10-Q 1 form10q.htm RIO VISTA ENERGY PARTNERS 10-Q 3-31-2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

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

For the transition period from to

Commission file number: 000-50394

Rio Vista Energy Partners L.P.

(Exact Name of Registrant as Specified in Its Charter)

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

820 Gessner Road, Suite 1285, Houston, Texas		77024
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No x

The number of common units outstanding on May 8, 2006 was 1,910,656.

RIO VISTA ENERGY PARTNERS L.P. AND SUBSIDIARIES

TABLE OF CONTENTS

	ITEM		PAGE NO.

Part I	1.	Financial Statements

		Report of Independent Registered Public Accounting Firm	3

		Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006 (unaudited)	4-5

		Unaudited Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006	6

		Unaudited Consolidated Statement of Partners’ Capital for the three months ended March 31, 2006	7

		Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006	8

		Notes to Consolidated Financial Statements (unaudited)	9-32

	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-52

	3.	Quantitative and Qualitative Disclosures About Market Risk	53

	4.	Controls and Procedures	53

Part II	1.	Legal Proceedings	54

	1A.	Risk Factors	54-55

	2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

	3.	Defaults Upon Senior Securities	55

	4.	Submission of Matters to a Vote of Security Holders	55

	5.	Other Information	55

	6.	Exhibits	56-57

	Signatures		58

Table of Contents

Part I

Item 1.

Report of Independent Registered Public Accounting Firm

To the Board of Managers of Rio Vista GP LLC,

General Partner of Rio Vista Energy Partners L.P.

We have reviewed the consolidated balance sheet of Rio Vista Energy Partners L.P. and subsidiaries (Rio Vista) as of March 31, 2006, the consolidated statements of operations and the consolidated statements of cash flows for the three months ended March 31, 2005 and 2006 and the consolidated statement of partners’ capital for the three months ended March 31, 2006. These interim consolidated financial statements are the responsibility of Rio Vista’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Rio Vista Energy Partners L.P. and subsidiaries as of December 31, 2005 and the related consolidated statements of operations, partners’ capital and cash flows for the year ended December 31, 2005 (not presented herein); and in our report dated February 13, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated.

Our auditors’ report on Rio Vista’s financial statements as of December 31, 2005 included an explanatory paragraph referring to the matters discussed in Note N of those financial statements which raised substantial doubt about Rio Vista’s ability to continue as a going concern. As indicated in Note M to the accompanying unaudited interim consolidated financial statements, conditions continue to exist which raise substantial doubt about Rio Vista’s ability to continue as a going concern.

/s/ BURTON McCUMBER & CORTEZ, L.L.P.

Brownsville, Texas

May 2, 2006

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Rio Vista Energy Partners L.P. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

ASSETS

	December 31, 2005		March 31, 2006 (Unaudited)

Current Assets
Cash	$	26,000	$	10,000
Restricted cash		1,907,000		855,000
Trade accounts receivable (less allowance for doubtful accounts of $0)		10,926,000		4,811,000
Inventories		262,000		236,000
Prepaid expenses and other current assets		5,000		27,000
Total current assets		13,126,000		5,939,000
Property, plant and equipment - net		13,394,000		13,198,000
Other non-current assets		15,000		17,000
Total assets	$	26,535,000	$	19,154,000

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

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Rio Vista Energy Partners L.P. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND PARTNERS’ CAPITAL

	December 31, 2005		March 31, 2006 (Unaudited)
Current Liabilities
Note payable	$	1,300,000	$	1,300,000
Due to Penn Octane Corporation, net		11,582,000		4,754,000
Accounts payable		670,000		323,000
Mexican taxes payable		22,000		14,000
Accrued liabilities		762,000		785,000
Total current liabilities		14,336,000		7,176,000
Commitments and contingencies		-		-
Partners’ Capital
Common units		11,955,000		11,739,000
General partner’s equity		244,000		239,000
Total partners’ capital		12,199,000		11,978,000
Total liabilities and partners’ capital	$	26,535,000	$	19,154,000

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

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Rio Vista Energy Partners L.P. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	March 31, 2005			March 31, 2006
Revenues	$	28,557,000		$	39,237,000
Cost of goods sold		27,238,000			38,551,000

Gross profit		1,319,000			686,000
Selling, general and administrative expenses
Legal and professional fees		242,000			237,000
Salaries and payroll related expenses		394,000			195,000
Other		391,000			360,000
		1,027,000			792,000
Operating income (loss)		292,000			( 106,000	)
Other income (expense)
Interest and LPG financing expense		( 119,000	)		( 131,000	)
Income (loss) before taxes		173,000			( 237,000	)
Provision for Mexican income taxes		1,000			14,000
Net income (loss)	$	172,000		$	( 251,000	)

Net income (loss) allocable to the partners	$	172,000		$	( 251,000	)
Less general partner’s interest in net income (loss)		3,000			( 5,000	)
Net income (loss) allocable to the common units	$	169,000		$	( 246,000	)

Net income (loss) per common unit	$	0.09		$	( 0.13	)
Net income (loss) per common unit assuming dilution	$	0.08		$	( 0.13	)
Weighted average common units outstanding		1,910,656			1,910,656

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

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Rio Vista Energy Partners L.P. and Subsidiaries

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(Unaudited)

	Common Units
	Units		Amount			General Partner			Total Partners’ Capital

Balance as of December 31, 2005		1,910,656	$	11,955,000		$	244,000		$	12,199,000
Net loss		-		( 246,000	)		( 5,000	)		( 251,000	)
Cash distribution to partners		-		-			-			-
Unit-based payment expense		-		8,000			-			8,000
Loan discount on Penn Octane Corporation’s debt related to detachable warrants		-		22,000			-			22,000

Balance as of March 31, 2006 (unaudited)		1,910,656	$	11,739,000		$	239,000		$	11,978,000

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

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Rio Vista Energy Partners L.P. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended
	March 31, 2005			March 31, 2006
Cash flows from operating activities:
Net loss	$	172,000		$	( 251,000	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		205,000			200,000
Amortization of loan discount related to detachable warrants		57,000			22,000
Unit-based payment expense		-			8,000
Changes in current assets and liabilities:
Accounts receivable		( 879,000	)		6,115,000
Inventories		2,000			26,000
Prepaid expenses and other current assets		( 38,000	)		( 23,000	)
Accounts payable		82,000			( 347,000	)
Due to Penn Octane Corporation, net		( 2,152,000	)		( 6,828,000	)
Accrued liabilities		( 3,000	)		23,000
Mexican taxes payable		1,000			( 8,000	)
Net cash used in operating activities		( 2,553,000	)		( 1,063,000	)
Cash flows from investing activities:
Capital expenditures		( 7,000	)		( 4,000	)
Other non-current assets		( 1,000	)		( 1,000	)
Net cash used in investing activities		( 8,000	)		( 5,000	)
Cash flows from financing activities:
Increase in restricted cash		3,061,000			1,052,000
Cash distributions to partners		( 487,000	)		-
Net cash provided by financing activities		2,574,000			1,052,000
Net increase (decrease) in cash		13,000			( 16,000	)
Cash at beginning of period		13,000			26,000
Cash at end of period	$	26,000		$	10,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest and LPG financing expense	$	-		$	20,000
Supplemental disclosures of noncash transactions:
Units and warrants issued and other	$	422,000		$	22,000

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

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE A - ORGANIZATION

Rio Vista Energy Partners L.P. (Rio Vista), a Delaware limited partnership, was formed by Penn Octane Corporation (Penn Octane) on July 10, 2003 and was a wholly owned subsidiary of Penn Octane until September 30, 2004, the date that Penn Octane completed a series of transactions involving (i) the transfer of substantially all of its owned pipeline and terminal assets in Brownsville, Texas and Matamoros, Mexico and certain immaterial liabilities (Assets) to Rio Vista Operating Partnership L.P. (RVOP) (ii) the transfer of Penn Octane’s 99.9% interest in RVOP to Rio Vista and (iii) the distribution of 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 Vista’s outstanding capital and 100% of Rio Vista’s limited partnership interests. The remaining 2%, which is the general partner interest, is owned and controlled by Rio Vista GP LLC (General Partner), a wholly owned subsidiary of Penn Octane. The General Partner is responsible for the management of Rio Vista. Common unitholders do not participate in the management of Rio Vista. Rio Vista Energy Partners L.P. and its consolidated subsidiaries (not including the General Partner) are hereinafter referred to as “Rio Vista”.

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

All of Rio Vista’s LPG operations are conducted through, and Rio Vista’s LPG operating assets are owned by, RVOP. The General Partner is entitled to receive distributions on its general partner interest and additional incentive distributions as provided in Rio Vista’s partnership agreement. The General Partner has sole responsibility for conducting Rio Vista’s business and for managing Rio Vista’s operations in accordance with the partnership agreement. The General Partner does not receive a management fee in connection with its management of Rio Vista’s business, but is entitled to be reimbursed for all direct and indirect expenses incurred on Rio Vista’s behalf.

Rio Vista purchases LPG from Penn Octane under a long-term supply agreement (LPG Supply Agreement). The purchase price of the LPG from Penn Octane is determined based on the cost of LPG under Penn Octane’s agreements with its LPG suppliers for volumes sold to Rio Vista for sale to PMI or to other Rio Vista customers, other direct costs related to PMI and other LPG sales of Rio Vista and a formula that takes into consideration operating costs of Penn Octane and Rio Vista.

Historically, until the date of the Spin-Off, Penn Octane sold LPG primarily to PMI. Penn Octane has a long-term lease agreement, expiring in December 2013, for approximately 132 miles of pipeline (Leased Pipeline) which connects ExxonMobil Corporation’s (Exxon) King Ranch Gas Plant in Kleberg County, Texas and Duke Energy’s La Gloria Gas Plant in Jim Wells County, Texas, to Rio Vista’s Brownsville Terminal Facility. In connection with Penn Octane’s lease agreement for the Leased Pipeline, Penn Octane has access up to 21,000,000 gallons of storage located in Markham, Texas (Markham Storage), as well as other potential propane pipeline suppliers, via approximately 155 miles of pipeline located between Markham, Texas and the Exxon King Ranch Gas Plant. Penn Octane’s long term supply agreement in effect as of March 31, 2006 with Exxon requires Penn Octane to purchase minimum quantities of LPG totaling up to 13,900,000 gallons of LPG per month although actual quantities supplied under such agreement for the three months ended March 31, 2006 averaged approximately 9,356,000 gallons of LPG per month.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE A - ORGANIZATION - Continued

Basis of Presentation

The accompanying unaudited consolidated financial statements include Rio Vista and its United States subsidiaries including RVOP, Rio Vista Operating GP LLC 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.

The unaudited consolidated balance sheet as of March 31, 2006, the unaudited consolidated statements of operations for the three months ended March 31, 2005 and 2006 and the unaudited consolidated statements of cash flows for the three months ended March 31, 2005 and 2006, have been prepared by Rio Vista without audit. In the opinion of management, the unaudited consolidated financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the unaudited consolidated financial position of Rio Vista as of March 31, 2006, the unaudited consolidated results of operations for the three months ended March 31, 2005 and 2006 and the unaudited consolidated statements of cash flows for the three months ended March 31, 2005 and 2006.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities Exchange Commission, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited consolidated financial statements should be read in conjunction with the Rio Vista’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission.

Certain reclassifications have been made to prior period balances to conform in the current presentation. All reclassifications have been consistently applied to the periods presented.

