.
23
The timing of both our production and our incurrence of expenses in connection with the development
and production of oil and natural gas properties will affect the timing of actual future net cash flows
from proved reserves, and thus their actual present value. In addition, the 10% discount factor we
use when calculating discounted future net cash flows in compliance with SFAS No. 69, Disclosures
about Oil and Gas Producing Activities, may not be the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with us or the oil and natural gas
industry in general.
Developing and producing oil and natural gas are costly and high-risk activities with many
uncertainties that could adversely affect our financial condition or results of operations and, as
a result, our ability to make distributions to our unitholders.
The cost of developing, completing and operating a well is often uncertain, and cost factors can
adversely affect the economics of a well. Our efforts will be uneconomical if we drill dry holes or
wells that are productive but do not produce as much oil and natural gas as we had estimated.
Furthermore, our development and producing operations may be curtailed, delayed or canceled as a
result of other factors, including:
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high costs, shortages or delivery delays of rigs, equipment, labor or other services;
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unexpected operational events and/or conditions;
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reductions in oil and natural gas prices;
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increases in severance taxes;
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limitations in the market for oil and natural gas;
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adverse weather conditions and natural disasters;
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facility or equipment malfunctions, and equipment failures or accidents;
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title problems;
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pipe or cement failures and casing collapses;
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compliance with environmental and other governmental requirements;
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environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and
discharges of toxic gases;
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lost or damaged oilfield development and service tools;
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unusual or unexpected geological formations, and pressure or irregularities in
formations;
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loss of drilling fluid circulation;
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fires, blowouts, surface craterings and explosions;
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uncontrollable flows of oil, natural gas or well fluids; and
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loss of leases due to incorrect payment of royalties.
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If any of these factors were to occur with respect to a particular field, we could lose all or a
part of our investment in the field, or we could fail to realize the expected benefits from the
field, either of which could materially and adversely affect our revenue and profitability.
24
Shortages of rigs, equipment and crews could delay our operations and reduce our cash available for
distribution.
Higher oil and natural gas prices generally increase the demand for rigs, equipment and crews and
can lead to shortages of, and increasing costs for, development equipment, services and personnel.
Shortages of, or increasing costs for, experienced development crews and oil field equipment and
services could restrict our ability to drill the wells and conduct the operations that we currently
have planned. Any delay in the development of new wells or a significant increase in development
costs could reduce our revenues.
If we do not make acquisitions on economically acceptable terms, our future growth and ability to
make or increase distributions will be limited.
Our ability to grow and to increase distributions to unitholders depends in part on our ability to
make acquisitions that result in an increase in pro forma available cash per unit. We may be unable
to make such acquisitions because we are:
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unable to identify attractive acquisition candidates or negotiate acceptable purchase
contracts with them;
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unable to obtain financing for these acquisitions on economically acceptable terms; or
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outbid by competitors.
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If we are unable to acquire properties containing proved reserves, our total level of proved
reserves will decline as a result of our production, and we will be limited in our ability to
increase or possibly even to maintain our level of cash distributions.
Any acquisitions we complete are subject to substantial risks that could reduce our ability to make
distributions to unitholders.
Even if we do make acquisitions that we believe will increase pro forma available cash per unit,
these acquisitions may nevertheless result in a decrease in pro forma available cash per unit. Any
acquisition involves potential risks, including, among other things:
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the validity of our assumptions about reserves, future production, revenues, capital
expenditures, operating expenses and costs, including synergies;
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an inability to integrate the businesses we acquire successfully;
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a decrease in our liquidity by using a significant portion of our available cash or
borrowing capacity to finance acquisitions;
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a significant increase in our interest expense or financial leverage if we incur
additional debt to finance acquisitions;
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the assumption of unknown liabilities, losses or costs for which we are not indemnified
or for which our indemnity is inadequate;
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the diversion of managements attention from other business concerns;
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an inability to hire, train or retain qualified personnel to manage and operate our
growing business and assets;
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natural disasters;
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the incurrences of other significant charges, such as impairment of goodwill or other
intangible assets, asset devaluation or restructuring charges;
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unforeseen difficulties encountered in operating in new geographic areas; and
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customer or key employee losses at the acquired businesses.
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25
Our decision to acquire a property will depend in part on the evaluation of data obtained from
production reports and engineering studies, geophysical and geological analyses and seismic and
other information, the results of which are often inconclusive and subject to various
interpretations.
In addition, our reviews of acquired properties are inherently incomplete because it generally is
not feasible to perform an in-depth review of the individual properties involved in each
acquisition given time constraints imposed by sellers. Even a detailed review of records and
properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their deficiencies and potential.
Inspections may not always be performed on every well, and environmental problems, such as
groundwater contamination, are not necessarily observable even when an inspection is undertaken.
Due to our lack of geographic diversification, adverse developments in our operating areas would
reduce our ability to make distributions to our unitholders.
Currently, our only oil and natural gas properties and related assets are located in Oklahoma and
the greatest part of Regionals operations are conducted within a 150-mile radius of its principal
facility in southeastern Virginia. Due to our lack of diversification in location, an adverse
development in the relevant businesses within our geographic areas would have a significantly
greater impact on our results of operations and cash available for distribution to our unitholders
than if we maintained more diverse locations.
We may be unable to compete effectively with larger companies, which may adversely affect our
ability to generate sufficient revenue to allow us to make distributions to our unitholders.
The oil and natural gas industry is intensely competitive with respect to acquiring prospects and
productive properties, marketing oil and natural gas and securing equipment and trained personnel,
and we compete with other companies that have greater resources. Many of our competitors are major
and large independent oil and natural gas companies, and possess and employ financial, technical
and personnel resources substantially greater than ours. Those companies may be able to develop and
acquire more prospects and productive properties than our financial or personnel resources permit.
Our ability to acquire additional properties and to discover reserves in the future will depend on
our ability to evaluate and select suitable properties and to consummate transactions in a highly
competitive environment. Many of our larger competitors not only drill for and produce oil and
natural gas but also carry on refining operations and market petroleum and other products on a
regional, national or worldwide basis. These companies may be able to pay more for oil and natural
gas properties and evaluate, bid for and purchase a greater number of properties than our financial
or human resources permit. In addition, there is substantial competition for investment capital in
the oil and natural gas industry. These larger companies may have a greater ability to continue
development activities during periods of low oil and natural gas prices and to absorb the burden of
present and future federal, state, local and other laws and regulations. Our inability to compete
effectively with larger companies could have a material adverse impact on our business activities,
financial condition and results of operations.
We may incur substantial additional debt to enable us to make our quarterly distributions, which
may negatively affect our ability to execute our business plan and make future distributions.
We may be unable to make a distribution at the initial distribution rate or the then-current
distribution rate without incurring indebtedness. When we borrow to make distributions, we are
distributing more cash than we are generating from our operations on a current basis. This means
that we are using a portion of our borrowing capacity under our revolving credit facility to make
distributions rather than to maintain or expand our operations. If we use borrowings under our
revolving credit facility to make distributions for an extended period of time rather than toward
funding capital expenditures and other matters relating to our operations, we may be unable to
support or grow our business. Such a curtailment of our business activities, combined with our
payment of principal and interest on our future indebtedness to make these distributions, will
reduce our cash available for distribution on our units and will have a material adverse effect on
our business, financial condition and results of operations. If we borrow to make distributions
during periods of low commodity prices and commodity prices remain low, we may have to reduce our
distribution in order to avoid excessive leverage.
26
Our future debt levels may limit our flexibility to obtain additional financing and pursue other
business opportunities and may affect our ability to make future distributions.
As of December 31, 2007, we had approximately $30.2 million of debt. We may incur additional debt
in the future. Our future indebtedness could have important consequences to us, including:
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our ability to obtain additional financing, if necessary, for working capital, capital
expenditures, acquisitions or other purposes may be impaired or such financing may not be
available on favorable terms;
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covenants contained in our future debt arrangements may require us to meet financial
tests that may affect our flexibility in planning for and reacting to changes in our
business, including possible acquisition opportunities;
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we may need a substantial portion of our cash flow to make principal and interest
payments on our indebtedness, reducing the funds that would otherwise be available for
operations, future business opportunities and distributions to unitholders; and
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our debt level may make us more vulnerable than our competitors with less debt to
competitive pressures or a downturn in our business or the economy generally.
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Our ability to service our indebtedness will depend upon, among other things, our future financial
and operating performance, which will be affected by prevailing economic conditions and financial,
business, regulatory and other factors, some of which are beyond our control. If our operating
results are not sufficient to service our current or future indebtedness, we will be forced to take
actions such as reducing distributions, reducing or delaying business activities, acquisitions,
investments and/or capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital or bankruptcy protection. We may not be able to
effect any of these remedies on satisfactory terms or at all.
Our operations are subject to operational hazards and unforeseen interruptions for which we may not
be adequately insured.
There are a variety of operating risks inherent in our wells, gathering systems, pipelines,
transportation, storage, transloading and other facilities, such as leaks, accidents, fires,
explosions, mechanical problems, hurricanes, adverse weather conditions, hazardous materials
releases, mechanical failures and other events beyond our control, all of which could cause
substantial financial losses. Any of these or other similar occurrences could result in the
disruption of our operations, substantial repair costs, personal injury or loss of human life,
significant damage to property, fines, environmental pollution, impairment of our operations and
substantial revenue losses. The location of our facilities near populated areas, including
residential areas, commercial business centers and industrial sites, could significantly increase
the level of damages resulting from these risks. As a result of the foregoing, we are, and are
likely to continue to be, a defendant in various legal proceedings and litigation arising in the
ordinary course of business.
We are not fully insured against all risks, including development and completion risks that are
generally not recoverable from third parties or insurance. In addition, pollution and environmental
risks generally are not fully insurable. We may also elect not to obtain insurance if we believe
that the cost of available insurance is excessive relative to the perceived risks presented. Losses
could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing
insurance coverage. Moreover, insurance may not be available in the future at commercially
reasonable costs and on commercially reasonable terms. Changes in the insurance markets due to
terrorist attacks and hurricanes have made it more difficult for us to obtain certain types of
coverage. We may not be able to obtain the levels or types of insurance we would otherwise have
obtained prior to these market changes, and our insurance may contain large deductibles or fail to
cover certain hazards or cover all potential losses. Losses and liabilities from uninsured and
underinsured events and delay in the payment of insurance proceeds could have a material adverse
effect on our business, financial condition, results of operations and ability to make
distributions to our unitholders.
27
Our business depends in part on gathering and transportation facilities owned by others. Any
limitation in the availability of those facilities could interfere with our ability to market our
oil and natural gas production and could harm our business.
The marketability of our oil and natural gas production depends in part on the availability,
proximity and capacity of pipelines, oil and natural gas gathering systems and processing
facilities. The amount of oil and natural gas that can be produced and sold is subject to
curtailment in certain circumstances, such as pipeline interruptions due to scheduled and
unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on such
systems. The curtailments arising from these and similar circumstances may last from a few days to
several months. In many cases, we are provided only with limited, if any, notice as to when these
circumstances will arise and their duration. Any significant curtailment in gathering system or
pipeline capacity could reduce our ability to market our oil and natural gas production and harm
our business.
We have limited control over the activities on properties we do not operate.
Other companies operated approximately 15% of our wells on a pro forma basis as of December 31,
2007. We have limited ability to influence or control the operation or future development of these
non-operated properties or the amount of capital expenditures that we are required to fund with
respect to them. Our dependence on the operator and other working interest owners for these
projects and our limited ability to influence or control the operation and future development of
these properties could materially adversely affect the realization of our targeted returns on
capital in drilling or acquisition activities and lead to unexpected future costs.
We are subject to complex federal, state, local and other laws and regulations that could adversely
affect the cost, manner or feasibility of conducting our operations.
Our oil and natural gas exploration and production operations are subject to complex and stringent
laws and regulations. Environmental and other governmental laws and regulations have increased the
costs to plan, design, drill, install, operate and abandon oil and natural gas wells and related
pipeline and processing facilities. In order to conduct our operations in compliance with these
laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from
various federal, state and local governmental authorities. We may incur substantial costs in order
to maintain compliance with these existing laws and regulations. In addition, our costs of
compliance may increase if existing laws and regulations are revised or reinterpreted, or if new
laws and regulations become applicable to our operations.
Our business is subject to federal, state and local laws and regulations as interpreted and
enforced by governmental authorities possessing jurisdiction over various aspects of the
exploration for, and production of, oil and natural gas. Failure to comply with such laws and
regulations, as interpreted and enforced, could have a material adverse effect on our business,
financial condition, results of operations and ability to make distributions to our unitholders.
Our pipeline integrity program may subject us to significant costs and liabilities.
As a result of pipeline integrity testing under the Pipeline Safety Improvement Act of 2002, we may
incur significant and unanticipated operating and capital expenditures for repairs or upgrades
deemed necessary to ensure the continued safe and reliable operation of our pipelines. Furthermore,
the Act or an increase in public expectations for pipeline safety may require additional reporting,
the replacement of our pipeline segments, additional monitoring equipment and more frequent
inspection or testing of our pipeline facilities. Any repair, remediation, preventative or
mitigating actions may require significant capital and operating expenditures. Should we fail to
comply with the U.S. Department of Transportation rules and related regulations and orders, we
could be subject to penalties and fines, which could have a material adverse effect on our ability
to make distributions to our unitholders.
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Our business would be adversely affected if operations at our terminalling, transportation and
distribution facilities experienced significant interruptions. Our business would also be adversely
affected if the operations of our customers and suppliers experienced significant interruptions.
Our operations are dependent upon our terminalling and storage facilities and various means of
transportation. We are also dependent upon the uninterrupted operations of certain facilities owned
or operated by our suppliers and customers. Any significant interruption at these facilities or
inability to transport products to or from these facilities or to or from our customers for any
reason would adversely affect our results of operations, cash flow and ability to make
distributions to our unitholders or to make principal and interest payments on our debt securities.
Operations at our facilities and at the facilities owned or operated by our suppliers and customers
could be partially or completely shut down, temporarily or permanently, as the result of any number
of circumstances that are not within our control, such as:
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weather conditions;
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environmental remediations;
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labor difficulties; and
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disruptions in the supply of our products to our facilities or means of transportation.
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In addition, terrorist attacks and acts of sabotage could target oil and gas production facilities,
refineries, processing plants, terminals and other infrastructure facilities. Any significant
interruptions at our facilities, facilities owned or operated by our suppliers or customers, or in
the oil and gas industry as a whole caused by such attacks or acts could have a material adverse
affect on our results of operations, cash flow and ability to make distributions to our unitholders
or to make principal and interest payments on our debt securities.
The occurrence or threat of extraordinary events, including domestic and international terrorist
attacks, and laws and regulations related thereto may disrupt our operations and decrease demand
for our products and services.
Chemical-related assets may be at greater risk of future terrorist attacks than other possible
targets in the United States. Federal legislation is under consideration that could impose new site
security requirements, specifically on chemical facilities, which may increase our overhead
expenses. Our business or our customers businesses could be adversely affected because of the cost
of complying with new security regulations.
New federal regulations have already been adopted to increase the security of the transportation of
hazardous chemicals in the United States. We believe we have met these requirements but additional
federal and local regulations that limit the distribution of hazardous materials are being
considered. We store, ship and receive materials that are classified as hazardous. Bans on movement
of hazardous materials through certain cities could affect the efficiency of our logistical
operations. Broader restrictions on hazardous material movements could lead to additional
investment to produce hazardous raw materials and change where and what products we provide and
transport.
The occurrence of extraordinary events, including future terrorist attacks and the outbreak or
escalation of hostilities, cannot be predicted, and their occurrence can be expected to continue to
affect negatively the economy in general, and specifically the markets for our products. The
resulting damage from a direct attack on our assets, or assets used by us, could include loss of
life and property damage. In addition, available insurance coverage may not be sufficient to cover
all of the damage incurred or, if available, may be prohibitively expensive.
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We are subject to many environmental and safety regulations that may result in significant
unanticipated costs or liabilities or cause interruptions in our operations.
Our operations involve the handling, production, transportation, treatment and disposal of
materials that are classified as hazardous or toxic and that are extensively regulated by
environmental and health and safety laws, regulations and permit requirements. We may incur
substantial costs, including fines, damages and criminal or civil sanctions, or experience
interruptions in our operations for actual or alleged violations or compliance requirements arising
under environmental laws, any of which could have a material adverse effect on our business,
financial condition, results of operations or cash flows. Our operations could result in violations
of environmental laws, including spills or other releases of hazardous substances to the
environment. In the event of a catastrophic incident, we could incur material costs. Furthermore,
we may be liable for the costs of investigating and cleaning up environmental contamination on or
from our properties or at off-site locations where we disposed of or arranged for the disposal or
treatment of hazardous materials. We own or lease a number of properties that have been used to
store or distribute refined products for many years. Many of these properties, such as the assets
acquired from Regional Enterprises, Inc. in 2007 and the Oklahoma assets, were operated by third
parties whose handling, disposal, or release of hydrocarbons and other wastes was not under our
control. If significant previously unknown contamination is discovered, or if existing laws or
their enforcement change, then the resulting expenditures could have a material adverse effect on
our business, financial condition, results of operations or cash flows.
Environmental, health and safety laws, regulations and permit requirements, and the potential for
further expanded laws, regulations and permit requirements may increase our costs or reduce demand
for our products and thereby negatively affect our business. Environmental permits required for our
operations are subject to periodic renewal and may be revoked or modified for cause or when new or
revised environmental requirements are implemented. Changing and increasingly strict environmental
requirements and the potential for further expanded regulation may increase our costs and can
affect the manufacturing, handling, processing, distribution and use of our products. If so
affected, our business and operations may be materially and adversely affected. In addition,
changes in these requirements may cause us to incur substantial costs in upgrading or redesigning
our facilities and processes, including our waste treatment, storage, disposal and other waste
handling practices and equipment. For these reasons, we may need to make capital expenditures
beyond those currently anticipated to comply with existing or future environmental or safety laws.
We store and transport hazardous or volatile chemicals at some of our facilities. If our safety
procedures are not effective, an accident involving these other hazardous or volatile chemicals
could result in serious injuries or death, or result in the shutdown of our facilities.
We store and transport hazardous chemicals such as aqua ammonia, phosphoric acid, hydrochloric acid
and sulfuric acid. An accident involving any of these chemicals could result in serious injuries or
death, or evacuation of areas near an accident. An accident could also result in third-party
property damage or shutdown of our terminalling facilities, or cause us to expend significant
amounts to remediate safety issues or to repair damaged facilities. As a result, an accident
involving any of these chemicals could have a material adverse effect on our results of operations,
liquidity or financial condition.
Risks Inherent in an Investment in Us
The amount of cash distributions that we will be able to distribute to unitholders will be reduced
by the costs associated with general and administrative expenses and reserves that our General
Partner believes prudent to maintain for the proper conduct of our business and for future
distributions.
Before we can pay distributions to our unitholders, we must first pay or reserve cash for our
expenses, including capital expenditures and the costs of being a public company and other
operating expenses, and we may reserve cash for future distributions during periods of limited cash
flows. The amount of cash we have available for distribution to our unitholders will be affected by
our level of reserves and expenses.
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Our General Partner and its affiliates own a controlling interest in us and may have conflicts of
interest with us and limited fiduciary duties to us, which may permit them to favor their own
interests to the detriment of our unitholders.
Penn Octane Corporation controls our General Partner, which controls us. The managers and officers
of our General Partner have a fiduciary duty to manage our General Partner in a manner beneficial
to Penn Octane. Furthermore, certain managers and officers of our General Partner may be directors
or officers of affiliates of our General Partner, including Penn Octane. Conflicts of interest may
arise between Penn Octane and its affiliates, including our General Partner, on the one hand, and
us and our unitholders, on the other hand. As a result of these conflicts, our General Partner may
favor its own interests and the interests of its affiliates over the interests of our unitholders.
These potential conflicts include, among others, the following situations:
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neither our partnership agreement nor any other agreement requires Penn Octane or its
affiliates (other than our General Partner) to pursue a business strategy that favors us.
Penn Octanes directors and officers have a fiduciary duty to make these decisions in the
best interests of its unitholders, which may be contrary to our interests;
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our General Partner is allowed to take into account the interests of parties other than
us, such as Penn Octane, in resolving conflicts of interest, which has the effect of
limiting its fiduciary duty to our unitholders;
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Penn Octane is not limited in its ability to compete with us and is only obligated to
provide us with the services and personnel required by the Omnibus Agreement;
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under the terms of our partnership agreement, the doctrine of corporate opportunity, or
any analogous doctrine, does not apply to our General Partner or its affiliates (including
Penn Octane) and no such person who acquires knowledge of a potential transaction,
agreement, arrangement or other matter that may be an opportunity for our partnership will
have any duty to communicate or offer such opportunity to us;
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some officers of our General Partner who will provide services to us will devote time
to affiliates of our General Partner and may be compensated for services rendered to such
affiliates;
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our General Partner has limited its liability and reduced its fiduciary duties, and has
also restricted the remedies available to our unitholders for actions that, without the
limitations, might constitute breaches of fiduciary duty. By purchasing common units,
unitholders will be deemed to have consented to some actions and conflicts of interest that
might otherwise constitute a breach of fiduciary or other duties under applicable law;
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our General Partner determines the amount and timing of asset purchases and sales,
borrowings, issuance of additional partnership securities and reserves, each of which can
affect the amount of cash that is distributed to unitholders;
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our General Partner may cause us to borrow funds in order to permit the payment of cash
distributions;
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our General Partner intends to limit its liability regarding our contractual and other
obligations and, in some circumstances, is entitled to be indemnified by us;
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our General Partner may cause us to purchase common units;
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our General Partner controls the enforcement of obligations owed to us by our General
Partner and its affiliates; and
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our General Partner decides whether to retain separate counsel, accountants or others
to perform services for us.
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Penn Octane is not limited in its ability to compete with us, which could limit our ability to
acquire additional assets or businesses.
Our partnership agreement does not prohibit Penn Octane from owning assets or engaging in
businesses that compete directly or indirectly with us. In addition, Penn Octane may acquire,
develop or dispose of additional oil and natural gas properties or other assets in the future,
without any obligation to offer us the opportunity to purchase or develop any of those assets.
Penn Octane, which controls our General Partner, has the power to appoint and remove the members of
the board of managers of our General Partner.
Because Penn Octane controls our General Partner, it has the ability to elect all of the members of
the board of managers of our General Partner. Our General Partner has control over all decisions
related to our operations. Furthermore, the goals and objectives of Penn Octane and our General
Partner relating to us may not be consistent with those of a majority of the public unitholders.
We are primarily dependent on officers of our General Partner to manage our operations. Failure of
such officers to devote sufficient attention to the management and operation of our business may
adversely affect our financial results and our ability to make distributions to our unitholders.
The officers of our General Partner are primarily responsible for managing our business and
operations. We do not maintain key person life insurance policies on any personnel. Although our
General Partner has arrangements relating to compensation and benefits, our General Partner does
not have any employment contracts or other agreements with such officers binding them to provide
services for any particular term. The loss of the services of any of these individuals, including
Messrs. Bothwell and Manner could have a material adverse effect on our business and our ability to
make distributions to our unitholders.
Our partnership agreement limits our General Partners fiduciary duties to unitholders and
restricts the remedies available to unitholders for actions taken by our General Partner that might
otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that reduce the fiduciary standards to which our
General Partner would otherwise be held by state fiduciary duty laws. For example, our partnership
agreement:
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permits our General Partner to make a number of decisions in its individual capacity,
as opposed to in its capacity as our General Partner. This entitles our General Partner to
consider only the interests and factors that it desires, and it has no duty or obligation
to give any consideration to any interest of, or factors affecting, us, our affiliates or
any limited partner. Examples include the exercise of its rights to transfer or vote the
units it owns, the exercise of its registration rights and its determination whether or not
to consent to any merger or consolidation of the partnership or amendment to the
partnership agreement;
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provides that our General Partner will not have any liability to us or our unitholders
for decisions made in its capacity as a General Partner so long as it acted in good faith;
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generally provides that affiliated transactions and resolutions of conflicts of
interest not approved by the conflicts committee of the board of managers of our General
Partner acting in good faith and not involving a vote of unitholders must be fair and
reasonable to us, as provided by the partnership agreement. In determining whether a
transaction or resolution is fair and reasonable, our General Partner may consider the
totality of the relationships between the parties involved, including other transactions
that may be particularly advantageous or beneficial to us;
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provides that our General Partner and its officers and managers will not be liable for
monetary damages to us, our limited partners or assignees for any acts or omissions unless
there has been a final and non-appealable judgment entered by a court of competent
jurisdiction determining that the General Partner or its officers and managers acted in bad
faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be presumed that in making
its decision the General Partner or its conflict committee acted in good faith, and in any
proceeding brought by or on behalf of any limited partner or us, the person bringing or
prosecuting such proceeding will have the burden of overcoming such presumption.
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By purchasing a common unit, a unitholder will become bound by the provisions in the partnership
agreement, including the provisions discussed above.
Unitholders have limited voting rights and are not entitled to elect our General Partner or its
managers.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on
matters affecting our business and, therefore, limited ability to influence managements decisions
regarding our business. Unitholders will not elect our General Partner or its board of managers on
an annual or other continuing basis. The board of managers of our General Partner will be chosen by
Penn Octane. Furthermore, if the unitholders are dissatisfied with the performance of our General
Partner, they will have little ability to remove our General Partner. As a result of these
limitations, the price at which the common units will trade could be diminished because of the
absence or reduction of a takeover premium in the trading price.
Even if unitholders are dissatisfied, it would be difficult to remove our General Partner.
The vote of the holders of at least 80% of all outstanding units voting together as a single class
is required to remove the General Partner. Therefore, even if the unitholders are dissatisfied it
would be difficult to remove our General Partner.
Control of our General Partner may be transferred to a third party without unitholder consent.
Our General Partner may transfer its General Partner interest to a third party in a merger or in a
sale of all or substantially all of its assets without the consent of the unitholders. After
October 31, 2008, our General Partner may transfer its General Partner interest to a third party
for any reason without the consent of the unitholders. Furthermore, our partnership agreement does
not restrict the ability of Penn Octane, the owner of our General Partner, from transferring all or
a portion of its ownership interest in our General Partner to a third party. The new owner of our
General Partner would then be in a position to replace the board of managers and officers of our
General Partner with its own choices and thereby influence the decisions made by the board of
managers and officers.
We may issue additional units, including units that are senior to the common units, without
unitholder approval, which would dilute the ownership interests of our existing unitholders.
Our partnership agreement does not limit the number of additional partner interests that we may
issue. In addition, we may issue an unlimited number of units that are senior to the common units
in right of distribution, liquidation and voting. The issuance by us of additional common units or
other equity securities of equal or senior rank will have the following effects:
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our unitholders proportionate ownership interest in us will decrease;
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the amount of cash available for distribution on each unit may decrease;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding unit may be diminished; and
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the market price of the common units may decline.
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Our partnership agreement restricts the voting rights of unitholders, other than our General
Partner and its affiliates, owning 20% or more of our common units, which may limit the ability of
significant unitholders to influence the manner or direction of management.
Our partnership agreement restricts unitholders voting rights by providing that any common units
held by a person, entity or group that owns 20% or more of any class of common units then
outstanding, other than our General Partner, its affiliates, their transferees and persons who
acquired such common units with the prior approval of the board of managers of our General Partner,
cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability
of unitholders to call meetings or to acquire information about our operations, as well as other
provisions limiting unitholders ability to influence the manner or direction of management.
The liability of our unitholders may not be limited if a court finds that unitholder action
constitutes control of our business.
A General Partner of a partnership generally has unlimited liability for the obligations of the
partnership, except for those contractual obligations of the partnership that are expressly made
without recourse to the General Partner. Our partnership is organized under Delaware law and we
conduct business in a number of other states. The limitations on the liability of holders of
limited partner interests for the obligations of a limited partnership have not been clearly
established in some of the other states in which we do business. Unitholders could be liable for
our obligations as if they were a General Partner if:
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a court or government agency determined that we were conducting business in a state but
had not complied with that particular states partnership statute; or
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their right to act with other unitholders to remove or replace the General Partner, to
approve some amendments to our partnership agreement or to take other actions under our
partnership agreement constitute control of our business.
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Unitholders may have liability to repay distributions.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or
distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act,
we may not make a distribution to unitholders if the distribution would cause our liabilities to
exceed the fair value of our assets. Liabilities to partners on account of their partnership
interests and liabilities that are non-recourse to the partnership are not counted for purposes of
determining whether a distribution is permitted. Delaware law provides that for a period of three
years from the date of an impermissible distribution, limited partners who received the
distribution and who knew at the time of the distribution that it violated Delaware law will be
liable to the limited partnership for the distribution amount. A purchaser of common units who
becomes a limited partner is liable for the obligations of the transferring limited partner to make
contributions to the partnership that are known to such purchaser of common units at the time it
became a limited partner and for unknown obligations if the liabilities could be determined from
our partnership agreement.
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Unitholders who are not Eligible Holders will not be entitled to receive distributions on or
allocations of income or loss on their common units and their common units will be subject to
redemption.
In order to comply with U.S. laws with respect to the ownership of interests in oil and natural gas
leases on federal lands, we have adopted certain requirements regarding those investors who may own
our common units. As used herein, an Eligible Holder means a person or entity qualified to hold an
interest in oil and natural gas leases on federal lands. As of the date hereof, Eligible Holder
means:
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a citizen of the United States;
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a corporation organized under the laws of the United States or of any state thereof;
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a public body, including a municipality; or
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an association of United States citizens, such as a partnership or limited liability
company, organized under the laws of the United States or of any state thereof, but only if
such association does not have any direct or indirect foreign ownership, other than foreign
ownership of stock in a parent corporation organized under the laws of the United States or
of any state thereof.
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For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may
be acquired and held by aliens only through stock ownership, holding or control in a corporation
organized under the laws of the United States or of any state thereof. Unitholders who are not
persons or entities who meet the requirements to be an Eligible Holder, will not receive
distributions or allocations of income and loss on their common units and they run the risk of
having their common units redeemed by us at the then-current market price. The redemption price
will be paid in cash or by delivery of a promissory note, as determined by our General Partner.
An increase in interest rates may cause the market price of our common units to decline.
Like all equity investments, an investment in our common units is subject to certain risks. In
exchange for accepting these risks, investors may expect to receive a higher rate of return than
would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the
ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed
debt securities may cause a corresponding decline in demand for riskier investments generally,
including yield-based equity investments such as publicly traded limited partner interests. Reduced
demand for our common units resulting from investors seeking other more favorable investment
opportunities may cause the trading price of our common units to decline.
Risks Related to Tax Matters
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well
as our not being subject to a material amount of entity-level taxation by individual states. If the
Internal Revenue Service were to treat us as a corporation for federal income tax purposes or we
were to become subject to additional entity-level taxation for state tax purposes, then our cash
available for distribution would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common units depends largely on
our being treated as a partnership for federal income tax purposes. We have not requested, and do
not plan to request, a ruling from the Internal Revenue Service, which we refer to as the IRS, on
this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain
circumstances for a partnership such as ours to be treated as a corporation for federal income tax
purposes. Although we do not believe based upon our current operations that we will be treated as a
corporation for federal income tax purposes, a change in our business (or a change in current law)
could cause us to be treated as a corporation for federal income tax purposes or otherwise subject
us to taxation as an entity.
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If we were treated as a corporation for federal income tax purposes, we would pay federal income
tax on our taxable income at the corporate tax rate, which is currently a maximum of 35% and would
likely pay state income tax at varying rates. Distributions to our unitholders would generally be
taxed again as corporate distributions, and no income, gains, losses or deductions would flow
through to our unitholders. Because a tax
would be imposed upon us as a corporation, our cash available for distribution to our unitholders
would be substantially reduced. Therefore, treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax return to the unitholders, likely
causing a substantial reduction in the value of our common units.
Current law may change so as to cause us to be treated as a corporation for federal income tax
purposes or otherwise subject us to entity-level taxation. For example, legislation has been
proposed that would eliminate partnership tax treatment for certain publicly traded partnerships.
Although such legislation would not apply to us as currently proposed, it could be amended prior to
enactment in a manner that does apply to us. We are unable to predict whether any of these changes
or other proposals will ultimately be enacted. Any such changes could negatively impact the value
of an investment in our units.
In addition, because of widespread state budget deficits and other reasons, several states,
including Texas, are evaluating ways to subject partnerships to entity-level taxation through the
imposition of state income, franchise, margin and other forms of taxation. For example, beginning
in 2008, we have become subject to a new entity level tax on any portion of our income that is
generated in Texas. Specifically, the Texas margin tax is imposed at a maximum effective rate of
0.7% of our gross income that is apportioned to Texas. Imposition of such a tax on us by Texas, or
any other state, will reduce the cash available for distribution to our unitholders.