NOTE B - UNIT-BASED PAYMENT

During the quarter ended March 31, 2006, Rio Vista adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123R) 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. 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). In the quarter ended March 31, 2006, Rio Vista recorded unit-based payment expense of $8,000 under the fair-value provisions of SFAS 123R. Rio Vista utilizes unit-based awards as a form of compensation for employees, officers and directors.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE B - UNIT-BASED PAYMENT - Continued

Had compensation cost related to the warrants granted to employees been determined based on the fair value at the grant dates, consistent with the provisions of SFAS 123, Rio Vista’s pro forma net income, and net income per common unit would have been as follows for the three months ended March 31, 2005 :


Net income (loss) as reported	$	172,000
Add: Unit-based employee compensation expense included in reported net loss		-
Less: Total unit-based employee compensation expense determined under fair value based method for all awards		( 285,000	)
Net income (loss) pro forma	$	( 113,000	)
Net income (loss) allocable to the common units pro forma	$	( 111,000	)
Net income (loss) per common unit, as reported	$	.09
Net income (loss) per common unit, pro forma	$	( .06	)
Net income (loss) per common unit assuming dilution, as reported	$	.08
Net income (loss) per common unit assuming dilution, pro forma	$	( .06	)

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE C - INCOME (LOSS) PER COMMON UNIT

Income (loss) per common unit is computed on the weighted average number of units outstanding. During periods in which Rio Vista incurs losses, giving effect to common unit equivalents is not presented as it would be antidilutive.

The following tables present reconciliations from income (loss) per common unit to income (loss) per common unit assuming dilution (see note H for the warrants):

	For the three months ended March 31, 2005
	Income (Loss)		Shares		Per-Unit
	(Numerator)		(Denominator)		Amount
Net income (loss) allocable to the common units	$	169,000

Basic EPS
Net income (loss) allocable to the common units		169,000		1,910,656	$	0.09

Effect of Dilutive Securities
Warrants		-		85,686

Diluted EPS
Net income (loss) allocable to the common units	$	169,000		1,996,342	$	0.08

	For the three months ended March 31, 2006
	Income (Loss)			Shares		Per-Unit
	(Numerator)			(Denominator)		Amount
Net income (loss) allocable to the common units	$	( 246,000	)

Basic EPS
Net income (loss) allocable to the common units		( 246,000	)		1,910,656	$	( 0.13	)

Effect of Dilutive Securities
Warrants		-			-

Diluted EPS
Net income (loss) allocable to the common units		N/A			N/A		N/A

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE D - PURCHASE AND SALE AGREEMENT

On August 15, 2005, Rio Vista and Penn Octane each entered into separate purchase and sale agreements (PSA’s) with TransMontaigne Product Services Inc. (TransMontaigne) which provide for the sale and assignment of all of their respective LPG assets and refined products assets (LPG Asset Sale) including the Brownsville Terminal Facility and refined products tank farm and associated leases, owned pipelines located in the United States, including land, leases, and rights of ways, LPG inventory, 100% of the outstanding stock of Mexican subsidiaries and affiliate, which in turn own pipelines and the Matamoros Terminal Facility, including land and rights of way, and assignment of the lease of the Leased Pipeline, PMI sales agreement and Exxon Supply Contract (see note J). The purchase price is $10,100,000 for assets to be sold by Penn Octane and $17,400,000 for assets to be sold by Rio Vista. The purchase price may be reduced as provided for in the PSA’s.

In connection with the PSA’s, TransMontaigne loaned Rio Vista $1,300,000 (TransMontaigne Note) which is 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 is 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%. In connection with the TransMontaigne Note, RZB Finance, LLC (RZB) provided a consent and the Brownsville Navigation District issued an estoppel letter. Rio Vista used the proceeds from the TransMontaigne Note to fund certain expenses associated with the PSA’s and for working capital purposes. If the LPG Asset Sales does not occur and Rio Vista does not pay the TransMontaigne Note as provided for above, Rio Vista is required to convey title to the Collateral to TransMontaigne and to lease the Collateral from TransMontaigne for $10,000 per month until such time as Rio Vista pays the $1,300,000, in addition to the lease payments, to TransMontaigne. In the event of a conveyance of the title to the Collateral, no further interest payments will be required under the TransMontaigne Note. When the $1,300,000 is repaid to TransMontaigne, if ever, the lease payments will cease and title to the Collateral will be re-conveyed to Rio Vista.

The closing of the LPG Asset Sale is subject to several conditions, including TransMontaigne’s satisfactory completion of its due diligence review, including financial, business, environmental and legal, assignment of LPG related contracts, and the modification of LPG related permits and the related Mexican governmental approvals. Certain of the conditions to closing were not met by October 31, 2005. The PSA’s provide that any party may terminate the agreements if closing did not occur on or before October 31, 2005. None of the parties have elected to terminate the agreements and the parties continue to work towards the closing of the LPG Asset Sale.

In connection with the LPG Asset Sale, Penn Octane filed a definitive proxy statement with the Securities Exchange Commission (SEC) on September 27, 2005 pursuant to the requirement to obtain approval for the LPG Asset Sale from Penn Octane’s stockholders. On October 26, 2005, Penn Octane held a special meeting of stockholders at which the stockholders approved the LPG Asset Sale.

In connection with the LPG Asset Sale, Rio Vista filed a definitive proxy statement with the SEC on September 27, 2005 pursuant to the requirement to obtain approval for the LPG Asset Sale from Rio Vista’s unitholders. In addition, in order to permit Rio Vista’s continued existence following the LPG Asset Sale, Rio Vista’s proxy statement contained a proposal to amend a provision in its partnership agreement to remove the requirement to dissolve upon a sale of all or substantially all of its assets. On October 26, 2005, Rio Vista held a special meeting of unitholders at which the unitholders approved the LPG Asset Sale and the amendment to its partnership agreement.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE D - PURCHASE AND SALE AGREEMENT - Continued

The following unaudited pro forma consolidated financial information (Pro Forma Statements) for Rio Vista gives effect to the LPG Asset Sale. The unaudited pro forma consolidated balance sheet assumes that the LPG Asset Sale was consummated on March 31, 2006. The unaudited pro forma consolidated statement of operations for the year ended March 31, 2006 assumes that the LPG Asset Sale was consummated as of January 1, 2006.

The Pro Forma Statements are based on the available information and contain certain assumptions that Rio Vista deems appropriate. The Pro Forma Statements do not purport to be indicative of the financial position of Rio Vista had the transaction referred to above occurred on the dates indicated, nor are the Pro Forma Statements necessarily indicative of the future financial position of Rio Vista. The Pro Forma Statements should be read in conjunction with the consolidated financial statements and notes thereto included herein.

Rio Vista Energy Partners L.P. and Subsidiaries

PRO FORMA CONSOLIDATED BALANCE SHEET

(Unaudited)

	As Reported		Pro Forma			Pro Forma
	March 31, 2006		Adjustments			March 31, 2006
ASSETS
Current Assets
Cash	$	10,000	$	17,400,000	(1)	$	15,751,000
				(1,326,000	)(1)
				(333,000	)(1)
Restricted cash		855,000					855,000
Trade accounts receivable		4,811,000					4,811,000
Inventories		236,000		(236,000	)(1)		-
Prepaid expenses and other current assets		27,000					27,000

Total current assets		5,939,000		15,505,000			21,444,000
Property, plant and equipment — net		13,198,000		(13,198,000	)(1)		-
Other non-current assets		17,000		—			17,000

Total assets	$	19,154,000	$	2,307,000		$	21,461,000

LIABILITIES AND PARTNERS’ CAPITAL
Current Liabilities
Note Payable	$	1,300,000	$	(1,300,000	)(1)	$	-
Due to Penn Octane Corporation, net		4,754,000		336,000	(4)		5,090,000
Mexican taxes payable		14,000		—			14,000
Accounts payable		323,000		—			323,000
Accrued liabilities		785,000		(333,000	)(1)		521,000
				(26,000	)(1)
				95,000	(3)

Total current liabilities		7,176,000		(1,228,000	)		5,948,000
Partners’ Capital		11,978,000					11,978,000
				3,966,000	(1)
				(95,000	)(3)
				(336,000	)(4)		3,535,000

Total partners’ capital		11,978,000		3,535,000			15,513,000

Total liabilities and partners’ capital	$	19,154,000	$	2,307,000		$	21,461,000

RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE D - PURCHASE AND SALE AGREEMENT - Continued

Rio Vista Energy Partners L.P. and Subsidiaries

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

	As Reported			Pro Forma			Pro Forma
	March 31, 2006			Adjustments			March 31, 2006


Revenues	$	39,237,000		$	(39,237,000	)(2)	$	-

Cost of Goods Sold		38,551,000			(38,551,000	)(2)		-

Gross Profit		686,000			(686,000	)		-


Selling, general and administrative expenses
Legal and professional fees		237,000			(70,000	)(2)		167,000
Salaries and payroll related expenses		195,000			(30,000	)(2)		165,000
Other		360,000			(46,000	)(2)		314,000
		792,000			(146,000	)		646,000

Operating income (loss)		(106,000	)		(540,000	)		(646,000	)


Other income (expense)
Interest and LPG financing expense		(131,000	)		131,000	(2)		-
Gain on LPG Asset Sale					3,744,000	(1)		3,744,000
					(339,000	)(4)		(339,000	)
Income (loss) before taxes		(237,000	)		2,996,000			2,759,000

Provision for Mexican income taxes		14,000			(14,000	)(2)		-

Net income (loss)	$	(251,000	)	$	3,010,000		$	2,759,000

Net income (loss) allocable to the partners	$	(251,000	)	$	3,010,000		$	2,759,000

Less general partner’s interest in net income (loss)		(5,000	)		60,000			55,000

Net income (loss) allocable to the common units	$	(246,000	)	$	2,950,000		$	2,704,000

Net income (loss) per common unit	$	(0.13	)				$	1.42

Net income (loss) per common unit assuming dilution	$	(0.13	)				$	1.42

Weighted average common units outstanding		1,910,656						1,910,656

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE D - PURCHASE AND SALE AGREEMENT - Continued

Rio Vista Energy Partners L.P. and Subsidiaries

Notes to Pro Forma Consolidated Financial Information

March 31, 2006

(Unaudited)

(1)

To reflect the LPG Asset Sale, including net proceeds received, the payment by Rio Vista of the Mexican subsidiaries net working capital deficit estimated at $333,000, the payment of the TransMontaigne Note including accrued interest and the resulting gain. This amount does not assume any reductions to the purchase price other than in connection with the Mexican subsidiaries net working capital deficit as provided for in the PSA’s. (See adjustments 3 and 4 below which are related to the sale).

(2)	To eliminate revenues and expenses related to the LPG operations.

(3)	To accrue for estimated expenses associated with the LPG Asset Sale.

(4)	To accrue fee to Jerome B. Richter on the LPG Asset Sale (see note I).

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE E - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	December 31,			March 31,
	2005			2006
Brownsville Terminal Facility	$	173,000		$	173,000
Building		3,631,000			3,631,000
Terminal facilities		374,000			374,000
Tank Farm		319,000			319,000
Leasehold improvements		226,000			226,000
Equipment		26,000			26,000
Truck		4,749,000			4,749,000

US - Mexico Pipelines and Matamoros Terminal Facility: (a)

U.S. Pipelines and Rights of Way		6,915,000			6,919,000
Mexico Pipelines and Rights of Way		993,000			993,000
Matamoros Terminal Facility		5,876,000			5,876,000
Land		705,000			705,000
Total		14,489,000			14,493,000

		19,238,000			19,242,000
Less: accumulated depreciation and amortization		(5,844,000	)		(6,044,000	)
	$	13,394,000		$	13,198,000

(a)

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

Property, plant and equipment, net of accumulated depreciation, includes $5,327,000 and $5,224,000 of costs, located in Mexico at December 31, 2005 and March 31, 2006, respectively.

NOTE F - INVENTORIES

Inventories are valued at the lower of FIFO cost or market (LCM) and consist of the following:

	December 31, 2005				March 31, 2006
	Gallons		LCM		Gallons		LCM
LPG:
Brownsville Terminal Facility and Matamoros Terminal Facility		239,000	$	262,000		239,000	$	236,000

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE G - INCOME TAXES

Rio Vista is taxed as a Partnership under Code Section 701 of the Internal Revenue Code. All of Rio Vista’s income is taxed at the partner level, therefore, Rio Vista has no U.S. income tax expense or liability. Rio Vista’s Mexican subsidiaries incur income tax expense in Mexico on their taxable income. Mexican income tax expense for the three months ended March 31, 2005 and 2006 was $1,000 and $14,000, respectively. No deferred Mexican income tax expense was recorded for the three months ended March 31, 2006.

The Partnership’s significant basis differences between the tax bases and the financial statement bases of the Company’s asset and liabilities are the cost basis and depreciation differences of the Company’s depreciable assets and deferred interest costs on unexercised warrants. The net reversal of cost basis and depreciation differences varies considerably from limited partner to limited partner due to allocations under Section 734 and 743 of the Internal Revenue Code. The deferred interest cost for tax purposes is $1,408,000. Interest expense may or may not be recognized for tax purposes depending on the exercise of related warrants prior to their expiration.

NOTE H - PARTNERS’ CAPITAL

Common Units

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

The common units represent limited partner interests in Rio Vista. The holders of common units are entitled to participate in Rio Vista’s distributions and exercise the rights or privileges available to limited partners under the 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 its stockholders. The General Partner generally may not be removed except upon the vote of the holders of at least 80% of the outstanding common units; provided, however, if at any time any person or group, other than the General Partner and its affiliates, or a direct or subsequently approved transferee of the General Partner or its affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes.

In addition, the partnership agreement contains provisions limiting the ability of holders of common units to call meetings or to acquire information about Rio Vista’s operations, as well as other provisions limiting the holders’ of common units ability to influence the manner or direction of management.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE H - PARTNERS’ CAPITAL - Continued

General Partner Interest

The General Partner of Rio Vista owns a 2% general partner interest in Rio Vista. The General Partner is currently 100% owned by Penn Octane. Penn Octane has granted options to Jerome B. Richter, former Chief Executive Officer of Penn Octane and to Shore Capital LLC (Shore Capital), an affiliate of Richard Shore, Jr., former President of Penn Octane and former Chief Executive Officer of the General Partner, to purchase 50% of its general partner interest. The options expire on July 10, 2006. Following the exercise of any of these options, Penn Octane will retain voting control of the General Partner pursuant to a voting agreement.

The General Partner generally has unlimited liability for the obligations of Rio Vista, such as its debts and environmental liabilities, except for those contractual obligations of Rio Vista that are expressly made without recourse to the General Partner.

Options and Warrants

Loan discount on Penn Octane Corporation’s Debt Related to Detachable Warrants

During January 2004, in connection with $1,805,000 of debt obligations of Penn Octane, Penn Octane agreed to issue an aggregate of 110,250 warrants to purchase Rio Vista common units (Rio Vista Warrants) at an exercise price of $5.00 per common unit and recorded a discount of approximately $422,000 which was reflected as interest expense ratably amortized from the grant date of January 14, 2005 to December 15, 2005, the maturity date of the debt obligations. The Rio Vista Warrants will expire on December 15, 2006.

During March 2006, Rio Vista agreed to extend from December 15, 2006 to December 15, 2008 the expiration date on the Rio Vista warrants corresponding to the Notes then outstanding. The warrants were initially issued in connection with the December 15, 2003 amendment. In connection with the extension, Rio Vista recorded additional interest expense of approximately $22,000.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE H - PARTNERS’ CAPITAL - Continued

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. 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.

On March 9, 2005, the board of managers of the General Partner approved the grant of options to purchase a total of 108,750 common units under the 2005 Plan. Of the total number of options granted, 93,750 were granted to executive officers of the General Partner and to Mr. Richter and 15,000 were issued to outside managers of the General Partner. The exercise price for the options is $12.51 per common unit, which was the average of the high and low sales prices for Rio Vista common units as reported by the Nasdaq Stock Market on March 9, 2005. The options granted to executive officers (including Mr. Richter) were fully vested on the date of grant. The options granted to outside managers vest in equal monthly installments over a period of 12 months from the date of grant. All options become fully exercisable upon a change in control event and expire three years from the date of grant. The board of managers has not yet determined if Rio Vista will grant any common unit options for the fiscal year 2006.

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. 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 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.

On both February 14, 2005 and May 13, 2005, Rio Vista made cash distributions of $487,000 for the quarters ended December 31, 2004 and March 31, 2005. Because of insufficient available cash, Rio Vista has not declared any other distributions since May 2005.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES

Litigation

Penn Octane, Rio Vista and/or Rio Vista’s subsidiaries have been 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 nor any of Rio Vista’s subsidiaries owned or operated the tanker truck or employed or controlled the driver of the tanker truck. Further, none of the Penn Octane, Rio Vista nor any of Rio Vista’s 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 Vista’s 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 operator of the tanker truck, or its insurance company, is reportedly taking claims in Mexico from victims of the accident.

Even though the accident took place in Mexico, both 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 and was filed in the 404^th District Court for Cameron County, Texas on September 26, 2005. The plaintiffs seek unspecified monetary damages and a temporary injunction in order to preserve evidence relevant to the case and assets to secure a potential judgment. An ex parte temporary restraining order was sought and obtained by the plaintiffs on September 28, 2005, in order to preserve evidence and prevent any sale of assets, including Penn Octane’s and Rio Vista’s LPG Asset Sales. This order was issued without prior notice to, or opportunity to contest by, Penn Octane or Rio Vista. The temporary restraining order expired in accordance with its terms on October 19, 2005 and no further injunctive relief has been granted. On November 29, 2005, the parties entered into an agreement on the record wherein a subsidiary of Rio Vista assumed the obligation of preserving and delivering relevant evidence, and the plaintiffs dropped their request for a temporary injunction against a sale of assets. Limited discovery has been conducted to date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

Litigation - Continued

The second case is captioned Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et al. and was filed in the 107^th District Court for Cameron County, Texas, on November 14, 2005. The plaintiffs seek unspecified monetary damages. On December 29, 2005, Penn Octane, Rio Vista and Rio Vista’s subsidiaries filed a motion for removal of the case in the U.S. District Court for the Southern District of Texas, Brownsville Division. On February 15, 2006, the U.S. District Court denied a motion by the plaintiffs to remand the case to state court and dismissed the case as to defendants other than Penn Octane Corporation. The court found that the plaintiffs failed to provide factual allegations sufficient to establish a possibility of recovery against Rio Vista or its subsidiaries. The plaintiffs filed a motion for reconsideration in which they added a new allegation that Rio Vista and its subsidiaries failed to properly odorize the LPG before the accident. Because of the new allegation by the plaintiffs, the U.S. District Court on May 2, 2006 reinstated Rio Vista and its subsidiaries as defendants and remanded the case to the Cameron County, Texas state court. In its remand order, the U.S. District Court noted that it had not found that the conduct of Rio Vista and its subsidiaries caused the injuries of the plaintiffs, but only that plaintiffs had made sufficient allegations to reinstate the Rio Vista defendants and return the case to state court. Penn Octane and Rio Vista believe that there is no factual basis to support the new allegation by the plaintiffs.

Management believes the above lawsuits against Penn Octane, Rio Vista and/or Rio Vista’s subsidiaries are without merit and, based on the advice of counsel, does not anticipate either liability for damages or the issuance of a temporary injunction against a sale of Penn Octane’s or Rio Vista’s assets. Rio Vista’s insurance carrier is expected to bear the legal fees and expenses in connection with defending these cases. 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 Octane’s and Rio Vista’s business, financial condition and results of operations. If a court enjoined the sale of all or any portion of Penn Octane’s or Rio Vista’s assets to a third party, such an injunction could delay or prevent Penn Octane’s or Rio Vista’s LPG Asset Sale before resolution of the claims underlying the lawsuit. A lengthy delay of, or inability to close, the LPG Asset Sale could have a material adverse effect on Penn Octane’s and Rio Vista’s business, financial condition and results of operations.

In October 2005 in a case captioned Rio Vista Operating Partnership L.P. vs. J. Guajardo, Jr. Farms, Inc., the Special Commissioners appointed by the District Court of Cameron County, Texas awarded $100,000 to a land owner in connection with the acquisition of a right of way by Rio Vista. The $100,000 was deposited into the Registry of the court on November 17, 2005. Rio Vista is currently appealing the $100,000 award. Subsequently the land owner has filed an inverse condemnation action against both Rio Vista and Penn Octane seeking damages of $1,800,000. In response to the Company’s motion, the Court granted partial summary judgment in favor of Rio Vista, holding that there are no compensable damages arising from an inverse condemnation.

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.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

Credit Facility, Letters of Credit and Other

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

As of March 31, 2006, Penn Octane had a $20,000,000 credit facility with RZB for demand loans and standby letters of credit (RZB Credit Facility) to finance Penn Octane’s purchases of LPG and gasoline and diesel fuel (Fuel Products) in connection with Penn Octane’s fuel sales business. The RZB Credit Facility includes a $3,000,000 limit for purchase of Fuel Products inventory for a maximum of 30 days. The RZB Credit facility is an uncommitted facility under which the letters of credit have an expiration date of no more than 90 days and the facility is reviewed annually at March 31. As a result of the financing provided to Rio Vista by Penn Octane, Rio Vista has agreed to guarantee Penn Octane’s obligations with respect to the RZB Credit Facility. In connection with Rio Vista’s guaranty, Rio Vista granted RZB a security interest and assignment in any and all of Rio Vista’s accounts, inventory, real property, buildings, pipelines, fixtures and interests therein or relating thereto, including, without limitation, the lease with the Brownsville Navigation District of Cameron County (District) for the land on which Rio Vista’s Brownsville Terminal Facility is located, and has entered into leasehold deeds of trust, security agreements, financing statements and assignments of rent. Under the RZB Credit Facility, Rio Vista may not permit to exist any subsequent lien, security interest, mortgage, charge or other encumbrance of any nature on any of its properties or assets, except in favor of RZB, without the consent of RZB.

In connection with the LPG Supply Agreement, Penn Octane and Rio Vista have agreed to share the financing costs related to Penn Octane’s purchase of LPG under the RZB Credit Facility. Under the RZB Credit Facility, Penn Octane is required to pay a fee with respect to each letter of credit thereunder in an amount equal to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such letter of credit, or (iii) such higher amount as may be agreed to between Penn Octane and RZB. Any loan amounts outstanding under the RZB Credit Facility accrue interest at a rate equal to the rate announced by the JPMorgan Chase Bank as its prime rate (7.75% at March 31, 2006) 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.

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.