Our partnership agreement provides that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to additional amounts of entity-level taxation, the
minimum quarterly distribution amount and the target distribution amounts may be adjusted to
reflect the impact of that law on us.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our
units each month based upon the ownership of our units on the first business day of each month,
instead of on the basis of the date a particular unit is transferred. The IRS may challenge this
treatment, which could change the allocation of items of income, gain, loss and deduction among our
unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our
units each month based upon the ownership of our units on the first business day of each month,
instead of on the basis of the date a particular unit is transferred. The use of this method may
not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to
opine as to the validity of this method. If the IRS were to challenge this method or new Treasury
regulations were issued, we may be required to change the allocation of items of income, gain, loss
and deduction among our unitholders.
An IRS contest of our federal income tax positions may adversely affect the market for our common
units, and the cost of any IRS contest will reduce our cash available for distribution to our
unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for
federal income tax purposes or any other matter affecting us. The IRS may adopt positions that
differ from the conclusions of our counsel expressed in this prospectus or from the positions we
take. It may be necessary to resort to administrative or court proceedings to sustain some or all
of our counsels conclusions or the positions we take. A court may not agree with all of our
counsels conclusions or positions we take. Any contest with the IRS may materially and adversely
impact the market for our common units and the price at which they trade. In addition, our costs of
any contest with the IRS will be borne indirectly by our unitholders and our General Partner
because the costs will reduce our cash available for distribution.
Our unitholders may be required to pay taxes on income from us even though their cash distributions
from us are less than their share of income.
Because our unitholders will be treated as partners to whom we will allocate taxable income which
could be different in amount than the cash we distribute, our unitholders may be required to pay
any federal income taxes and, in some cases, state and local income taxes, on their share of our
taxable income even if they receive no cash distributions from us. Our unitholders may not receive
cash distributions from us equal to their share of our taxable income or even equal to the tax
liability that results from that income.
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Tax gain or loss on disposition of common units could be more or less than expected.
If unitholders sell their common units, they will recognize a gain or loss equal to the difference
between the amount realized and their tax basis in those common units. Because distributions in
excess of unitholders allocable share of our net taxable income decrease their tax basis in their
common units, the amount, if any, of such prior excess distributions with respect to the common
units they sell will, in effect, become taxable income to them if they sell such units at a price
greater than their tax basis in those units, even if the price they receive is
less than their original cost. Furthermore, a substantial portion of the amount realized, whether
or not representing gain, may be taxed as ordinary income due to potential recapture items,
including depletion, intangible drilling costs and depreciation recapture. In addition, because the
amount realized includes a unitholders share of our nonrecourse liabilities, if our unitholders
sell their common units, they may incur a tax liability in excess of the amount of cash they
receive from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may
result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as individual retirement accounts (known as
IRAs), other retirement plans and non-U.S. persons raises issues unique to them. For example,
virtually all of our income allocated to organizations that are exempt from federal income tax,
including IRAs and other retirement plans, will be unrelated business taxable income and will be
taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the
highest applicable effective tax rate, and non-U.S. persons will be required to file United States
federal tax returns and pay tax on their share of our taxable income.
We will treat each purchaser of our common units as having the same tax benefits without regard to
the actual common units purchased. The IRS may challenge this treatment, which could adversely
affect the value of the common units.
Because we cannot match transferors and transferees of common units and because of other reasons,
we will take depletion, depreciation and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to those positions could adversely
affect the amount of tax benefits available to our unitholders. It also could affect the timing of
these tax benefits or the amount of gain from the sale of common units and could have a negative
impact on the value of our common units or result in audit adjustments to our unitholders tax
returns.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month
period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have terminated our partnership for federal income tax purposes if there
is a sale or exchange of 50% or more of the total interests in our capital and profits within a
twelve-month period. For example, an exchange of 50% of our capital and profits could occur if, in
any twelve-month period, holders of our subordinated and common units sell at least 50% of the
interests in our capital and profits. Our termination would, among other things, result in the
closing of our taxable year for all unitholders, which would result in us filing two tax returns
(and unitholders receiving two Schedule K-1s for one fiscal year). Our termination could also
result in a deferral of depreciation deductions allowable in computing our taxable income. In the
case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the
closing of our taxable year may also result in more than twelve months of our taxable income or
loss being includable in his taxable income for the year of termination. Our termination currently
would not affect our classification as a partnership for federal income tax purposes, but instead,
we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must
make new tax elections and could be subject to penalties if we are unable to determine that a
termination occurred.
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Unitholders may be subject to state and local taxes and tax return filing requirements in states
where they do not live as a result of investing in our common units.
In addition to federal income taxes, our unitholders will likely be subject to other taxes,
including state and local taxes, unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions in which we do business or own
property now or in the future, even if they do not live in any of those jurisdictions. Our
unitholders will likely be required to file foreign, state and local income tax returns and pay
state and local income taxes in some or all of these jurisdictions. Furthermore, our unitholders
may be subject to penalties for failure to comply with those requirements. We currently own assets
and do business in Oklahoma. Oklahoma currently imposes a personal income tax. As we make
acquisitions or expand our business, we may own assets or do business in additional states that
impose a personal income tax or that impose entity level taxes to which we could be subject. It is
our unitholders responsibility to file all United States federal, foreign, state and local tax
returns.
A unitholder whose units are loaned to a short seller to cover a short sale of units may be
considered as having disposed of those units. If so, he would no longer be treated for tax purposes
as a partner with respect to those units during the period of the loan and may recognize gain or
loss from the disposition.
Because a unitholder whose units are loaned to a short seller to cover a short sale of units may
be considered as having disposed of the loaned units, he may no longer be treated for tax purposes
as a partner with respect to those units during the period of the loan to the short seller and the
unitholder may recognize gain or loss from such disposition. Moreover, during the period of the
loan to the short seller, any of our income, gain, loss or deduction with respect to those units
may not be reportable by the unitholder and any cash distributions received by the unitholder as to
those units could be fully taxable as ordinary income. Strasburger & Price, LLP has not rendered an
opinion regarding the treatment of a unitholder where common units are loaned to a short seller to
cover a short sale of common units; therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify
any applicable brokerage account agreements to prohibit their brokers from loaning their units.
We may adopt certain valuation methodologies that may result in a shift of income, gain, loss and
deduction between the General Partner and the unitholders. The IRS may successfully challenge this
treatment, which could adversely affect the value of our common units.
When we issue additional units or engage in certain other transactions, we will determine the fair
market value of our assets and allocate any unrealized gain or loss attributable to our assets to
the capital accounts of our unitholders and the holders of the incentive distribution rights. Our
methodology may be viewed as understating the value of our assets. In that case, there may be a
shift of income, gain, loss and deduction between certain unitholders and the General Partner,
which may be unfavorable to such unitholders. Moreover, subsequent purchasers of common units may
have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our
tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our
methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and
intangible assets, and allocations of income, gain, loss and deduction between the General Partner
and certain of our unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of
taxable income or loss being allocated to our unitholders. It also could affect the amount of gain
from our unitholders sale of common units and could have a negative impact on the value of the
common units or result in audit adjustments to our unitholders tax returns without the benefit of
additional deductions.
Item 1B. Unresolved Staff Comments.
Inapplicable.
38
Item 3. Legal Proceedings.
Penn Octane, Rio Vista and/or Rio Vistas subsidiaries were named as defendants in two lawsuits
filed in connection with an accident in the town of Lucio Blanco, Mexico on August 11, 2005,
involving a tanker truck carrying LPG which was struck by a train resulting in an explosion. None
of Penn Octane, Rio Vista or any of Rio Vistas subsidiaries owned or operated the tanker truck or
employed or controlled the driver of the tanker truck. Furthermore, none of Penn Octane, Rio Vista
or any of Rio Vistas subsidiaries owned or had custody of the LPG on the tanker truck at the time
and location of the accident.
The tanker truck reportedly took delivery of LPG at the Matamoros Terminal Facility operated under
agreement with Rio Vistas Mexican subsidiaries. According to the lawsuits, after leaving the
Matamoros Terminal Facility, the tanker truck was involved in a collision with a train in Lucio
Blanco, Mexico, resulting in a tragic explosion that killed and injured several persons and caused
significant property damage. Published reports indicate that the truck used a road not approved
for large trucks and failed to stop at an unprotected rail crossing, resulting in the collision and
explosion. The insurance carrier for the owner of the tanker truck has settled certain claims in
Mexico with victims of the accident.
Even though the accident took place in Mexico, these lawsuits were filed in Texas. The first case
is captioned
Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
International LLC, et al
and was filed in the 404
th
Judicial District Court for Cameron
County, Texas on September 26, 2005. The plaintiffs seek unspecified monetary damages. On August
16, 2006 with the consent of the parties, the Court issued an amended order for temporary
injunction for the purpose of preserving relevant evidence. The amended injunction required a
subsidiary of Rio Vista to make available for inspection by plaintiffs Rio Vistas terminal
facilities in Brownsville, Texas and Matamoros, Mexico and associated equipment and records. The
order also required Rio Vista to give 30 days advance notice to plaintiffs before conducting any
alteration, repair, service, work or changes to the facilities or equipment. In addition, the
order required Rio Vista to make available its employees for deposition by the plaintiffs and to
secure and preserve certain physical evidence believed to be located in Mexico. The Brownsville,
Texas terminal facility was sold to TransMontaigne Product Services Inc. on August 22, 2006. In
January 2007, this case was removed to the U.S. District Court for the Southern District of Texas,
Brownsville Division. In July 2007, the case was remanded to the state court in Cameron County,
Texas. In August 2007, plaintiffs filed an amended petition alleging that defendants delivered
the LPG to an unqualified driver and that defendants failed to properly odorize the LPG before
delivery. Discovery is being conducted and it is anticipated that a trial on a limited number of
the Plaintiffs will take place during September 2008 or October 2008.
The second case is captioned
Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et
al.
and was filed in the 107
th
Judicial District Court for Cameron County, Texas, on
November 14, 2005. The plaintiffs sought unspecified monetary damages. In March 2007, the Company
entered into a settlement agreement with the plaintiffs on terms deemed favorable to the Company.
Pursuant to the settlement agreement this case was dismissed in April 2007. The Companys legal
fees and settlement costs were covered by insurance.
Management believes the remaining lawsuit against Penn Octane, Rio Vista and/or Rio Vistas
subsidiaries relating to the accident in Lucio Blanco is without merit and, based on the advice of
counsel, does not anticipate liability for damages. The Companys insurance carrier is expected to
bear the legal fees and expenses in connection with defending this case. If, however, a court
found liability on the part of Penn Octane, Rio Vista or their subsidiaries, a judgment or
settlement in excess of insurance coverage could have a material adverse effect on Penn Octanes
and Rio Vistas business, financial condition and results of operations.
On November 3, 2004, there was an accident between a Regional truck driver and another motorist who
allegedly sustained injuries as a result of the accident. The other motorist filed suit against
Regional. The case was filed on February 26, 2007 as
Nolte v. Regional Enterprizes, Inc.
in the
United States District Court for the District of Maryland (Case No. 07 CV-0478-PJM). This case was
settled within the limits of insurance coverage on or about January 28, 2008 and the case was
dismissed accordingly on or about January 30, 2008.
39
On December 13, 2007, Lexington Insurance Company filed a declaratory action complaint against Penn
Octane Corporation, Rio Vista Energy Partners, LP and their related entities in the United States
District Court in the Southern District of Texas (Brownsville) requesting the US Federal Court to
rule that the plaintiff has no obligation to defend Penn Octane and the Rio Vista related entities
in the Camacho and Gonzalez litigation based on alleged coverage exceptions. Federal jurisdiction
was contested and the case moved to state court. A trial date is currently set for September 2008.
According to local counsel, Gonzalez was referenced in the original complaint only because the
plaintiffs lawyers were unaware that Gonzalez had been settled prior to filing. It is unclear,
however, to the extent Lexington is successful in its action, whether the plaintiff will request
repayment of all settlement and litigation expenses paid by the insurance carrier in Gonzalez.
Furthermore, if there is a determination that there is no insurance coverage resulting in Penn
Octane and Rio Vista having to fund all defense costs as well as any material settlement or
judgment amount in the Camacho suit, this could have a material adverse effect on Penn Octanes and
Rio Vistas business, financial condition and results of operations.
On November 20, 2007 Rio Vista Energy Partners, LP, Rio Vista Penny, LLC, Gary Moores, Bill Wood
and GM Oil Properties, Inc. jointly filed an action for declaratory relief against Energy Spectrum
Advisors, Inc. in the District Court in McIntosh County, Oklahoma. This action was filed in
response to Energy Spectrums assertion that Rio Vista Energy Partners, LP, Rio Vista Penny, LLC,
as well as GM Oil Properties, Inc. owed Energy Spectrum a commission allegedly due and owing based
on Rio Vista Penny, LLCs November, 2007 purchase of certain assets from GM Oil Properties, Inc.
The foundation for the Energy Spectrum claim is a January 22, 2007 written agreement signed by
Energy Spectrum and GM Properties, Inc. Neither Rio Vista Energy Partners, LP nor Rio Vista Penny
were parties to this agreement, nor were they named in the Energy Spectrums counter claim. Based
in part on the fact that the GM Oil Properties acquisition was an asset purchase, rather than a
stock sale, management believes that the Rio Vista entities should have no liability for any
obligation that GM Oil Properties, Inc. may have to Energy Spectrum. Discovery is currently
pending.
Rio Vista and its subsidiaries are involved with other proceedings, lawsuits and claims. Rio Vista
believes that the liabilities, if any, ultimately resulting from such proceedings, lawsuits and
claims should not materially affect its consolidated financial results.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
40
PART II
Item 5. Market for Registrants Common Equity, Related Unitholder Matters and Issuer Purchases of
Equity Securities.
Rio Vistas common units began trading on the NASDAQ National Market under the symbol RVEP
on October 1, 2004.
The following table sets forth the reported high ask and low bid quotations of the common
units for the periods indicated. Such quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
LOW
|
|
|
HIGH
|
|
The year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.34
|
|
|
$
|
9.54
|
|
Second Quarter
|
|
|
7.80
|
|
|
|
12.37
|
|
Third Quarter
|
|
|
10.50
|
|
|
|
23.00
|
|
Fourth Quarter
|
|
|
10.05
|
|
|
|
17.50
|
|
|
|
|
|
|
|
|
|
|
|
|
LOW
|
|
|
HIGH
|
|
The year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.43
|
|
|
$
|
5.74
|
|
Second Quarter
|
|
|
4.28
|
|
|
|
5.43
|
|
Third Quarter
|
|
|
3.72
|
|
|
|
5.03
|
|
Fourth Quarter
|
|
|
3.88
|
|
|
|
5.01
|
|
On March 28, 2008, the closing bid price of the common units as reported on the NASDAQ
National Market was $13.50 per common unit. On March 28, 2008, Rio Vista had 2,515,518 common
units outstanding and approximately 1,250 holders of record of the common units.
Rio Vista made the following distributions during the years ended December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
Quarter
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
Sep 2006
|
|
|
10/26/06
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Dec 2006
|
|
|
01/18/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Mar 2007
|
|
|
05/04/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Jun 2007
|
|
|
07/31/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Sep 2007
|
|
|
11/14/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
June 30, 2005 -
June 30, 2006
Arrearages
|
|
|
12/10/07
|
|
|
$
|
1.25
|
|
|
$
|
2,420,000
|
|
|
$
|
49,000
|
|
The amount of the distributions paid represents the minimum quarterly distribution required to be
made by Rio Vista pursuant to the partnership agreement. As of December 31, 2007, Rio Vista had
made all of the required minimum distributions to its common unitholders. A distribution of
$607,000 and $13,000 for the quarter ended December 31, 2007 was made on February 14, 2008 to the
common unitholders and General Partner, respectively.
41
Recent Sales of Unregistered Securities
On February 15, 2007, the board of managers of our General Partner approved the grant of options to
purchase a total of 21,250 common units under Rio Vistas 2005 Equity Incentive Plan (2005 Plan).
Of the total number of options granted, 5,000 were issued to an executive officer of our General
Partner and 16,250 were issued to outside managers of our General Partner. The exercise price for
the options is $8.38 per unit, which was the average of the high and low sale prices for Rio Vista
common units as reported by the NASDAQ Stock Market on February 15, 2007. Options granted to the
executive officer vest in equal monthly installments over a period of 36 months from the date of
grant, become fully vested and exercisable upon a change in control event, and expire five years
from the date of grant. Options granted to outside managers are fully vested on the date of grant
and expire five years from the date of grant.
On March 21, 2007, the board of managers of our General Partner approved the grant of an option to
purchase 20,000 common units of Rio Vista under the 2005 Plan to an executive officer of our
General Partner. The exercise price for the options is $7.36 per unit, which was the average of
the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on
March 21, 2007. The options vest in equal monthly installments over a period of 36 months from
the date of grant, become fully vested and exercisable upon a change in control event, and expire
five years from the date of grant.
On June 29, 2007, the board of managers of our General Partner approved the grant of an option to
purchase 75,000 common units of Rio Vista under the 2005 Plan to an executive officer of our
General Partner. The exercise price for the options is $11.21 per unit, which was the average of
the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on
June 29, 2007. The options vest in equal monthly installments over a period of 36 months beginning
January 1, 2007, become fully vested and exercisable upon a change in control event, and expires
five years from the date of grant.
On June 29, 2007, the Board of Managers of our General Partner approved the grant of a restricted
unit bonus of 25,000 common units under the 2005 Plan to an executive officer of our General
Partner. The restricted unit bonus vested as to 8,334 units on July 1, 2007 and an additional
8,333 units on January 1, 2008, and the remaining units vest on July 1, 2008, and become fully
vested upon a change in control event. In connection with the grant of restricted units, the Board
of Managers also approved the payment to the executive officer of one or more cash bonuses in
amounts sufficient, on an after-tax basis, to cover all taxes payable by the executive officer with
respect the award of restricted units to him.
On July 27, 2007, in connection with the employment agreement with an executive of Regional, Rio
Vista agreed to the grant of options to purchase a total of 25,000 common units under the 2005 Plan
to the executive. The options will vest over a two year period.
On August 23, 2007, the board of managers of our General Partner approved the grant of options to
purchase a total of 8,125 common units under the 2005 Plan to outside managers of our General
Partner. The exercise price for the options is $15.15 per unit, which was the average of the high
and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on August 23,
2007. Options granted to outside managers are fully vested on the date of grant and expire five
years from the date of grant.
On November 19, 2007, in connection with the acquisition of the Oklahoma assets, Rio Vista issued a
total of 137,994 common units to the sellers of GO LLC and Penny Petroleum Corp. In addition, on
November 19, 2007, Rio Vista issued the TCW Warrant to TCW see note I to the consolidated financial
statements.
42
On November 29, 2007, in connection with a private placement, Rio Vista issued a total of 355,556
common units at a price of $11.25 per share to Standard General Fund L.P., Credit Suisse Management
LLC and Structured Finance Americas LLC. The total purchase price of the common units was
$4,000,000.
On January 23, 2008, the Board of Managers of our General Partner approved the grant of options to
purchase a total of 16,250 common units under the 2005 Plan to certain outside members of the Board
of Managers of our General Partner. The exercise price for the options is $14.42 per unit, which
was the average of the high and low sale prices for Rio Vista common units as reported by the
NASDAQ Stock Market on January 23, 2008. Options granted to outside managers are fully vested on
the date of grant and expire five years from the date of grant.
On March 7, 2008, the Board of Managers of our General Partner approved the grant of a unit bonus
of 8,812 common units under the 2005 Plan to an executive officer of our General Partner. The
amount of units granted was based on the average of the high and low sale prices for Rio Vista
common units as reported by the NASDAQ Stock Market on March 7, 2008.
The above issuances were exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof because the issuances did not involve any public offering of securities.
Equity Compensation Plans
The following table provides information concerning Rio Vistas equity compensation plans as
of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
remaining available for
|
|
|
|
Number of securities to
|
|
|
exercise price of
|
|
|
future issuance under
|
|
|
|
be issued upon exercise
|
|
|
outstanding options,
|
|
|
equity compensation
|
|
|
|
of outstanding options,
|
|
|
warrants and rights
|
|
|
plans (excluding securities
|
|
|
|
warrants and rights
|
|
|
(per unit)
|
|
|
reflected in column (a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation
plans approved by
security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
(1)
|
|
|
349,094
|
|
|
$
|
10.90
|
|
|
|
466,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
349,094
|
|
|
|
|
|
|
|
466,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Under the terms of the partnership agreement and applicable rules of the NASDAQ Stock
Market, no approval by the unitholders of Rio Vista was required.
|
Item 6. Selected Financial Data.
Not applicable.
43
Item 7
.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of Rio Vistas liquidity and capital resources should be read in
conjunction with the consolidated financial statements of Rio Vista and related notes thereto
appearing elsewhere herein. References to specific years preceeded by fiscal (e.g. fiscal 2007)
refer to Rio Vistas fiscal year ending December 31.
Overview
Historical Assets and Operations
From inception until 2007, Rio Vista was focused on the operation of the assets acquired from Penn
Octane, including an LPG terminal facility in Matamoros, Mexico and approximately 23 miles of
pipelines connecting the Matamoros Terminal Facility to an LPG terminal facility in Brownsville,
Texas.
In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to
TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm,
together with associated improvements, leases, easements, licenses and permits; an LPG sales
agreement; and all of LPG inventory. In December 2007, Rio Vista completed the disposition of its
remaining LPG assets to TransMontaigne, including the U.S. portion of the two pipelines from a
Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along with all associated
rights-of-way and easements; all of the outstanding equity interests in entities owning interests
in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico; and all
of the rights for indirect control of an entity that owns a terminal site in Matamoros, Mexico. As
a result, effective January 1, 2008, Rio Vista no longer operates the assets acquired from Penn
Octane or conducts the businesses it had historically conducted.
Current Assets and Operations
In July 2007, Rio Vista acquired Regional and in November 2007, Rio Vista acquired certain oil and
natural gas producing properties and related assets in the State of Oklahoma formerly owned by GM
Oil Properties, Inc., Penny Petroleum Corporation and GO LLC. As a result of these acquisitions in
2007, Rio Vista is now focused on the acquisition, development and production of oil and natural
gas properties and related midstream assets, and the operation and development of Regionals
business.
The above acquisitions were funded by a combination of debt (new and assumed), private placements
of Rio Vista common units and proceeds from the sale of Rio Vistas LPG related assets. During
November 2007, Rio Vista completed a private placement of common units raising gross proceeds of
$4,000,000.
44
Results of Operations
Because of our rapid growth through acquisitions during this past year, our historical results of
operations and period-to-period comparisons of these results and certain financial data may not be
meaningful or indicative of future results. The following discussion of Rio Vistas results of
operations from continuing operations for all periods presented excludes the results of operations
related to the Sold Assets, including revenues, direct costs, associated interest expenses,
minority interest and income taxes, which have been reclassified as discontinued operations (see
below). The results of operations from continuing operations reflects only the results associated
with the Transportation and Terminaling Business associated with bulk and petroleum products
associated with Regional operations and LPG (sold December 31, 2007) including all costs associated
with operation of the US-Mexico Pipelines and Matamoros Terminal Facility, and the acquisition of
the Oklahoma assets during November 2007 and all indirect income and expenses of Rio Vista.
Revenues from Rio Vistas Transportation and Terminaling Business commenced on August 22, 2006
although expenses associated with operation of the US-Mexico Pipelines and Matamoros Terminal
Facility were incurred during the entire period for each period presented.
Continuing Operations
Year Ended December 31, 2007 Compared With Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2007
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
527,000
|
|
|
|
3,038,000
|
|
|
|
2,341,000
|
|
|
|
|
|
|
|
5,906,000
|
|
Cost Of Goods Sold
|
|
|
390,000
|
|
|
|
2,399,000
|
|
|
|
1,971,000
|
|
|
|
|
|
|
|
4,760,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
137,000
|
|
|
|
639,000
|
|
|
|
370,000
|
|
|
|
|
|
|
|
1,146,000
|
|
Selling, General And
Administrative Expenses
|
|
|
41,000
|
|
|
|
363,000
|
|
|
|
258,000
|
|
|
|
4,023,000
|
|
|
|
4,685,000
|
|
Loss on sale of remaining
LPG assets
|
|
|
|
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
96,000
|
|
|
|
276,000
|
|
|
|
(294,000
|
)
|
|
|
(4,023,000
|
)
|
|
|
(3,945,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(275,000
|
)
|
|
|
(431,000
|
)
|
|
|
(281,000
|
)
|
|
|
(7,000
|
)
|
|
|
(994,000
|
)
|
Interest Income
|
|
|
|
|
|
|
14,000
|
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Continuing
Operations Before Taxes
|
|
|
(179,000
|
)
|
|
|
(141,000
|
)
|
|
|
(574,000
|
)
|
|
|
(4,028,000
|
)
|
|
|
(4,922,000
|
)
|
Provision For Income Taxes
|
|
|
(4,000
|
)
|
|
|
(51,000
|
)
|
|
|
34,000
|
|
|
|
|
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
|
|
|
(175,000
|
)
|
|
|
(90,000
|
)
|
|
|
(608,000
|
)
|
|
|
(4,028,000
|
)
|
|
|
(4,901,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
|
Oklahoma
|
|
|
Regional
|
|
|
LPG
|
|
|
Corporate/
|
|
|
|
|
|
|
Assets (a)
|
|
|
Enterprises (b)
|
|
|
Transportation (c)
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
908,000
|
|
|
|
|
|
|
|
908,000
|
|
Cost Of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
1,814,000
|
|
|
|
|
|
|
|
1,814,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
(906,000
|
)
|
|
|
|
|
|
|
(906,000
|
)
|
Selling, General And
Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
183,000
|
|
|
|
2,666,000
|
|
|
|
2,849,000
|
|
Loss on sale of remaining
LPG assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
(1,089,000
|
)
|
|
|
(2,666,000
|
)
|
|
|
(3,755,000
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
(354,000
|
)
|
|
|
217,000
|
|
|
|
(137,000
|
)
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Minority Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Continuing
Operations Before Taxes
|
|
|
|
|
|
|
|
|
|
|
(1,443,000
|
)
|
|
|
(2,448,000
|
)
|
|
|
(3,891,000
|
)
|
Provision For Income Taxes
|
|
|
|
|
|
|
|
|
|
|
37,000
|
|
|
|
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) From
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
(1,480,000
|
)
|
|
|
(2,448,000
|
)
|
|
|
(3,928,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquired during November 2007
|
|
(b)
|
|
Acquired during July 2007
|
|
(c)
|
|
Business commenced in August 2006 and sold December 31, 2007
|
Year Ended December 31, 2006 Compared With Year Ended December 31, 2005
Revenues.
Revenues for the year ended December 31, 2006, were $0.9 million. There were no
revenues during the year ended December 31, 2005 since the LPG transportation business did not
commence until August 22, 2006. All revenues prior to August 22, 2006 were derived from Rio
Vistas LPG sales business and have been reclassified as discontinued operations (see below).
Cost of goods sold.
Cost of goods sold for the year ended December 31, 2006 was $1.8 million
compared with $2.1 million for the year ended December 31, 2005. The cost of goods sold consists
of those costs associated with operation of the US Mexico Pipelines and Matamoros Terminal
Facility. All costs associated with Rio Vistas LPG sales business prior to its sale, except for
costs associated with the US Mexico Pipelines and Matamoros Terminal Facility, which were used
for Rio Vistas LPG transportation business, have been reclassified as discontinued operations (see
below).
Selling, general and administrative expenses.
Selling, general and administrative expenses
were $2.8 million for the year ended December 31, 2006 compared with $3.9 million for the year
ended December 31, 2005, a decrease of $1.1 million or 28.2%. These costs were comprised of
indirect selling, general and administrative expenses directly incurred by Rio Vista or allocated
by Penn Octane to Rio Vista in accordance with the Omnibus Agreement. Salary related costs
allocated by Penn Octane were based on the percentage of time spent by those employees (including
executive officers) in performing Rio Vista related matters compared with the overall time spent
working by those employees. The decrease was principally attributable to reduced professional fees
and payroll related costs during the year ended December 31, 2006.
46
Other income (expense).
Other expense was approximately $(0.1) million for the year ended
December 31, 2006 and consisted of interest expense on debt then in effect. Other expense was
approximately $(0.4) million for the year ended December 31, 2005 and primarily consisted of
amortization of loan discount related to detachable warrants.
Discontinued Operations
The following discussion of Rio Vistas results of operations from discontinued operations of its
LPG sales business for the periods January 1, 2005 through August 21, 2006, the date the business
was sold, and includes all related revenues, direct costs and associated interest expenses.
Year Ended December 31, 2006 Compared With Year Ended December 31, 2005
Revenues.
Revenues for the year ended December 31, 2006, were $71.5 million compared with
$120.9 million for the comparative period one year earlier, a decrease of $49.4 million or 40.8%.
Of this decrease, $57.4 million was attributable to decreased volumes of LPG sold to PMI during the
year ended December 31, 2006 (LPG sales business terminated on August 21, 2006), partially offset
by $8.0 million attributable to increases in average sales prices of LPG sold to PMI during the
year ended December 31, 2006.
Cost of goods sold.
Cost of goods sold for the year ended December 31, 2006 was $69.5 million
compared with $116.5 million for the year ended December 31, 2005, a decrease of $47.0 million or
40.3%. The cost of goods sold for LPG purchased from Penn Octane was determined in accordance with
the LPG Supply Agreement. Of this decrease, $55.2 million was attributable to decreased volumes of
LPG sold to PMI during the year ended December 31, 2006 (LPG sales business terminated on August
21, 2006), partially offset by $8.6 million attributable to increases in the average costs of LPG
sold to PMI during the year ended December 31, 2006.
Liquidity and Capital Resources
General
As a result of the disposition of the LPG-related businesses in 2006 and 2007 and the acquisition
of Regionals business and the Oklahoma assets, Rio Vistas sources of operating cash flows are
expected to be derived from the operations of Regional and from the revenues received from the
Oklahoma assets. Although the operations of Regional are expected to be profitable, the cash flows
of Regional are subject to payments required under the RZB Loan Agreement described below under
Debt Obligations and income taxes payable on Regionals stand-alone taxable income. Based on the
current production levels from the Oklahoma assets and current prices for oil and gas, there is not
expected to be sufficient cash from operations to meet debt service requirements under the TCW
Credit Facility described below under debt obligations unless additional production can be
realized. Rio Vista has minimal management experience in operating oil and gas properties and will
be relying on the assistance of its Chairman of the Board and outside consultants to provide
ongoing management expertise. Additional production will require additional capital expenditures
to fund drilling expansion opportunities. Rio Vista has only secured funding for its planned
development through April 2008, and such development is not expected to increase cash flow to the
levels needed for payment of operating costs and debt service. In addition, Rio Vista projects
that monthly cash flows received from the Oklahoma assets during the months of April through
September will be less than during the months of October through March as a result of seasonality.
In addition, pursuant to the Omnibus Agreement, Penn Octane is entitled to reimbursement of costs
incurred on behalf of Rio Vista, including an allocable share of overhead. However, the TCW
Credit Facility prohibits distributions by Rio Vistas Oklahoma subsidiaries until December 2008
and subsequent thereto, those distributions are limited to 75% of defined available cash flow. As
a result, Rio Vista may not have sufficient available cash to pay its separate general and
administrative and other operating expenses, debt service and/or minimum quarterly distributions to
unitholders. In addition, Rio Vista may not distribute sufficient cash to meet the tax obligations
of unitholders associated with the ownership of common units.
47
Rio Vista may obtain additional sources of revenues through the completion of future transactions,
including acquisitions and/or dispositions of assets. The ability of Rio Vista to complete future
acquisitions may require the use of a portion or substantially all of Rio Vistas liquid assets,
the issuance of additional debt and/or the issuance of additional units. Currently, substantially
all of Rio Vistas assets are pledged or committed to be pledged as collateral on existing debt in
connection with the RZB Credit Facility described below under Debt Obligations, the TCW Credit
Facility and the RZB Loan Agreement. Accordingly Rio Vista may be unable to obtain additional
financing collateralized by those assets.
At December 31, 2007, Rio Vista had a working capital deficit of approximately $8.1 million. Rio
Vista cannot be certain that future cash flows from Regionals business or the Oklahoma assets
operations and future investments, if any, will be adequate to cover all of its future working
capital requirements, including minimum distributions to unitholders.
Distributions of Available Cash.