Under the terms of the RZB Credit Facility, all cash from Rio Vista’s LPG sales are deposited directly into a restricted cash account under the direction of RZB to pay down all obligations of Penn Octane arising under the RZB Credit Facility. Accordingly, Rio Vista only receives net proceeds from the restricted cash account when the amounts of collateral provided by Penn Octane and Rio Vista exceed all liabilities under outstanding letters of credit issued on behalf of Penn Octane, at the sole discretion of RZB. Upon the release of Rio Vista’s net proceeds from Rio Vista’s restricted cash account, Rio Vista is then required to pay any remaining amounts due Penn Octane, if any, for the supply of LPG and other allocated or direct expenses.

LPG financing expense allocated to Rio Vista from Penn Octane associated with the RZB Credit Facility totaled $61,000 and $89,000 for the three months ended March 31, 2005 and 2006, respectively.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

Consulting Agreement

During November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting agreement whereby Mr. Richter shall serve as a special advisor to the board of directors of Penn Octane and the board of managers of Rio Vista and will provide 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 agreed to pay 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 PMI Agreement (see Note J).

Rio Vista may, in its discretion, offset the amount of any Fees due and payable to Mr. Richter against any amounts owed (whether or not then due or payable) by Mr. Richter to Rio Vista.

The term of Mr. Richter’s consulting agreement shall continue until the earlier of November 26, 2006 or termination of the agreement upon 30 days written notice to the other party.

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 limit.

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 Octane’s 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

Rio Vista is not a taxable entity for U.S. tax purposes (see below) and incurs no U.S. federal income tax liability. Rio Vista’s Mexican subsidiaries are taxed on their income directly by the Mexican government. The income/loss of Rio Vista’s 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 unitholder’s share of items of income, gain, loss and deduction of Rio Vista in computing that unitholder’s federal income tax liability, even if no cash distributions are made to the unitholder by Rio Vista. Distributions by Rio Vista to a unitholder are generally not taxable unless the amount of cash distributed is in excess of the unitholder’s adjusted basis in Rio Vista.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

Partnership Tax Treatment - 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”.

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

If Rio Vista 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 Vista’s items of income, gain, loss and deduction would be reflected only on Rio Vista’s tax return rather than being passed through to Rio Vista’s unitholders, and Rio Vista’s net income would be taxed at corporate rates.

If Rio Vista 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 Vista’s ability to make minimum quarterly distributions would be impaired. Consequently, treatment of Rio Vista as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to unitholders and therefore would likely result in a substantial reduction in the value of Rio Vista’s common units.

Current law may change so as to cause Rio Vista to be taxable as a corporation for federal income tax purposes or otherwise subject Rio Vista to entity-level taxation. The 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.

Current Maturities of Debt Obligations

Current maturities of long-term debt of Penn Octane for which certain Rio Vista’s assets are pledged totaled $1,085,000 at March 31, 2006. The Notes were due December 15, 2005 and notes totaling $720,000 were paid in December 2005 and February 2006. Notes totaling $1,085,000 are still outstanding and have not been extended.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

Guarantees and Assets Pledged on Certain of Penn Octane’s Obligations

The dollar amounts of Penn Octane’s obligations which Rio Vista guarantees and/or for which Rio Vista’s assets are pledged total $17,175,000 at March 31, 2006 based on Penn Octane’s most recently filed Quarterly Report on Form 10-Q and the amounts were as follows:

LPG and Fuel Products trade accounts payable	$	8,975,000
Total debt	$	1,259,000
Lines of credit	$	4,716,000
Letters of credit in excess of LPG and Fuel Products trade accounts payable	$	2,225,000

Consolidated current assets of Penn Octane, which includes assets of Rio Vista, pledged in favor of Penn Octane’s credit facility and certain other debt total $31,687,000 at March 31, 2006 and the amounts were as follows:

Accounts receivable	$	10,683,000
Restricted cash	$	3,528,000
Inventory	$	2,737,000
Property, plant and equipment, net	$	14,739,000

Rio Vista’s assets that are included in the above amounts are as follows:

Accounts receivable	$	4,811,000
Restricted cash	$	855,000
Inventory	$	236,000
Property, plant and equipment, net	$	13,198,000

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE J - CONTRACTS

LPG Sales to PMI

PMI and Rio Vista operated under a three month contract for the period from January 1, 2005 to March 31, 2005 and monthly contracts for April 2005 and May 2005. Effective June 4, 2005, Rio Vista entered into an agreement with PMI for the period June 4, 2005 through March 31, 2006 for the sale of LPG to PMI (PMI Agreement). The following table sets forth the minimum monthly volume of LPG that PMI committed to purchase from Rio Vista pursuant to the PMI Agreement and the actual volumes purchased for the months January 2006 through March 2006.

Month	Minimum Contract Volumes		Actual Volumes Sold
	(gallons)		(gallons)

January 2006		11,700,000		14,757,646
February 2006		11,700,000		11,940,257
March 2006		8,100,000		11,606,435

On March 31, 2006, the PMI Agreement expired. During the month of April 2006, Rio Vista sold LPG to PMI under a monthly contract which provided for volumes of approximately 6,000,000 gallons at prices similar to the PMI Agreement. During April 2006, PMI purchased approximately 6,000,000 gallons.

On April 28, 2006, Rio Vista received electronic confirmation (PMI Confirmation) from PMI of the terms of a new purchase and sale agreement for LPG for the period May 1, 2006 through March 31, 2007 (Term). The PMI Confirmation remains subject to execution of a definitive written agreement between Rio Vista and PMI. The PMI Confirmation provides that PMI does not have a financial obligation with respect to any shortfalls if volumes actually purchased are less than minimum volumes contained in the PMI Confirmation.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE J - CONTRACTS - Continued

LPG Sales to PMI - Continued

Month		Minimum Volume
		(gallons)

May 2006		4,500,000
June 2006		4,500,000
July 2006		4,500,000
August 2006		4,500,000
September 2006		4,500,000
October 2006		8,100,000
November 2006		8,100,000
December 2006		9,000,000
January 2007		9,000,000
February 2007		8,100,000
March 2007		8,100,000

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

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE K - RELATED PARTY TRANSACTIONS

The General Partner has a legal duty to manage Rio Vista in a manner beneficial to Rio Vista’s unitholders. This legal duty originates in statutes and judicial decisions and is commonly referred to as a “fiduciary” duty. Because the General Partner is currently owned by Penn Octane, Penn Octane’s officers and managers of the General Partner also have fiduciary duties to manage the business of the General Partner in a manner beneficial to Penn Octane and its stockholders.

The 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 Partner’s fiduciary duty.

Under the terms of the LPG Supply Agreement and Omnibus Agreement, Penn Octane charged Rio Vista $27,280,000 and $38,166,000 for the three months ended March 31, 2005 and 2006, respectively.

LPG Supply Agreement with Penn Octane

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

Under the terms of Penn Octane’s existing supply contract, Penn Octane must provide letters of credit in amounts equal to the cost of the product to be purchased. In addition, the cost of the product purchased is tied directly to overall market conditions. As a result, Penn Octane’s existing letter of credit facility may not be adequate to meet the letter of credit requirements under the agreement with its supplier due to increases in quantities of LPG purchased and/or to finance future price increases of LPG.

The LPG Supply Agreement terminates on the earlier to occur of:

Penn Octane ceases to have the right to access the Leased Pipeline that connects to Rio Vista’s Brownsville Terminal Facility; or

Rio Vista ceases to sell LPG using any of the assets transferred by Penn Octane to Rio Vista pursuant to the Spin-Off.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE K - RELATED PARTY TRANSACTIONS - Continued

Omnibus Agreement

In connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement with Rio Vista that governs, among other things, indemnification obligations among the parties to the agreement, related party transactions and the provision of general administration and support services by Penn Octane.

The Omnibus Agreement prohibits Rio Vista from entering into any material agreement with Penn Octane without the prior approval of the conflicts committee of the board of managers of the General Partner. For purposes of the Omnibus Agreement, a material agreement is any agreement between Rio Vista and Penn Octane that requires aggregate annual payments in excess of $100,000.

The Omnibus Agreement may be amended by written agreement of the parties; provided, however that it may not be amended without the approval of the conflicts committee of the General Partner if the amendment would adversely affect the unitholders of Rio Vista. The Omnibus Agreement has an initial term of five years that automatically renews for successive five-year terms and, other than the indemnification provisions, will terminate if Rio Vista is no longer an affiliate of Penn Octane.

NOTE L - MEXICAN OPERATIONS

Under current Mexican law, foreign ownership of Mexican entities involved in the distribution of LPG or the operation of LPG terminal facilities is prohibited. Foreign ownership is permitted in the transportation and storage of LPG. Mexican law also provides that a single entity is not permitted to participate in more than one of the defined LPG activities (transportation, storage or distribution). PennMex has a transportation permit and Termatsal owns, leases, or is in the process of obtaining the land or rights of way used in the construction of the Mexican portion of the US-Mexico Pipelines, and owns the Mexican portion of the assets comprising the US-Mexico Pipelines. Rio Vista’s consolidated Mexican affiliate, Tergas, owns the Matamoros Terminal Facility and has been granted the permit to operate the Matamoros Terminal Facility. Rio Vista relies on Tergas’ permit to continue its delivery of LPG at the Matamoros Terminal Facility. Tergas is owned 95% by Mr. Vicente Soriano, and the remaining balance is owned by an unrelated party. Rio Vista has an option to purchase Tergas for a nominal price of approximately $5,000.

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

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE M - REALIZATION OF ASSETS

The accompanying unaudited 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 operations for the three months ended March 31, 2006 and has a deficit in working capital. Rio Vista is dependent on Penn Octane’s ability to deliver adequate quantities of LPG at an acceptable price for ultimate sale to PMI, to provide credit to Rio Vista for such purchases and to provide management of its operations. Currently, Rio Vista’s only source of revenue is from sales of LPG to PMI and it operates under the PMI Confirmation which provides for monthly volumes and margins which are materially less than historical monthly volumes and margins. As a result, Penn Octane’s and Rio Vista’s gross profit have been materially reduced and may continue to decline and their cash flow and available credit may be insufficient to absorb such reductions in gross profit. The LPG Asset Sale has not closed and the TransMontaigne Note may be due on the earlier of the time of closing or 120 days following demand by TransMontaigne (see note D).

The minimum volumes and applicable margins contained in the PMI Confirmation are expected to provide Rio Vista with gross profit similar to the gross profit Rio Vista would have received if PMI had purchased only the minimum volumes provided under its agreements with Rio Vista during the period from May 1, 2005 to March 31, 2006 as a result of increased margins on lower volume levels contained in the PMI Confirmation. Actual volumes purchased by PMI under those prior agreements, however, exceeded minimum contractual amounts by approximately 35%. There is no assurance that PMI will purchase volumes as indicated in the PMI Confirmation or that PMI will continue to purchase LPG from Rio Vista or in quantities or prices that are profitable upon the expiration of the PMI Confirmation.

Assuming that the LPG Asset Sale does not close, Rio Vista projects that its gross profit from operations under the PMI Confirmation, based on the minimum volumes and applicable margins, will not provide sufficient cash flow for Rio Vista to pay its normal operating expenses through March 31, 2007 unless it can sufficiently reduce its operating expenses. Also, Rio Vista projects that monthly cash flows from LPG sales during the months of May 2006 through September 2006 will be less than during the months of October 2006 through March 2007 as a result of reduced monthly volumes committed to be purchased during May 2006 through September 2006. In addition, Rio Vista may be unable to make any necessary capital expenditures or to pay arrearages in distributions or to pay future distributions to its unitholders during the Term of the PMI Confirmation.

Assuming that the LPG Asset Sale does not close, Penn Octane projects that its gross profit from operations based on the minimum volumes and applicable margins contained in the PMI Confirmation will not provide sufficient cash flow to pay its normal operating expenses through March 31, 2007, assuming breakeven results from its Fuel Sales Business, unless it can sufficiently reduce its operating expenses. In addition, Penn Octane’s cash flow at the minimum volumes contained in the PMI Confirmation is projected not to be sufficient to pay its other obligations, including its secured debt. The Fuel Sales Business is a relatively new business and, as a result, Penn Octane does not believe it can rely on that portion of its business to provide sufficient additional cash flow.

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RIO VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE M - REALIZATION OF ASSETS - Continued

Rio Vista has guaranteed certain of Penn Octane’s obligations. Substantially all of Rio Vista’s and Penn Octane’s assets are pledged or committed to be pledged as collateral on $1,085,000 of Penn Octane’s existing debt, the RZB Credit Facility and/or the TransMontaigne Note, and therefore, both Rio Vista and Penn Octane may be unable to obtain additional financing collateralized by those assets. Penn Octane’s Report of Independent Registered Public Accounting Firm on the consolidated financial statements of Penn Octane at December 31, 2005 contains an explanatory paragraph which describes an uncertainty about Penn Octane’s ability to continue as a going concern. If Penn Octane’s and Rio Vista’s 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 Penn Octane’s 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 closing the LPG Asset Sale, or if the LPG Asset Sales does not close, upon the ability of Penn Octane to continue as a going concern and the continued sale of LPG to PMI at adequate volumes and margins to provide sufficient cash flow to pay Rio Vista’s expenses, the TransMontaigne Note and guarantees of Penn Octane’s obligations assuming Penn Octane’s inability to pay such obligations. 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 close the LPG Asset Sale. Because the LPG Asset Sale has not closed, management is seeking to reduce operating expenses. In the event the LPG Asset Sale is not closed, management may also continue to attempt to sell its LPG assets.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of Rio Vista's liquidity and capital resources should be read in conjunction with the unaudited consolidated financial statements of Rio Vista and related notes thereto appearing elsewhere herein. References to specific years preceded by “fiscal” (e.g. fiscal 2006) refer to Rio Vista’s fiscal year ending December 31.

Forward-Looking Statements

The statements contained in this Quarterly Report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will”, “should”, “estimates”, “projects” or “anticipates” or by discussions of strategy that inherently involve risks and uncertainties. From time to time, Rio Vista has made or may make forward-looking statements, orally or in writing. These forward-looking statements include statements regarding anticipated future revenues, sales, LPG supply, LPG pricing, operations, demand, potential acquisitions, competition, capital expenditures, future acquisitions, additional financing, the deregulation of the LPG market in Mexico, the operations of the US - Mexico Pipelines, the Brownsville and Matamoros Terminal Facilities, other upgrades to Rio Vista’s facilities, foreign ownership of LPG operations, short-term obligations and credit arrangements, LPG Asset Sale, the PMI Confirmation, guarantees, cash distributions, Qualifying Income, Penn Octane, partnership tax treatment, risk factors and other statements regarding matters that are not historical facts, and involve predictions which are based upon a number of future conditions that ultimately may prove to be inaccurate. Actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that may cause or contribute to such differences include those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Rio Vista’s Annual Report on Form 10-K for the year ended December 31, 2005, Rio Vista’s Registration Statement on Form 10 as well as those discussed elsewhere in this Quarterly Report. These factors may not include all material risks facing Rio Vista.

Rio Vista Energy Partners L.P. and its consolidated subsidiaries are collectively hereinafter referred to as “Rio Vista”.

Purchase and Sale Agreements

On August 15, 2005, Rio Vista and Penn Octane each entered into separate purchase and sale agreements (PSA’s) with TransMontaigne Product Services Inc. (“TransMontaigne”) which provide for the sale and assignment of all of their respective LPG assets and refined products assets (the “LPG Asset Sale”) including the Brownsville Terminal Facility and refined products tank farm and associated leases, owned pipelines located in the United States, including land, leases, and rights of ways, LPG inventory, 100% of the outstanding stock of Mexican subsidiaries and affiliate, which in turn own pipelines and the Matamoros Terminal Facility, including land and rights of way, and assignment of the lease of the Leased Pipeline, PMI sales agreement and Exxon Supply Contract (see note J to the unaudited consolidated financial statements). The purchase price is $10.1 million for assets to be sold by Penn Octane and $17.4 million for assets to be sold by Rio Vista. The purchase price may be reduced as provided for in the PSA’s.

In connection with the PSA’s, TransMontaigne loaned Rio Vista $1.3 million (the “TransMontaigne Note”) which is 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 is secured by the tank farm and certain LPG storage tanks located at the Brownsville Terminal Facility (the “Collateral”). The TransMontaigne Note began to accrue interest on November 15, 2005 at the prime rate plus 2%. In connection with the TransMontaigne Note, RZB Finance, LLC (“RZB”) provided a consent and the Brownsville Navigation District issued an estoppel letter. Rio Vista used the proceeds from the TransMontaigne Note to fund certain expenses associated with the PSA’s and for working capital purposes. If the LPG Asset Sales does not occur and Rio Vista does not pay the TransMontaigne Note as provided for above, Rio Vista is required to convey title to the Collateral to TransMontaigne and to lease the Collateral from TransMontaigne for $10,000 per month until such time as Rio Vista pays the $1.3 million, in addition to the lease payments, to TransMontaigne. In the event of a conveyance of the title to the Collateral, no further interest payments will be required under the TransMontaigne Note. When the $1.3 million is repaid to TransMontaigne, if ever, the lease payments will cease and title to the Collateral will be re-conveyed to Rio Vista.

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There can be no assurance that the LPG Asset Sale will be completed according to the terms contained in the PSA’s or according to different terms or at all. Even if the LPG Asset Sale is completed, Rio Vista may be unable to resume payment of minimum quarterly distributions or to pay the arrearages of such distributions, in order to maintain cash reserves necessary for the conduct of business. A continued delay of or inability to close the LPG Asset Sale could have a material adverse effect on Penn Octane’s and Rio Vista’s business, financial condition and results of operations.

In connection with the LPG Asset Sale, Penn Octane filed a definitive proxy statement with the Securities Exchange Commission (“SEC”) on September 27, 2005 pursuant to the requirement to obtain approval for the LPG Asset Sale from Penn Octane’s stockholders. On October 26, 2005, Penn Octane held a special meeting of stockholders at which the stockholders approved the LPG Asset Sale.

If the LPG Asset Sale is completed, Rio Vista intends to use the proceeds to fund working capital requirements and to pursue transactions intended to enhance unitholder value.

The following discusses Rio Vista’s existing its business, its results of operations and its liquidity and capital resources.

The following discussion of Rio Vista's results of operations and liquidity and capital resources should be read in conjunction with the unaudited consolidated financial statements of Rio Vista and related notes thereto appearing elsewhere herein.

Overview

Rio Vista Energy Partners L.P. (“Rio Vista”), a Delaware limited partnership, was formed by Penn Octane Corporation (“Penn Octane”) on July 10, 2003 and was a wholly owned subsidiary of Penn Octane until September 30, 2004, the date that Penn Octane completed a series of transactions involving (i) the transfer of substantially all of its owned pipeline and terminal assets in Brownsville, Texas and Matamoros, Mexico and certain immaterial liabilities (the “Assets”) to Rio Vista Operating Partnership L.P. (“RVOP”) (ii) the transfer of Penn Octane’s 99.9% interest in RVOP to Rio Vista and (iii) the distribution of all of its limited partnership interests (the “Common Units”) in Rio Vista to its common stockholders (the “Spin-Off”), resulting in Rio Vista becoming a separate public company. The Common Units represented 98% of Rio Vista’s outstanding capital and 100% of Rio Vista’s limited partnership interests. The remaining 2%, which is the general partner interest, is owned and controlled by Rio Vista GP LLC (the “General Partner”), a wholly owned subsidiary of Penn Octane. The General Partner is responsible for the management of Rio Vista. Common unitholders do not participate in the management of Rio Vista. Rio Vista Energy Partners L.P. and its consolidated subsidiaries (not including the General Partner) are hereinafter referred to as “Rio Vista”.

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

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

All of Rio Vista’s LPG operations are conducted through, and Rio Vista’s LPG operating assets are owned by, RVOP. The General Partner is entitled to receive distributions on its general partner interest and additional incentive distributions (see Liquidity and Capital Resources - Distributions of Available Cash) as provided in Rio Vista’s partnership agreement. The General Partner has sole responsibility for conducting Rio Vista’s business and for managing Rio Vista’s operations in accordance with the partnership agreement. The General Partner does not receive a management fee in connection with its management of Rio Vista’s business, but is entitled to be reimbursed for all direct and indirect expenses incurred on Rio Vista’s behalf.

Rio Vista purchases LPG from Penn Octane under a long-term supply agreement (the “LPG Supply Agreement”). The purchase price of the LPG from Penn Octane is determined based on the cost of LPG under Penn Octane’s agreements with its LPG suppliers for volumes sold to Rio Vista for sale to PMI or to other Rio Vista customers, other direct costs related to PMI and other LPG sales of Rio Vista and a formula that takes into consideration operating costs of Penn Octane and Rio Vista.

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

Historically, until the date of the Spin-Off, Penn Octane sold LPG primarily to PMI. Penn Octane has a long-term lease agreement, expiring in December 2013, for approximately 132 miles of pipeline (the “Leased Pipeline”) which connects ExxonMobil Corporation’s (“Exxon”) King Ranch Gas Plant in Kleberg County, Texas and Duke Energy’s La Gloria Gas Plant in Jim Wells County, Texas, to Rio Vista’s Brownsville Terminal Facility. In connection with Penn Octane’s lease agreement for the Leased Pipeline, Penn Octane may access up to 21.0 million gallons of storage located in Markham, Texas (the “Markham Storage”), as well as other potential propane pipeline suppliers, via approximately 155 miles of pipeline located between Markham, Texas and the Exxon King Ranch Gas Plant. Penn Octane’s long term supply agreements in effect as of March 31, 2006 with Exxon requires Penn Octane to purchase minimum quantities of LPG totaling up to 13.9 million gallons of LPG per month although actual quantities supplied under such agreement for the three months ended March 31, 2006 averaged approximately 9.4 million gallons of LPG per month.

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LPG Sales

The following table shows Rio Vista's actual volumes sold to PMI in gallons and average sales price for LPG for the three months ended March 31, 2005 and 2006;

	March 31, 2005		March 31, 2006
Volume Sold
LPG (millions of gallons) - PMI		32.3		38.3

Average sales price
LPG (per gallon) - PMI	$	0.88	$	1.02

Recent Trends. Since April 2004, PMI has contracted with either Penn Octane or Rio Vista (subsequent to the Spin-Off) for volumes which were significantly lower than amounts purchased by PMI in similar periods during previous years, and beginning in April 2005 margins have been significantly lower than historic levels. See Liquidity and Capital Resources - Sales to PMI below. Rio Vista believes that the reduction of volume commitments and margins for April 2004 through March 2006 is based on additional LPG production by PEMEX being generated from the Burgos Basin field in Reynosa, Mexico, an area within the proximity of Rio Vista’s Matamoros Terminal Facility and increased competition from U.S. suppliers (see below). Although Rio Vista is not aware of the total amount of LPG actually being produced by PEMEX from the Burgos Basin, it is aware that PEMEX has constructed and is operating two new cryogenic facilities at the Burgos Basin which it believes may have a capacity of producing up to 12 million gallons of LPG per month. Rio Vista also believes that PEMEX intends to install two additional cryogenic facilities, with similar capacity, to be operational in 2006. Rio Vista is not aware of the capacity at which the current cryogenic facilities are being operated. Furthermore, Rio Vista is not aware of the actual gas reserves of the Burgos Basin or the gas quality, each of which could significantly impact LPG production amounts.