All Rio Vista unitholders have the right to receive distributions from Rio Vista of available
cash as defined in the partnership agreement in an amount equal to at least the minimum
distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum
quarterly distribution on the units from prior quarters subject to any reserves determined by our
General Partner. Our General Partner has a right to receive a distribution corresponding to its
2% General Partner interest and the incentive distribution rights described below. The
distributions are to be paid within 45 days after the end of each calendar quarter. However, Rio
Vista is prohibited from making any distributions to unitholders if it would cause an event of
default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has
guaranteed.
In addition to its 2% General Partner interest, our General Partner is currently the holder of
incentive distribution rights which entitle the holder to an increasing portion of cash
distributions as described in the partnership agreement. As a result, cash distributions from Rio
Vista are shared by the holders of the common units and our General Partner based on a formula
whereby our General Partner receives disproportionately more distributions per percentage interest
than the holders of the common units as annual cash distributions exceed certain milestones.
Rio Vista made the following distributions during the years ended December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
Quarter
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
Sep 2006
|
|
|
10/26/06
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Dec 2006
|
|
|
01/18/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Mar 2007
|
|
|
05/04/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Jun 2007
|
|
|
07/31/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Sep 2007
|
|
|
11/14/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
June 30, 2005 -
June 30, 2006
Arrearages
|
|
|
12/10/07
|
|
|
$
|
1.25
|
|
|
$
|
2,420,000
|
|
|
$
|
49,000
|
|
The amount of the distributions paid represents the minimum quarterly distribution required to
be made by Rio Vista pursuant to the partnership agreement. As of December 31, 2007, Rio Vista had
made all of the required minimum distributions to its common unitholders. A distribution of
$607,000 and $13,000 for the quarter ended December 31, 2007 was made on February 14, 2008 to the
common unitholders and our General Partner, respectively.
48
Debt Obligations
RZB Loan Agreement
In July 2007, Rio Vista and Regional entered into a $5 million loan agreement (RZB Loan Agreement)
with RZB Finance LLC (RZB) dated July 26, 2007. The loan is due on demand, with a one-year
maturity. Any borrowings under the RZB Loan Agreement bear a variable annual rate of interest equal
to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank,
N.A. as its base rate or its prime rate, or (b) the weighted average overnight funds rate of
the Federal Reserve System plus 0.50%, in each case plus a margin of 4.75%. Under the RZB Loan
Agreement, either Rio Vista or Penn Octane is required to maintain a minimum net worth of $10
million. In connection with the RZB Loan Agreement, Regional granted to RZB a security interest in
all of Regionals assets, and Rio Vista delivered to RZB a pledge of the outstanding capital stock
of Regional. Penn Octane, Regional and RVOP have also provided a guaranty of Rio Vistas
obligations under the RZB Loan Agreement in favor of RZB. As of December 31, 2007, Rio Vista has $
5 million outstanding under the RZB Loan Agreement and was in compliance with all of the covenants
thereunder.
TCW Credit Facility
In connection with the acquisition of certain of the Oklahoma assets, Rio Vista Penny LLC, an
indirect, wholly-owned subsidiary of Rio Vista, entered into a $30 million senior secured credit
facility (TCW Credit Facility) with TCW Asset Management Company and certain TCW Energy Fund X
investors (collectively, TCW) in November 2007. The TCW Credit Facility has a maturity date of
August 29, 2010. However, at any time during the period from May 19, 2008 through November 19,
2009, TCW has the right to demand payment of $2,250,000 of the amount outstanding under the TCW
Credit Facility. The TCW Credit Facility is secured by a first lien on all of the Oklahoma assets
and associated production proceeds. The interest rate on borrowings under the TCW Credit Facility
is 10.5%, increasing to 12.5% if there is an event of default. Payments under the TCW Credit
Facility are interest-only until December 29, 2008. The TCW Credit Facility has no prepayment
penalty. Certain Rio Vista subsidiaries have guaranteed payment of the obligations outstanding
under the TCW Credit Facility. Rio Vista Penny and Rio Vista GO LLC, an indirect, wholly-owned
subsidiary of Rio Vista, both of which hold all of the Oklahoma assets, are prohibited from making
upstream distributions to Rio Vista before November 30, 2008. Thereafter, upstream distributions
to Rio Vista not in excess of 75% of quarterly cash flow are permitted subject to certain
conditions. As of December 31, 2007, Rio Vista had $23.7 million outstanding under the TCW Credit
Facility and was in compliance with all of the covenants thereunder.
RZB Credit Facility Guarantee
As of December 31, 2007, Penn Octane had a $10,000,000 credit facility with RZB for demand loans
and standby letters of credit (RZB Credit Facility). In connection with the spin-off of the LPG
business by Penn Octane to Rio Vista, Rio Vista agreed to guarantee Penn Octanes obligations with
respect to the RZB Credit Facility. In connection with Rio Vistas guaranty, Rio Vista granted
RZB a security interest and assignment in any and all of Rio Vistas accounts, real property,
buildings, pipelines, fixtures and interests therein or relating thereto. In addition, Rio Vista
may not permit to exist any subsequent lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in favor of RZB, without the
consent of RZB. Rio Vista may also be prohibited from making any distributions to unitholders if
it would cause an event of default, or if an event of default is existing, under the RZB Credit
Facility.
Under the RZB Credit Facility, Penn Octane pays a fee with respect to each letter of credit
thereunder in an amount equal to the greater of (i) $500, (ii) 2% 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 accrue interest at a rate equal to the
rate announced by the JPMorgan Chase Bank as its prime rate (7.25% at December 31, 2007) 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.
49
Moores Note
As partial consideration for the acquisition of certain of the Oklahoma assets by Rio Vista Penny,
Rio Vista delivered a promissory note in November 2007 to Gary Moores in the aggregate principal
amount of $500,000. The note bears interest at 7% per annum and matures on May 19, 2008.
Beginning February 19, 2008, Gary Moores has the option to convert the outstanding principal and
interest of the note into common units of Rio Vista at a conversion price equal to 90% of the
10-day average closing price of such common units as reported by the NASDAQ Stock market at the
time of conversion. The conversion option may be exercised on only one occasion and expires on May
19, 2008. As of December 31, 2007, $493,000, net of $7,000 discount remained outstanding under the
note.
Regional Note
In connection with the Regional Acquisition, Regional issued a promissory note in the amount of
$1.0 million to be paid in four equal semiannual installments beginning six months from the date of
the Regional Acquisition. Rio Vista has recorded a discount of $116,000, (10% effective rate)
representing the portion of interest associated with the note, which shall be amortized over the
term of the note. For the period of July 28, 2007 through December 31, 2007, $37,000 was
amortized.
Leases
Norfolk Southern Leases.
On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern
Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection
with Regionals existing operations at Regionals facilities in Hopewell, Virginia. The lease
includes the right to maintain existing warehouses, storage tanks for handling petroleum and
chemical products, and necessary appurtenances. The lease term was January 1, 2003 through
December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30
days written notice. Rent is $1,500 per month subject to adjustment based on inflation.
On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk
Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land
which is utilized in connection with Regionals existing operations at Regionals facilities in
Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding
lease began on August 21, 2003 and continues until terminated by either party with 30 days
written notice. Rent is $4,875 per year, payable in advance.
As replacement of the foregoing leases, Regional is currently negotiating with Norfolk Southern
the purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of land
on a long-term basis. On June 1, 2007, Regional executed a letter of intent from Norfolk
Southern dated May 29, 2007. Regional received a letter form Norfolk Southern dated July 26,
2007, approving the purchase of the land and the lease on the terms contained in the letter of
intent. Regional is awaiting definitive documents from Norfolk Southern in order to complete
the purchase and lease transactions.
Other.
Regional has several leases for parking and other facilities which are short term in
nature and can be terminated by the lessors or Regional upon giving 60 days notice of
cancellation.
Agreements
Gas Service and Sales Agreements
During the period from November 19, 2007 through December 31, 2007, GO entered into an agreement
with Clearwater Enterprises, LLC (Clearwater) to provide monthly services in relationship to the
Brooken system pipeline. In accordance with terms of the agreement, Clearwater (i) receives
pipeline nominations from the various shippers on the Brooken system, (ii) allocates volumes to the
wellhead based upon the volumes delivered to the Brooken interconnect, (iii) prepares gathering and
compression fee invoices on behalf of the Company, and (iv) prepares pipeline imbalance and cashout
statements. The monthly gathering management fee that GO pays for these services is $3,000. The
agreement is month-to-month unless and until terminated by either party upon 30 days notice.
50
In addition, during the period from November 19, 2007 through December 31, 2007, substantially all
of the gas sales associated with Rio Vistas oil and gas properties were made to Clearwater. These
gas sales were governed by an agreement that expires in 2009 and continues yearly thereafter, until
canceled by either party 30 days notice.
During March 2008, certain of the Clearwater agreements were amended to name Rio Vista Operating
LLC as the contracting party based on Rio Vista Operating LLCs assumption of operations of the oil
and gas properties.
Gas Compression Agreements
GO entered into a one-year lease agreement with Hanover Compression Limited Partnership for the use
of a compressor. The lease continues monthly until cancelled by either party with 30 days notice.
Minimum base lease payments of $10,500 plus taxes and are due monthly. The base amount is subject
to semi-annual adjustments.
MV entered into a Gas Compression Master Service Agreement with USA Compression Partners, LP on
November 1, 2007. The agreement provides for monthly payments of approximately $17,000 per month
through August 31, 2009.
CEOcast Agreement
Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc. (CEOcast)
pursuant to which CEOcast agrees to render investor relations services to Rio Vista. Under the
terms of the CEOcast agreement, CEOcast receives cash fees of $7,500 per month, and Rio Vista has
agreed to issue to CEOcast (i) 1,399 of Rio Vistas fully-paid, non-assessable common units (Common
Units) and (ii) $75,000 worth of common units on March 31, 2008 based on a calculation of units
contained in the consulting agreement. The agreement is effective for a one-year period and can be
terminated by either party by providing written notice to the other party on or before May 30,
2008; otherwise, the Agreement will automatically renew for additional one year periods (Additional
Period) under the same terms and conditions except that either party may terminate the agreement at
any time by providing 60 days written notice to the other party. As of December 31, 2007, Rio
Vista was obligated to provide CEOcast a total of 4,610 common units. Based on the closing price
of Rio Vista common units on December 31, 2007, the Company recorded additional expense of $78,275
associated with the agreement.
Asphalt Agreement.
On November 30, 2000, Regional entered into a Storage and Product Handling
Agreement with a customer with an effective date of December 1, 2000 (Asphalt Agreement). The
Asphalt Agreement provides for the pricing, terms and conditions under which the customer will
purchase terminal services and facility usage from Regional for the storage and handling of the
customers asphalt products. The Asphalt Agreement was amended on October 15, 2002 with an
effective date of December 1, 2002 (Amended Asphalt Agreement). The term of the Amended Asphalt
Agreement is five years with an option by the customer for an additional five-year renewal term,
which the customer exercised in July 2007. After the additional five-year term, the Amended
Asphalt Agreement renews automatically for successive one-year terms unless terminated upon 120
days advance written notice by either party. The annual fee payable to Regional for the initial
five-year term of the Amended Asphalt Agreement is approximately $500,000, payable in equal monthly
installments, subject to adjustments for inflation and certain facility improvements. In exchange
for the annual fee, Regional agrees to provide minimum annual throughput of 610,000 net barrels per
contract year, with additional volume to be paid on a per barrel basis. During the term of the
amended Asphalt Agreement, Regional agrees to provide three storage tanks and certain related
equipment to the customer on an exclusive basis as well as access to Regionals barge docking
facility.
51
Fuel Oil Agreement.
On November 16, 1998, Regional entered into a Terminal Agreement with a
customer with an effective date of November 1, 1998, as amended on April 5, 2001, October 11,
2001 and August 1, 2003 (Fuel Oil Agreement). The Fuel Oil Agreement provides for the pricing,
terms and conditions under which Regional will provide terminal facilities and services to the
customers for the delivery of fuel oil. The agreement renews automatically for successive
one-year terms unless terminated upon 365 days advance written notice by either party. Pursuant
to the agreement, as amended, Regional agrees to provide three storage tanks, certain related
pipelines and equipment, and at least two tractor tankers to the customer on an exclusive basis,
as well as access to Regionals barge docking facility. In exchange for use of Regionals
facilities and services, the customer pays an annual tank rental amount of approximately
$300,000 plus a product transportation fee calculated on a per gallon basis, each subject to
annual adjustment for inflation. Regional agrees to deliver a minimum daily quantity of fuel
oil on behalf of the customer.
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 has a loss from continuing operations for each of
the two years ended December 31, 2007 and has a deficit in working capital. Currently, all
revenues generated from the Oklahoma assets are held as collateral against the TCW Credit
Facility. The current portion of the TCW Credit Facility, the Moores Note, the RZB Note, and
the Seller Note Regional are all short-term in nature and amounts due in the current year
are approximately $9,100,000 million.
The Oklahoma assets and/or the Regional operations currently do not generate sufficient cash flow
to pay general and administrative and other operating expenses of Rio Vista (parent) and all debt
service requirements. The TCW Credit Facility prohibits distributions by Rio Vistas Oklahoma
subsidiaries until December 2008 and subsequent thereto, those distributions are limited to 75% of
defined available cash flow. In addition, Rio Vista requires additional funding in order to
increase production levels for its Oklahoma assets.
Rio Vista has guaranteed certain of Penn Octanes obligations. Substantially all of Rio Vistas
and Penn Octanes assets are pledged or committed to be pledged as collateral on the TCW
Credit Facility, and the RZB Note and RZB Credit Facility, and therefore, both Rio Vista and
Penn Octane may be unable to obtain additional financing collateralized by those assets.
Penn Octanes Report of Independent Registered Public Accounting Firm on the consolidated
financial statements of Penn Octane at December 31, 2007 contains an explanatory paragraph
which describes an uncertainty about Penn Octanes ability to continue as a going concern. If
Penn Octanes and Rio Vistas cash flows are not adequate to pay their obligations, Penn
Octane and/or Rio Vista may be required to raise additional funds to avoid foreclosure by
creditors. There can be no assurance that such additional funding will be available on terms
attractive to either Penn Octane or Rio Vista or available at all. If additional amounts
cannot be raised and cash flow is inadequate, Penn Octane and/or Rio Vista would likely be
required to seek other alternatives which could include the sale of assets, closure of
operations and/or protection under the U.S. bankruptcy laws.
In view of the matters described in the preceding paragraphs, recoverability of the recorded
asset amounts shown in the accompanying consolidated balance sheet is dependent upon the
ability of Rio Vista to continue as a going concern. The consolidated financial statements do
not include any adjustments related to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary should Rio Vista
be unable to continue in existence.
To provide Rio Vista with the ability it believes necessary to continue in existence, management
is taking steps to restructure its existing debt obligations and raise additional debt and/or
equity financing.
Off-Balance Sheet Arrangements
Rio Vista does not have any off-balance sheet arrangements.
52
Recently Issued Financial Accounting Standards
FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, issued in
September 2006, establishes a formal framework for measuring fair value under GAAP. It defines and
codifies the many definitions of fair value included among various other authoritative literature,
clarifies and, in some instances, expands on the guidance for implementing fair value measurements,
and increases the level of disclosure required for fair value measurements. Although SFAS No. 157
applies to and amends the provisions of existing FASB and AICPA pronouncements, it does not, of
itself, require any new fair value measurements, nor does it establish valuation standards. SFAS
No. 157 applies to all other accounting pronouncements requiring or permitting fair value
measurements, except for: SFAS No. 123(R), share-based payment and related pronouncements, the
practicability exceptions to fair value determinations allowed by various other authoritative
pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue
recognition. This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of
SFAS No. 157 did not have a material impact on its consolidated results of operations, financial
position, and cash flows.
In February 2007, SFAS No. 159 The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FAS 115, was issued, which allows entities to choose, at
specified election dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that items fair value in subsequent reporting periods must be
recognized in current earnings. SFAS No. 159 also establishes presentation and disclosure
requirements designed to draw comparison between entities that elect different measurement
attributes for similar assets and liabilities. SFAS No. 159 is effective for us on January 1,
2008. Rio Vista does not expect the adoption of SFAS No. 159 to have a material impact on its
consolidated results of operations, cash flows or financial position.
In December 2007, the FASB released SFAS No. 141(R), Business Combinations (revised 2007), which
changes many well-established business combination accounting practices and significantly affects
how acquisition transactions are reflected in the financial statements. In addition, SFAS No.
141(R) will affect how companies negotiate and structure transactions, model financial projections
of acquisitions and communicate to stakeholders. SFAS No. 141(R) must be applied prospectively to
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. Rio Vista is currently evaluating
the impact the adoption of this statement could have on its financial condition, results of
operations and cash flows.
In December 2007, the FASB released SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51, which establishes accounting and reporting
standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interests and requires
disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. Previously, net income
attributable to the noncontrolling interest was reported as an expense or other deduction in
arriving at consolidated net income. SFAS No. 160 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Rio Vista believes the adoption of this statement
will not have a material impact on its consolidated financial statements.
53
Critical Accounting Policies
The consolidated financial statements of Rio Vista reflect the selection and application of
accounting policies which require management to make significant estimates and judgments. See note
B to Rio Vistas consolidated financial statements included in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, Summary of Significant Accounting Policies. Rio Vista
believes that the following reflect the more critical accounting policies that affect its financial
position and results of operations.
Impairment of long-lived assets
- The determination of whether impairment has occurred is based on
an estimate of undiscounted cash flows attributable to assets in future periods. If impairment has
occurred, the amount of the impairment loss recognized will be determined by estimating the fair
value of the assets and recording a loss if the fair value is less than the carrying value.
Assessments of impairment are subject to managements judgments and based on estimates that
management is required to make.
Depreciation and amortization expenses
- Property, plant and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization rates are based on
managements estimate of the future utilization and useful lives of the assets. Should the nature
of Rio Vistas business change our future utilization and useful lives of depreciable and
amortizable assets may also change. This could result in increases or decreases in depreciation
and amortization expense compared with historical amounts.
Unit-based compensation
- Rio Vista utilizes unit-based awards as a form of compensation for
employees, officers and managers of our General Partner and to non-employees for goods and services
and to acquire or extend debt. Effective January 1, 2006, Rio Vista adopted the provisions of SFAS
No. 123(R), Share-Based Payment (SFAS 123R) using the modified prospective transition method.
Under this method, previously reported amounts should not be restated to reflect the provisions of
SFAS 123R. SFAS 123R requires Rio Vista to record compensation expense for all awards granted
after the date of adoption, and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. The fair value concepts have not changed significantly in
SFAS 123R; however, in adopting this standard, companies must choose among alternative valuation
models and amortization assumptions. After assessing alternative valuation models and amortization
assumptions, Rio Vista will continue using both the Black-Scholes valuation model and straight-line
amortization of compensation expense over the requisite service period for each separately vesting
portion of the grant. Rio Vista will reconsider use of this model if additional information
becomes available in the future that indicates another model would be more appropriate, or if
grants issued in future periods have characteristics that cannot be reasonably estimated using this
model.
Allowance for doubtful accounts
- The carrying value of trade accounts receivable is based on
estimated fair value. The determination of fair value is subject to managements judgments and is
based on estimates that management is required to make. Those estimates are made based on the
creditworthiness of customers and payment history. Rio Vista has made no provisions for doubtful
accounts since its inception.
We account for oil and gas properties by the successful efforts method. Leasehold acquisition
costs are capitalized when incurred. If proved reserves are found on an undeveloped property,
leasehold cost is transferred to proved properties. Under this method of accounting, costs
relating to the development of proved areas are capitalized when incurred.
Depreciation and depletion of producing oil and gas properties is recorded based on units of
production. Unit rates are computed for unamortized drilling and development costs using proved
developed reserves and for acquisition costs using all proved reserves. SFAS No. 19,
"
Financial
Accounting and Reporting for Oil and Gas Producing Companies (SFAS 19) requires that acquisition
costs of proved properties be amortized on the basis of all proved reserves, developed and
undeveloped, and that capitalized development costs (wells and related equipment and facilities) be
amortized on the basis of proved developed reserves. As more fully described in the Supplementary
Oil and Gas Data (Unaudited) in Item 8. Financial Statements and Supplementary Data, our proved
reserves at December 31, 2007 were estimated by an independent petroleum engineering firm, Lee
Keeling and Associates, Inc.
54
Geological, geophysical, annual lease rentals and dry hole costs on oil and gas properties relating
to unsuccessful wells are charged to expense as incurred.
Upon sale or retirement of complete fields of depreciable or depleted property, the book value
thereof, less proceeds or salvage value, is charged or credited to income. On sale or retirement
of an individual well, the proceeds are credited to accumulated depreciation and depletion.
In accordance with SFAS No. 144,
"
Accounting for the Impairment or Disposal of Long-Lived Assets
,
we assess proved oil and gas properties for possible impairment when events or circumstances
indicate that the recorded carrying value of the properties may not be recoverable. We recognize
an impairment loss as a result of a triggering event and when the estimated undiscounted future
cash flows from a property are less than the carrying value. If an impairment is indicated, the
cash flows are discounted at a rate approximate to our cost of capital and compared to the carrying
value for determining the amount of the impairment loss to record. Estimated future cash flows are
based on managements expectations for the future and include estimates of oil and gas reserves and
future commodity prices and operating costs. Downward revisions in estimates of reserve quantities
or expectations of falling commodity prices or rising operating costs could result in a reduction
in undiscounted future cash flows and could indicate property impairment.
Unproved properties that are individually insignificant are amortized and assessed for impairment
on a property-by-property basis. If considered impaired, costs are charged to expense when such
impairment is deemed to have occurred.
Rio Vistas estimates of proved reserves are based on the quantities of oil and gas that
engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from
established reservoirs in the future under current operating and economic parameters. Lee Keeling
and Associates, Inc. prepared a reserve and economic evaluation of all our properties on a
well-by-well basis as of December 31, 2007.
Reserves and their relation to estimated future net cash flows impact our depletion and impairment
calculations. As a result, adjustments to depletion and impairment are made concurrently with
changes to reserve estimates. Our reserve estimates and the projected cash flows derived from
those estimates are prepared in accordance with SEC guidelines. The accuracy of our reserve
estimates is a function of many factors including the following: the quality and quantity of
available data, the interpretation of that data, the accuracy of various mandated economic
assumptions and the judgments of the individuals preparing the estimates.
Rio Vistas proved reserve estimates are a function of many assumptions, all of which could deviate
significantly from actual results. As such, reserve estimates may materially vary from the
ultimate quantities of gas, natural gas liquids and oil eventually recovered.
Gas and oil production revenue and related natural gas liquids revenue are recognized based on
actual volumes of gas, oil, and natural gas liquids sold to purchasers. Sales require delivery of
the product to the purchaser, passage of title, and probability of collection of purchaser amounts
owed. Gas and oil production revenue and related natural gas liquids revenue are reported net of
royalties. Rio Vista uses the sales method of accounting for gas imbalances. Gas imbalances
result from the gas volumes sold by Rio Vista from a property being different from its actual
entitled volumes. Under the sales method, revenues are recognized based on actual volumes of gas
sold. The volumes sold may differ from the entitled volumes. Direct operating expenses are
recognized on an accrual basis and consist of costs required to operate gas and oil properties,
product transportation expenses, and production and property taxes.
Gas revenues are recognized based on actual volumes of gas purchased from third-party producers and
sold to customers. Sales are recorded only upon the delivery of the product to the purchaser,
passage of title, and collectability is reasonably assured. Losses, if any, resulting from
imbalances from such sales are recognized currently, and gains, if any, are recognized at final
delivery.
55
Oil and gas is sold by Rio Vista on a monthly basis. Virtually all of the Companys contracts
pricing provisions are tied to a market index, with certain adjustments based on, among other
factors, whether a well delivers to a gathering or transmission line, quality of oil and gas, and
prevailing supply and demand conditions, so that the price of the oil and gas fluctuate to remain
competitive with other available oil and gas suppliers.
We use hedging contracts to minimize the variability of cash flow from our oil and gas production
by reducing our exposure to price fluctuations. Currently, these transactions consist of fixed
price contracts. We account for these activities pursuant to SFAS 133. This statement establishes
accounting and reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded at
fair market value and included in the balance sheet as assets or liabilities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
56
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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|
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|
PAGE NO.
|
|
|
|
|
|
|
Rio Vista Energy Partners L.P.
|
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|
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|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
57
Report of Independent Registered Public Accounting Firm
To the Board of Managers of Rio Vista GP LLC,
General Partner of Rio Vista Energy Partners L.P.
We have audited the accompanying consolidated balance sheets of Rio Vista Energy Partners L.P. and
its subsidiaries (Rio Vista) as of December 31, 2006 and 2007, and the related consolidated
statements of operations, Partners Capital, and cash flows for each of the two years in the period
ended December 31, 2007. These financial statements are the responsibility of Rio Vistas
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rio Vista as of December 31, 2006 and
2007, and the consolidated results of their operations and their consolidated cash flows for each
of the two years in the period ended December 31, 2007 in conformity with United States generally
accepted accounting principles.
We have also audited Schedule II of Rio Vista for each of the two years in the period ended
December 31, 2007. In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
The accompanying consolidated financial statements have been prepared assuming that Rio Vista will
continue as a going concern. As discussed in note O to the consolidated financial statements,
conditions exist which raise substantial doubt about Rio Vistas ability to continue as a going
concern including 1) Rio Vistas ability to generate sufficient cash flow to pay its expenses and
its current debt obligations as they become due and 2) Rio Vistas dependence on Penn Octane to
continue as a going concern. Managements plans in regard to these matters are also described in
note O. The consolidated financial statements do not include any adjustments related to the
recoverability and classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should Rio Vista be unable to continue in existence.
/s/ BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
April 4, 2008
58
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,896,000
|
|
|
$
|
3,450,000
|
|
|
|
|
Restricted cash
|
|
|
25,000
|
|
|
|
26,000
|
|
|
|
|
Trade accounts receivable (less allowance for
doubtful accounts of $0 at 2006 and 2007)
|
|
|
523,000
|
|
|
|
1,446,000
|
|
|
|
|
Due from Penn Octane Corporation, net
|
|
|
1,751,000
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
246,000
|
|
|
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,441,000
|
|
|
|
5,375,000
|
|
|
|
|
Oil and gas properties and related equipment
(successful efforts method) net
|
|
|
|
|
|
|
26,197,000
|
|
|
|
|
Property, plant and equipment net
|
|
|
10,704,000
|
|
|
|
12,762,000
|
|
|
|
|
Other non-current assets
|
|
|
11,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
5,121,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,156,000
|
|
|
$
|
49,455,000
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS CONTINUED
December 31,
LIABILITIES AND PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
1,000,000
|
|
|
$
|
3,361,000
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
5,493,000
|
|
|
|
|
Due to Penn Octane Corporation, net
|
|
|
|
|
|
|
347,000
|
|
|
|
|
Accounts payable
|
|
|
397,000
|
|
|
|
2,101,000
|
|
|
|
|
Mexican taxes payable
|
|
|
17,000
|
|
|
|
|
|
|
|
|
Taxes payable
|
|
|
|
|
|
|
618,000
|
|
|
|
|
Accrued liabilities
|
|
|
702,000
|
|
|
|
1,585,000
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,116,000
|
|
|
|
13,505,000
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities, net of discount
|
|
|
|
|
|
|
21,250,000
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
3,238,000
|
|
|
|
|
Partners Capital
|
|
|
|
|
|
|
|
|
|
|
|
Common units
|
|
|
14,739,000
|
|
|
|
11,233,000
|
|
|
|
|
General Partners equity
|
|
|
301,000
|
|
|
|
229,000
|
|
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
15,040,000
|
|
|
|
11,462,000
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital
|
|
$
|
17,156,000
|
|
|
$
|
49,455,000
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
60
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
Revenues
|
|
$
|
908,000
|
|
|
$
|
5,906,000
|
|
Cost of goods sold
|
|
|
1,814,000
|
|
|
|
4,760,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(906,000
|
)
|
|
|
1,146,000
|
|
Selling, general and administrative expenses and other
|
|
|
|
|
|
|
|
|
Legal and professional fees
|
|
|
669,000
|
|
|
|
1,531,000
|
|
Salaries and payroll related expenses
|
|
|
755,000
|
|
|
|
1,444,000
|
|
Other
|
|
|
1,425,000
|
|
|
|
1,710,000
|
|
Loss on sale of remaining LPG assets
|
|
|
|
|
|
|
406,000
|
|
|
|
|
|
|
|
|
|
|
|
2,849,000
|
|
|
|
5,091,000
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
(3,755,000
|
)
|
|
|
(3,945,000
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(137,000
|
)
|
|
|
(994,000
|
)
|
Interest income
|
|
|
1,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes
|
|
|
(3,891,000
|
)
|
|
|
(4,922,000
|
)
|
(Provision) benefit for income taxes
|
|
|
(37,000
|
)
|
|
|
21,000
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(3,928,000
|
)
|
|
|
(4,901,000
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Net income from operations of the LPG assets sold
|
|
|
2,012,000
|
|
|
|
|
|
Net gain on sale of LPG assets
|
|
|
5,214,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
7,226,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
3,298,000
|
|
|
$
|
(4,901,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable to the partners
|
|
$
|
3,298,000
|
|
|
$
|
(4,901,000
|
)
|
Less General Partners interest in net income (loss)
|
|
|
66,000
|
|
|
|
(97,000
|
)
|
|
|
|
|
|
|
|
Net income (loss) allocable to the common units
|
|
$
|
3,232,000
|
|
|
$
|
(4,804,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per common unit
|
|
$
|
(2.01
|
)
|
|
$
|
(2.44
|
)
|
Net income from discontinued operations per common unit
|
|
|
3.70
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common unit
|
|
$
|
1.69
|
|
|
$
|
(2.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding
|
|
|
1,910,656
|
|
|
|
1,971,799
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
61
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Units
|
|
|
General
|
|
|
Partners
|
|
|
|
Units
|
|
|
Amount
|
|
|
Partner
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
1,910,656
|
|
|
$
|
11,955,000
|
|
|
$
|
244,000
|
|
|
$
|
12,199,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
3,232,000
|
|
|
|
66,000
|
|
|
|
3,298,000
|
|
Cash distribution to partners
|
|
|
|
|
|
|
(477,000
|
)
|
|
|
(10,000
|
)
|
|
|
(487,000
|
)
|
Loan discount on Penn Octane
Corporations
debt related to detachable warrants issued
|
|
|
|
|
|
|
21,000
|
|
|
|
1,000
|
|
|
|
22,000
|
|
Unit based compensation
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
1,910,656
|
|
|
|
14,739,000
|
|
|
|
301,000
|
|
|
|
15,040,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(4,804,000
|
)
|
|
|
(97,000
|
)
|
|
|
(4,901,000
|
)
|
Issuance of equity
|
|
|
493,550
|
|
|
|
5,390,000
|
|
|
|
110,000
|
|
|
|
5,500,000
|
|
Cost associated with issuance of equity
|
|
|
|
|
|
|
(294,000
|
)
|
|
|
(6,000
|
)
|
|
|
(300,000
|
)
|
Cash distribution to partners
|
|
|
|
|
|
|
(4,342,000
|
)
|
|
|
(89,000
|
)
|
|
|
(4,431,000
|
)
|
Beneficial conversion feature
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
Unit based compensation
|
|
|
25,000
|
|
|
|
519,000
|
|
|
|
10,000
|
|
|
|
529,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
2,429,206
|
|
|
$
|
11,233,000
|
|
|
$
|
229,000
|
|
|
$
|
11,462,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
62
Rio Vista Energy Partners L.P. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,298,000
|
|
|
$
|
(4,901,000
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation depletion and amortization
|
|
|
724,000
|
|
|
|
1,129,000
|
|
Unit-based payment expense
|
|
|
8,000
|
|
|
|
343,000
|
|
Amortization of loan discount related to detachable warrants issued
|
|
|
22,000
|
|
|
|
37,000
|
|
Beneficial
conversion feature
|
|
|
|
|
|
|
7,000
|
|
Loss on sale of asset
|
|
|
75,000
|
|
|
|
|
|
Gain on sale of LPG Assets
|
|
|
(5,214,000
|
)
|
|
|
|
|
Loss on sale of remaining LPG-related assets
|
|
|
|
|
|
|
406,000
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
10,404,000
|
|
|
|
(169,000
|
)
|
Inventories
|
|
|
(6,000
|
)
|
|
|
|
|
Prepaid and other current assets
|
|
|
(23,000
|
)
|
|
|
65,000
|
|
Trade accounts payable
|
|
|
(273,000
|
)
|
|
|
2,098,000
|
|
Due to/from Penn Octane Corporation, net
|
|
|
(13,333,000
|
)
|
|
|
1,587,000
|
|
Accrued liabilities
|
|
|
(280,000
|
)
|
|
|
(128,000
|
)
|
U.S. and foreign taxes payable
|
|
|
(5,000
|
)
|
|
|
215,000
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,603,000
|
)
|
|
|
689,000
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(87,000
|
)
|
|
|
(137,000
|
)
|
Proceeds from the sale of land and other assets
|
|
|
131,000
|
|
|
|
|
|
Proceeds from the sale of LPG assets
|
|
|
7,330,000
|
|
|
|
|
|
Proceeds from the sale of the remaining LPG-related assets
|
|
|
|
|
|
|
9,187,000
|
|
Costs to acquire Regional Enterprises, Inc.
|
|
|
|
|
|
|
(8,399,000
|
)
|
Costs to acquire Oklahoma assets
|
|
|
|
|
|
|
(10,070,000
|
)
|
Other non-current assets
|
|
|
4,000
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) by investing activities
|
|
|
7,378,000
|
|
|
|
(9,408,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
1,882,000
|
|
|
|
|
|
Payment on TransMontaigne Note
|
|
|
(300,000
|
)
|
|
|
(1,000,000
|
)
|
Issuance of equity, net
|
|
|
|
|
|
|
3,704,000
|
|
Cash distributions to partners
|
|
|
(487,000
|
)
|
|
|
(4,431,000
|
)
|
Issuance of debt
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,095,000
|
|
|
|
8,273,000
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
3,870,000
|
|
|
|
(446,000
|
)
|
Cash at beginning of period
|
|
|
26,000
|
|
|
|
3,896,000
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
3,896,000
|
|
|
$
|
3,450,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
36,000
|
|
|
$
|
1,287,000
|
|
|
|
|
|
|
|
|
U.S. and foreign taxes
|
|
$
|
73,000
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash transactions:
|
|
|
|
|
|
|
|
|
Notes issued in acquisition
|
|
$
|
|
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
Units issued in acquisition
|
|
$
|
|
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
TCW Credit Facility
|
|
$
|
|
|
|
$
|
18,700,000
|
|
|
|
|
|
|
|
|
Unit based compensation
|
|
$
|
8,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
Units issued for compensation
|
|
$
|
|
|
|
$
|
280,000
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature
|
|
$
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
63
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A ORGANIZATION
Rio Vista Energy Partners L.P. (Rio Vista), a Delaware limited partnership, was formed by Penn
Octane Corporation (Penn Octane) on July 10, 2003 and was a wholly owned subsidiary of Penn
Octane until September 30, 2004, the date that Penn Octane completed a series of transactions
that (i) transferred substantially all of its owned pipeline and terminal assets in Brownsville,
Texas and Matamoros, Mexico and certain immaterial liabilities to Rio Vista Operating Partnership
L.P. (RVOP) (ii) transferred Penn Octanes 99.9% interest in RVOP to Rio Vista and (iii)
distributed all of its limited partnership interests (Common Units) in Rio Vista to its common
stockholders (Spin-Off), resulting in Rio Vista becoming a separate public company. The Common
Units represented 98% of Rio Vistas outstanding capital and 100% of Rio Vistas limited
partnership interests. The remaining 2% represented the General Partner interest. The General
Partner is Rio Vista GP LLC (General Partner) (see note I General Partner Interest). Common
unitholders do not participate in the management of Rio Vista. The General Partner is entitled
to receive distributions from Rio Vista on its General Partner interest and additional incentive
distributions (see
Liquidity and Capital Resources Distributions of Available Cash)
as provided
in Rio Vistas partnership agreement. The General Partner has sole responsibility for conducting
Rio Vistas business and for managing Rio Vistas operations in accordance with the partnership
agreement. The General Partner does not receive a management fee in connection with its
management of Rio Vistas business, but is entitled to be reimbursed for all direct and indirect
expenses incurred on Rio Vistas behalf.