During June 2004, Valero L.P. (”Valero”) began operation of a newly constructed LPG terminal facility in Nuevo Laredo, Mexico and a newly constructed pipeline connecting the terminal facility in Nuevo Laredo, Mexico to existing pipelines in Juarez, Texas which connect directly to Valero Energy Corporation’s Corpus Christi, Texas and Three Rivers, Texas refineries. Valero originally contracted with PMI under a five year agreement to deliver approximately 6.3 million gallons (of which 3.2 million gallons were previously delivered by truck from Three Rivers, Texas) of LPG per month. During July 2005, Valero announced that it had entered into a new agreement with PMI which provides for double the amount of LPG previously contracted for with PMI.

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

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

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Results of Operations

Three Months Ended March 31, 2006 Compared With Three Months Ended March 31, 2005

Revenues. Revenues for the three months ended March 31, 2006, were $39.2 million compared with $28.6 million for the comparative period one year earlier, an increase of $10.6 million or 37.1%. Of this increase, $6.1 million was attributable to increased volumes of LPG sold to PMI during the three months ended March 31, 2006 and $4.7 million was attributable to increases in average sales prices of LPG sold to PMI during the three months ended March 31, 2006.

Cost of goods sold. Cost of goods sold for the three months ended March 31, 2006 was $38.6 million compared with $27.2 million for the three months ended March 31, 2005, an increase of $11.4 million or 41.5%. The cost of goods sold for LPG purchased from Penn Octane was determined in accordance with the LPG Supply Agreement. Of this increase, $5.7 million was attributable to increases in the average costs of LPG sold to PMI during the three months ended March 31, 2006, $5.8 million was attributable to increased volumes of LPG sold to PMI during the three months ended March 31, 2006, and $0.2 million was attributable to increases in other direct costs associated with the LPG Business during the three months ended March 31, 2006.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.8 million for the three months ended March 31, 2006 compared with $1.0 million for the three months ended March 31, 2005, a decrease of $0.2 million or 25.0%. These costs were comprised of indirect selling general 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 three months ended March 31, 2006.

Other income (expense). Other expense was $(0.1) million for the three months ended March 31, 2006 compared with $(0.1) million for the three months ended March 31, 2005. Other expense is primarily comprised of interest expense allocated to Rio Vista by Penn Octane in connection with the RZB Credit Facility and amortization of loan discount related to detachable warrants.

Liquidity and Capital Resources

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

Rio Vista has a loss from operations for the three months ended March 31, 2006 and has a deficit in working capital. Rio Vista is dependent on Penn Octane’s ability to deliver adequate quantities of LPG at an acceptable price for ultimate sale to PMI, to provide credit to Rio Vista for such purchases and to provide management of its operations. Currently, Rio Vista’s only source of revenue is from sales of LPG to PMI and it operates under the PMI Confirmation which provides for monthly volumes and margins which are materially less than historical monthly volumes and margins. As a result, Penn Octane’s and Rio Vista’s gross profit have been materially reduced and may continue to decline and their cash flow and available credit may be insufficient to absorb such reductions in gross profit. The LPG Asset Sale has not closed and the TransMontaigne note will be due on the earlier of the time of closing or 120 days following demand by TransMontaigne (see note D to the unaudited consolidated financial statements).

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Rio Vista has guaranteed certain of Penn Octane’s obligations. Substantially all of Rio Vista’s and Penn Octane’s assets are pledged or committed to be pledged as collateral on $1.1 million of Penn Octane’s existing debt, the RZB Credit Facility and the TransMontaigne Note, and therefore, both Rio Vista and Penn Octane may be unable to obtain additional financing collateralized by those assets. Penn Octane’s Report of Independent Registered Public Accounting Firm on the consolidated financial statements of Penn Octane at December 31, 2005 contains an explanatory paragraph which describes an uncertainty about Penn Octane’s ability to continue as a going concern. If Penn Octane’s and Rio Vista’s 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 Penn Octane’s 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.

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

The following table reflects cash flows for the three months ended March 31, 2005 and 2006. All information is in thousands.

	For the three months ended March 31, 2005			For the three months ended March 31, 2006

Net cash (used in) operating activities	$	( 2,553	)	$	( 1,063	)
Net cash (used in) investing activities		( 8	)		( 5	)
Net cash provided by in financing activities		2,574			1,052
Net increase (decrease) in cash	$	13		$	(16	)

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The following is a discussion of the guaranteed obligations:

RZB Obligation

Rio Vista’s LPG purchases are financed entirely by Penn Octane. Penn Octane finances its purchases through its credit facility with RZB Finance, LLC (“RZB”). As of March 31, 2006, Penn Octane had a $20.0 million credit facility with RZB for demand loans and standby letters of credit (the “RZB Credit Facility”) to finance Penn Octane’s purchases of LPG and gasoline and diesel fuel (“Fuel Products”) in connection with Penn Octane’s fuel sales business. The RZB Credit Facility includes a $3.0 million limit for purchase of Fuel Products inventory for a maximum of 30 days. The RZB Credit facility is an uncommitted facility under which the letters of credit have an expiration date of no more than 90 days and the facility is reviewed annually at March 31. As a result of the financing provided to Rio Vista by Penn Octane, Rio Vista has agreed to guarantee Penn Octane’s obligations with respect to the RZB Credit Facility. In connection with Rio Vista’s guaranty, Rio Vista granted RZB a security interest and assignment in any and all of Rio Vista’s accounts, inventory, real property, buildings, pipelines, fixtures and interests therein or relating thereto, including, without limitation, the lease with the Brownsville Navigation District of Cameron County (the “District”) for the land on which Rio Vista’s Brownsville Terminal Facility is located, and has entered into leasehold deeds of trust, security agreements, financing statements and assignments of rent. Under the RZB Credit Facility, Rio Vista may not permit to exist any subsequent lien, security interest, mortgage, charge or other encumbrance of any nature on any of its properties or assets, except in favor of RZB, without the consent of RZB.

In connection with the LPG Supply Agreement, Penn Octane and Rio Vista have agreed to share the financing costs related to Penn Octane’s purchase of LPG under the RZB Credit Facility. Under the RZB Credit Facility, Penn Octane is required to pay a fee with respect to each letter of credit thereunder in an amount equal to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such letter of credit, or (iii) such higher amount as may be agreed to between Penn Octane and RZB. Any loan amounts outstanding under the RZB Credit Facility shall accrue interest at a rate equal to the rate announced by the JPMorgan Chase Bank as its prime rate (7.75% at March 31, 2006) 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.

Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required to maintain net worth of a minimum of $10.0 million.

LPG financing expense allocated to Rio Vista from Penn Octane associated with the RZB Credit Facility totaled $61,000 and $89,000 for the years ended March 31, 2005 and 2006, respectively.

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

If the LPG Asset Sale is completed, the Company expects that the RZB Credit Facility will be restructured and/or reduced.

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Current Maturities of Debt Obligations

Current maturities of long-term debt of Penn Octane for which certain of Rio Vista’s assets are pledged totaled $1.1 million at March 31, 2006. The Notes were due December 15, 2005 and notes totaling $720,000 were paid in December 2005 and February 2006. Notes totaling $1.1 million are still outstanding and have not been extended.

Guarantees and Assets Pledged on Certain of Penn Octane’s Obligations

The dollar amounts of Penn Octane obligations which Rio Vista guarantees and/or for which Rio Vista’s assets are pledged total $17.2 million at March 31, 2006, based on Penn Octane’s most recently filed Quarterly Report on Form 10-Q, and the amounts were as follows (in millions):

LPG and Fuel Products trade payables	$	9.0
Total debt	$	1.3
Lines of credit	$	4.7
Letters of credit in excess of LPG and Fuel Products trade payables	$	2.2

Consolidated current assets of Penn Octane, which includes assets of Rio Vista, pledged in favor of Penn Octane’s credit facility and certain other debt total $31.6 million at March 31, 2006 and the amounts were as follows (in millions):

Accounts receivable	$	10.7
Restricted cash	$	3.5
Inventory	$	2.7
Property, plant and equipment, net	$	14.7

Rio Vista’s assets that are included in the above amounts are as follows (in millions):

Accounts receivable	$	4.8
Restricted cash	$	.9
Inventory	$	.2
Property, plant and equipment, net	$	13.2

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The following is a summary of Rio Vista’s estimated minimum contractual obligations as of March 31, 2006.

	Payments due by Period (Amounts in Millions)
			Less than		1 - 3		4 - 5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years

Long-Term Debt Obligations	$	1.3	$	1.3	$	-	$	-	$	-
Operating Leases		.1		.1		-		-		-
LPG Purchase Obligations		-		-		-		-		-
Other Long-Term Obligations		-		-		-		-		-
Total Contractual Cash Obligations	$	1.4	$	1.4	$	-	$	-	$	-

The following is a summary of Rio Vista’s estimated minimum commercial obligations as of March 31, 2006, based on Penn Octane’s most recently filed Form 10-Q as of March 31, 2006.

	Amount of Commitment Expiration Per Period (Amounts in Millions)
	Total Amounts		Less than		1 - 3		4 - 5		Over
Commercial Commitments	Committed		1 Year		Years		Years		5 Years

Lines of Credit	$	-	$	-	$	-	$	-	$	-
Standby Letters of Credit		-		-		-		-		-
Guarantees		17.2		17.2		-		-		-
Standby Repurchase Obligations		N/A		N/A		N/A		N/A		N/A
Other Commercial Commitments		N/A		N/A		N/A		N/A		N/A
Total Commercial Commitments	$	17.2	$	17.2	$	-	$	-	$	-

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

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Income Taxes. Rio Vista has agreed to indemnify Penn Octane for a period of three years from the fiscal year end that includes the date of the Spin-Off for any federal income tax liabilities resulting from the Spin-Off in excess of $2.5 million. 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 $2.5 million. However, the Internal Revenue Service (the “IRS”) may review Penn Octane’s federal income tax returns and challenge positions that Penn Octane has taken with respect to the Spin-Off.

Partnership Tax Treatment. See note I to the unaudited consolidated financial statements for discussion of partnership tax treatment.

Litigation. See note I to the unaudited consolidated financial statements for the litigation discussion.

Consulting Agreement. See note I to the unaudited consolidated financial statements for discussion of Mr. Richter’s consulting agreement.

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 at least to the minimum distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum quarterly distribution on the units from prior quarters. The 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 45 days after the end of each calendar quarter. However, Rio Vista is prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has guaranteed.

In addition to its 2% general partner interest, the General Partner is currently the holder of incentive distribution rights which entitle the holder to an increasing portion of cash distributions as described in the partnership agreement. As a result, cash distributions from Rio Vista are shared by the holders of the common units and the General Partner 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.

Rio Vista’s ability to make distributions will continue to be adversely impacted if sales to PMI are not at sufficient volumes and margins, payments are required on its guarantees, expenses increase, Rio Vista is unable to obtain additional financing on its pledged assets or the LPG Asset Sale does not close. Although Penn Octane is not required to do so, to the extent that Penn Octane has sufficient cash to do so, it may lend amounts to Rio Vista to meet the minimum distributions. If Rio Vista’s revenues and other sources of liquidity after its quarterly distributions are not adequate to satisfy such payment obligations of Penn Octane and/or Penn Octane does not have the necessary cash to loan to Rio Vista, Rio Vista may be unable to resume the quarterly distributions to unitholders or pay any arrearages, and Penn Octane and/or Rio Vista may be required to raise additional funds to avoid foreclosure. However, there can be no assurance that such additional funding will be available on terms attractive to either Penn Octane or Rio Vista or available at all.

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The following is a reconciliation of Rio Vista’s consolidated net income to distributable cash flow for the three months ended March 31, 2005 and 2006.

	Three Months Ended
	March 31, 2005			March 31, 2006

Net income (loss)	$	172,000		$	( 251,000	)
Plus interest and LPG financing expense and taxes, net		119,000			145,000
Plus depreciation and amortization		205,000			200,000
Earnings before interest, taxes, depreciation and amortization (“EBITDA”)		496,000			94,000
Plus other non-cash expenses		-			8,000
Less cash interest, LPG financing expense and taxes, net		( 61,000	)		( 122,000	)
Distributable cash flow (deficit)		435,000			( 20,000	)
Distributable cash flow (deficit) applicable to general partner		( 9,000	)		-
Distributable cash flow (deficit) applicable to limited partners	$	426,000		$	( 20,000	)

Rio Vista utilizes two financial measures, EBITDA and distributable cash flow, which are not defined in GAAP. Management uses these financial measures because they are widely accepted financial indicators used by investors to compare partnership performance. In addition, management believes that these measures provide investors an enhanced perspective of the operating performance of Rio Vista’s assets and the cash flow the business is generating. Neither EBITDA nor distributable cash flow are intended to represent cash flows for the period, nor are they presented as an alternative to net income. They should not be considered in isolation or as substitutes for a measure of performance prepared in accordance with GAAP.

Sales to PMI. PMI and Rio Vista operated under a three month contract for the period from January 1, 2005 to March 31, 2005 and monthly contracts for April 2005 and May 2005. Effective June 4, 2005, Rio Vista entered into an agreement with PMI for the period June 4, 2005 through March 31, 2006 for the sale of LPG to PMI (the “PMI Agreement”). The following table sets forth the minimum monthly volume of LPG that PMI committed to purchase from Rio Vista pursuant to the PMI Agreement and the actual volumes purchased for the months January 2006 through March 2006.

Month	Minimum Contract Volumes		Actual Volumes Sold
	(gallons)		(gallons)

January 2006		11,700,000		14,757,646
February 2006		11,700,000		11,940,257
March 2006		8,100,000		11,606,435

On March 31, 2006, the PMI Agreement expired. During the month of April 2006, Rio Vista sold LPG to PMI under a monthly contract which provided for volumes of approximately 6.0 million gallons at prices similar to the PMI Agreement. During April 2006, PMI purchased approximately 6.0 million gallons.

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On April 28, 2006, Rio Vista received electronic confirmation (the “PMI Confirmation”) from PMI of the terms of a new purchase and sale agreement for LPG for the period May 1, 2006 through March 31, 2007 (the “Term”). The PMI Confirmation remains subject to execution of a definitive written agreement between Rio Vista and PMI. The PMI Confirmation provides that PMI does not have a financial obligation with respect to any shortfalls if volumes actually purchased are less than minimum volumes contained in the PMI Confirmation.

Month	Minimum Volume
	(gallons)

May 2006		4,500,000
June 2006		4,500,000
July 2006		4,500,000
August 2006		4,500,000
September 2006		4,500,000
October 2006		8,100,000
November 2006		8,100,000
December 2006		9,000,000
January 2007		9,000,000
February 2007		8,100,000
March 2007		8,100,000

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

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

Under the LPG Supply Agreement, Penn Octane supplies all of Rio Vista’s LPG requirements in connection with its LPG sales obligations to PMI. The purchases of the LPG are at fluctuating prices and are determined based on the cost of LPG under Penn Octane’s agreements with its LPG suppliers for volumes sold to Rio Vista for sale to PMI or to other Rio Vista customers, other direct costs related to PMI and other LPG sales of Rio Vista and a formula that takes into consideration operating costs of Penn Octane and Rio Vista. Rio Vista expects the aggregate costs per gallon to purchase LPG (less any applicable adjustments) to be below the aggregate sales prices per gallon of LPG sold to PMI. Rio Vista believes that its LPG Supply Agreement with Penn Octane provides it with an advantage over competitors in the supply of LPG to PMI based on Penn Octane’s adequate volumes and price provided for in its agreements with its LPG suppliers, and Penn Octane’s Leased Pipeline which takes the LPG directly to Rio Vista’s Brownsville Terminal Facility from those suppliers. The Leased Pipeline’s capacity is estimated to be between 25.0 million and 30.0 million gallons per month.

Under the terms of Penn Octane’s existing supply contract, Penn Octane must provide letters of credit in amounts equal to the cost of the product to be purchased. In addition, the cost of the product purchased is tied directly to overall market conditions. As a result, Penn Octane’s existing letter of credit facility may not be adequate to meet the letter of credit requirements under agreement with its supplier due to increases in quantities of LPG purchased and/or to finance future price increases of LPG.

The LPG Supply Agreement terminates on the earlier to occur of:

Penn Octane ceases to have the right to access the Leased Pipeline that connects to Rio Vista’s Brownsville Terminal Facility; or

Rio Vista ceases to sell LPG using any of the assets transferred by Penn Octane to Rio Vista pursuant to the Spin-Off.

Mexican Operations. Under current Mexican law, foreign ownership of Mexican entities involved in the distribution of LPG or the operation of LPG terminal facilities is prohibited. Foreign ownership is permitted in the transportation and storage of LPG. Mexican law also provides that a single entity is not permitted to participate in more than one of the defined LPG activities (transportation, storage or distribution). PennMex has a transportation permit and Termatsal owns, leases, or is in the process of obtaining the land or rights of way used in the construction of the Mexican portion of the US-Mexico Pipelines, and owns the Mexican portion of the assets comprising the US-Mexico Pipelines. Rio Vista’s consolidated Mexican affiliate, Tergas, owns the Matamoros Terminal Facility and has been granted the permit to operate the Matamoros Terminal Facility. Rio Vista relies on Tergas’ permit to continue its delivery of LPG at the Matamoros Terminal Facility. Tergas is owned 95% by Mr. Vicente Soriano, and the remaining balance is owned by an unrelated party. Rio Vista has an option to purchase Tergas for a nominal price of approximately $5,000.

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

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

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

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

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

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

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

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Common Units

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

General Partner Interest

The General Partner of Rio Vista owns a 2% general partner interest in Rio Vista. The General Partner is currently 100% owned by Penn Octane. Penn Octane has granted options to Jerome B. Richter, former Chief Executive Officer of Penn Octane, and to Shore Capital, LLC (“Shore Capital”) an affiliate of Richard Shore, Jr., former President of Penn Octane and former Chief Executive Officer of the General Partner to purchase 50% of its general partner interest. The options expire on July 10, 2006. Following the exercise of any of these options, Penn Octane will retain voting control of the General Partner pursuant to a voting agreement.

Options and Warrants

Common Unit Warrants. During January 2004, in connection with $1.8 million of debt obligations of Penn Octane, Penn Octane agreed to issue an aggregate of 110,250 warrants to purchase Rio Vista common units (“Rio Vista Warrants”) at an exercise price of $5.00 per common unit and recorded a discount of approximately $422,000 which was reflected as interest expense ratably amortized from the grant date of January 14, 2005 to December 15, 2005, the maturity date of the debt obligations. The Rio Vista Warrants will expire on December 15, 2006.

During March 2006, Rio Vista agreed to extend from December 15, 2006 to December 15, 2008 the expiration date on the Rio Vista warrants corresponding to the Notes then outstanding. The warrants were initially issued in connection with the December 15, 2003 amendment of the Notes. In connection with the extension, Rio Vista recorded additional interest expense of approximately $22,000.

On both February 14, 2005 and May 13, 2005, Rio Vista made cash distributions of $487,000 for the quarters ended December 31, 2004 and March 31, 2005.

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On March 9, 2005, the board of managers of the General Partner approved the Rio Vista 2005 Equity Incentive Plan (the “2005 Plan”). The 2005 Plan permits the grant of common unit options, common unit appreciation rights, restricted common unit 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.

On March 9, 2005, the board of managers of the General Partner approved the grant of options to purchase a total of 108,750 common units under the 2005 Plan. Of the total number of options granted, 93,750 were granted to executive officers of the General Partner and to Mr. Richter and 15,000 were issued to outside managers of the General Partner. The exercise price for the options is $12.51 per common unit, which was the average of the high and low sales prices for Rio Vista common units as reported by the Nasdaq Stock Market on March 9, 2005. The options granted to executive officers were fully vested on the date of grant. The options granted to outside managers vest in equal monthly installments over a period of 12 months from the date of grant. All options become fully exercisable upon a change in control event and expire three years from the date of grant. The board of managers has not yet determined if Rio Vista will grant any common unit options for the fiscal year 2006.

Intercompany Agreements

As a result of the Spin-Off, Rio Vista owns and operates the LPG distribution, transportation and marketing business previously conducted by Penn Octane. Rio Vista sells LPG directly to PMI and purchases LPG from Penn Octane under the LPG Supply Agreement. Intercompany agreements between Penn Octane and Rio Vista are as follows:

LPG Supply Agreement with Penn Octane. Penn Octane entered into the LPG Supply Agreement with Rio Vista pursuant to which Rio Vista has agreed to purchase all of its LPG requirements for sales which utilize the assets transferred to Rio Vista by Penn Octane to the extent Penn Octane is able to supply such LPG requirements (see LPG Supply Agreement above).

Omnibus Agreement. In connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement with Rio Vista that governs, among other things, indemnification obligations among the parties to the agreement, related party transactions and the provision of general administration and support services by Penn Octane.

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Realization of Assets. The accompanying unaudited 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 operations for the three months ended March 31, 2006 and has a deficit in working capital. Rio Vista is dependent on Penn Octane’s ability to deliver adequate quantities of LPG at an acceptable price for ultimate sale to PMI, to provide credit to Rio Vista for such purchases and to provide management of its operations. Currently, Rio Vista’s only source of revenue is from sales of LPG to PMI and it operates under the PMI Confirmation which provides for monthly volumes and margins which are materially less than Penn Octane’s historical monthly volumes and margins. As a result, Penn Octane’s and Rio Vista’s gross profit have been materially reduced and may continue to decline and their cash flow and available credit may be insufficient to absorb such reductions in gross profit. The LPG Asset Sale has not closed and the TransMontaigne Note may be due on the earlier of the time of closing or 120 days following demand by TransMontaigne (see note D to the unaudited consolidated financial statements).

The minimum volumes and applicable margins contained in the PMI Confirmation are expected to provide Rio Vista with gross profit similar to the gross profit Rio Vista would have received if PMI had purchased only the minimum volumes provided under its agreements with Rio Vista during the period from May 1, 2005 to March 31, 2006 as a result of increased margins on the lower volume levels contained in the PMI Confirmation. Actual volumes purchased by PMI under those prior agreements, however, exceeded minimum contractual amounts by approximately 35%. There is no assurance that PMI will purchase volumes as indicated in the PMI Confirmation or that PMI will continue to purchase LPG from Rio Vista or in quantities or prices that are profitable upon the expiration of the PMI Confirmation.