Until 2007, Rio Vista was focused on the operation of the LPG terminal facility and pipelines.
After August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG
assets to TransMontaigne including the Brownsville, Texas terminal facility and refined products
tank farm, together with associated improvements, leases, easements, licenses and permits; an LPG
sales agreement; and all of LPG inventory. After August 2006, Rio Vista operated this system
exclusively on behalf of TransMontaigne Partners L.P. and its affiliates, or TransMontaigne, to
transport their LPG on a fee for services basis.
In December 2007, Rio Vista completed the disposition of its remaining LPG assets to
TransMontaigne, including the U.S. portion of the two pipelines from the Brownsville, Texas
terminal owned by TransMontaigne to the U.S. border, along with all associated rights-of-way and
easements; all of the outstanding equity interests in Rio Vistas subsidiaries owning interests
in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico and the
terminal in Matamoros (see note D). As a result, effective January 1, 2008, Rio Vista no longer
operates the assets acquired from Penn Octane or conduct the businesses it had historically
conducted.
In July 2007, Rio Vista acquired Regional Enterprises, Inc. (Regional) and in November 2007, Rio
Vista acquired certain oil and natural gas producing properties and related assets in the State
of Oklahoma formerly owned by GM Oil Properties, Inc., Penny Petroleum Corporation and GO LLC
(GO). The businesses and assets acquired in 2007 are described further in note E. As a result of
these acquisitions in 2007, Rio Vista is now focused on the acquisition, development and
production of oil and natural gas properties and related midstream assets, and the operation and
development of Regionals business.
The above acquisitions were funded by a combination of debt (new and assumed), private placements
of Rio Vista common units and proceeds from the sale of Rio Vistas LPG related assets. During
November 2007, Rio Vista completed a private placement of common units raising gross proceeds of
$4,000,000.
64
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A ORGANIZATION Continued
Basis of Presentation
The accompanying consolidated financial statements include Rio Vista and its United States
subsidiaries including RVOP, Rio Vista Operating GP LLC, Rio Vista Penny LLC, GO, MV Pipeline
Company (MV), Regional Enterprises Inc, and Penn Octane International, L.L.C., and its Mexican
subsidiaries, Penn Octane de Mexico, S. de R.L. de C.V. (PennMex) and Termatsal, S. de R.L. de
C.V. (Termatsal) and its consolidated affiliate, Tergas, S. de R.L. de C.V. (Tergas). All
significant intercompany accounts and transactions are eliminated.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of
the accompanying consolidated financial statements are as follows.
1.
Inventories
Inventories were stated at the lower of cost or market. Cost was determined on the first-in,
first-out method.
2.
Oil and Gas Properties
Rio Vista accounts for oil and gas properties by the successful efforts method. Leasehold
acquisition costs are capitalized. If proved reserves are found on an undeveloped property,
leasehold costs are transferred to proved properties. Under this method of accounting, costs
relating to the development of proved areas are capitalized when incurred.
Depreciation and depletion of producing oil and gas properties is recorded based on units of
production. Unit rates are computed for unamortized drilling and development costs using proved
developed reserves and for unamortized acquisition costs using all proved reserves. Statement of
Financial Accounting Standards (SFAS) No. 19, as amended,
Financial Accounting and Reporting by
Oil and Gas Producing Companies
(SFAS 19) requires that acquisition costs of proved properties
be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized
development costs (wells and related equipment and facilities) be amortized on the basis of
proved developed reserves.
Proved reserves are estimated by an independent petroleum engineering firm and are subject to
future revisions based on availability of additional information.
Geological, geophysical, annual lease rentals and exploratory dry hole costs on oil and gas
properties relating to unsuccessful exploratory wells are charged to expense as incurred.
Upon sale or retirement of complete fields of depreciable or depleted property, the book value
thereof, less proceeds or salvage value, is charged or credited to income. On sale or retirement
of an individual well the proceeds are credited to accumulated depreciation and depletion.
65
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
2.
Oil and Gas Properties Continued
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets,
Rio Vista assess proved oil and gas properties for possible impairment when events or
circumstances indicate that the recorded carrying value of the properties may not be recoverable
(see note B4).
Unproved properties are assessed for impairment on a property-by-property basis. If considered
impaired, costs are charged to expense when such impairment is deemed to have occurred. Rio
Vista has no unproved properties at December 31, 2007.
3. Hedging Activities and Derivative Instruments
Rio Vista seeks to enter into contracts for the future sale of a portions of its existing
production based on favorable price levels. As of December 31, 2007, these transactions were in
the form of contracts to sell a certain amount of production at a fixed price.
Based on the above, Rio Vista is not required to mark to market the value of those contracts.
Rio Vista has adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
which requires that all derivative financial instruments be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either recognized periodically
in income or partners capital (as a component of comprehensive income), depending on whether
the derivative is being used to hedge changes in fair value or cash flows. In April 2003, the
FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments and hedging activities. For each of the two years in the period ended
December 31, 2007, Rio Vista had no derivative financial instruments.
4.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. After being placed into service,
assets are depreciated using the straight-line method over their estimated useful lives as
follows:
|
|
|
|
|
Terminal Facility and improvements
|
|
5-30 years
|
Pipelines
|
|
30 years
|
Automotive equipment
|
|
5-20 years
|
Machinery and equipment
|
|
5-10 years
|
Office equipment
|
|
3-10 years
|
|
|
|
Maintenance and repair costs are charged to expense as incurred.
|
66
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
4.
Property, Plant and Equipment Continued
In August 2001 Statement SFAS No. 144 was issued. SFAS No. 144 supersedes the provisions of
Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of. SFAS No. 144 requires Rio Vista to review
long-lived assets and certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is
determined that an impairment has occurred, the amount of the impairment is charged to
operations.
5.
Income Taxes
Rio Vista is a public limited partnership and is not subject to federal or state income
taxes. However, some of Rio Vistas operating subsidiaries are subject to foreign and U.S.
corporate income taxes as follows:
Rio Vistas U.S. corporate subsidiaries account for deferred taxes in accordance with SFAS
109, Accounting for Income Taxes. Under the liability method specified therein, deferred tax
assets and liabilities are determined based on the difference between the financial statement and
tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in deferred tax
assets and liabilities. The principal types of differences between assets and liabilities for
financial statement and income tax purposes are asset cost basis differences and depreciation.
Mexican subsidiaries:
Rio Vistas Mexican subsidiaries are taxed on their income directly by the Mexican government
and file their own separate income tax returns in Mexico. Rio Vistas Mexican subsidiaries have
elected pass-through treatment for U.S. income tax purposes. Accordingly, the income/loss of
Rio Vistas Mexican subsidiaries is included in the U.S. partnership income tax return of Rio
Vista. The holders of the common units and General Partner interest are entitled to their
proportionate share of any tax credits resulting from any income taxes paid to the Mexican
government.
Regional and MV:
Regional and MV are taxed as U.S. corporations. A valuation allowance is provided when it is
determined that it is more likely than not that a portion of a deferred tax asset balance will
not be realized. Prior to November 1, 2004, Regional used the cash basis of accounting for
determining taxable income and MV uses the cash basis of accounting for determining taxable
income.
6. (
Loss) Income Per Common Unit
Net (loss) income per common unit is computed on the weighted average number of common units
outstanding in accordance with SFAS 128, Earnings Per Share. During periods in which Rio
Vista incurs losses from continuing operations, giving effect to common unit equivalents is not
included in the computation as it would be antidilutive.
67
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
7.
Cash Equivalents
For purposes of the cash flow statement, Rio Vista considers cash in banks and securities
purchased with a maturity of three months or less to be cash equivalents.
8.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires Rio Vista to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
9.
Fair Value of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of
fair value information about financial instruments, whether or not recognized on the balance
sheet, for which it is practicable to estimate the value. SFAS 107 excludes certain financial
instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts are
not intended to represent the underlying value of Rio Vista. The carrying amounts of cash and
cash equivalents, current receivables and payables approximate fair value because of the
short-term nature of these instruments. Notes payable bear market rates of interest.
10.
Unit-Based Payment
Rio Vista may issue warrants to purchase common units to non-employees for goods and services
and to acquire or extend debt. Rio Vista applies the provisions of Statement of Financial
Accounting Standards No. 123R Share-Based Payment (SFAS 123R) and Accounting Principles Board
Opinion No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
(APB 14) to account for such transactions. SFAS 123R requires that such transactions be
accounted for at fair value. If the fair value of the goods and services or debt related
transactions are not readily measurable, the fair value of the warrants is used to account for
such transactions.
Rio Vista utilizes unit-based awards as a form of compensation for employees, officers, manager
and consultants of the General Partner. During the quarter ended March 31, 2006, Rio Vista
adopted the provisions of SFAS 123R for unit-based payments to employees using the modified
prospective application transition method. Under this method, previously reported amounts
should not be restated to reflect the provisions of SFAS 123R. SFAS 123R requires measurement
of all employee unit-based payment awards using a fair-value method and recording of such
expense in the consolidated financial statements over the requisite service period. The fair
value concepts have not changed significantly in SFAS 123R; however, in adopting this standard,
companies must choose among alternative valuation models and amortization assumptions. After
assessing alternative valuation models and amortization assumptions, Rio Vista will continue
using both the Black-Scholes valuation model and straight-line amortization of compensation
expense over the requisite service period for each separately vesting portion of the grant. Rio
Vista will reconsider use of this model if additional information becomes available in the
future that indicates another model would be more appropriate, or if grants issued in future
periods have characteristics that cannot be reasonably estimated using this model. Previously,
Rio Vista had applied the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations and elected to utilize the
disclosure option of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Rio Vista recorded unit-based payment expense for
employees and non-employees of $8,000 ($0.00 per common unit) and $249,000 ($0.12 per common
unit) for the years ended December 31, 2006 and 2007, respectively, under the fair-value
provisions of SFAS 123R.
68
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
11.
Revenue Recognition
LPG Transportation Fees and Regional:
Rio Vista recorded revenue only upon the actual gallons of LPG delivered to its customer at
either the Matamoros Terminal Facility or Brownsville Terminal Facility at the agreed upon price
per gallon.
Rio Vista recorded revenue under its LPG Transportation Agreement (see note D) when gallons of
LPG were delivered to customers designated by TransMontaigne at the Matamoros Terminal Facility.
Regional records revenue for storage, transportation and transloading as the services are
performed and delivery occurs.
Revenues for LPG transportation fees and Regional were recorded based on the following criteria:
(1) Persuasive evidence of an arrangement existed and the price was determined
(2) Delivery occurred.
(3) Collectibility was reasonably assured
Oil & Gas Revenues:
Sales of Natural Gas
Gas and oil production revenue and related natural gas liquids revenue are recognized based on
actual volumes of gas, oil, and natural gas liquids sold to purchasers. Sales require delivery
of the product to the purchaser, passage of title, and probability of collection of purchaser
amounts owed. Gas and oil production revenue and related natural gas liquids revenue are
reported net of royalties. Rio Vista uses the sales method of accounting for gas imbalances.
Gas imbalances result from the gas volumes sold by Rio Vista from a property being different from
its actual entitled volumes. Under the sales method, revenues are recognized based on actual
volumes of gas sold. The volumes sold may differ from the entitled volumes. Direct operating
expenses are recognized on an accrual basis and consist of costs required to operate gas and oil
properties, product transportation expenses, and production and property taxes.
Gas revenues are recognized based on actual volumes of gas purchased from third party producers
and sold to customers. Sales are recorded only upon the delivery of the product to the purchaser,
passage of title, and collectability is reasonably assured. Losses, if any, resulting from
imbalances from such sales are recognized currently, and gains, if any, are recognized at final
delivery.
Oil and gas is sold by Rio Vista on a monthly basis. Virtually all of the Companys contracts
pricing provisions are tied to a market index, with certain adjustments based on, among other
factors, whether a well delivers to a gathering or transmission line, quality of oil and gas, and
prevailing supply and demand conditions, so that the price of the oil and gas fluctuate to remain
competitive with other available oil and gas suppliers.
Gathering fees
Gas gathering fees are recorded as the services are performed and delivery has occurred and
collectibility is reasonably assured.
69
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
12.
Foreign Currency Translation
Rio Vista follows FASB No. 52 Foreign Currency Translation in consolidation of the Rio Vistas
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.
13.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current
presentation.
14.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are accounted for at fair value. Trade accounts receivable do not
bear interest and are short-term in nature. An allowance for doubtful accounts for trade
accounts receivable is established when the fair value is less than the carrying value. Trade
accounts receivable are charged to the allowance when it is determined that collection is
remote.
15.
Consolidation of Variable Interest Entities
During 2004, Rio Vista adopted Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Entities (FIN 46), which was amended by FIN 46R. This
interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of variable interest entities (VIE) that do not
have sufficient equity investment at risk to permit the entity to finance its activities without
additional subordinated financial support. FIN 46R requires the beneficiary of a VIE to
consolidate in its financial statements the assets, liabilities and results of operations of the
VIE. Tergas, 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.
16.
Guarantees
In November 2002, the Financial Accounting Standards board issued Financial Accounting Standards
Board Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others (FIN 45). This interpretation requires
guarantors to disclose certain information about guarantees of indebtedness of others (see note
K). In addition, under certain circumstances, those guarantees may result in such debts being
recorded in the guarantors financial statements.
17.
Restricted Cash
Prior to the Restated LPG Asset Sale, under the terms of the RZB Credit Facility (see note K),
all cash from Rio Vistas LPG sales were 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. Rio Vista initially classified the balance of restricted cash separate from cash in
the accompanying balance sheet and classified changes in the restricted cash balances as
financing activities in the statements of cash flows since the restriction was directly related
to RZBs Credit Facility. When all restrictions are removed, restricted cash is reclassified
into cash.
70
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
18.
Environmental Matters
Rio Vista is subject to various federal, state and local laws and regulations relating to the
protection of the environment. Rio Vista has established procedures for the ongoing evaluation of
its operations, to identify potential environmental exposures and to comply with regulatory
policies and procedures.
Rio Vista accounts for environmental contingencies in accordance with SFAS No. 5 Accounting for
Contingencies. Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition caused by past
operations, and do not contribute to current or future revenue generation, are expensed.
Liabilities for environmental contingencies are recorded when environmental assessments and/or
clean-ups are probable and the costs can be reasonably estimated. Rio Vista maintains insurance
which may cover in whole or in part certain types of environmental contingencies. For the year
ended December 31, 2007, Rio Vista had no environmental contingencies requiring specific
disclosure or the recording of a liability.
19.
Asset Retirement Obligations
Rio Vista accounts for asset retirement obligations in accordance with SFAS No. 143,
Accounting
for Asset Retirement Obligations
(SFAS 143). In accordance with SFAS 143, estimated asset
retirement costs are recognized when the obligation is incurred, and are amortized over proved
developed reserves using the units of production method. Asset retirement costs are estimated by
Rio Vista using existing regulatory requirements and anticipated future inflation rates. Rio
Vista had no estimated asset retirement obligations at December 31, 2007.
20.
Segment Information
Rio Vista reports segment information in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131). Under SFAS 131, all publicly
traded companies are required to report certain information about the operating segments,
products, services and geographical areas in which they operate and their major customers.
Operating segments are components of Rio Vista for which separate financial information is
available that is evaluated regularly by management in deciding how to allocate resources and
assess performance. This information is reported on the basis that it is used internally for
evaluating segment performance. Rio Vista operates as two business segments: Transportation and
Terminalling business and the Oil and Gas business (see note Q).
71
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C LOSS PER COMMON UNIT
The following tables present reconciliations from net loss from continuing operations per common
unit to loss from continuing operations per common unit assuming dilution (see note J for the
warrants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(3,849,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(3,849,000
|
)
|
|
|
1,910,656
|
|
|
$
|
(2.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
|
|
Loss
|
|
|
Units
|
|
|
Per-Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss from continuing operations
available to the common units
|
|
$
|
(4,804,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
(4,804,000
|
)
|
|
|
1,971,799
|
|
|
$
|
(2.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to the common units
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
72
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D DISPOSITIONS
SALE OF LPG ASSETS / DISCONTINUED OPERATIONS
On August 22, 2006, Rio Vista completed the sale and assignment to TransMontaigne of certain LPG
assets, including the Brownsville Terminal Facility, the refined products tank farm and
associated leases, and LPG inventory, wherever located, (collectively, the Brownsville Terminal
Assets) and assignment of the 2006 PMI agreement (Brownsville Terminal Assets and the 2006 PMI
agreement collectively, the Rio Vista Sold Assets) pursuant to an amended and restated purchase
and sale agreement (Rio Vista Restated PSA). The Rio Vista Restated PSA replaced the previous
purchase and sale agreement entered into between Rio Vista and TransMontaigne on August 15, 2005.
Rio Vista retained its owned pipelines located in the United States, including land, leases and
rights of way and 100% of the outstanding stock of its Mexican subsidiaries. Rio Vistas Mexican
subsidiaries and consolidated affiliate own pipelines in Mexico and the Matamoros Terminal
Facility, including land and rights of way (collectively, the Retained Assets). The purchase
price for the Rio Vista Sold Assets was $8,300,000 less closing adjustments of $351,173 and
escrow cleaning costs of $500,000 (see paragraph below).
Also on August 22, 2006, Penn Octane completed the sale and assignment to TransMontaigne of all
of Penn Octanes LPG assets, including assignment of the lease of its leased pipeline (Leased
Pipeline) and the Exxon Supply Contract (Penn Octane Sold Assets) pursuant to an amended and
restated purchase and sale agreement (Penn Octane Restated PSA). The terms of the Penn Octane
Restated PSA were substantially similar to the original purchase and sale agreement entered into
between Penn Octane and TransMontaigne on August 15, 2005. Penn Octane retained assets related
to its Fuel Sales Business, and its interest in the General Partner. The purchase price was
$10,100,000 for assets sold by Penn Octane less closing adjustments of $132,177.
The Rio Vista Restated PSA required Rio Vista to escrow $500,000 for disposal and cleaning costs
of the refined products tank farm (Escrow Cleaning Costs) and the TransMontaigne Note (see note
G) was amended whereby Rio Vista was required to pay $300,000 of principal at closing and was
required to pay the remaining outstanding principal balance on August 22, 2007 (see
Sale of
Remaining LPG Assets
below). In addition, any portion of the Escrow Cleaning Costs returned to
Rio Vista is required to be paid on the outstanding principal balance of the TransMontaigne Note.
Under the Rio Vista Restated PSA and the related transportation agreement between Rio Vista and
TransMontaigne dated August 22, 2006 (LPG Transportation Agreement), TransMontaigne agreed to
exclusively use the services and Retained Assets of Rio Vista on a fee basis for purposes of
transportation of LPG to be delivered into northeastern Mexico and/or LPG sold pursuant to the
existing PMI agreement. Rio Vista has agreed not to transport LPG through Rio Vistas Retained
Assets in Mexico except on behalf of TransMontaigne, subject to certain conditions.
TransMontaigne has agreed to use the Retained Assets pursuant to the LPG Transportation Agreement
which began on August 22, 2006 and runs for the term of the existing PMI agreement between
TransMontaigne and PMI, as extended from time to time thereafter. Rio Vista receives a fee for
all LPG transported on behalf of TransMontaigne through the Retained Assets. In addition, under
the Rio Vista Restated PSA and the related pipeline services agreement between Rio Vista and
TransMontaigne dated August 22, 2006 (U.S. Pipeline Services Agreement), TransMontaigne agreed to
provide routine and non-routine operation and maintenance services, as defined, for the U.S.
portion only of Rio Vistas pipelines between Brownsville, Texas and Matamoros, Mexico.
TransMontaigne agreed to provide the routine services at its sole cost and expense. For the
non-routine services, Rio Vista agreed to reimburse TransMontaigne for all costs actually
incurred in performing the services and all materials and supplies provided in connection with
such services, plus 15%.
73
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D DISPOSITION Continued
SALE OF LPG ASSETS / DISCONTINUED OPERATIONS Continued
The sale of the Rio Vista Sold Assets constituted a disposal of a business in accordance with FAS
144. Accordingly, the financials statements reflect the results associated with the Sold Assets
prior to the sale as discontinued operations in the accompanying financial statements. Costs
related to the Retained Assets, consisting of depreciation expense and the expenses related to
the US-Mexico Pipelines and Matamoros Terminal Facility have been included in costs of goods sold
since these costs have continued to be incurred in connection with the LPG Transportation
Agreement. Revenues reported in discontinued operations in the accompanying consolidated
statement of operations for the year ended December 31, 2006 were $71,526,000.
SALE OF REMAINING LPG ASSETS
On December 27, 2007, RVOP and RVOPs wholly-owned subsidiary, Penn Octane International, LLC,
entered into a definitive Purchase and Sale Agreement (the Purchase and Sale Agreement) with a
wholly-owned subsidiary (TMOC Corp.) and two affiliates (TLP MEX L.L.C. and RAZORBACK L.L.C.) of
TransMontaigne Partners L.P. (collectively, TLP) regarding TLPs acquisition of RVOPs remaining
liquefied petroleum gas (LPG) assets. The Purchase and Sale Agreement was effective as of
December 26, 2007. The transaction closed on December 31, 2007. The Purchase and Sale Agreement
was executed pursuant to the letter of intent between RVOP and TLP dated September 12, 2007 and
amended December 4, 2007.
Pursuant to the Purchase and Sale Agreement, subject to its terms and conditions, TLP agreed
purchase from RVOP: (a) the United States portion of the two pipelines from the Brownsville,
Texas terminal owned by TLP to the United States border (the US Pipelines) with all associated
rights-of-way and easements (the US Easements); (b) all of the outstanding equity interests of
PennMex, which holds the Mexican energy regulatory commission (CRE) permit, and Termatsal, which
owns the portion of the two pipelines that extend from the US border to Matamoros, Mexico
(the Mexican Pipelines); and (c) all of RVOPs rights for indirect control of Tergas, which owns
the Matamoros, Mexico terminal site (the Mexican Terminal). PennMex and Termatsal are 100% owned
subsidiaries of RVOP and Tergas is an affiliate of RVOP, and each of the three companies
(collectively, the Included Subsidiaries) is organized under the laws of Mexico. The US
Pipelines, the US Easements, the Included Subsidiaries, the Mexican Pipelines and the Mexican
Terminal, are collectively referred to as the LPG Assets.
The total purchase price for the LPG Assets was $10,825,000, subject to adjustment as provided in
the Purchase and Sale Agreement. TLP has previously paid to RVOP deposits totaling $8,000,000
(the Deposits) which was credited to the purchase price at closing. The remaining $2,825,000 was
paid at closing, subject to adjustments and less a holdback of $500,000 as security for RVOPs
indemnification obligations under the Purchase and Sale Agreement. In addition, RVOPs existing
$1,000,000 promissory note (the Existing Loan) payable to TransMontaigne Product Services Inc.
(TPSI), an affiliate of TLP, was paid from the proceeds at closing. Prior to the execution of the
Purchase and Sale Agreement, and until the closing, RVOP provided LPG transportation services to
TLP or its affiliates under the terms of an LPG Transportation Agreement with TPSI.
In connection with the sale of the LPG Assets to TLP, RVOP and TPSI agreed to terminate the LPG
Transportation Agreement and the U.S. Pipeline Service Agreement as of such closing date.
74
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E ACQUISITIONS
REGIONAL
On July 27, 2007, Rio Vista entered into an Agreement and Plan of Merger (Merger Agreement) with
Regional Enterprises, Inc., a Virginia corporation (New Regional), Regional Enterprizes, Inc., a
Virginia corporation (Old Regional), the shareholders of Old Regional and W. Gary Farrar, Jr.
The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a
merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista
(the Regional Acquisition). The principal business of Regional is storage, transportation and
railcar transloading of bulk liquids, including chemical and petroleum products owned by its
customers. The total consideration pursuant to the Merger Agreement was $9,000,000, of which Rio
Vista paid $8,000,000 in cash, less certain working capital and other adjustments and subject to
certain amounts held in escrow, with the remaining $1,000,000 to be paid in four equal semiannual
installments beginning six months from the date of the Regional Acquisition (Sellers
Note-Regional). Under the terms of the Merger Agreement, Rio Vista was entitled to net working
capital of Old Regional of $500,000, subject to adjustments. Under the terms of the Merger
Agreement, a total of $1,500,000 was placed into escrow to secure certain indemnification
obligations of the former shareholders of Old Regional. Rio Vista funded the Regional Acquisition
through a loan of $5,000,000 (RZB Note) from RZB Finance LLC (RZB) and the remaining amounts due
at closing were paid from available working capital. In connection with the Regional
Acquisition, Rio Vista entered into a loan agreement (the Loan Agreement) with RZB dated July 26,
2007. The RZB Note is due on demand, with a one-year maturity. The RZB Note carries a variable
annual rate of interest equal to the higher of (a) the rate of interest established from time to
time by JPMorgan Chase Bank, N.A. as its base rate or its prime rate (7.25% at December 31,
2007), or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%,
in each case plus a margin of 4.75%. In connection with the RZB Note, New Regional granted to RZB
a security interest in all of New Regionals assets, including a deed of trust on real property
owned by New Regional, and Rio Vista delivered to RZB a pledge of the outstanding capital stock
of New Regional. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane
also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn
Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to
RZB under the Loan Agreement and otherwise. The RZB Note is also guaranteed by New Regional and
RVOP.
Regionals principal facilities are located on the James River in Hopewell, Virginia, where it
receives bulk chemicals and petroleum products from ships and barges into approximately
10,400,000 gallons of available storage. Regional also receives product from a rail spur which is
capable of receiving 14 rail cars at any one time for transloading of chemical and petroleum
liquids for delivery throughout the mid-Atlantic region.
Regional utilizes its fleet of 32 tractors and 50 trailers to distribute the various products it
receives as well as to perform direct hauling operations on behalf of its customers.
The accompanying consolidated balance sheet includes goodwill in the amount of $5,121,000
resulting from the acquisition. Goodwill represents the excess of the purchase price over the
estimated fair value of identifiable net assets associated with acquisition transactions. Rio
Vista has adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FASB 142). Under FASB 142, goodwill is not amortized.
Rio Vista is required to make at least an annual test of the fair value of the intangible to
determine if impairment has occurred. Rio Vista performs an annual impairment test for goodwill
in the fourth quarter of each calendar year.
75
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E ACQUISITIONS Continued
OKLAHOMA ASSETS
On November 19, 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary
of Rio Vista, entered into a Note Purchase Agreement, Promissory Notes, Security Agreement,
Common Unit Purchase Warrant and related agreements with TCW Asset Management Company (TAMCO) as
agent and TCW Energy Fund X investors as holders (the TCW Noteholders) (TAMCO and the TCW
Noteholders collectively, TCW) in connection with a first lien senior credit facility (the TCW
Credit Facility) between TCW and Rio Vista Penny. The purpose of the TCW Credit Facility was to
provide financing of the acquisition of certain of the assets of GM Oil Properties, Inc., an
Oklahoma corporation (GM Oil) and assets of Penny Petroleum Corporation, an Oklahoma corporation
(Penny Petroleum) by Rio Vista Penny and the acquisition of the membership interests of GO, by
Rio Vista GO LLC (Rio Vista GO), an indirect, wholly-owned subsidiary of Rio Vista. The assets of
GM Oil, Penny Petroleum and GO are collectively referred to as the Oklahoma assets.
GM Oil Properties Inc.
On November 19, 2007, Rio Vista Penny completed the purchase of assets from GM Oil pursuant to
the Asset Purchase Agreement between Rio Vista Penny and GM Oil dated as of October 1, 2007, as
amended on November 16, 2007 (the Amended GM Agreement). The assets acquired pursuant to the
Amended GM Agreement consist of the real and personal property interests of GM Oil in certain oil
and gas properties located in Haskell, McIntosh and Pittsburg counties in Oklahoma, including
approximately 33.33% of the outstanding capital stock of MV (collectively, the GM Assets). The
total purchase price for the GM Assets was paid by assumption of the TCW Credit Facility in the
amount of $16,750,000 million (including $250,000 of unpaid interest included in the TCW Credit
Facility plus payment of additional accrued but unpaid interest in the amount of $340,000). The
TCW Credit Facility is payable to the TCW Noteholders and is administered by TAMCO as agent
pursuant to the TCW Credit Facility. No cash or equity consideration was paid to GM Oil or its
shareholders as part of the purchase price of the GM Assets.
Penny Petroleum Corporation
On November 19, 2007, Rio Vista Penny completed the purchase of assets from Penny Petroleum
pursuant to the Asset Purchase Agreement between Rio Vista Penny, Penny Petroleum and Gary Moores
(a shareholder of Penny Petroleum), dated as of October 1, 2007, as amended on October 25 and
November 16, 2007 (the Amended Penny Agreement). The assets acquired pursuant to the Amended
Penny Agreement consist of the real and personal property interests of Penny Petroleum in certain
oil and gas properties located in McIntosh, Pittsburg and Haskell counties in Oklahoma,
including approximately 66.66% of the outstanding capital stock of MV (collectively, the Penny
Assets).
The total purchase price paid for the Penny Assets was $7,400,000, consisting of cash, a
promissory note and equity interests in Rio Vista. The cash portion of the purchase price was
$6,400,000, together with a promissory note with the principal amount of $500,000 bearing
interest at 7% per annum (the Moores Note) payable to Gary Moores on May 19, 2008. Beginning
February 19, 2008, Gary Moores has the option to convert the outstanding principal and interest
of the Moores Note into common units of Rio Vista at a conversion price equal to 90% of the
10-day average closing price of such common units as reported by the NASDAQ Stock Market at the
time of conversion. The conversion option may be exercised on only one occasion and expires on
May 19, 2008. The equity portion of the purchase price was paid by delivery of 45,998 common
units of Rio Vista (the Penny Units). Rio Vista agreed to file with the SEC a registration
statement on Form S-3 covering the Penny Units within 90 days following November 19, 2007. On
February 13, 2008, Rio Vista filed a Form S-3 with the SEC. The Form S-3 is expected to be
declared effective upon the filing of this Annual Report on Form 10-K.
76
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E ACQUISITIONS Continued
OKLAHOMA
ASSETS
Continued
GO LLC
On November 19, 2007, Rio Vista GO completed the purchase of membership interests of GO pursuant
to the Membership Interest Purchase and Sale Agreement between Rio Vista GO, GO, Outback
Production Inc. (Outback) (the owner of all of the outstanding membership interests of GO), and
Gary Moores and Bill Wood (each a shareholder of Outback), dated as of October 2, 2007, as
amended on November 16, 2007 (the Amended GO Agreement). The total purchase price paid for the
membership interests of GO was $4,000,000, consisting of cash and equity interests in Rio Vista.
The cash portion of the purchase price was $3,000,000. The equity portion of the purchase price
was paid by delivery of 91,996 common units of Rio Vista (the GO Units) to Gary Moores and Bill
Wood. Rio Vista has agreed to file with the SEC a registration statement on Form S-3 (the GO
Registration Statement) covering the GO Units within 90 days following November 19, 2007. On
February 13, 2008, Rio Vista filed a Form S-3 with the SEC. The Form S-3 is expected to be
declared effective upon the filing of this Annual Report on Form 10-K.
On the date the GO Registration Statement is declared effective by the SEC (the Registration
Date), if the closing price of Rio Vistas common units as reported by the NASDAQ Stock Market
(the Registration Date Price) is less than 80% of $10.87 (the Minimum Price), Rio Vista GO will
deliver to Outback either (i) additional common units of Rio Vista (the Additional GO Units) in
such number as necessary so that the total value of the GO Units and the Additional GO Units, in
each case based on the Registration Date Price, is at least 80% of the value of the Purchase
Price Units based on the Minimum Price or (ii) additional cash (the Additional Cash) in such
amount as necessary so that the total value of the GO Units, based on the Registration Date
Price, together with the Additional Cash, is at least 80% of the value of the GO Units based on
the Minimum Price. In lieu of delivery of Additional GO Units or Additional Cash to supplement
the GO Units, Rio Vista GO has the alternate option to pay the entire value of the GO Units based
on the Minimum Price in cash (the All Cash Payment). Upon delivery of the All Cash Payment to the
Seller, all GO Units shall be returned to Rio Vista GO and/or cancelled by Rio Vista.
Summary of Assets Acquired and Pro forma Information
The total purchase price for the acquisition of the Oklahoma assets was approximately $33,007,000
consisting of a cash payment in the amount of $10,070,000, including $3,000,000 from the TCW
Credit Facility, which included acquisition fees and other assumed liabilities of $1,890,000, the
issuance of $1,500,000 of common units, the issuance of a $500,000 short-term convertible note,
and the assumption the TCW Credit Facility with a balance of $21,700,000 including $2,000,000
payment to TCW to obtain the credit facility. In December 2008, the TCW Credit Facility will
convert to an eight-year amortizing loan with a fixed interest rate of 10.5%.
The accompanying consolidated financial statements include the operations of Regional and the
Oklahoma assets since the dates of acquisition. The assets acquired and liabilities assumed have
been recorded at their estimated fair values at the date of acquisition.
77
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E ACQUISITIONS Continued
Summary of Assets Acquired and Pro forma Information
- Continued
The following table summarizes the initial estimated fair values of the assets acquired and
liabilities assumed at the acquisition dates. Such estimates could change as a result of further
refinement and the possible purchase price adjustment discussed above. The goodwill assigned to
the Regional acquisition is not expected to be deductible for Federal or state income tax
purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
|
Regional
|
|
|
Acquisitions
|
|
Current assets
|
|
$
|
843,000
|
|
|
$
|
|
|
Oil and gas properties and related equipment
|
|
|
|
|
|
|
26,255,000
|
|
Property, plant and equipment, net
|
|
|
6,421,000
|
|
|
|
6,752,000
|
|
Goodwill
|
|
|
5,121,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
12,385,000
|
|
|
|
33,007,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
1,122,000
|
|
|
|
4,615,000
|
|
Long-term liabilities
|
|
|
2,864,000
|
|
|
|
19,822,000
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
3,986,000
|
|
|
|
24,437,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
8,399,000
|
|
|
$
|
8,570,000
|
|
|
|
|
|
|
|
|
The following unaudited pro forma information assumes that the acquisitions occurred at the
beginning of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
13,561,000
|
|
|
|
14,202,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,239,000
|
)
|
|
|
(7,594,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common unit
|
|
|
(1.15
|
)
|
|
|
(3.77
|
)
|
78
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
Oklahoma:
|
|
|
|
|
|
|
|
|
Pipelines and equipment
|
|
$
|
|
|
|
$
|
6,756,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional:
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
237,000
|
|
Terminal and improvements
|
|
|
|
|
|
|
3,825,000
|
|
Automotive equipment
|
|
|
|
|
|
|
2,438,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Mexico Pipelines and Matamoros Terminal Facility: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pipelines and Rights of Way
|
|
|
6,852,000
|
|
|
|
|
|
Mexico Pipelines and Rights of Way
|
|
|
1,046,000
|
|
|
|
|
|
Matamoros Terminal Facility
|
|
|
5,564,000
|
|
|
|
|
|
Land
|
|
|
705,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,167,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,167,000
|
|
|
|
13,256,000
|
|
Less: accumulated depreciation and amortization
|
|
|
( 3,463,000
|
)
|
|
|
( 494,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
10,704,000
|
|
|
$
|
12,762,000
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Sold December 27, 2007 (see note D).
|
Depreciation expense of property, plant and equipment from continuing operations totaled
$591,000 and $1,071,000 for each of the two years in the period ended December 31, 2007,
respectively.
Property, plant and equipment, net of accumulated depreciation, includes $4,704,000 of costs,
located in Mexico at December 31, 2006.
79
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G DEBT OBLIGATIONS
Short-term debt obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
RZB Note (see note E)
|
|
$
|
|
|
|
$
|
5,000,000
|
|
Moores Note (net of discount of $7,000) (see note E)
|
|
|
|
|
|
|
493,000
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
5,493,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
obligations are as
follows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCW Credit Facility
(net of discount of $11,000)
|
|
$
|
|
|
|
$
|
23,689,000
|
|
Sellers Note Regional (net of discount of $78,000)
|
|
|
|
|
|
|
922,000
|
|
TransMontaigne Note
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
24,611,000
|
|
Less current portion
|
|
|
1,000,000
|
|
|
|
3,361,000
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
21,250,000
|
|
|
|
|
|
|
|
|
Maturities of long-term debt are as
follows:
|
|
|
|
|
2008
|
|
$
|
3,361,000
|
|
2009
|
|
|
3,109,000
|
|
2010
|
|
|
2,687,000
|
|
2011
|
|
|
15,454,000
|
|
2012
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
$
|
24,611,000
|
|
|
|
|
|
TransMontaigne Note
In connection with the purchase and sale agreement entered into between Rio Vista and
TransMontaigne on August 15, 2005 (see note D), TransMontaigne loaned Rio Vista $1,300,000
(TransMontaigne Note). The TransMontaigne Note was to be repaid, including interest, as a
reduction of the total purchase price at the time of closing or 120 days following demand by
TransMontaigne. The TransMontaigne Note was secured by the tank farm and certain LPG storage
tanks located at the Brownsville Terminal Facility (Collateral). The TransMontaigne Note began
to accrue interest on November 15, 2005 at the prime rate plus 2%. On August 22, 2006, in
connection with the Rio Vista Restated PSA, the TransMontaigne Note was amended whereby Rio Vista
paid $300,000 of principal and the TransMontaigne Note was extended. The TransMontaigne Note was
also amended to substitute as collateral the US portion of the eight-inch pipeline owned by Rio
Vista. As a result of the sale of the remaining LPG Assets (see note D), the TransMontaigne Note
was paid December 31, 2007.
Sellers Note Regional
In connection with the Regional Acquisition, Regional issued a promissory note in the amount of
$1,000,000 to be paid in four equal semiannual installments beginning six months from the date of
the Regional Acquisition. Rio Vista has recorded a discount of $116,000, (10% effective rate)
representing the portion of interest associated with the note, which shall be amortized over the
term of the note. For the period of July 28, 2007 through December 31, 2007, $37,000 was
amortized.
80
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G DEBT OBLIGATIONS Continued
TCW Credit Facility
The TCW Credit Facility is a $30,000,000 senior secured credit facility available to Rio Vista
Penny with a maturity date of August 29, 2010. The amount of the initial draw under the facility
was $21,700,000, consisting of $16,750,000 in assumption of the existing indebtedness in the
principal amount of $16,500,000 plus accrued but unpaid interest in the amount of $250,000 owed
by GM Oil to TCW, $1,950,000 in consideration for TCW to enter into the TCW Credit Facility with
Rio Vista Penny and for Rio Vista Penny to purchase an overriding royalty interest (ORRI) held by
an affiliate of TCW, and $3,000,000 to fund the acquisition of the membership interests of GO by
Rio Vista GO. TCW has also approved plan of development (APOD) for the Oklahoma assets totaling
approximately $2,000,000 which was funded during December 2007. The TCW Credit Facility is
secured by a first lien on all of the Oklahoma assets and associated production proceeds pursuant
to the Note Purchase Agreement, Security Agreement and related agreements, including mortgages of
the Oklahoma assets in favor of TCW. The interest rate is 10.5%, increasing to 12.5% if there is
an event of default. Payments under the TCW Credit Facility are interest-only until December 29,
2008. The TCW Credit Facility carries no prepayment penalty. Rio Vista ECO LLC (an indirect,
wholly-owned subsidiary of Rio Vista and the direct parent of Rio Vista Penny and Rio Vista GO),
Rio Vista GO, GO and MV have each agreed to guarantee payment of the Notes payable to investors
under the TCW Credit Facility.
Under the terms of the Note Purchase Agreement, at any time during the period from May 19, 2008
through November 19, 2009, TCW has the right to demand payment of $2,200,000 of debt (Demand
Loan). Beginning May 19, 2008, TCW also has the right to convert the outstanding principal amount
of the Demand Loan into common units of Rio Vista at a price equal to the lesser of $13.33 per
unit or 90% of the 20-day average trading price of such units preceding the election to convert.
Beginning November 19, 2008, TCW has the right to convert the balance of the debt under the TCW
Credit Facility into common units of Rio Vista at a price equal to 90% of the 20-day average
trading price of such units preceding the election to convert. Rio Vista has agreed to file with
the Securities and Exchange Commission (SEC) a registration statement on Form S-3 covering the
common units issued pursuant to the conversion feature within 90 days following the first
exercise of the conversion feature.
Rio Vista Penny and Rio Vista GO, which hold the Oklahoma assets, are prohibited from making
upstream distributions to Rio Vista until December 2008. Thereafter, upstream distributions to
Rio Vista not in excess of 75% of quarterly cash flow are permitted subject to certain
conditions. In addition, the TCW Credit Facility agreement requires semi-annual reserve reports
by an independent engineer which is used in determining the allowable borrowing base. The
initial report is due June 1, 2008.
Beneficial Conversion Features
In connection with the issuance of the Moores Note and TWC Credit Facility, Rio Vista recorded a
beneficial conversion feature as interest expense and debt discount for the difference between
carrying amount of the debt obligations and the estimated fair value of the common units to be
issued upon conversion in the amount of $25,000.
81
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets
and liabilities for Regional and MV were as follows at:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
|
|
|
$
|
1,180,000
|
|
Asset basis differences
|
|
|
|
|
|
|
1,973,000
|
|
Deferred other cost
|
|
|
4,000
|
|
|
|
85,000
|
|
Net operating loss carryforward
|
|
|
87,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,000
|
|
|
|
3,238,000
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
91,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
3,238,000
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2007, Rio Vista incurred U.S. income
tax expense of $125,000,
deferred U.S. and state income tax benefit of $203,000 state income
tax expense of $23,000 and
Mexican income tax expense of $34,000. U.S. and State income taxes were entirely associated with
the taxable subsidiaries of Rio Vista, Regional and MV.
Rio Vista has established a valuation allowance on its deferred tax assets reducing them to the
value management feels is more likely than not to be realized.
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an Interpretation of SFAS No. 109 (FIN 48). FIN
48 clarifies the accounting for uncertainty in tax positions recognized in a companys financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of the tax position taken or expected to be taken in a tax return. Rio Vista adopted
FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the
accompanying financial statements.
The
tax years that remain open to examination are 2002 2007 for
foreign jurisdictions, and 2003-2007 for domestic entities.
82
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
H INCOME TAXES Continued
The tax effects of Mexican income tax temporary differences and carryforwards that give rise to
Mexican deferred tax assets and liabilities were as follows at December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
2,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net operating loss carryforward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rio Vistas Mexican subsidiaries incurred income tax expense in Mexico on their taxable
income. Mexican income tax expense for the years ended December 31, 2006 and 2007 was
approximately $37,000 and $34,000, respectively. No deferred Mexican income tax expense was
recorded for the year ended December 31, 2006. The Mexican subsidiaries were sold in
December 2007 (see note D).
Management believed that the valuation allowance reflected above was appropriate because of the
uncertainty that sufficient taxable income will be generated in future taxable years by Rio
Vistas Mexican subsidiaries to utilize the deferred tax assets.
A reconciliation of the U.S. Federal statutory tax rate to Rio Vistas effective tax rate is as
follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
( 4,901,000
|
)
|
Financial statement income taxed at partner level
|
|
|
4,740,000
|
|
|
|
|
|
Loss from Regional and MV
|
|
|
( 161,000
|
)
|
Income tax benefit at statutory rate (38%)
|
|
|
( 61,000
|
)
|
|
|
|
|
|
Reconciling items:
|
|
|
|
|
Mexican taxes
|
|
|
34,000
|
|
Permanent differences and other
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
( 21,000
|
)
|
|
|
|
|
83
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H INCOME TAXES Continued
Rio Vista is taxed as a Partnership under Code Section 701 of the Internal Revenue Code. All of
Rio Vistas subsidiaries except for Regional and MV are taxed at the partner level, therefore,
Rio Vista has no U.S. income tax expense or liability. The Partnerships significant basis
differences between the tax bases and the financial statement bases of its assets and
liabilities are the cost basis and depreciation differences of the depreciable assets and
deferred interest and compensation costs on unexercised warrants. The net reversal of cost
basis and depreciation differences vary considerably from limited partner to limited partner due
to allocations under Section 734 and 743 of the Internal Revenue Code. The deferred interest
and compensation cost for tax purposes is $975,000. Interest and compensation expense may or
may not be recognized for tax purposes depending on the exercise of related warrants prior to
their expiration.
NOTE I PARTNERS CAPITAL
Common Units
On June 29, 2007, the Board of Managers of the General Partner Rio Vista approved the grant
of a restricted unit bonus of 25,000 common units under Rio Vistas 2005 Equity Incentive
Plan to an executive officer of the General Partner. The restricted unit bonus vests as to
8,334 units on July 1, 2007, an additional 8,333 units on January 1, 2008, and an additional
8,333 units on July 1, 2008, and becomes fully vested upon a change in control event. In
connection with the grant of restricted units, the Board of Managers also approved the
payment to the executive officer of one or more cash bonuses in amounts sufficient, on an
after-tax basis, to cover all taxes payable by the executive officer with respect the award
of restricted units to him. Total compensation to be recorded under the aforementioned
grant of units as they vest totals $280,000 of which $186,000 will be charged to operations
in 2008.
On November 19, 2007, in connection with the acquisition of the Oklahoma assets, Rio Vista issued
a total of 137,994 common units of Rio Vista to the sellers of GO and Penny Petroleum.
Private Placement of Common Units
On November 29, 2007, Rio Vista and Rio Vista GP LLC (Rio Vista GP), entered into a Unit Purchase
Agreement with Standard General Fund L.P., Credit Suisse Management LLC and Structured Finance
Americas LLC (collectively, Purchasers) dated effective as of November 29, 2007 (the Unit
Purchase Agreement). Pursuant to the terms of the Unit Purchase Agreement, Rio Vista agreed to
sell, and the Purchasers agreed to purchase, a total of 355,556 common units of Rio Vista (Common
Units) at a price of $11.25 per share in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended (Securities Act). The total purchase price
of the Common Units is $4,000,000. Rio Vista agreed to pay expenses of counsel to the Purchasers
in an amount not to exceed $100,000. Rio Vista used the net proceeds from the sale of the Common
Units for general working capital purposes, including repayment of indebtedness. Rio Vista agreed
not to offer or sell any of its equity securities (including equity securities of subsidiaries)
for a period of 12 months following the closing date without first offering such securities to
the Purchasers, which shall have the right to purchase up to 30% of such securities. The Unit
Purchase Agreement contains customary representations, warranties and covenants of the parties
and is subject to customary conditions to closing, including approval for listing of the Common
Units on the Nasdaq Global Market.
84
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL Continued
Private Placement of Common Units Continued
On December 3, 2007, Rio Vista and Standard General entered into a Registration Rights Agreement
(Registration Rights Agreement) pursuant to which Rio Vista agreed to provide to the Purchasers
registration rights with respect to the Common Units. Pursuant to the Registration Rights
Agreement, Rio Vista agreed to file, within 90 days after the closing date for the sale of the
Common Units, a shelf registration statement under the Securities Act to permit the public resale
of the Common Units from time to time, including resale on a delayed or continuous basis as
permitted by Rule 415 under the Securities Act. Rio Vista agreed to use its best efforts to cause
the registration statement to become effective on or before the date of filing of Rio Vistas
Annual Report on Form 10-K for the year ending December 31, 2007 but no later than April 14,
2008. On February 13, 2008, Rio Vista filed a Form S-3 with the SEC. The form S-3 is expected
to be declared effective upon the filing of this Annual Report on Form 10-K. Rio Vista must pay
liquidated damages to Standard General if the registration statement is not declared effective by
such date as to all of the Common Units. In general, the amount of such damages equals 1% of the
purchase price of the unregistered Common Units for each period of 30 days for which such units
remain unregistered. If payment of such damages in cash would result in a default under any
credit agreement of Rio Vista, in lieu of a cash payment Rio Vista may issue additional common
units at a discount of 5% to the closing price for such units as reported by the Nasdaq Global
Market. Holders of at least $250,000 of the Common Units also have piggyback registration rights
to include their Common Units in an underwritten offering by Rio Vista, subject to cutback as
requested by the managing underwriter of such offering. No holder of Common Units is entitled to
any demand rights that would require Rio Vista to effect an underwritten offering solely on
behalf of such holder. Rio Vista is responsible for paying expenses of registration of the Common
Units, excluding underwriting fees, discounts and selling commissions. Subject to certain
exceptions, Rio Vista may not grant registration rights superior to those of the holders of the
Common Units without the consent of such holders.
On March 7, 2008, the Board of Managers of the General Partner Rio Vista approved the grant of a
unit bonus of 8,812 common units under Rio Vistas 2005 Equity Incentive Plan to an executive
officer of the General Partner. The amount of units granted was based on the average of the high
and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on March 7,
2008.
On March 7, 2008, a total of 61,875 options to acquire common units of Rio Vista were exercised
by holders of such warrants. Total proceeds received from the exercises were $774,000. In
addition, on March 7, 2008, 15,625 options to acquire common units of Rio Vista were exercised by
a holder through the offset of a severance obligation in connection with that employees
termination.
The common units represent limited partner interests in Rio Vista. The holders of common units
are entitled to participate in Rio Vistas distributions and exercise the rights or privileges
available to limited partners under the partnership agreement. The holders of common units have
only limited voting rights on matters affecting Rio Vista. Holders of common units have no right
to elect the General Partner or its managers on an annual or other continuing basis. Penn Octane
elects the managers of the General Partner. Although the General Partner has a fiduciary duty to
manage Rio Vista in a manner beneficial to Rio Vista and its unitholders, the managers of the
General Partner also have a fiduciary duty to manage the General Partner in a manner beneficial
to Penn Octane and the other owners of the General Partners. The General Partner generally may
not be removed except upon the vote of the holders of at least 80% of the outstanding common
units; provided, however, if at any time any person or group, other than the General Partner and
its affiliates, or a direct or subsequently approved transferee of the General Partner or its
affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units
then outstanding, that person or group will lose voting rights on all of its units and the units
may not be voted on any matter and will not be considered to be outstanding when sending notices
of a meeting of unitholders, calculating required votes, determining the presence of a quorum or
for other similar purposes. In addition, the partnership agreement contains provisions limiting
the ability of holders of common units to call meetings or to acquire information about Rio
Vistas operations, as well as other provisions limiting the holders of common units ability to
influence the manner or direction of management.
85
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL Continued
General Partner Interest
The General Partner of Rio Vista owns a 2% General Partner interest in Rio Vista. On July 1,
2006, Penn Octanes 100% interest in the General Partner was decreased to 50% as a result of the
exercise by Shore Capital LLC (Shore Capital), an affiliate of Mr. Richard Shore Jr., former
president of Penn Octane and former chief executive officer of Rio Vista, and by Mr. Jerome B.
Richter, of options to each acquire 25% of the General Partner (General Partner Options). The
exercise price for each option was approximately $82,000. Mr. Richters option was amended to
permit payment of the exercise price by surrender of Penn Octane common stock having a fair
market value equal to the exercise price. Mr. Richter paid the exercise price for his option by
surrender of 136,558 shares of Penn Octane common stock. In connection with the exercise of the
General Partner Options, Penn Octane retained voting control of the General Partner pursuant to
a voting agreement with each of Shore Capital and Mr. Richter. In December 2006, Shore Capital
transferred its interest in the General Partner to Shore Trading LLC, an affiliated entity
(Shore Trading). Shore Trading is also a party to the voting agreement with Penn Octane.
On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading
that provided Penn Octane with the option to purchase the 25% interest in the General Partner
held by Shore Trading. Penn Octane exercised its option on July 19, 2007 and acquired the 25%
interest for a total cost of $1,400,000.
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.
Distributions of Available Cash
All Rio Vista unitholders have the right to receive distributions from Rio Vista of available
cash as defined in the partnership agreement in an amount equal to at least the minimum
distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum
quarterly distribution on the units from prior quarters subject to any reserves determined by the
General Partner. The General Partner has a right to receive a distribution corresponding to its
2% General Partner interest and the incentive distribution rights described below. The
distributions are to be paid within 45 days after the end of each calendar quarter. However, Rio
Vista is prohibited from making any distributions to unitholders if it would cause an event of
default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has
guaranteed.
In addition to its 2% General Partner interest, the General Partner is currently the holder of
incentive distribution rights which entitled the holder to an increasing portion of cash
distributions as described in the partnership agreement. As a result, cash distributions from
Rio Vista are shared by the holders of the common units and the General Partner interest based on
a formula whereby the General Partner receives disproportionately more distributions per
percentage interest than the holders of the common units as annual cash distributions exceed
certain milestones.
86
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I PARTNERS CAPITAL Continued
Distributions of Available Cash
Continued
Rio Vista made the following distributions during the years ended December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Paid
|
|
Quarter
|
|
Payment
|
|
|
Distribution
|
|
|
Common
|
|
|
General
|
|
Ended
|
|
Date
|
|
|
Per Unit
|
|
|
Units
|
|
|
Partner
|
|
Sep 2006
|
|
|
10/26/06
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Dec 2006
|
|
|
01/18/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Mar 2007
|
|
|
05/04/07
|
|
|
$
|
0.25
|
|
|
$
|
478,000
|
|
|
$
|
10,000
|
|
Jun 2007
|
|
|
07/31/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
Sep 2007
|
|
|
11/14/07
|
|
|
$
|
0.25
|
|
|
$
|
484,000
|
|
|
$
|
10,000
|
|
June 30, 2005
June 30, 2006
Arrearages
|
|
|
12/10/07
|
|
|
$
|
1.25
|
|
|
$
|
2,420,000
|
|
|
$
|
49,000
|
|
The amount of the distributions paid represents the minimum quarterly distribution required to be
made by Rio Vista pursuant to the partnership agreement. As of December 31, 2007, Rio Vista has
made all the required minimum distributions to its common unitholders. A distribution of
$607,000 and $13,000 for the quarter ended December 31, 2007 was made on February 14, 2008 to the
common units and General Partner, respectively.
NOTE J UNIT WARRANTS
Options and Warrants
Rio Vista has no U.S. employees and is managed by its General Partner. Rio Vista applies SFAS
123R for warrants granted to employees and managers of the General Partner and for warrants
issued to acquire goods and services from non-employees.
Equity Incentive Plan
On March 9, 2005, the board of managers of the General Partner approved the Rio Vista 2005 Equity
Incentive Plan (2005 Plan). The 2005 Plan permits the grant of common unit options, common unit
appreciation rights, restricted common units and phantom common units to any person who is an
employee (including to any executive officer) or consultant of Rio Vista or the General Partner
or any affiliate of Rio Vista or the General Partner. The 2005 Plan provides that each outside
manager of the General Partner shall be granted a common unit option once each fiscal year for
not more than 5,000 common units, in an equal amount as determined by the board of managers. The
aggregate number of common units authorized for issuance as awards under the 2005 Plan is
750,000. The 2005 Plan shall remain available for the grant of awards until March 9, 2015, or
such earlier date as the board of managers may determine. The 2005 Plan is administered by the
compensation committee of the board of managers. In addition the board of managers may exercise
any authority of the compensation committee under the 2005 Plan. Under the terms of the
partnership agreement and applicable rules of the NASDAQ Stock Market, no approval of the 2005
Plan by the common unitholders of Rio Vista was required.
87
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
Equity Incentive Plan Continued
On February 15, 2007, the board of managers of the General Partner approved the grant of options
to purchase a total of 21,250 common units under the 2005 Plan. Of the total number of options
granted, 5,000 were issued to an executive officer of the General Partner and 16,250 were issued
to outside managers of the General Partner. The exercise price for the options is $8.38 per
unit, which was the average of the high and low sale prices for Rio Vista common units as
reported by the NASDAQ Stock Market on February 15, 2007. Options granted to the executive
officer vest in equal monthly installments over a period of 36 months from the date of grant,
become fully vested and exercisable upon a change in control event, and expire five years from
the date of grant. Options granted to outside managers are fully vested on the date of grant
and expire five years from the date of grant. Total compensation to be recorded under the
aforementioned grant of option as they vest totals approximately $51,000.
On March 21, 2007, the board of managers of the General Partner approved the grant of an option
to purchase 20,000 common units of Rio Vista under the 2005 Plan to an executive officer of the
General Partner. The exercise price for the options is $7.36 per unit, which was the average of
the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market
on March 21, 2007. The options vest in equal monthly installments over a period of 36 months
from the date of grant, become fully vested and exercisable upon a change in control event, and
expire five years from the date of grant. Total compensation to be recorded under the
aforementioned grant of options as they vest totals approximately $44,000.
On June 15, 2007, in connection with the Board Consulting Agreement with Mr. Richard R. Canney
(see note K), Rio Vista granted Mr. Canney an option to purchase 26,963 common units of Rio
Vista. The exercise price for the option is $11.14 per unit, which was the average of the high
and low sale prices as reported by the NASDAQ Stock Market on June 15, 2007. The Board
Consulting Agreement was terminated by Mr. Canney effective September 30, 2007 resulting in the
termination of the options.
On June 29, 2007, the board of managers of the General Partner Rio Vista approved the grant of
an option to purchase 75,000 common units of Rio Vista under the 2005 Plan to an executive
officer of the General Partner. The exercise price for the options is $11.21 per unit, which was
the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ
Stock Market on June 29, 2007. The unit option vests in equal monthly installments over a period
of 36 months beginning January 1, 2007, becomes fully vested and exercisable upon a change in
control event, and expires five years from the date of grant. Total compensation to be
recorded under the aforementioned grant of options as they vest totals $294,000.
In connection with the employment agreement with an executive of Regional, Rio Vista granted
options to purchase a total of 25,000 common units under the 2005 Plan to the executive. The
exercise price for the options is $16.66 per unit, which was the average of the high and low
sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on July 27, 2007.
The options vest over a two year period.
On August 23, 2007, the board of managers of the General Partner approved the grant of options
to purchase a total of 8,125 common units under the 2005 Plan to outside managers of the General
Partner. The exercise price for the options is $15.15 per unit, which was the average of the
high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on
August 23, 2007. Options granted to outside managers are fully vested on the date of grant and
expire five years form the date of grant. Total compensation to be recorded under the
aforementioned grant of options as they vest totals approximately $58,000.
The amount of total compensation not yet recognized as of December 31, 2007 was $ 416,000. Such
amounts will be recognized over the remaining life of the grants.
88
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
Equity Incentive Plan Continued
On January 23, 2008, the board of managers of the General Partner approved the grant of options
to purchase a total of 16,250 common units under the 2005 Plan to certain outside members of the
board of managers of the General Partner. The exercise price for the options is $14.42 per unit,
which was the average of the high and low sale prices for Rio Vista common units as reported by
the NASDAQ Stock Market on January 23, 2008. Options granted to outside managers are fully
vested on the date of grant and expire five years from the date of grant. These issuances were
exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof
because the issuances do not involve any public offering of securities.
For warrants granted to non-employees of the General Partner, Rio Vista applies the
provisions of SFAS 123R to determine the fair value of the warrants issued. No warrants
were granted to non-employees of the General Partner for each of the three years in the
period ended December 31, 2007.
A summary of the status of Rio Vistas warrants for each of the two years in the period ended
December 31, 2007 and changes during the years ending on these dates are presented below:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Warrants
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
383,290
|
|
|
$
|
9.50
|
|
|
|
209,719
|
|
|
$
|
10.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
149,375
|
|
|
|
11.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
( 173,571
|
)
|
|
|
8.13
|
|
|
|
( 10,000
|
)
|
|
|
13.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
209,719
|
|
|
|
10.64
|
|
|
|
349,094
|
|
|
|
10.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at end of year
|
|
|
209,719
|
|
|
|
|
|
|
|
254,663
|
|
|
|
|
|
The intrinsic value of warrants exercised during the year ended December 31, 2007 was $ 0.
The following table depicts the weighted-average exercise price and weighted average fair value
of warrants granted during each of the two years in the period ended December 31, 2007, by the
relationship of the exercise price of the warrants granted to the market price on the grant
date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
For warrants granted
|
|
|
For warrants granted
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
Exercise pricecompared to
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
market price on grant date
|
|
Fair Value
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equals market price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4.30
|
|
|
$
|
11.42
|
|
Exceeds market price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than market price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in the year
ended December 31, 2007, dividend yield of 12.5%, 13.0%, 9.3%, 6.1% and 6.5%; expected
volatility of 81.9%, 82.2%, 80.8%, 84.1% and 84.4%; risk-free interest rate of 4.25%, 4.64%,
4.72%, 4.72% and 4.94%; and expected life of 5 years.
89
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J UNIT WARRANTS Continued
Equity Incentive Plan Continued
The following table summarizes information about the warrants outstanding at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
|
|
|
|
|
Warrants Exercisable
|
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Weighted
|
|
|
Exercisable
|
|
|
Weighted
|
|
|
|
at
|
|
|
Remaining
|
|
|
Average
|
|
|
at
|
|
|
Average
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
2007
|
|
|
Life
|
|
|
Price
|
|
|
2006
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.00 to $11.21
|
|
|
173,000
|
|
|
|
4.66 years
|
|
|
$
|
8.45
|
|
|
|
98,361
|
|
|
$
|
7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12.51 to $16.66
|
|
|
176,094
|
|
|
|
3.94
|
|
|
|
13.30
|
|
|
|
156,302
|
|
|
|
12.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,094
|
|
|
|
4.29
|
|
|
$
|
10.90
|
|
|
|
254,663
|
|
|
$
|
10.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at December 31, 2007 and options
exercisable at December 31, 2007 were $1,625,000 and $506,000, respectively.
A summary of the status of nonvested shares as of December 31, 2007 and changes during the
year ended December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant-
|
|
Nonvested shares
|
|
Shares
|
|
|
Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2007
|
|
|
|
|
|
|
|
|
Granted
|
|
|
149,375
|
|
|
|
11.42
|
|
Vested
|
|
|
( 54,944
|
)
|
|
|
3.78
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
94,431
|
|
|
|
11.64
|
|
|
|
|
|
|
|
|
|
NOTE K COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Penn Octane, Rio Vista and/or Rio Vistas subsidiaries were named as defendants in two lawsuits
filed in connection with an accident in the town of Lucio Blanco, Mexico on August 11, 2005,
involving a tanker truck carrying LPG which was struck by a train resulting in an explosion.
None of Penn Octane, Rio Vista or any of Rio Vistas subsidiaries owned or operated the tanker
truck or employed or controlled the driver of the tanker truck. Further, none of Penn Octane,
Rio Vista or any of Rio Vistas subsidiaries owned or had custody of the LPG on the tanker truck
at the time and location of the accident.
The tanker truck reportedly took delivery of LPG at the Matamoros Terminal Facility operated
under agreement with Rio Vistas Mexican subsidiaries. According to the lawsuits, after leaving
the Matamoros Terminal Facility, the tanker truck was involved in a collision with a train in
Lucio Blanco, Mexico, resulting in a tragic explosion that killed and injured several persons
and caused significant property damage. Published reports indicate that the truck used a road
not approved for large trucks and failed to stop at an unprotected rail crossing, resulting in
the collision and explosion. The insurance carrier for the owner of the tanker truck has
settled certain claims in Mexico with victims of the accident.
90
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Legal Proceedings Continued
Even though the accident took place in Mexico, these lawsuits were filed in Texas. The first
case is captioned
Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
International LLC, et al
and was filed in the 404
th
Judicial District Court for
Cameron County, Texas on September 26, 2005. The plaintiffs seek unspecified monetary damages.
On August 16, 2006 with the consent of the parties, the Court issued an amended order for
temporary injunction for the purpose of preserving relevant evidence. The amended injunction
required a subsidiary of Rio Vista to make available for inspection by plaintiffs Rio Vistas
terminal facilities in Brownsville, Texas and Matamoros, Mexico and associated equipment and
records. The order also required Rio Vista to give 30 days advance notice to plaintiffs before
conducting any alteration, repair, service, work or changes to the facilities or equipment. In
addition, the order required Rio Vista to make available its employees for deposition by the
plaintiffs and to secure and preserve certain physical evidence believed to be located in Mexico.
The Brownsville, Texas terminal facility was sold to TransMontaigne Product Services Inc. on
August 22, 2006. In January 2007, this case was removed to the U.S. District Court for the
Southern District of Texas, Brownsville Division. In July 2007, the case was remanded to the
state court in Cameron County, Texas. In August 2007, plaintiffs filed an amended petition
alleging that defendants delivered the LPG to an unqualified driver and that defendants failed to
properly odorize the LPG before delivery. Discovery is being conducted and it is anticipated
that a trial on a limited number of the Plaintiffs will take place during September 2008 or
October 2008.
The second case is captioned
Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et
al.
and was filed in the 107
th
Judicial District Court for Cameron County, Texas, on
November 14, 2005. The plaintiffs sought unspecified monetary damages. In March 2007, the
Company entered into a settlement agreement with the plaintiffs on terms deemed favorable to the
Company. Pursuant to the settlement agreement this case was dismissed in April 2007. The
Companys legal fees and settlement costs were covered by insurance.
Management believes the remaining lawsuit against Penn Octane, Rio Vista and/or Rio Vistas
subsidiaries relating to the accident in Lucio Blanco is without merit and, based on the advice
of counsel, does not anticipate liability for damages. The Companys insurance carrier is
expected to bear the legal fees and expenses in connection with defending this case. If,
however, a court found liability on the part of Penn Octane, Rio Vista or their subsidiaries, a
judgment or settlement in excess of insurance coverage could have a material adverse effect on
Penn Octanes and Rio Vistas business, financial condition and results of operations.
On November 3, 2004, there was an accident between a Regional truck driver and another motorist
who allegedly sustained injuries as a result of the accident. The other motorist filed suit
against Regional. The case was filed on February 26, 2007 as Nolte v. Regional Enterprises, Inc.
in the United States District Court for the District of Maryland (Case No. 07 CV 0478 PJM). This
case was settled within the limits of insurance coverage on or about January 28, 2008 and the
case was dismissed accordingly on or about January 30, 2008.
On December 13, 2007, Lexington Insurance Company filed a declaratory action complaint against
Penn Octane Corporation, Rio Vista Energy Partners, LP and their related entities in the United
States District Court in the Southern District of Texas (Brownsville) requesting the US Federal
Court to rule that the plaintiff has no obligation to defend Penn Octane and the Rio Vista
related entities in the Camacho and Gonzalez litigation based on alleged coverage exceptions.
Federal jurisdiction was contested and the case moved to state court. A trial date is currently
set for September 2008. According to local counsel, Gonzalez was referenced in the original
complaint only because the plaintiffs lawyers were unaware that Gonzalez had been settled prior
to filing. It is unclear, however, to the extent Lexington is successful in its action, whether
the plaintiff will request repayment of all settlement and litigation expenses paid by the
insurance carrier in Gonzalez. Furthermore, if there is a determination that there is no
insurance coverage resulting in Penn Octane and Rio Vista having to fund all defense costs as
well as any material settlement or judgment amount in the Camacho suit, this could have a
material adverse effect on Penn Octanes and Rio Vistas business, financial condition and
results of operations.
91
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Legal Proceedings Continued
On November 20, 2007 Rio Vista Energy Partners, LP, Rio Vista Penny, LLC, Gary Moores, Bill Wood
and GM Oil Properties, Inc. jointly filed an action for declaratory relief against Energy
Spectrum Advisors, Inc. in the District Court in McIntosh County, Oklahoma. This action was
filed in response to Energy Spectrums assertion that Rio Vista Energy Partners, LP, Rio Vista
Penny, LLC, as well as GM Oil Properties, Inc. owed Energy Spectrum a commission allegedly due
and owing based on Rio Vista Penny, LLCs November, 2007 purchase of certain assets from GM Oil
Properties, Inc. The foundation for the Energy Spectrum claim is a January 22, 2007 written
agreement signed by Energy Spectrum and GM Properties, Inc. Neither Rio Vista Energy Partners,
LP nor Rio Vista Penny were parties to this agreement, nor were they named in the Energy
Spectrums counter claim. Based in part on the fact that the GM Oil Properties acquisition was an
asset purchase, rather than a stock sale, management believes that the Rio Vista entities should
have no liability for any obligation that GM Oil Properties, Inc. may have to Energy Spectrum.
Discovery is currently pending.
Rio Vista and its subsidiaries are involved with other proceedings, lawsuits and claims. Rio
Vista believes that the liabilities, if any, ultimately resulting from such proceedings,
lawsuits and claims should not materially affect its consolidated financial results.
Credit Facility, Letters of Credit and Other
Rio Vistas LPG purchases before the Restated LPG Asset Sale were financed entirely by Penn
Octane. Penn Octane previously financed its purchases of LPG and continues to finance its
purchases of Fuel Products through its credit facility with RZB.
As of December 31, 2007, Penn Octane has a $10,000,000 credit facility available with RZB for
demand loans and standby letters of credit (RZB Credit Facility). The RZB Credit facility is an
uncommitted facility under which the letters of credit have an expiration date of no more than
90 days and the facility is reviewed annually. In connection with the Spin-Off, Rio Vista
agreed to guarantee Penn Octanes obligations with respect to the RZB Credit Facility. In
connection with Rio Vistas guaranty, Rio Vista granted RZB a security interest and assignment
in any and all of Rio Vistas accounts, real property, buildings, pipelines, fixtures and
interests therein or relating thereto. Rio Vistas guarantee and asset pledge continue under
the existing RZB Credit Facility. In addition, Rio Vista may not permit to exist any subsequent
lien, security interest, mortgage, charge or other encumbrance of any nature on any of its
properties or assets, except in favor of RZB, without the consent of RZB.
Under the RZB Credit Facility, Penn Octane pays a fee with respect to each letter of credit
thereunder in an amount equal to the greater of (i) $500, (ii) 2% 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 accrue interest at a rate equal
to the rate announced by the JPMorgan Chase Bank as its prime rate (7.25% at December 31, 2007)
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.
On July 26, 2007, as a condition of the Loan Agreement (see note E), Penn Octane entered into a
First Amendment to Line Letter (First Amendment) with RZB. The First Amendment amends the Amended
and Restated Line Letter dated as of September 14, 2004 between Penn Octane and RZB. The First
Amendment reduces the amount of the RZB Credit Facility from $15,000,000 to $10,000,000. Subject
to RZBs discretion, the amount of the RZB Credit Facility will be increased dollar for dollar by
Rio Vistas principal repayments under the Loan Agreement.
92
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Credit Facility, Letters of Credit and Other Continued
Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required to
maintain net worth of a minimum of $10,000,000.
LPG financing expense allocated to Rio Vista from Penn Octane associated with the RZB Credit
Facility totaled $239,000 and $0.00 for each of the two years in the period ended
December 31, 2007, respectively and is included in the consolidated statement of operations in
discontinued operations.
Guarantees and Assets Pledged on Certain of Penn Octanes Obligations
The dollar amounts of Penn Octanes obligations which Rio Vista guarantees and/or for which Rio
Vistas assets are pledged total $8,277,000 at December 31, 2007 based on Penn Octanes most
recently filed Annual Report on Form 10-K and the amounts were as follows:
|
|
|
|
|
Fuel Products trade accounts payable
|
|
$
|
4,526,000
|
|
Lines of credit
|
|
$
|
|
|
Letters of credit in excess of Fuel Products
trade accounts payable
|
|
$
|
3,751,000
|
|
Consolidated current assets of Penn Octane, which includes assets of Rio Vista, pledged in favor
of Penn Octanes credit facility totals $48,504,000 at December 31, 2007 and the amounts were as
follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
4,261,000
|
|
Restricted cash
|
|
$
|
2,500,000
|
|
Inventory
|
|
$
|
2,563,000
|
|
Oil and gas properties and related equipment, net
|
|
$
|
26,197,000
|
|
Property, plant and equipment, net
|
|
$
|
12,983,000
|
|
Rio Vistas assets that are included in the above amounts are as follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
1,446,000
|
|
Oil and gas properties and related equipment, net
|
|
$
|
26,197,000
|
|
Property, plant and equipment, net
|
|
$
|
12,762,000
|
|
Leases
Norfolk Southern Leases
On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern
Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection
with Regionals existing operations at Regionals facilities in Hopewell, Virginia. The lease
includes the right to maintain existing warehouses, storage tanks for handling petroleum and
chemical products, and necessary appurtenances. The lease term was January 1, 2003 through
December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30
days written notice. Rent is $1,500 per month subject to adjustment based on inflation.
93
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Leases Continued
Norfolk Southern Leases
Continued
On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk
Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land
which is utilized in connection with Regionals existing operations at Regionals facilities in
Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding
lease began on August 21, 2003 and continues until terminated by either party with 30 days
written notice. Rent is $4,875 per year, payable in advance.
As replacement of the foregoing leases, Regional is currently negotiating with Norfolk Southern
the purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of land
on a long-term basis. On June 1, 2007, Regional executed a letter of intent from Norfolk
Southern dated May 29, 2007. Regional received a letter from Norfolk Southern dated July 26,
2007, approving the purchase of the land and the lease on the terms contained in the letter of
intent. Regional is awaiting definitive documents from Norfolk Southern in order to complete
the purchase and lease transactions.
Other
Regional has several leases for parking and other facilities which are short term in nature and
can be terminated by the lessors or Regional upon giving sixty days notice of cancellation.
Rent expense for all operation leases was $51,000 and $83,000 for the years ended December
31, 2006 and 2007, respectively.
Agreements
Asphalt Agreement
On November 30, 2000, Regional entered into a Storage and Product Handling Agreement with a
customer with an effective date of December 1, 2000 (Asphalt Agreement). The Asphalt Agreement
provides for the pricing, terms and conditions under which the customer will purchase terminal
services and facility usage from Regional for the storage and handling of the customers asphalt
products. The Asphalt Agreement was amended on October 15, 2002 with an effective date of
December 1, 2002 (Amended Asphalt Agreement). The term of the Amended Asphalt Agreement is five
years with an option by the customer for an additional five-year renewal term, which the
customer exercised in July 2007. After the additional five-year term, the Amended Asphalt
Agreement renews automatically for successive one-year terms unless terminated upon 120 days
advance written notice by either party. The annual fee payable to Regional for the initial
five-year term of the Amended Asphalt Agreement is approximately $500,000, payable in equal
monthly installments, subject to adjustments for inflation and certain facility improvements.
In exchange for the annual fee, Regional agrees to provide minimum annual throughput of 610,000
net barrels per contract year, with additional volume to be paid on a per barrel basis. During
the term of the amended Asphalt Agreement, Regional agrees to provide three storage tanks and
certain related equipment to the customer on an exclusive basis as well as access to Regionals
barge docking facility.
94
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Agreements Continued
Fuel Oil Agreement
On November 16, 1998, Regional entered into a Terminal Agreement with a customer with an
effective date of November 1, 1998, as amended on April 5, 2001, October 11, 2001 and August 1,
2003 (Fuel Oil Agreement). The Fuel Oil Agreement provides for the pricing, terms and
conditions under which Regional will provide terminal facilities and services to the customers
for the delivery of fuel oil. The agreement renews automatically for successive one-year terms
unless terminated upon 365 days advance written notice by either party. Pursuant to the
agreement, as amended, Regional agrees to provide three storage tanks, certain related pipelines
and equipment, and at least two tractor tankers to the customer on an exclusive basis, as well
as access to Regionals barge docking facility. In exchange for use of Regionals facilities
and services, the customer pays an annual tank rental amount of approximately $300,000 plus a
product transportation fee calculated on a per gallon basis, each subject to annual adjustment
for inflation. Regional agrees to deliver a minimum daily quantity of fuel oil on behalf of the
customer.
Gas Service and Sales Agreements
GO entered into an agreement with Clearwater Enterprises, LLC (Clearwater) to provide monthly
services in relationship to the Brooken system pipeline. In accordance with terms of the
agreement, Clearwater would 1) receive pipeline nominations from the various shippers on the
Brooken system. 2) allocate volumes to the wellhead based upon the volumes delivered to the
Brooken interconnect 3) prepare gathering and compression fee invoices on behalf of the Company
4) prepare pipeline imbalance and cashout statements. The monthly gathering management fee for
these services is $3,000. The agreement is month to month unless and until terminated by either
party upon 30 days notice.
Substantially all of the gas sales are made to Clearwater. These gas sales are governed by an
agreement that expires in 2009 and continues yearly thereafter, until canceled by either party
within thirty day notice.
Gas Compression Agreements
GO entered into a one year lease agreement with Hanover Compression Limited Partnership for the
use of a compressor. The lease is dated October 11, 2006 and is guaranteed for a minimum of
twelve months and continues monthly until cancelled by either party with 30 day notice. Minimum
base lease payments of $10,500 plus taxes and are due monthly. The base amount is subject to
semi-annual adjustments.
MV entered into a Gas Compression Master Service Agreement with USA Compression Partners, LP on
November 1, 2007. This agreement replaces an earlier agreement for gas compression services.
The agreement provides for monthly payments of approximately $17,000 per month through August 31,
2009.
Consulting Agreement
During November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting agreement
whereby Mr. Richter shall served as a special advisor to the board of directors of Penn
Octane and the board of managers of the General Partner and provided the following services
(Services) to both Penn Octane and Rio Vista: assistance with the sale of all or part of
their LPG assets, assistance with other transactions (including restructurings) involving
the companies as mutually agreed by the parties and such other services that the companies
may reasonably request.
95
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Consulting Agreements Continued
In consideration of the Services rendered by Mr. Richter to the companies, Penn Octane and
Rio Vista paid the following fees (Fees) to Mr. Richter: an amount equal to two percent
(2%) of (i) the net proceeds, as defined, to the companies resulting from a sale of assets
to a third party, and (ii) the net proceeds, as defined, to the companies from sales of LPG
to PMI for any calendar month in which such sales exceed the volumes pursuant to the
previous agreement with PMI. Amounts expensed pursuant to (i) above (see note D) were
$138,000 and have been paid to Mr. Richter. Amounts expensed pursuant to (ii) above for the
year ended December 31, 2006 totaled approximately $3,000.
Mr. Richters consulting agreement expired on November 14, 2006.
Rio Vista entered into a consulting agreement (Consulting Agreement) with JBR Capital Resources,
Inc. (JBR Capital) regarding consulting services to be rendered by JBR Capital to Rio Vista and
to Penn Octane. JBR Capital is controlled by Mr. Richter. The provisions of the Consulting
Agreement are effective as of November 15, 2006 (Effective Date).
Pursuant to the Consulting Agreement, JBR Capital has agreed to assist Rio Vista and Penn Octane
with the potential acquisition and disposition of assets and with other transactions involving
Rio Vista or Penn Octane. In exchange for these services, Rio Vista has agreed to pay JBR
Capital a fee based on approved services rendered by JBR Capital plus a fee based on the net
proceeds to Rio Vista resulting from a sale of assets to a third party introduced to Rio Vista by
JBR Capital. In addition, in connection with the Regional transaction, JBR Capital earned a fee
of $180,000 which fee was expensed. The term of the Consulting Agreement is six months following
the Effective Date. The Consulting Agreement renews for additional six-month terms unless
terminated by either party at least 30 days before the end of each term.
Richard R. Canney
On June 15, 2007, Penn Octane and Rio Vista entered into the Board Consulting Agreement regarding
consulting services to be rendered by Mr. Canney to Penn Octane and to Rio Vista. Pursuant to
the Board Consulting Agreement, Mr. Canney has agreed to assist Penn Octane and Rio Vista with
the potential acquisition and disposition of assets, obtaining financing, other transactions, and
recommending candidates for management and board service. In exchange for these services, Penn
Octane and Rio Vista paid Mr. Canney a combined total monthly fee of $12,500, inclusive of all
fees payable in connection with Mr. Canneys services as a director and chairman of the board of
Penn Octane and Rio Vista, retroactive to November 1, 2006. The monthly fee was paid equally by
Penn Octane and Rio Vista. During August 2007, Mr. Canney provided notice to Rio Vista of the
termination of the Board Consulting Agreement effective September 30, 2007.
96
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
CEOcast
Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc.
(CEOcast) whereby CEOcast agreed to render investor relations services to Rio Vista. Under the
terms of the CEOcast agreement, CEOcast will receive cash fees of $7,500 per month and Rio Vista
shall also issue to CEOcast (a) 1,399 of Rio Vistas fully-paid, non-assessable common units
(Common Units) and (b) $75,000 worth of Common units on March 31, 2008 based on a calculation of
units contained in the consulting agreement. The delivery of any Common Units provided for
herein shall be made at the soonest practical date after March 31, 2008, based on the best
efforts of Rio Vista. This Agreement shall be effective for a one-year period and can be
terminated by either party by providing written notice to the other party on or before May 30,
2008, otherwise the Agreement will automatically renew for additional one year periods
(Additional Period) under the same terms and conditions except that either party may terminate
the Agreement at any time during any Additional Period by providing 60 days written notice to the
other party. As of December 31, 2007, Rio Vista is obligated to provide CEO cast a total of
4,610 common units. Based on the closing price of Rio Vista common units on December 31, 2007,
the Company recorded additional expense of $78,275 associated with the agreement.
Concentrations of Credit Risk
Financial instruments that potentially subject Rio Vista to credit risk include cash balances at
banks which at times exceed the federal deposit insurance.
Tax obligations of Penn Octane resulting from the Spin-Off
Rio Vista has agreed to indemnify Penn Octane for a period of three years from the fiscal year
end that includes the date of the Spin-Off for any federal income tax liabilities resulting from
the Spin-Off in excess of $2,500,000. Penn Octane has filed its federal income tax return for
the year of the Spin-Off and it did not incur a federal income tax liability in excess of
$2,500,000. However, the Internal Revenue Service (IRS) may review Penn Octanes federal income
tax returns and challenge positions that Penn Octane has taken with respect to the Spin-Off.
Further, if Penn Octane is determined to have a federal income tax liability in excess of the
amounts which were included in the federal income tax return related to the Spin-Off and if Penn
Octane is unable to pay such liabilities or Rio Vista is unable to pay, then the Internal Revenue
Service may assert that the Penn Octane stockholders who received common units in the Spin-Off
are liable for unpaid federal income taxes of Penn Octane, including interest and any penalties,
up to the value of the Rio Vista Common Units received by each stockholder.
Partnership Tax Treatment and Mexican Subsidiaries, Regional and MV Income Taxes
Rio Vista, excluding Regional and MV, is not a taxable entity for U.S. tax purposes (see below)
and incurs no U.S. Federal income tax liability. Regional and MV are corporations and as such
are subject to U.S. Federal and State corporate income tax. Rio Vistas Mexican subsidiaries are
taxed on their income directly by the Mexican government. The income/loss of Rio Vistas Mexican
subsidiaries is included in the U.S. partnership income tax return of Rio Vista. The holders of
the common units and General Partner interest will be entitled to their proportionate share of
any tax credits resulting from any income taxes paid to the Mexican government. Each unitholder
of Rio Vista is required to take into account that unitholders share of items of income, gain,
loss and deduction of Rio Vista in computing that unitholders federal income tax liability, even
if no cash distributions are made to the unitholder by Rio Vista. Distributions by Rio Vista to
a unitholder are generally not taxable unless the amount of cash distributed is in excess of the
unitholders adjusted basis in Rio Vista.
97
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K COMMITMENTS AND CONTINGENCIES Continued
Partnership Tax Treatment and Mexican Subsidiaries, Regional and MV Income Taxes Continued
Section 7704 of the Internal Revenue Code (Code) provides that publicly traded partnerships
shall, as a general rule, be taxed as corporations despite the fact that they are not classified
as corporations under Section 7701 of the Code. Section 7704 of the Code provides an exception
to this general rule for a publicly traded partnership if 90% or more of its gross income for
every taxable year consists of qualifying income (Qualifying Income Exception). For purposes
of this exception, qualifying income includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation (including pipelines) or
marketing of any mineral or natural resource. Other types of qualifying income include
interest (other than from a financial business or interest based on profits of the borrower),
dividends, real property rents, gains from the sale of real property, including real property
held by one considered to be a dealer in such property, and gains from the sale or other
disposition of capital assets held for the production of income that otherwise constitutes
qualifying income.
Rio Vista estimates that more than 90% of its gross income is qualifying income. No ruling has
been or will be sought from the IRS and the IRS has made no determination as to Rio Vistas
classification as a partnership for federal income tax purposes or whether Rio Vistas operations
generate a minimum of 90% of qualifying income under Section 7704 of the Code.
If Rio Vista was classified as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, Rio Vistas items of income, gain, loss and
deduction would be reflected only on Rio Vistas tax return rather than being passed through to
Rio Vistas unitholders, and Rio Vistas net income would be taxed at corporate rates.
If Rio Vista was treated as a corporation for federal income tax purposes, Rio Vista would pay
tax on income at corporate rates, which is currently a maximum of 35%. Distributions to
unitholders would generally be taxed again as corporate distributions, and no income, gains,
losses, or deductions would flow through to the unitholders. Because a tax would be imposed upon
Rio Vista as a corporation, the cash available for distribution to unitholders would be
substantially reduced and Rio Vistas ability to make minimum quarterly distributions would be
impaired. Consequently, treatment of Rio Vista as a corporation would result in a material
reduction in the anticipated cash flow and after-tax return to unitholders and therefore would
likely result in a substantial reduction in the value of Rio Vistas common units.
Current law may change so as to cause Rio Vista to be taxable as a corporation for federal income
tax purposes or otherwise subject Rio Vista to entity-level taxation. The partnership agreement
provides that, if a law is enacted or existing law is modified or interpreted in a manner that
subject Rio Vista to taxation as a corporation or otherwise subjects Rio Vista to entity-level
taxation for federal, state or local income tax purposes, then the minimum quarterly distribution
amount and the target distribution amount will be adjusted to reflect the impact of that law on
Rio Vista.
98
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L OIL AND GAS HEDGING ACTIVITIES
Rio Vista sells oil and gas in the normal course of its business and utilizes hedging contracts
in the form of guaranteed fixed prices to minimize the variability in forecasted cash flows due
to price movements in oil and gas.
At December 31, 2007, Rio Vista has one contract for the period November 2007 March 2008 for
0.8 MMcf/d @ $6.70/Mcf. Subsequent to December 31, 2007, Rio Vista entered into the following
contracts:
|
|
|
Date
|
|
Terms
|
- April 2008 October 2008:
|
|
1.0 MMcf/d @ $6.35/Mcf (MV Pipeline production)
|
- April 2008 October 2008:
|
|
0.5 MMcf/d @ $7.97/Mcf (Brooken Pipeline production)
|
- November 2008 March 2009:
|
|
1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)
|
- November 2008 March 2009:
|
|
0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)
|
The hedges currently in place cover substantially all of Rio Vistas current production.
NOTE M RELATED PARTY TRANSACTIONS
The General Partner has a legal duty to manage Rio Vista in a manner beneficial to Rio Vistas
unitholders. This legal duty originates in statutes and judicial decisions and is commonly
referred to as a fiduciary duty. Because of Penn Octanes ownership and control of the
General Partner, Penn Octanes officers and managers of the General Partner also have fiduciary
duties to manage the business of the General Partner in a manner beneficial to Penn Octane and
its stockholders.
The partnership agreement limits the liability and reduces the fiduciary duties of the General
Partner to the unitholders. The partnership agreement also restricts the remedies available to
unitholders for actions that might otherwise constitute breaches of the General Partners
fiduciary duty.
Omnibus Agreement
In connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement with Rio Vista
that governs, among other things, indemnification obligations among the parties to the agreement,
related party transactions and the provision of general administration and support services by
Penn Octane.
The Omnibus Agreement prohibits Rio Vista from entering into any material agreement with Penn
Octane without the prior approval of the conflicts committee of the board of managers of the
General Partner. For purposes of the Omnibus Agreement, a material agreement is any agreement
between Rio Vista and Penn Octane that requires aggregate annual payments in excess of $100,000.
The Omnibus Agreement may be amended by written agreement of the parties; provided, however that
it may not be amended without the approval of the conflicts committee of the General Partner if
the amendment would adversely affect the unitholders of Rio Vista. The Omnibus Agreement has an
initial term of five years that automatically renews for successive five-year terms and, other
than the indemnification provisions, will terminate if Rio Vista is no longer an affiliate of
Penn Octane.
Under the terms of the Omnibus Agreement, Penn Octane charged Rio Vista $70,051,000 and
$686,000 for the two years in the period ended December 31, 2007, respectively.
99
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N 401K
Regional sponsors a defined contribution retirement plan (401(k) Plan) covering all eligible
employees effective November 1, 1988. The 401(k) Plan allows eligible employees to contribute,
subject to Internal Revenue Service limitations on total annual contributions, up to 60% of
their compensation as defined in the 401(k) plan, to various investment funds. Regional
matches, on a discretionary basis, 50% of the first 6% of employee compensation. Furthermore,
Regional may make additional contributions on a discretionary basis at the end of the Plan year
for all eligible employees. Regional made no discretionary contributions from the acquisition
of Regional to December 31, 2007.
NOTE O REALIZATION OF ASSETS
The accompanying consolidated balance sheet has been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate
continuation of Rio Vista as a going concern. Rio Vista has a loss from continuing
operations for each of the two years ended December 31, 2007 and has a deficit in working
capital. Currently, all revenues generated from the Oklahoma assets are held as collateral
against the TCW Credit Facility. The current portion of the TCW Credit Facility, the Moores
Note, the RZB Note, and the Seller Note Regional are all short-term in nature and amounts
due in the current year are approximately $9,100,000.
The Oklahoma assets and/or the Regional operations currently do not generate sufficient cash
flow to pay general and administrative and other operating expenses of Rio Vista (parent) and
all debt service requirements. The TCW Credit Facility prohibits distributions by Rio Vistas
Oklahoma subsidiaries until December 2008 and subsequent thereto, those distributions are
limited to 75% of defined available cash flow. In addition, Rio Vista requires additional
funding in order to increase production levels for its Oklahoma assets.
Rio Vista has guaranteed certain of Penn Octanes obligations. Substantially all of Rio
Vistas and Penn Octanes assets are pledged or committed to be pledged as collateral on the
TCW Credit Facility, and the RZB Note and RZB Credit Facility, and therefore, both Rio Vista
and Penn Octane may be unable to obtain additional financing collateralized by those assets.
Penn Octanes Report of Independent Registered Public Accounting Firm on the consolidated
financial statements of Penn Octane at December 31, 2007 contains an explanatory paragraph
which describes an uncertainty about Penn Octanes ability to continue as a going concern.
If Penn Octanes and Rio Vistas cash flows are not adequate to pay their obligations, Penn
Octane and/or Rio Vista may be required to raise additional funds to avoid foreclosure by
creditors. There can be no assurance that such additional funding will be available on
terms attractive to either Penn Octane or Rio Vista or available at all. If additional
amounts cannot be raised and cash flow is inadequate, Penn Octane and/or Rio Vista would
likely be required to seek other alternatives which could include the sale of assets,
closure of operations and/or protection under the U.S. bankruptcy laws.
In view of the matters described in the preceding paragraphs, recoverability of the recorded
asset amounts shown in the accompanying consolidated balance sheet is dependent upon the
ability of Rio Vista to continue as a going concern. The consolidated financial statements
do not include any adjustments related to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be necessary should
Rio Vista be unable to continue in existence.
To provide Rio Vista with the ability it believes necessary to continue in existence,
management is taking steps to restructure its existing debt obligations and raise additional
debt and/or equity financing.
100
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited)
(A) Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities
|
|
|
Costs incurred in oil and gas property acquisition and development are presented below:
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December
|
|
|
|
31, 2007
|
|
|
|
(in thousands)
|
|
|
Property acquisition costs:
|
|
|
|
|
Proved
|
|
$
|
26,255
|
|
Unproved
|
|
|
|
|
Development costs
|
|
|
|
|
|
|
|
|
Total costs incurred
|
|
$
|
26,255
|
|
|
|
|
|
Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a
property. Development costs include costs incurred to gain access to and prepare development well
locations for drilling, to drill and equip development wells and to provide facilities to extract,
treat and gather oil and gas.
Rio Vista capitalizes costs related to drilling and development of oil and gas properties for
specific activities related to drilling its wells, which included site preparation, drilling labor,
meter installation, pipeline connection and site reclamation. There were no drilling and
development costs during the year ended December 31, 2007.
(B) Oil and Gas Capitalized Costs
Aggregate capitalized costs related to oil and gas production activities with applicable
accumulated depreciation, depletion and amortization are presented below:
|
|
|
|
|
|
|
December
|
|
|
|
31, 2007
|
|
|
|
(in thousands)
|
|
|
Proved properties:
|
|
|
|
|
Leasehold, equipment and drilling
|
|
$
|
26,255
|
|
|
|
|
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(58
|
)
|
|
|
|
|
Net capitalized costs
|
|
$
|
26,197
|
|
|
|
|
|
101
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited) Continued
(C) Results of Oil and Gas Producing Activities
The results of operations for oil and gas producing activities (excluding corporate overhead
and interest costs) are presented below:
|
|
|
|
|
|
|
Year
|
|
|
|
Ended
December
|
|
|
|
31, 2007
|
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
Oil and gas sales
|
|
$
|
396
|
|
Gain (loss) on oil and gas derivatives
|
|
|
|
|
|
|
|
|
Net oil and gas sales
|
|
|
396
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Production costs
|
|
|
212
|
|
Depreciation, depletion and amortization
|
|
|
58
|
|
|
|
|
|
Total expenses
|
|
|
270
|
|
|
|
|
|
Results of operations for oil and gas producing
activities (excluding corporate overhead and interest
costs)
|
|
$
|
126
|
|
|
|
|
|
Production costs include those costs incurred to operate and maintain productive wells and
related equipment, including such costs as labor, repairs, maintenance, materials, supplies,
fuel consumed, insurance and other production taxes. In addition, production costs include
administrative expenses applicable to support equipment associated with these activities.
(D) Net Proved Oil and Gas Reserves
The proved reserves of oil and gas of Rio Vista have been estimated by an independent
petroleum engineering firm, Lee Keeling and Associates, Inc., at December 31, 2007. These
reserve estimates have been prepared in compliance with the SEC rules based on year-end
prices. An analysis of the change in estimated quantities of oil and gas reserves, all of
which are located within the United States, is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Gas (Bcf)
|
|
|
Oil (MMbls)
|
|
|
Total (Bcfe)
|
|
Proved developed and undeveloped reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Oklahoma assets
|
|
|
35.668
|
|
|
|
|
|
|
|
35.668
|
|
Production
|
|
|
(.080
|
)
|
|
|
|
|
|
|
(.080
|
)
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
35.588
|
|
|
|
|
|
|
|
35.588
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
12.766
|
|
|
|
|
|
|
|
12.766
|
|
|
|
|
|
|
|
|
|
|
|
102
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P SUPPLEMENTARY OIL AND GAS DATA (Unaudited) Continued
(E) Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Reserves Continued
Summarized in the following table is information for Rio Vista with respect to the standardized
measure of discounted future net cash flows relating to proved reserves. Future cash inflows
are computed by applying year-end prices relating to Rio Vistas proved reserves to the year-end
quantities of those reserves. Future production, development, site restoration and abandonment
costs are derived based on current costs assuming continuation of existing economic conditions.
There are no future income tax expenses because Rio Vista is a nontaxable entity.
The following represents changes in the Standard measure of discounted future net cash flow
estimated.
|
|
|
|
|
Future cash inflows
|
|
$
|
179,015
|
|
Future production costs
|
|
|
(63,693
|
)
|
Future development costs
|
|
|
(10,891
|
)
|
|
|
|
|
|
|
|
|
|
Future cash flows before income taxes
|
|
$
|
104,431
|
|
|
|
|
|
|
|
|
|
|
Future net cash flows before income, taxes,
discounted at 10%
|
|
$
|
41,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31, 2007
|
|
|
|
(in thousands)
|
|
|
Beginning balance
|
|
$
|
|
|
Oil and gas sales, net of production costs
|
|
|
(183
|
)
|
Purchase of reserves in place, net of future
development costs
|
|
|
41,455
|
|
Accretion of discount
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
41,272
|
|
|
|
|
|
It is necessary to emphasize that the data presented should not be viewed as representing the
expected cash flow from, or current value of, existing proved reserves since the computations
are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot
be measured with precision and their estimation requires many judgmental determinations and
frequent revisions. The required projection of production and related expenditures over time
requires further estimates with respect to pipeline availability, rates of demand and
governmental control. Actual future prices and costs are likely to be substantially different
from the current prices and costs utilized in the computation of reported amounts. Any analysis
or evaluation of the reported amounts should give specific recognition to the computational
methods utilized and the limitations inherent therein.
103
RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q SEGMENT INFORMATION
Rio Vista has the following reportable segments: Transportation and Terminalling and Oil and Gas.
The Transportation and Terminalling segment transports bulk liquids, including chemical and
petroleum products, by truck and provides terminalling and storage services, the Oil and Gas
segment produces, transports and sells oil and gas.
The accounting policies used to develop segment information correspond to those described in the
summary of significant accounting policies. Segment profit (loss) is based on gross profit
(loss) from operations before selling, general and administrative expenses, other income
(expense) and income tax. The reportable segments are distinct business units operating in
similar industries. They are separately managed, with separate marketing and distribution
systems. The following information about the segments is for the years ended December 31, 2007.
The LPG Transportation segment commenced August 22, 2006 and the oil and gas segment commenced
November 19, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
Terminalling
|
|
|
Oil and Gas
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
5,378,000
|
|
|
|
865,000
|
|
|
|
6,243,000
|
|
Interest expense
|
|
|
712,000
|
|
|
|
275,000
|
|
|
|
987,000
|
|
Interest income
|
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
Depreciation and amortization
|
|
|
1,033,000
|
|
|
|
96,000
|
|
|
|
1,129,000
|
|
Segment gross profit (loss)
|
|
|
1,009,000
|
|
|
|
137,000
|
|
|
|
1,146,000
|
|
Segment assets
|
|
|
13,881,000
|
|
|
|
35,368,000
|
|
|
|
49,249,000
|
|
Segment liabilities
|
|
|
6,391,000
|
|
|
|
21,604,000
|
|
|
|
27,557,000
|
|
Expenditure for segment assets
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
|
|
|
|
$
|
6,243,000
|
|
|
|
|
|
Elimination of intersegment revenues
|
|
|
|
|
|
|
(337,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
|
|
|
|
$
|
5,906,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit (loss) for reportable
segments
|
|
|
|
|
|
|
1,146,000
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
(5,091,000
|
)
|
|
|
|
|
Interest and Fuel Products financing expense
|
|
|
|
|
|
|
(994,000
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
17,000
|
|
|
|
|
|
Elimination of intersegment profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate headquarters expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing
operations before income tax
|
|
|
|
|
|
$
|
(4,922,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
|
|
|
|
49,249,000
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
206,000
|
|
|
|
|
|
Corporate headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
$
|
49,455,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A(T). Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that
information required to be disclosed in the Companys reports under the Securities Exchange Act of
1934, as amended (Exchange Act), such as this Form 10-K, is reported in accordance with the rules
of the SEC. Disclosure controls are also designed with the objective of ensuring that such
information is accumulated appropriately and communicated to management, including the chief
executive officer and chief financial officer, as appropriate, to allow for timely decisions
regarding required disclosures.
As of the end of the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management, including the Companys
chief executive officer/chief financial officer and the Companys controller, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e).
The Companys has only two members of management involved in the financial reporting process: the
chief executive officer/chief financial officer and the controller. As a result, segregation of
duties is difficult and therefore, the internal control environment is limited. As a result of
this material weakness, management concluded that our disclosure controls and procedures were not
effective as of December 31, 2007. As noted below, we believe we are taking the necessary steps to
address the matters related to the material weakness. However, before concluding that the material
weakness has been remediated, management believes that the new internal controls should be
implemented and operational for a sufficient period of time to demonstrate that the controls are
operating effectively. We believe our consolidated financial statements included in this Annual
Report on Form 10-K fairly present in all material respects our financial position, results of
operations and cash flows for the periods presented in accordance with United States generally
accepted accounting principles.
Steps taken:
1. We are recruiting experienced accounting professionals with an emphasis on
accounting and financial reporting.
2. We are utilizing outside consultants with extensive oil and gas financial reporting
experience.
3. We are providing extensive training on our accounting software system to both new and
established accounting personnel.
105
Managements Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The
Companys internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States
of America (GAAP). The Companys internal control over financial reporting includes those policies
and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
|
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
|
|
|
|
|
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness
of the Companys internal control over financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on its assessment and those criteria, management concluded that the Rio Vistas disclosure
controls and procedures over financial reporting were not effective as of December 31, 2007.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
Item 9B. Other Information
None.
106
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Rio Vista does not have directors, managers or officers. The board of managers and officers of Rio
Vista GP LLC, the General Partner of Rio Vista (General Partner), a subsidiary of Penn Octane,
perform all management functions for Rio Vista. Officers of the General Partner are appointed by
its board of managers. The officers of the General Partner are paid directly by Penn Octane.
Other than distributions attributable to its General Partner interest and incentive distribution
rights, the General Partner does not receive a management fee or other compensation in connection
with its management of Rio Vistas business. Pursuant to the Omnibus Agreement, Penn Octane is
entitled to receive reimbursement for all direct and indirect expenses it or the General Partner
incurs on Rio Vistas behalf, including general and administrative expenses. The indirect expenses
include an allocation of the salaries and benefit costs related to employees (including executive
officers) of Penn Octane who provide services to Rio Vista based on actual time spent performing
services between Penn Octane and the General Partner. The General Partner has sole responsibility
for conducting Rio Vistas business and for managing Rio Vistas operations.
Set forth below is certain information concerning the board of managers and executive officers of
the General Partner:
Managers of Rio Vista GP LLC
The following table shows information for the board of managers of the General Partner. The
members of the General Partners conflicts committee, audit committee and compensation committee
are Murray J. Feiwell, Richard R. Canney and Douglas G. Manner.
|
|
|
|
|
|
|
|
|
|
|
|
|
Manager
|
Name of Manager
|
|
Age
|
|
Position with the General Partner
|
|
Since
|
|
|
|
|
|
|
|
Douglas G. Manner
|
|
52
|
|
Manager and Chairman of the Board
|
|
2004
|
|
|
|
|
|
|
|
Richard R. Canney
|
|
53
|
|
Manager
|
|
2004
|
|
|
|
|
|
|
|
Murray J. Feiwell
|
|
70
|
|
Manager
|
|
2004
|
|
|
|
|
|
|
|
Bruce I. Raben
|
|
54
|
|
Manager
|
|
2008
|
|
|
|
|
|
|
|
Nicholas J. Singer
|
|
28
|
|
Manager
|
|
2008
|
All managers hold office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Douglas G. Manner
was elected as a member of the board of managers of the General Partner in August
2004. Mr. Manner is currently Senior Vice President and Chief Operating Officer of Kosmos Energy,
LLC, a private oil and gas exploration company. Mr. Manner joined Kosmos Energy in January 2004.
Prior to Kosmos Energy, Mr. Manner served as President and Chief Operating Officer of White Stone
Energy since August 2002. For the two years prior to joining White Stone Energy, Mr. Manner was
Chairman and Chief Executive Officer of Mission Resources and Chairman of the Board of one of
Missions predecessor companies, Bellwether Exploration. Prior to joining Bellwether, Mr. Manner
was employed by Ryder Scott Petroleum Engineers for fifteen years and by Gulf Canada Resources
Limited. Mr. Manner is a member of the board of directors of Blizzard Energy, Inc., an oil and gas
company based in Alberta, Canada; Resolute Energy Inc., an oil and gas company based in Alberta,
Canada; Westside Energy Corporation, an oil and gas company based in Texas; and Cordero Energy
Inc., an oil and gas company based in Alberta, Canada. Mr. Manner holds a B.S. degree in
mechanical engineering from Rice University. In January 2008, Mr. Manner was also elected to the
board of directors of Penn Octane Corporation, an affiliate of Rio Vista.
107
Richard R. Canney
was elected as a member of the board of managers of the General Partner in
August 2004. Since 1997, Mr. Canney has been employed in the mergers and acquisitions and new
ventures division of Shell Oil Company in Houston, Texas. Prior to joining Shell, Mr. Canney was
a Director and Managing Partner of Corporacion Mercantil Internacional, S.A. de C.V. in Mexico
City. From 1994 to 1996, Mr. Canney was a professor of finance at Instituto Tecnologico Autonomo
de Mexico in Mexico City. Mr. Canney earned a Masters of Business Administration from the
University of Chicago in June 1989. Mr. Canney is also Chairman of the Board of Penn Octane.
Murray J. Feiwell
was elected as a member of the board of managers of the General Partner in
August 2004. From 1986 until January 1, 2007, Mr. Feiwell served as President and Chief Executive
Officer of Feiwell & Hannoy, P.C., a law firm located in Indianapolis, Indiana, that specializes
in general civil practice, bankruptcy and creditors rights, real estate and foreclosure, general
business and commercial law. From 1997 until January 1, 2007, Mr. Feiwell also served as
President and Chief Executive Officer of Statewide Title Company, a title company located in
Indianapolis, Indiana. Mr. Feiwell earned a J.D. from the University of Michigan in 1963. Mr.
Feiwell retired from the practice of law on January 1, 2007 and no longer owns an interest in the
law firm or the title company.
Bruce I. Raben
was elected as a member of the board of managers of the General Partner in January
2008. Mr. Raben is a founding Partner of Hudson Capital Advisors, LLC, a provider of investment
banking advisory, placement and capital raising services formed in 2004. From 1979 until 1990,
Mr. Raben worked at Drexel Burnham Lambert, an investment banking firm. From 1990 through 1995, he
was an executive vice president with Jeffries & Company, an investment banking firm. From 1995
until 2002, Mr. Raben served as a managing director of CIBC World Markets, an investment banking
firm. He continued to serve as a consultant to CIBC in 2003. Mr. Raben has previously served on
the boards of numerous public and private companies. Mr. Raben currently serves as a member of the
Board of Directors of Penn Octane.
Nicholas J. Singer
was elected as a member of the board of managers of the General Partner in
January 2008. Mr. Singer is a Co-Managing Member of Standard General Management LLC, an
investment management firm based in New York City. Before joining Standard General Management LLC
in 2007, Mr. Singer was a Founding Partner at Cyrus Capital Partners during 2005 and 2006. Prior
to joining Cyrus Capital Partners, he was a senior research analyst and principal at Och-Ziff
Capital Management from 2002 until 2005. He currently serves as a member of the Board of Directors
of Aquila, Inc. Concurrent with his election to the board of managers of Rio Vista, Mr. Singer
was also elected to the board of directors of Penn Octane.
Information Regarding The Board Of Managers
The business of Rio Vista is managed under the direction of the board of managers of Rio Vista GP
LLC. The board conducts its business through meetings of the board and its committees. During
2007, the board held four meetings, and the audit committee held four meetings. No member of the
board attended less than 75% of the meetings of the board and committees of which he was a member.
The board of managers currently consists of five members, none of whom are members of the
management of either Rio Vista GP LLC or Penn Octane. The board has determined that all of its
managers, Messrs. Manner, Canney, Feiwell, Raben and Singer, meet the independence requirements
under the rules of the NASDAQ Stock Market. As a result, although not required by NASDAQ rules
applicable to limited partnerships, the majority of the board of managers is comprised of
independent managers.
Communication with the Board of Managers
Unitholders and other interested parties may communicate with the board of managers or the
Chairman of the Board of our General Partner by sending written communication in an envelope
addressed to Board of Managers or Chairman of the Board of Managers in care of Company
Secretary, Rio Vista Energy Partners L.P., 1313 E. Alton Gloor Blvd., Suite J, Brownsville, TX
78526.
Audit Committee
Our General Partners audit committee (Audit Committee) consists of Mr. Canney (Chairman), Mr.
Feiwell, and Mr. Manner. Mr. Canney and Mr. Manner are considered audit committee financial
experts as defined in applicable rules of the Securities and Exchange Commission. The board has
determined that all three members of the audit committee meet the audit committee independence
requirements under the rules of the NASDAQ Stock Market. The board of managers has adopted a
written charter for the audit committee, which is available on Rio Vistas website of
http://www.riovistaenergy.com
.
108
The audit committee reviews and reports to the board on various auditing and accounting matters,
including the quality, objectivity and performance of Rio Vistas internal and external
accountants and auditors, the adequacy of its financial controls and the reliability of financial
information reported to the public. The audit committee met four times in 2007.
Compensation Committee
Rio Vista GP LLC has a compensation committee composed of managers whom the board has determined
to be independent consisting of Messrs. Canney, Feiwell and Manner.
Conflicts Committee
Rio Vistas partnership agreement provides for a conflicts committee composed of the managers whom
the board of mangers of the General Partner has determined to be independent. The conflicts
committee reviews and makes recommendations relating to potential conflicts of interest between
Rio Vista and its subsidiaries, on the one hand, and the General Partner and its affiliates
(including Penn Octane), on the other hand. The members of the conflicts committee are
Messrs. Feiwell, Canney, and Manner.
Executive Officers of the General Partner
The names of the General Partners executive officer and certain information about him are set
forth below:
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Officer
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Name of Executive Officer
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Age
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Position with General Partner
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Since
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Ian T. Bothwell
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48
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Acting Chief Executive
Officer, Acting President,
Vice President, Treasurer,
Chief Financial Officer and
Assistant Secretary
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2003
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Ian T. Bothwell
was elected Treasurer of the General Partner in 2003. In 2004, Mr. Bothwell was
elected to serve as Chief Financial Officer, Vice President and Assistant Secretary of the General
Partner. He was elected Vice President, Treasurer, Chief Financial Officer, and Assistant
Secretary of Penn Octane in October 1996. In November 2006, he was appointed Acting Chief
Executive Officer and Acting President of the General Partner and of Penn Octane. He also served as
a director of Penn Octane from March 1997 until July 2004. Since July 1993, Mr. Bothwell has been
a principal of Bothwell & Asociados, S.A. de C.V., a Mexican management consulting and financial
advisory company that was founded by Mr. Bothwell in 1993 and specializes in financing
infrastructure projects in Mexico. Mr. Bothwell also serves as Chief Executive Officer of B & A
Eco-Holdings, Inc., a company originally formed to purchase certain of Penn Octanes compressed
natural gas assets.
Code of Business Conduct
In 2004, Rio Vista adopted a code of conduct that applies to Rio Vista GP LLCs executive
officers, including its principal executive officer, principal financial officer and principal
accounting officer. This Code charges the executive officers of Rio Vista GP LLC with
responsibilities regarding honest and ethical conduct, the preparation and quality of the
disclosures in the documents and reports Rio Vista files with the SEC and compliance with
applicable laws, rules and regulations. In April 2007, the board of managers of the General
Partner approved a revised code of conduct that incorporates a formal policy for the approval of
transactions with related persons.
Compliance under Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the General Partners managers and executive officers,
and persons who own more than 10% of a registered class of Rio Vistas equity securities, to file
initial reports of ownership and reports of changes in ownership with the SEC. Such persons are
required by the SEC to furnish Rio Vista with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of Forms 3, 4 and 5 received by it, Rio Vista believes that all
managers and officers of the General Partner and 10% unitholders of Rio Vista complied with such
filing requirements except as follows: Jerome B. Richter filed a
Form 5 in February 2008 for the fiscal year ended December 2007,
which reflected the unreported purchase of 765 common units in
November 2007. Richard Canney filed a Form 4A during January
2008 which corrected previously filed Form 4s which
incorrectly reflected options to purchase 26,963 common units.
109
Item 11. Executive Compensation.
Rio Vista does not have any directors, managers or officers. The board of managers and officers of
the General Partner perform all management functions for Rio Vista. Officers of the General
Partner are appointed by its board of managers. The officers of the General Partner currently
hold the same positions as the officers of Penn Octane. All officers of the General Partner are
paid directly by Penn Octane. Pursuant to the Omnibus Agreement, Penn Octane is entitled to
receive reimbursement for all direct and indirect expenses it or the General Partner incurs on Rio
Vistas behalf, including general and administrative expenses. The direct expenses include the
salaries and benefit costs related to employees of Penn Octane who provide services to Rio Vista.
The General Partner has sole discretion in determining the amount of these expenses.
Compensation from Penn Octane
The table below sets forth a summary of compensation paid for the last two years to those employees
of Penn Octane who served as the General Partners Chief Executive Officer, Chief Financial Officer
and its other two most highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 for the year ended December 31, 2007. The General Partners executive officers
are paid by Penn Octane. The services rendered by the executive officers to the General Partner
are provided pursuant to the terms of the Omnibus Agreement for which Rio Vista pays Penn Octane
for its allocable portion of general and administrative expenses incurred by Penn Octane, including
expenses for services rendered by Penn Octane employees, for the benefit of Rio Vista.
Penn Octanes compensation to executive management was administered by the compensation committee
of the board of directors of Penn Octane. As of December 31, 2007, the compensation committee of
Penn Octane was comprised of two directors both of whom are outside directors, who report to the
board of directors on all compensation matters concerning Penn Octanes executive officers,
including Penn Octanes Chief Executive Officer, Chief Financial Officer and Penn Octanes other
executive officers (collectively, with the Chief Executive Officer and Chief Financial Officer, the
Named Executive Officers). In determining annual compensation, including bonus, and other
incentive compensation to be paid to the Named Executive Officers, the compensation committee
considers several factors, including overall performance of the Named Executive Officers (measured
in terms of financial performance of Penn Octane, opportunities provided to Penn Octane,
responsibilities, quality of work and/or tenure with Penn Octane), and considers other factors,
including retention and motivation of the Named Executive Officers and the overall financial
condition of Penn Octane. The Named Executive Officers receive compensation in the form of cash
and Penn Octane equity.
Compensation from Rio Vista
The compensation committee of the General Partner does not approve the cash or equity compensation
paid by Penn Octane to the Named Executive Officers. The compensation committee of the General
Partner has the ability to recommend the issuance of equity instruments of Rio Vista or other
compensation to the Named Executive Officers in connection with their service to Rio Vista.
110
Summary Compensation Table
The following table sets forth annual and all other compensation to Mr. Bothwell, our General
Partners only executive officer in 2007, for services rendered in all capacities to both Penn
Octane and Rio Vista and its subsidiaries during each of the periods indicated. This information
includes the dollar values of base salaries, bonus awards, the number of warrants granted and
certain other compensation, if any, whether paid or deferred. Rio Vista does not grant stock
appreciation rights or other long-term compensation plans for employees.
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Changes in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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Ian T. Bothwell
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2007
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219,000
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58,000
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93,000
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(4)
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309,000
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(2)
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88,000
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(3)
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767,000
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Acting Chief Executive
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2006
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180,000
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70,000
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250,000
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Officer, Acting President,
Chief Financial Officer,
Vice-President, Treasurer
and Assistant Secretary
(1)
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(1)
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Mr. Bothwell was appointed Acting President and Acting Chief Executive Officer of Penn
Octane and the General Partner in November 2006.
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(2)
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Represents warrants to purchase 180,000 of common stock of Penn Octane valued using the
Black-Scholes option pricing model.
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(3)
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Represents warrants to purchase 100,000 common units of Rio Vista valued using the
Black-Scholes option pricing model.
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(4)
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Represents 8,334 common units granted.
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Neither Penn Octane nor the General Partner has an employment agreement with Mr. Bothwell.
Outstanding Equity Awards at December 31, 2007
Option Awards
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Equity Incentive
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Number of
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Number of
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Plan Awards:
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Securities
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Securities
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Number of
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Underlying
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Underlying
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Securities
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Unexercised
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Unexercised
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Underlying
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Option
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Options
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Options
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Unexercised
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Exercise
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Option
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Exercisable
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Unexercisable
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Unearned Options
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Price
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Expiration
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Name
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(#)
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(#)
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(#)
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($)
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Date
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Ian T. Bothwell
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15,625
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12.51
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3/08/2008
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Ian T. Bothwell
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1,457
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3,543
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8.38
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2/12/2012
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Ian T. Bothwell
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5,205
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14,795
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7.36
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3/20/2012
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Ian T. Bothwell
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18,699
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56,301
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11.21
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6/28/2012
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111
Stock Awards
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Equity Incentive Plan Awards
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Number of
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Market or Payout
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Unearned
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Value of
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Number of
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Market Value
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Units or Other
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Unearned Units
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Units of Stock
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of Units of
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Rights That
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or Other Rights
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That Have Not
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Stock that Have
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Have Not
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That Have Not
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Vested
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Not Vested
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Vested
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Vested
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Name
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(#)
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($)
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(#)
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($)
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Ian T. Bothwell
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16,667
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186,667
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(1)
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(1)
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Based on the closing market price of Rio Vistas common units on the NASDAQ Stock Market on
December 31, 2007 of $17.00.
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Termination and Change in Control
Rio Vistas 2005 Equity Incentive Plan and the associated form of option agreement provide for
acceleration of vesting of outstanding options in connection with the following events: a merger
or consolidation in which Rio Vista and/or the General Partner is not the surviving entity; the
sale, transfer or other disposition of at least 75% of the total assets of Rio Vista and/or the
General Partner; the complete liquidation or dissolution of Rio Vista and/or the General Partner;
a reverse merger in which Rio Vista and/or the General Partner is the surviving entity but (i)
the Common Units outstanding immediately prior to such merger are converted or exchanged into
other property by virtue of the merger, or (ii) in which securities possessing more than 50% of
the total combined voting power of Rio Vistas and/or the General Partners outstanding
securities are transferred to persons different from those who held such securities immediately
prior to such merger; the acquisition by any person of beneficial ownership of securities
possessing more than 50% of the total combined voting power of Rio Vistas and/or the General
Partners outstanding securities; or a change in the composition of the board of managers of the
General Partner over a period of 12 months or less such that a majority of the managers ceases,
by reason of one or more contested elections for manager, to be comprised of individuals who are
continuing managers (as defined in the form of option agreement).
Compensation of Managers
The following table lists all compensation to managers during the year ended December 31, 2007.
Manager Compensation
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Change in
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Pension Value
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and
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Fee Earned
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Non-Equity
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Nonqualified
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All Other
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or Paid in
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Stock
|
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Option
|
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Incentive Plan
|
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Deferred
|
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Compen-
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Cash
|
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Awards
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Awards
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Compensation
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Compensation
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sation
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Total
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Name
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($)
(1)
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($)
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($)
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($)
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Earnings
|
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($)
(4)
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($)
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Richard R. Canney
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25,000
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36,000
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(2)
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33,500
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94,500
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Murray J. Feiwell
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20,000
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29,000
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(3)
|
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49,000
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Douglas G. Manner
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|
20,000
|
|
|
|
|
|
|
|
29,000
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,000
|
|
|
|
|
(1)
|
|
Amounts represent fees paid for the quarters ended March 2007 through September 2007 and
amounts earned for the quarter ended
December 2007.
|
|
(2)
|
|
Amounts represent warrants to purchase 9,375 common units of Rio Vista valued using
the Black-Scholes option pricing model.
|
|
(3)
|
|
Amounts represent warrants
to purchase 7,500 common units of Rio Vista valued using
the Black-Scholes option pricing model.
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|
(4)
|
|
Amount represent consulting fees.
|
112
On April 10, 2007, the board of managers of the General Partner approved a form of Chairman
Services Agreement and Manager Services Agreement. Pursuant to these agreements, the non-employee
chairman of the board of managers of the General Partner receives annual cash compensation of
$25,000, payable quarterly, and an annual grant of options to purchase 6,250 of our common units.
Other non-employee managers of our General Partner receive annual cash compensation of $20,000,
payable quarterly, and an annual grant of options to purchase 5,000 of our common units.
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|
|
Item 12.
|
|
Security Ownership of Certain Beneficial Owners and Management and Related Unitholder
Matters.
|
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of common units of Rio Vista beneficially owned as of
March 28, 2008 by each person known by Rio Vista to own beneficially more than 5% of the
outstanding common units of Rio Vista (Common Units).
|
|
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Amount and
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|
|
|
|
|
Nature of
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|
|
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|
Beneficial
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Name and Address of Beneficial Owner
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Ownership
(1)
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|
Percent of Class
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|
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|
Jerome B. Richter
335 Tomahawk Drive, Palm Desert, CA
92211
|
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|
599,004
|
(2)
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|
23.81
|
%
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|
|
|
|
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|
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|
Swank Group, LLC, Swank Energy Income
Advisors, L.P. and Jerry V. Swank
3300 Oak Lawn Ave., Suite 650, Dallas, TX
75219
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|
455,234
|
(3)
|
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|
18.10
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%
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|
|
|
|
|
|
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|
Standard General L.P.,
Standard General Fund, L.P., Soohyung
Kim and Nicholas J. Singer
|
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|
212,487
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(4)
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|
8.45
|
%
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|
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|
(1)
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|
Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with respect to
securities. Common units which are purchasable under warrants which are currently exercisable,
or which will become exercisable no later than 60 days after March 28, 2008, are deemed
outstanding for computing the percentage of the person holding such warrants but are not
deemed outstanding for computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the persons named in the
table have sole voting and investment power with respect to all common units shown as
beneficially owned by them.
|
|
(2)
|
|
Includes 4,730 common units owned by Mr. Richters spouse.
|
|
(3)
|
|
Swank Group, LLC serves as the General Partner of Swank Energy Income Advisors, L.P.
(Advisor) and may direct the Advisor to direct the vote and disposition of the 405,486 common
units of Rio Vista held by the Cushing Fund, L.P and/or Swank MLP Conveyance Fund, L.P
(collectively, Swank Funds). The Advisor is the General Partner of the Swank Funds. The
principal of Swank Group, LLC, Mr. Jerry V. Swank, may direct the vote and disposition of the
455,234 common units of Rio Vista held by the Swank Funds.
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(4)
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|
Standard General, Mr. Kim and Mr. Singer do not directly own any of the common units. By
reason of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, each of
Standard General, Mr. Kim and Mr. Singer may be deemed to own beneficially 212,487 common unit
(constituting approximately 8.45% of the common units outstanding). Each of Standard General,
Mr. Kim and Mr. Singer disclaim direct beneficial ownership of any of the securities.
|
113
The following table sets forth the number of common units of Rio Vista beneficially owned as of
March 28, 2008 by each manager of the General Partner, each Named Executive Officer, and all
managers and Named Executive Officers as a group. The address of each person in the table below is
c/o Rio Vista Energy Partners L.P., 1313 E. Alton Gloor Blvd., Suite J, Brownsville, Texas 78526.
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|
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|
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|
|
Amount and Nature
|
|
|
|
|
|
|
of Beneficial
|
|
|
|
|
Name of Beneficial Owner
|
|
Ownership
(1)
|
|
|
Percent of Class
|
|
|
|
|
|
|
|
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|
Nicholas J. Singer
|
|
|
212,487
|
(2)
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|
8.45
|
%
|
|
|
|
|
|
|
|
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|
Ian T. Bothwell
|
|
|
75,154
|
(3)
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|
|
2.95
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%
|
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|
|
|
|
|
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|
Murray J. Feiwell
|
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20,635
|
(4)
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|
*
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|
Douglas G. Manner
|
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19,375
|
(5)
|
|
|
*
|
|
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|
|
|
|
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|
Richard R. Canney
|
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|
13,750
|
(6)
|
|
|
*
|
|
|
|
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|
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|
Bruce I. Raben
|
|
|
5,735
|
|
|
|
*
|
|
|
|
|
|
|
|
|
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|
All Directors and Named
Executive Officers as a
group (6 persons)
|
|
|
347,136
|
(7)
|
|
|
13.39
|
%
|
|
|
|
*
|
|
Less than 1%
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with respect to
securities. Common units which are purchasable under warrants which are currently exercisable,
or which will become exercisable no later than 60 days after March 28, 2008, are deemed
outstanding for computing the percentage of the person holding such warrants but are not
deemed outstanding for computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the persons named in the
table have sole voting and investment power with respect to all common units shown as
beneficially owned by them.
|
|
(2)
|
|
Standard General, Mr. Kim and Mr. Singer do not directly own any of the common units. By
reason of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, each of
Standard General, Mr. Kim and Mr. Singer may be deemed to own beneficially 212,487 common unit
(constituting approximately 8.45% of the common units outstanding). Each of Standard General,
Mr. Kim and Mr. Singer disclaim direct beneficial ownership of any of the securities.
|
|
(3)
|
|
Includes 36,342 common units issuable upon exercise of common unit purchase warrants.
|
|
(4)
|
|
Includes 12,500 common units issuable upon exercise of common unit purchase warrants.
|
|
(5)
|
|
Includes 14,375 common units issuable upon exercise of common unit purchase warrants.
|
|
(6)
|
|
Includes 13,750 common units issuable upon exercise of common unit purchase warrants.
|
|
(7)
|
|
Includes 76,967 common units issuable upon exercise of common unit purchase warrants.
|
114
Equity Compensation Plans
The following table provides information concerning Rio Vistas equity compensation plans as of
December 31, 2007
(2)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
remaining available for
|
|
|
|
Number of securities to
|
|
|
exercise price of
|
|
|
future issuance under
|
|
|
|
be issued upon exercise
|
|
|
outstanding options,
|
|
|
equity compensation
|
|
|
|
of outstanding options,
|
|
|
warrants and rights
|
|
|
plans (excluding securities
|
|
|
|
warrants and rights
|
|
|
(per unit)
|
|
|
reflected in column (a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation
plans approved by
security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
(1)
|
|
|
349,094
|
|
|
$
|
10.90
|
|
|
|
466,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
349,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Under the terms of the partnership agreement and applicable rules of the NASDAQ Market, no
approval by the unitholders of Rio Vista was required.
|
|
(2)
|
|
On March 9, 2005, the board of managers of the General Partner approved the Rio Vista 2005
Equity Incentive Plan (2005 Plan). The 2005 Plan permits the grant of common unit options, common
unit appreciation rights, restricted common units and phantom common units to any person who is an
employee (including to any executive officer) or consultant of Rio Vista or the General Partner or
any affiliate of Rio Vista or the General Partner. The 2005 Plan provides that each outside manager
of the General Partner shall be granted a common unit option once each fiscal year for not more
than 5,000 common units, in an equal amount as determined by the board of managers. The aggregate
number of common units authorized for issuance as awards under the 2005 Plan is 750,000. The 2005
Plan shall remain available for the grant of awards until March 9, 2015, or such earlier date as
the board of managers may determine. The 2005 Plan is administered by the compensation committee
of the board of managers. In addition the board of managers may exercise any authority of the
compensation committee under the 2005 Plan. Under the terms of the partnership agreement and
applicable rules of the NASDAQ Stock Market, no approval of the 2005 Plan by the common unitholders
of Rio Vista was required.
|
115
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
General Partner Options
The General Partner of Rio Vista owns a 2% General Partner interest in Rio Vista. On July 1, 2006,
Penn Octanes 100% interest in the General Partner was decreased to 50% as a result of the exercise
by Shore Capital LLC (Shore Capital), an affiliate of Mr. Richard Shore Jr., former president of
Penn Octane and former chief executive officer of Rio Vista, and by Mr. Jerome B. Richter, of
options to each acquire 25% of the General Partner (General Partner Options). The exercise price
for each option was approximately $82,000. Mr. Richters option was amended to permit payment of
the exercise price by surrender of Penn Octane common stock having a fair market value equal to the
exercise price. Mr. Richter paid the exercise price for his option by surrender of 136,558 shares
of Penn Octane common stock. In connection with the exercise of the General Partner Options, Penn
Octane retained voting control of the General Partner pursuant to a voting agreement with each of
Shore Capital and Mr. Richter. In December 2006, Shore Capital transferred its interest in the
General Partner to Shore Trading LLC, an affiliated entity (Shore Trading). Shore Trading is also
a party to the voting agreement with Penn Octane.
On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading that
provided Penn Octane with the option to purchase the 25% interest in the General Partner held by
Shore Trading. Penn Octane exercised its option on July 19, 2007 and acquired the 25% interest
for a total cost of $1,400,000.
Consulting Agreement
During November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting agreement
whereby Mr. Richter shall served as a special advisor to the board of directors of Penn Octane and
the board of managers of the General Partner and provided the following services (Services) to both
Penn Octane and Rio Vista: assistance with the sale of all or part of their LPG assets, assistance
with other transactions (including restructurings) involving the companies as mutually agreed by
the parties and such other services that the companies may reasonably request.
In consideration of the Services rendered by Mr. Richter to the companies, Penn Octane and Rio
Vista paid the following fees (Fees) to Mr. Richter: an amount equal to two percent (2%) of
(i) the net proceeds, as defined, to the companies resulting from a sale of assets to a third
party, and (ii) the net proceeds, as defined, to the companies from sales of LPG to PMI for
any calendar month in which such sales exceed the volumes pursuant to the previous agreement
with PMI. Amounts expensed pursuant to (i) above (see note D) were $138,000 and have been
paid to Mr. Richter. Amounts expensed pursuant to (ii) above for the year ended December 31,
2006 totaled approximately $3,000.
Mr. Richters consulting agreement expired on November 14, 2006.
Rio Vista entered into a consulting agreement (Consulting Agreement) with JBR Capital Resources,
Inc. (JBR Capital) regarding consulting services to be rendered by JBR Capital to Rio Vista and to
Penn Octane. JBR Capital is controlled by Mr. Richter. The provisions of the Consulting Agreement
are effective as of November 15, 2006 (Effective Date).
Pursuant to the Consulting Agreement, JBR Capital has agreed to assist Rio Vista and Penn Octane
with the potential acquisition and disposition of assets and with other transactions involving Rio
Vista or Penn Octane. In exchange for these services, Rio Vista has agreed to pay JBR Capital a
fee based on approved services rendered by JBR Capital plus a fee based on the net proceeds to Rio
Vista resulting from a sale of assets to a third party introduced to Rio Vista by JBR Capital. In
addition, in connection with the Regional transaction, JBR Capital earned a fee of $180,000 which
fee was expensed. The term of the Consulting Agreement is six months following the Effective Date.
The Consulting Agreement renews for additional six-month terms unless terminated by either party
at least 30 days before the end of each term.
116
Private Placement of Common Units
On November 29, 2007, Rio Vista and Rio Vista GP LLC (Rio Vista GP), entered into a Unit Purchase
Agreement with Standard General Fund L.P., Credit Suisse Management LLC and Structured Finance
Americas LLC (collectively, Purchasers) dated effective as of November 29, 2007 (the Unit Purchase
Agreement). Pursuant to the terms of the Unit Purchase Agreement, Rio Vista agreed to sell, and the
Purchasers agreed to purchase, a total of 355,556 common units of Rio Vista (Common Units) at a
price of $11.25 per share in a private placement exempt from the registration requirements of the
Securities Act of 1933, as amended (Securities Act). The total purchase price of the Common Units
is $4,000,000. Rio Vista agreed to pay expenses of counsel to the Purchasers in an amount not to
exceed $100,000. Rio Vista used the net proceeds from the sale of the Common Units for general
working capital purposes, including repayment of indebtedness. Rio Vista agreed not to offer or
sell any of its equity securities (including equity securities of subsidiaries) for a period of
12 months following the closing date without first offering such securities to the Purchasers,
which shall have the right to purchase up to 30% of such securities. The Unit Purchase Agreement
contains customary representations, warranties and covenants of the parties and is subject to
customary conditions to closing, including approval for listing of the Common Units on the Nasdaq
Global Market.
Omnibus Agreement with Penn Octane
Pursuant to the Omnibus Agreement, Penn Octane is entitled to reimbursement for all direct and
indirect expenses it or the General Partner incurs on Rio Vistas behalf, including general and
administrative expenses.
Under the Omnibus Agreement, Penn Octane provides the General Partner with corporate staff and
support services in connection with its management and operation of the assets of Rio Vista. These
services include management and centralized corporate functions, such as accounting, treasury,
engineering, information technology, insurance, administration of employee benefit and incentive
compensation plans and other corporate services. Penn Octane is reimbursed for the costs and
expenses it incurs in rendering these services using a percentage calculated based on the time
spent by Penn Octanes employees on Rio Vistas business. Each Penn Octane employee involved with
Rio Vista activities accounts for his or her time each month related to Rio Vista as a percentage
of his or her total time worked. The General Partner calculates the general and administrative
expenses that are allocated to Rio Vista using the cumulative percentage. Administrative and
general expenses directly associated with providing services to Rio Vista (such as legal and
accounting services) are not included in the above allocation of indirect costs; such expenses are
charged directly to Rio Vista.
117
Distributions
All Rio Vista unitholders have the right to receive distributions from Rio Vista of available
cash as defined in the partnership agreement in an amount equal to at least the minimum
distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum
quarterly distribution on the units from prior quarters subject to any reserves determined by the
General Partner. The General Partner has a right to receive a distribution corresponding to its
2% General Partner interest and its incentive distribution rights. During 2007, Rio Vista made
$89,000 of distributions to the General Partner.
Guarantees and Assets Pledged on Certain of Penn Octanes Obligations
Rio Vista is liable as guarantor on the RZB Credit Facility and will continue to pledge certain of
its assets as collateral in connection with the RZB Credit Facility. See Item 7. Managements
Discussion and Analysis of Financial Conditions, Results of Operations Liquidation and Capital
Resource Debt Obligations. Rio Vista may also be prohibited from making any distributions to
unitholders if it would cause an event of default, or if an event of default is existing, under the
RZB Credit Facility.
Chairman Services Agreement and Manager Services Agreement
On April 10, 2007, the Board of Managers approved a form of Chairman Services Agreement and Manager
Services Agreement with each member of the board of managers of the General Partner. Pursuant to
these agreements, the non-employee chairman of the board will receive annual cash compensation of
$25,000, payable quarterly, and an annual grant of options to purchase 6,250 Rio Vista common
units. Other non-employee managers will receive annual cash compensation of $20,000, payable
quarterly, and an annual grant of options to purchase 5,000 Rio Vista common units.
Indemnification Agreement
On April 10, 2007, the Board of Managers approved a form of Indemnification Agreement for the
managers and officers of the General Partner. The agreement provides for indemnification against
liabilities in the event of legal proceedings brought by a third party or by or in the right of the
General Partner. The agreement also provides for advancement of expenses to an indemnified manager
or officer.
Manager Independence
The board of managers is currently composed of five members, none of whom are members of the
management of either Rio Vista GP LLC or Penn Octane. The board has determined that all five of
its managers, Messrs. Canney, Feiwell, Raben, Singer and Manner, meet the independence
requirements under the rules of the NASDAQ Stock Market. As a result, although not required by
NASDAQ rules applicable to limited partnerships, the majority of the board of managers is
comprised of independent managers.
The Companys audit committee (Audit Committee) consists of Mr. Canney (Chairman), Mr. Feiwell,
and Mr. Manner. The board has determined that all three members of the audit committee meet the
audit committee independence requirements under the rules of the NASDAQ Stock Market.
118
Item 14. Principal Accountant Fees and Services.
Rio Vista has been billed as follows for the professional services of Burton McCumber & Cortez,
L.L.P. rendered during the years ended December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
235,000
|
|
|
$
|
540,000
|
|
|
|
|
|
|
|
|
|
|
Audit Related Fees
(1)
|
|
$
|
9,000
|
|
|
$
|
118,000
|
|
|
|
|
|
|
|
|
|
|
Tax Fees
(2)
|
|
$
|
30,000
|
|
|
$
|
44,000
|
|
|
|
|
|
|
|
|
|
|
All Other Fees
(3)
|
|
$
|
4,000
|
|
|
$
|
4,000
|
|
|
|
|
(1)
|
|
Represents fees related to the LPG asset sale.
|
|
(2)
|
|
Represents fees related to the Mexican subsidiaries.
|
|
(3)
|
|
Represents fees billed for tax compliance, tax advice and tax planning services.
|
The General Partners audit committee approves the engagement of our independent auditor to perform
audit-related services. The audit committee does not formally approve specific amounts to be spent
on non-audit related services which in the aggregate do not exceed amounts to be spent on
audit-related services. In determining the reasonableness of audit fees, the audit committee
considers historical amounts paid and the scope of services to be performed. The audit committee
has determined that the professional services rendered by our accountants are compatible with
maintaining the principal accountants independence. The audit committee gave prior approval to
all audit services in 2006 and 2007.
119
PART IV
Item 15. Exhibits and Financial Statement Schedules
a. Financial Statements and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Rio Vista Energy Partners L.P.
Report of Independent Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2006 and 2007
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2007
Consolidated Statement of Partners Capital for each of the three years in the period
ended
December 31, 2007
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2007
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts
b. Exhibits.
120
The following Exhibits are incorporated by reference to previously filed reports, as
noted:
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
2.1
|
|
|
Distribution Agreement, dated September 16, 2004,
by and among Penn Octane Corporation, Rio Vista
Energy Partners L.P. and its Subsidiaries.
(Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26,
2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
2.2
|
|
|
Amended and Restated Purchase and Sale Agreement,
dated August 15, 2006, by and between Rio Vista
Operating Partnership L.P. and TransMontaigne
Product Services Inc. (Incorporated by reference to
Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006, filed on November
20, 2006, SEC File No. 000-50394).
|
|
|
|
|
|
|
2.3
|
|
|
Agreement and Plan of Merger, dated July 27, 2007,
by and among Rio Vista Energy Partners L.P.,
Regional Enterprises, Inc., Regional Enterprizes,
Inc. (also known as Regional Enterprises, Inc.);
the shareholders; and W. Gary Farrar, Jr..
(Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30,
2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
2.4
|
|
|
Articles of Merger of Regional Enterprises, Inc.
and Regional Enterprizes, Inc., dated July 27 2007.
(Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007, filed on August 20, 2007, SEC File
No. 000-50394).
|
|
|
|
|
|
|
2.5
|
|
|
Asset Purchase Agreement, dated October 1, 2007, by
and between Rio Vista Penny LLC and G M Oil
Properties, Inc. (Incorporated by reference to
Rio Vistas Current Report on Form 8-K, filed on
November 26, 2007, SEC File No. 000-50394).
|
|
2.6
|
|
|
Amendment to Asset Purchase Agreement, dated
November 16, 2007, by and between Rio Vista Penny
LLC and G M Oil Properties, Inc. (Incorporated by
reference to Rio Vistas Current Report on Form
8-K, filed on November 26, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
2.7
|
|
|
Asset Purchase Agreement, dated as of October 1,
2007, by and between Rio Vista Penny LLC, Penny
Petroleum Corporation and Gary Moores.
(Incorporated by reference to Rio Vistas Current
Report on Form 8-K, filed on November 26, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
2.8
|
|
|
Amendment to Asset Purchase Agreement, dated
October 25, 2007, by and among Rio Vista Energy
Partners L.P., Rio Vista Penny LLC, Penny Petroleum
Corporation and Gary Moores. (Incorporated by
reference to Rio Vistas Current Report on Form
8-K, filed on November 26, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
2.9
|
|
|
Second Amendment to Asset Purchase Agreement, dated
November 16, 2007, by and among Rio Vista Energy
Partners L.P., Rio Vista Penny LLC, Penny Petroleum
Corporation and Gary Moores. (Incorporated by
reference to Rio Vistas Current Report on Form
8-K, filed on November 26, 2007, SEC File No.
000-50394).
|
|
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|
|
|
|
2.10
|
|
|
Stock Purchase Agreement, dated October 2, 2007, by
and between Rio Vista GO, GO LLC, Outback
Production Inc., Gary Moores and Bill Wood.
(Incorporated by reference to Rio Vistas Current
Report on Form 8-K, filed on November 26, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
2.11
|
|
|
Amendment to Membership Interest Purchase and Sale
Agreement, dated November 16, 2007, by and between
Rio Vista Energy Partners L.P., Rio Vista GO LLC,
Outback Production Inc., GO LLC, and Gary Moores
and Bill Wood. (Incorporated by reference to Rio
Vistas Current Report on Form 8-K, filed on
November 26, 2007, SEC File No. 000-50394).
|
121
|
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|
|
Exhibit No.
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2.12
|
|
|
Purchase and Sale Agreement, dated December 26, 2007, by and among
Rio Vista Operating Partnership L.P., Penn Octane International,
LLC, TMOC Corp., TLP MEX L.L.C. and RAZORBACK L.L.C.
(Incorporated by reference to Rio Vistas Current Report on Form
8-K, filed on January 3, 2008, SEC File No. 000-50394).
|
|
|
|
|
|
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3.1
|
|
|
Certificate of Limited Partnership of Rio Vista Energy Partners
L.P., filed July 10, 2003. (Incorporated by reference to Rio
Vistas Registration Statement on Form 10, filed August 26, 2004,
SEC File No. 000-50394).
|
|
|
|
|
|
|
3.2
|
|
|
Amendment of Certificate of Limited Partnership of Rio Vista Energy
Partners L.P., filed September 17, 2003. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed on November 22, 2004, SEC
File No. 000-50394).
|
|
|
|
|
|
|
3.3
|
|
|
First Amended and Restated Limited Partnership Agreement of Rio
Vista Energy Partners L.P., dated September 16, 2004.
(Incorporated by reference to Rio Vistas Registration Statement on
Form 10, filed August 26, 2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
3.4
|
|
|
First Amendment to the First Amended and Restated Agreement of
Limited Partnership of Rio Vista Energy Partners L.P., dated
October 26, 2005. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005, filed on November 21, 2005, SEC File No. 000-50394).
|
|
|
|
|
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3.5
|
|
|
Certificate of Formation of Rio Vista GP LLC. (Incorporated by
reference to Rio Vistas Registration Statement on Form 10, filed
August 26, 2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
3.6
|
|
|
Rio Vista GP LLC Amended and Restated Limited Liability Company
Agreement, dated September 16, 2004. (Incorporated by reference to
Rio Vistas Registration Statement on Form 10, filed August 26,
2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
3.7
|
|
|
First Amendment to Amended and Restated Limited Liability Company
Agreement of Rio Vista GP LLC, dated October 2, 2006.
(Incorporated by reference to Rio Vistas Annual Report on Form
10-K for the year ended December 31, 2005, filed on April 6, 2006,
SEC File No. 000-50394).
|
|
|
|
|
|
|
4.1
|
|
|
Specimen Unit Certificate for Common Units. (Incorporated by
reference to Rio Vistas Registration Statement on Form 10, filed
August 26, 2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
4.2
|
|
|
Forms of Warrants to Purchase Common Units to be issued to Penn
Octane warrant holders. (Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26, 2004, SEC File
No. 000-50394).
|
|
|
|
|
|
|
10.1
|
|
|
Contribution, Conveyance and Assumption Agreement, dated September
16, 2004, by and among Penn Octane Corporation, Rio Vista GP LLC,
Rio Vista Energy Partners L.P., Rio Vista Operating GP LLC and Rio
Vista Operating Partnership L.P. (Incorporated by reference to Rio
Vistas Registration Statement on Form 10, filed August 26, 2004,
SEC File No. 000-50394).
|
|
|
|
|
|
|
10.2
|
|
|
Omnibus Agreement, dated September 16, 2004, by and among Penn
Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners,
L.P. and Rio Vista Operating Partnership L.P. (Incorporated by
reference to Rio Vistas Registration Statement on Form 10, filed
August 26, 2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.3
|
|
|
Amendment No. 1 to Omnibus Agreement, dated September 16, 2004, by
and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista
Energy Partners L.P. and Rio Vista Operating Partnership L.P.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, filed on November
22, 2004, SEC File No. 000-50394).
|
|
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|
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|
10.4
|
|
|
Purchase Contract, dated October 1, 2004, by and between Penn
Octane Corporation and Rio Vista Operating Partnership L.P.
(Incorporated by reference to Rio Vistas Registration Statement on
Form 10, filed August 26, 2004, SEC File No. 000-50394).
|
122
|
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|
|
Exhibit No.
|
|
|
|
|
|
|
10.5
|
|
|
Form of Unit Purchase Option between Penn Octane Corporation and
Shore Capital LLC. (Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26, 2004, SEC File
No. 000-50394).
|
|
|
|
|
|
|
10.6
|
|
|
Form of Unit Purchase Option between Penn Octane Corporation and
Jerome B. Richter. (Incorporated by reference to Rio Vistas
Registration Statement on Form 10, filed August 26, 2004, SEC File
No. 000-50394).
|
|
|
|
|
|
|
10.7
|
|
|
Rio Vista Energy Partners L.P. Unit Option Agreement, dated July
10, 2003, granted to Shore Capital LLC. (Incorporated by reference
to Rio Vistas Registration Statement on Form 10, filed August 26,
2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
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.
(Incorporated by reference to Rio Vistas Registration Statement on
Form 10, filed August 26, 2004, SEC File No. 000-50394).
|
|
|
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|
10.9
|
|
|
Conveyance Agreement, dated September 30, 2004 from Penn Octane
Corporation in favor of Rio Vista Operating Partnership L.P.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, filed on November
22, 2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.10
|
|
|
Guaranty & Agreement between Rio Vista Energy Partners L.P. and RZB
Finance LLC, dated September 15, 2004. (Incorporated by reference
to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, filed on November 22, 2004, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.11
|
|
|
Guaranty & Agreement, dated September 15, 2004, between Rio Vista
Operating Partnership L.P. and RZB Finance LLC. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed on November 22, 2004, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.12
|
|
|
General Security Agreement, dated September 15, 2004, between Rio
Vista Energy Partners L.P. and RZB Finance LLC. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed on November 22, 2004, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.13
|
|
|
General Security Agreement, dated September 15, 2004, between Rio
Vista Operating Partnership L.P. and RZB Finance LLC.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, filed on November
22, 2004, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.14*
|
|
|
Rio Vista Energy Partners L.P. 2005 Equity Incentive Plan
(Incorporated by reference to Rio Vistas Annual Report on Form
10-K for the year ended December 31, 2004, filed on April 12, 2005,
SEC File No. 000-50394).
|
|
|
|
|
|
|
10.15
|
|
|
Promissory Note, dated August 15, 2005, between Rio Vista Operating
Partnership L.P. and TransMontaigne Product Services Inc.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2005, filed on August 19,
2005, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.16
|
|
|
Security Agreement, dated August 15, 2005, between Rio Vista
Operating Partnership L.P. and TransMontaigne Product Services Inc.
(Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended September 30, 2005, filed on August 19,
2005, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.17
|
|
|
Amended and Restated Consulting Agreement, dated November 15, 2005,
by and among Penn Octane Corporation, Rio Vista Energy Partners and
Jerome B. Richter. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005, filed on November 21, 2005, SEC File No. 000-50394).
|
123
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.18
|
|
|
Unit Purchase Option, dated February 6, 2007, between Shore Trading LLC and Penn
Octane Corporation. (Incorporated by reference to Rio Vistas Annual Report on Form 10-K
for the year ended December 31, 2006, filed on April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.19
|
|
|
Consent to Transfer of Units, Acknowledgement of Representation, and Waiver of
Conflicts, dated February 6, 2007, by and among Penn Octane Corporation, Rio Vista GP
LLC and Shore Trading LLC. (Incorporated by reference to Rio Vistas Annual Report on
Form 10-K for the year ended December 31, 2006, filed on April 17, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.20
|
|
|
Consulting Agreement entered into on March 5, 2007, with an effective date of
November 15, 2006 by and between Penn Octane Corporation and Rio Vista Energy Partners
L.P. and JBR Capital Resources, Inc. (Incorporated by reference to Rio Vistas Annual
Report on Form 10-K for the year ended December 31, 2006, filed on April 17, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.21
|
|
|
Letter Agreement, dated March 5, 2007, by and between Penn Octane Corporation, Rio
Vista Energy Partners L.P. and JBR Capital Resources, Inc. (Incorporated by reference to
Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2006, filed on
April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.22*
|
|
|
Form of Rio Vista GP LLC Chairman Services Agreement. (Incorporated by reference to
Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2006, filed on
April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.23*
|
|
|
Form of Rio Vista GP LLC Managers Services Agreement. (Incorporated by reference to
Rio Vistas Annual Report on Form 10-K for the year ended December 31, 2006, filed on
April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.24*
|
|
|
Form of Rio Vista GP LLC Manager and Officer Indemnification Agreement. (Incorporated
by reference to Rio Vistas Annual Report on Form 10-K for the year ended December 31,
2006, filed on April 17, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.25 *
|
|
|
Form of Nonqualified Unit Option Agreement under the 2005 Rio Vista Energy
Partners L.P. Equity Incentive Plan. (Incorporated by reference to Rio Vistas Annual
Report on Form 10-K for the year ended December 31, 2006, filed on April 17, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.26
|
|
|
Consulting Agreement, dated November 1, 2006, by and among Penn Octane Corporation
And Rio Vista Energy Partners L.P. and Ricardo Rodriguez Canney. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended June 30,
2007, filed on August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.27
|
|
|
Consulting Agreement, dated July 2, 2007, by and between Rio Vista Energy
Partners, L.P. and CEOcast, Inc. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.28
|
|
|
Employment and Non-Competition Agreement, dated July 27, 2007, by and between
Regional Enterprises, Inc. and W. Gary Farrar, III. (Incorporated by reference to Rio
Vistas Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on
August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.29
|
|
|
Escrow Agreement, dated July 27, 2007, by and among Rio Vista Energy Partners
L.P., Regional Enterprises, Inc., W. Gary Farrar, Jr., and First Capital Bank.
(Incorporated by reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007, filed on August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.30
|
|
|
Loan Agreement, dated July 26, 2007, by and between Rio Vista Energy Partners
L.P., and RZB Finance LLC (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
124
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.31
|
|
|
Guaranty and Agreement, dated July 26, 2007, by and between Regional Enterprises,
Inc., and RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.32
|
|
|
Guaranty and Agreement, dated July 26, 2007, by and between Penn Octane
Corporation, and RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.33
|
|
|
Guaranty and Agreement, dated July 26, 2007, by and between Rio Vista Operating
Partnership L.P. and RZB Finance LLC Dated As Of July 26, 2007. (Incorporated by
reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended June 30,
2007, filed on August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.34
|
|
|
$5,000,000 Promissory Note, dated July 26, 2007, issued by Rio Vista Energy
Partners L.P. to RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.35
|
|
|
General Security Agreement, dated July 26, 2007, by and between RZB Finance LLC
and Regional Enterprises, Inc. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.36
|
|
|
Pledge Agreement, dated July 26, 2007, by and between: Rio Vista Energy Partners
L.P., and RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.37
|
|
|
First Amendment to Line Letter, dated July 26, 2007, by and between RZB Finance
LLC and Penn Octane Corporation. (Incorporated by reference to Rio Vistas Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.38
|
|
|
Debt Assumption Agreement, dated July 26, 2007, by and between Rio Vista Energy
Partners L.P. and Regional Enterprises, Inc. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20,
2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.39
|
|
|
$5,000,000 Debt Assumption Note, dated July 26, 2007, issued by Regional
Enterprises, Inc. to Rio Vista Energy Partners L.P. (Incorporated by reference to Rio
Vistas Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on
August 20, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.40
|
|
|
$2,500,000 Promissory Note, dated July 26, 2007, issued by Regional Enterprises,
Inc. to Rio Vista Energy Partners L.P. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20,
2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.41
|
|
|
Environmental Indemnity Agreement, dated July 26, 2007, by and between Regional
Enterprises, Inc. and RZB Finance LLC. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 20,
2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.42
|
|
|
Reaffirmation of Security Agreements, dated July 26, 2007, by and among Rio Vista
Energy Partners L.P., Penn Octane Corporation Rio Vista Operating Partnership L.P., and
RZB Finance LLC. (Incorporated by reference to Rio Vistas Quarterly Report on Form
10-Q for the quarter ended June 30, 2007, filed on August 20, 2007, SEC File No.
000-50394).
|
|
|
|
|
|
|
10.43
|
|
|
Binding Letter of Intent, dated September 12, 2007, by and between TransMontaigne
Partners L.P. and Rio Vista Operating Partnership L.P. (Incorporated by reference to Rio
Vistas Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed on
November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.44
|
|
|
Restated and Amended Promissory Note, dated September 12, 2007, by and between Rio
Vista Operating Partnership L.P. and TransMontaigne Product Services, Inc. (Incorporated
by reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, filed on November 19, 2007, SEC File No. 000-50394).
|
125
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.45
|
|
|
Restated and Amended Security Agreement, dated September 12, 2007, by and among
Rio Vista Operating Partnership, L.P., TransMontaigne Product Services, Inc. and
TransMontaigne Partners L.P. (Incorporated by reference to Rio Vistas Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007, filed on November 19, 2007, SEC
File No. 000-50394).
|
|
|
|
|
|
|
10.46
|
|
|
First Priority Equity Interest Pledge Agreement, dated September 12, 2007, by and
among Rio Vista Operating Partnership, L.P., Penn Octane International, LLC,
TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P., with the
acknowledgment of Penn Octane de Mexico, S. de R.L. de C.V. (Incorporated by reference to
Rio Vistas Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed
on November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.47
|
|
|
First Priority Equity Interest Pledge Agreement, dated September 12, 2007, by and
among Rio Vista Operating Partnership, L.P., Penn Octane International, LLC,
TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P., with the
acknowledgment of Termatsal, S. de R.L. de C.V. (Incorporated by reference to Rio Vistas
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed on November
19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.48
|
|
|
Assignment Agreement, dated September 12, 2007, by and among Rio Vista Operating
Partnership, L.P., TransMontaigne Partners L.P. and TransMontaigne Product Services, Inc.
(Incorporated by reference to Rio Vistas Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007, filed on November 19, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.49
|
|
|
Unit Purchase Agreement, dated November 29, 2007, by and among Rio Vista Energy
Partners L.P., Rio Vista GP LLC, Standard General Fund L.P., Credit Suisse Management LLC
and
Structured Finance Americas LLC. (Incorporated by reference to Rio Vistas
Current Report on Form 8-K, filed on December 4, 2007, SEC File No. 000-50394).
|
|
|
|
|
|
|
10.50
|
|
|
Registration Rights Agreement, dated December 3, 2007, by and among Rio Vista
Energy Partners L.P., Rio Vista GP LLC, Standard General Fund L.P., Credit Suisse
Management LLC and Structured Finance Americas LLC. (Incorporated by reference to Rio
Vistas Current Report on Form 8-K, filed on December 4, 2007, SEC File No. 000-50394).
|
126
The following Exhibits are filed as part of this report:
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10.52
|
|
|
Note Purchase Agreement between Rio Vista Penny LLC, TCW Asset Management
Company and TCW Energy Fund X Investors dated November 19, 2007.
|
|
|
|
|
|
|
10.53
|
|
|
Guaranty made as of November 19, 2007 by Rio Vista Eco LLC, Rio Vista GO LLC,
GO LLC and MV Pipeline Company in favor of TCW Asset Management Company as
administrative agent for Holders.
|
|
|
|
|
|
|
10.54
|
|
|
Security Agreement dated as of November 19, 2007 by Rio Vista Penny LLC in
favor of TCW Asset Management Company, as administrative agent.
|
|
|
|
|
|
|
10.55
|
|
|
Assumption Agreement dated November 19, 2007 by and among GM Oil Properties,
Inc., Rio Vista Penny LLC, TCW Asset Management Company, as administrative agent and
the holders party to the Note Purchase Agreement.
|
|
|
|
|
|
|
10.56
|
|
|
Rio Vista Energy Partners L.P. Common Unit Purchase Warrant issued to TCW
Energy Funds X Holdings, L.P.
|
|
|
|
|
|
|
10.57
|
|
|
Promissory note dated November 19, 2007 issued by Rio Vista to Gary Moores.
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
23.1
|
|
|
Consent
of Burton McCumber & Cortez, L.L.P.
|
|
|
|
|
|
|
23.2
|
|
|
Consent of Lee Keeling and Associates, Inc.
|
|
|
|
|
|
|
31.1
|
|
|
Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
|
|
|
|
|
|
|
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
|
|
|
|
*
|
|
indicates management contract or compensatory plan or arrangement.
|
All of the Exhibits are available from the SECs website at
www.sec.gov
. In addition, Rio
Vista will furnish a copy of any Exhibit upon payment of a fee (based on the estimated actual
cost which shall be determined at the time of the request) together with a request addressed
to Ian T. Bothwell, Rio Vista Energy Partners L.P., 1313 E. Alton Gloor Blvd., Suite J,
Brownsville, TX 78526.
127
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
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Balance at
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Charged to
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Beginning of
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Costs and
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Charged to
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Balance at End
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Description
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Period
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Expenses
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Other Accounts
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Deductions
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of Period
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Year ended
December 31, 2007
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Allowance for
doubtful accounts
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$
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$
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$
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$
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$
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Year ended
December 31, 2006
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Allowance for
doubtful accounts
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$
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$
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$
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$
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$
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Year ended
December 31, 2005
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Allowance for
doubtful accounts
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$
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$
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$
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$
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$
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128
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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RIO VISTA ENERGY PARTNERS L.P.
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By:
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RIO VISTA GP LLC, GENERAL PARTNER
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April 15, 2008
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By:
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/s/ Ian T. Bothwell
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Ian T. Bothwell
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Acting Chief Executive Officer, Acting
President,
Vice-President, Chief Financial
Officer,
Treasurer and Assistant Secretary
(Principal,
Executive, Financial and Accounting
Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Each capacity refers to the signers position with Rio Vista GP LLC, the General
Partner of the registrant.
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Signature
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Title
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Date
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/s/ Ian T. Bothwell
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Ian T. Bothwell
Acting Chief Executive Officer,
Acting President,
Vice-President, Chief Financial
Officer, Treasurer and
Assistant Secretary (Principal,
Executive, Financial and
Accounting Officer)
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April 15, 2008
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/s/ Richard R. Canney
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Richard R. Canney
Manager
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April 15, 2008
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/s/ Murray J. Feiwell
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Murray J. Feiwell
Manager
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April 15, 2008
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/s/ Douglas G. Manner
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Douglas G. Manner
Manager
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April 15, 2008
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/s/ Nicholas J. Singer
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Nicholas J. Singer
Manager
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April 15, 2008
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/s/ Bruce I. Raben
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Bruce I. Raben
Manager
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April 15, 2008
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129
EXHIBIT INDEX
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Exhibit No.
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10.52
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Note Purchase Agreement between Rio Vista Penny LLC, TCW Asset Management
Company and TCW Energy Fund X Investors dated November 19, 2007.
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10.53
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Guaranty made as of November 19, 2007 by Rio Vista Eco LLC, Rio Vista GO LLC,
GO LLC and MV Pipeline Company in favor of TCW Asset Management Company as
administrative agent for Holders.
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10.54
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Security Agreement dated as of November 19, 2007 by Rio Vista Penny LLC in
favor of TCW Asset Management Company, as administrative agent.
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10.55
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Assumption Agreement dated November 19, 2007 by and among GM Oil Properties,
Inc., Rio Vista Penny LLC, TCW Asset Management Company, as administrative agent and
the holders party to the Note Purchase Agreement.
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10.56
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Rio Vista Energy Partners L.P. Common Unit Purchase Warrant issued to TCW
Energy Funds X Holdings, L.P.
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10.57
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Promissory note dated November 19, 2007 issued by Rio Vista to Gary Moores.
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21
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Subsidiaries of the Registrant
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23.1
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Consent
of Burton McCumber & Cortez, L.L.P.
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23.2
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Consent of Lee Keeling and Associates, Inc.
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31.1
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Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
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31.2
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Certification Pursuant to Rule 13a-14(a) / 15d 14(a) of the Exchange Act
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32
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes Oxley Act of 2002
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130
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