Assuming that the LPG Asset Sale does not close, Rio Vista projects that its gross profit from operations under the PMI Confirmation, based on the minimum volumes and applicable margins contained in the PMI Confirmation, will not provide sufficient cash flow for Rio Vista to pay its normal operating expenses through March 31, 2007 unless it can sufficiently reduce its operating expenses. Also, Rio Vista projects that monthly cash flows from LPG sales during the months of May 2006 through September 2006 will be less than during the months of October 2006 through March 2007 as a result of reduced monthly volumes committed to be purchased during May 2006 through September 2006. In addition, Rio Vista may be unable to make any necessary capital expenditures or to pay arrearages in distributions or to pay future distributions to its unitholders during the Term of the PMI Confirmation.

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Impact of Inflation

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

Rio Vista may be adversely impacted as a result of increases in LPG prices, which are related to oil and natural gas prices, because of limits on Penn Octane’s credit facility.

Environmental Matters

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

Recently Issued Financial Accounting Standards

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 153, “Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29” (“SFAS 153”). The amendments made by SFAS 153 are based on the principle that exchanges on nonmonetary assets should be measured based on the fair value of the assets exchanged. The provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. Rio Vista has determined that SFAS 153 will not have a material impact on their consolidated results of operations, financial position or cash flows.

In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154, “Accounting Changes and Error Corrections” (the “SFAS 154”). This new standard replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. Rio Vista has determined that SFAS 154 will not have a material impact on their consolidated results of operations, financial position or cash flows.

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In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Under the provisions of FIN No. 47, the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity while the obligation to perform the asset retirement activity is unconditional. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation is required to be recognized when incurred - generally upon acquisition, construction, or development and/or through the normal operation of the asset. Rio Vista has adopted FIN No. 47 as of December 31, 2005. Adoption of this pronouncement did not have a significant effect on its 2005 consolidated financial statements, and Rio Vista does not expect this pronouncement to have a significant effect on its future reported financial position or earnings.

In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Instruments. This standard amends the guidance in FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. Statement 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.

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Critical Accounting Policies

The unaudited 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 Vista’s consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005, “Summary of Significant Accounting Policies”. Rio Vista believes that the following reflect the more critical accounting policies that affect the financial position and results of operations.

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

Impairment of long-lived assets - The determination of whether impairment has occurred is based on an estimate of undiscounted cash flows attributable to assets in future periods. If impairment has occurred, the amount of the impairment loss recognized will be determined by estimating the fair value of the assets and recording a loss if the fair value is less than the carrying value. Assessments of impairment are subject to management’s judgments and based on estimates that management is required to make.

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

Unit-based payment - Rio Vista accounts for unit-based payment using the provisions of SFAS 123R (fair value method).

Allowance for doubtful accounts - The carrying value of trade accounts receivable is based on estimated fair value. The determination of fair value is subject to management’s judgments and is based on estimates that management is required to make.

Statement by Management Concerning Review of Interim Information by An Independent Registered Public Accounting Firm.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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

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

Item 4. Controls and Procedures.

The General Partner’s management, including the principal executive officer and principal financial officer, are responsible for establishing and maintaining disclosure controls and procedures and internal controls and therefore have conducted an evaluation of Rio Vista’s disclosure controls and procedures and internal controls, as such term is defined under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as of March 31, 2006. Based on their evaluation, Penn Octane’s principal executive officer and principal accounting officer concluded that Rio Vista’s disclosure controls and procedures and internal controls are effective.

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

Rio Vista is not required to complete an annual evaluation pursuant to Section 404 of the Sarbanes Oxley Act of 2002 of its internal control systems until the year ended December 31, 2007.

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Part II

Item 1.

Legal Proceedings

See note I to Rio Vista’s unaudited consolidated financial statements included in this Report.

Item 1A. Risk Factors

Business Factors. Beginning with the expiration of the liquefied petroleum gas (“LPG”) sales contract between Penn Octane and P.M.I. Trading Limited (“PMI”) on March 31, 2004 and continuing through the PMI Confirmation entered into with PMI effective May 1, 2006, Rio Vista and Penn Octane have experienced materially lower LPG sales volumes and margins that have adversely affected Rio Vista’s results of operations. Rio Vista has only one customer for LPG in Mexico, PMI. Rio Vista cannot be sure that PMI will purchase volumes as indicated in the PMI Confirmation or that PMI will continue to purchase LPG from Rio Vista or in quantities or at prices that are profitable upon the expiration of the PMI Confirmation. There are a limited number of suppliers of LPG that connect to Rio Vista’s pipelines and a limited supply of LPG. Rio Vista may lose its competitive advantage when Penn Octane’s Seadrift pipeline lease expires in 2013. Rio Vista may be unable to successfully develop additional sources of revenue in order to reduce its dependence on PMI. Rio Vista may not have sufficient cash to meet its obligations. All of Rio Vista’s assets are pledged as collateral for existing debt of Penn Octane, and Rio Vista therefore may be unable to obtain additional financing collateralized by such assets. Rio Vista is at risk of economic loss due to fixed margin contracts. If Rio Vista cannot develop sufficient capital resources for acquisitions or opportunities for expansion, Rio Vista’s growth will be limited. Future acquisitions and expansions may not be successful, may substantially increase Rio Vista’s indebtedness and contingent liabilities, and may create integration difficulties. Rio Vista‘s business would be adversely affected if operations at its transportation, terminal and distribution facilities were interrupted. Rio Vista’s business would also be adversely affected if the operations of Rio Vista’s customers or suppliers (including Penn Octane) were interrupted.

LPG Asset Sale. There can be no assurance that the LPG Asset Sale will be completed according to the terms contained in the PSA’s or according to different terms or at all. Even if the LPG Asset Sale is completed, Rio Vista may be unable to resume payment of minimum quarterly distributions or to pay the arrearages of such distributions, in order to maintain cash reserves necessary for the conduct of business. If the LPG Asset Sale is completed the RZB Credit Facility may be restructured and/or reduced. A continued delay of or inability to close the LPG Asset Sale could have a material adverse effect on Penn Octane’s and Rio Vista’s business, financial condition and results of operations. See the Management’s Discussion and Analysis of Financial Condition and Results of Operations - Purchase and Sale Agreements.

Competitive Factors. The energy industry is highly competitive. There is competition within the industries and also with other industries in supplying the energy and fuel needs of industrial and individual consumers. Rio Vista competes with other companies in the sale or purchase of LPG as well as the transportation of these products in the U.S. and Mexican markets and employs all methods of competition which are lawful and appropriate for such purposes. A key component of Rio Vista’s competitive position, particularly given the commodity nature of its products, is its ability to manage its expenses successfully, which requires continuous management focus on reducing unit costs and improving efficiency and its ability to secure unique opportunities for the purchase, sale and/or delivery methods of its products.

International Factors. Mexican economic, political and social conditions may change and adversely affect Rio Vista’s operations. Rio Vista may not be able to continue operations in Mexico if Mexico restricts the existing ownership structure of its Mexican operations, requiring Rio Vista to increase its reliance on Mexican nationals to conduct its business. The LPG market in Mexico has yet to be deregulated. If deregulation occurs, the results may hinder Rio Vista’s ability to negotiate acceptable contracts with distributors. Rio Vista’s contracts and Mexican business operations are subject to volatility in currency exchange rates which could negatively impact its earnings.

Political Factors. The operations and earnings of Rio Vista in the U.S. and Mexico have been, and may in the future be, affected from time to time in varying degree by political instability and by other political developments and laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of Rio Vista’s facilities; price controls; tax increases and retroactive tax claims; expropriation of property; cancellation of contract rights; and environmental regulations. Both the likelihood of such occurrences and their overall effect upon Rio Vista vary greatly and are not predictable.

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Industry and Economic Factors. The operations and earnings of Rio Vista throughout the U.S. and Mexico are affected by local, regional and global events or conditions that affect supply and demand for Rio Vista’s products. These events or conditions are generally not predictable and include, among other things, general economic growth rates and the occurrence of economic recessions; the development of new supply sources for its products; supply disruptions; weather, including seasonal patterns that affect energy demand and severe weather events that can disrupt operations; technological advances, including advances in exploration, production, refining and advances in technology relating to energy usage; changes in demographics, including population growth rates and consumer preferences; and the competitiveness of alternative hydrocarbon or other energy sources or product substitutes.

Acquisition Factors. In additional to the factors cited above, the advancement, cost and results of particular acquisitions sought by Rio Vista, including projects which do not specifically fall within the areas of Rio Vista’s current lines of businesses will depend on: the outcome of negotiations for such projects; the ability of Rio Vista’s management to manage such businesses; the ability of Rio Vista to obtain financing for such acquisitions; business integration issues; changes in operating conditions or costs; and the occurrence of unforeseen technical difficulties.

Market Risk Factors. See “Notes to Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” in this report for discussion of the impact of market risks, inflation and other uncertainties.

Internal Control Factors. Pursuant to Section 404 of the Sarbanes Oxley Act of 2002, beginning with the year ended December 31, 2007, Rio Vista’s management is required to complete an annual evaluation of its internal control systems. In addition, Rio Vista’s independent auditors are required to provide an opinion regarding such evaluation and the adequacy of Rio Vista’s internal accounting controls. Rio Vista’s internal controls may be found to be inadequate, deficiencies or weaknesses may be discovered, and remediation may not be successful. If Rio Vista acquires an existing business, the internal control systems of the acquired business may be inadequate and may require additional strengthening.

Projections. Projections, estimates and descriptions of Rio Vista’s plans and objectives included or incorporated in Part I. Items 1. and 2. and Part II. Items 1. and 1A. are forward-looking statements. Actual future results could differ materially due to, among other things, the factors discussed above and elsewhere in this report.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

None.

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Item 6.

Exhibits

The following exhibits are incorporated by reference to previously filed reports, as noted.

Exhibit No.

10.1 Matamoros LPG Mix Purchase and Sales Agreement made and entered into as of June 4, 2005, by and between Rio Vista Energy Partners L.P. and P.M.I. Trading Limited (incorporated by reference to Rio Vista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed on August 19, 2005, SEC File No. 000-50394).

10.2 Purchase and Sale Agreement dated as of August 15, 2005 between Rio Vista Operating Partnership L.P. and TransMontaigne Product Services Inc. (incorporated by reference to Rio Vista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed on August 19, 2005, SEC File No. 000-50394).

10.3 Amendment No. 1 to Purchase and Sale Agreement between Rio Vista Operating Partnership L.P., Penn Octane International, LLC and TransMontaigne Product Services Inc., dated January 26, 2006. (Incorporated by reference to Rio Vista’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on April 6, 2006, SEC File No. 000-50394).

10.4 Promissory note dated August 15, 2005 between Rio Vista Operating Partnership L.P. and TransMontaigne Product Services Inc. (incorporated by reference to Rio Vista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed on August 19, 2005, SEC File No. 000-50394).

10.5 Security agreement dated August 15, 2005 between Rio Vista Operating Partnership L.P. and TransMontaigne Product Services Inc. (incorporated by reference to Rio Vista’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed on August 19, 2005, SEC File No. 000-50394).

10.6 Amended and Restated Consulting Agreement dated November 15, 2005 between Penn Octane Corporation, Rio Vista Energy Partners and Jerome B. Richter. (Incorporated by reference to Rio Vista’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-50394).

10.7 First Amendment to the First Amended and Restated Agreement of Limited Partnership of Rio Vista Energy Partners L.P. dated as of October 26, 2005. (Incorporated by reference to Rio Vista’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-50394).

10.8 First Amendment to the First Amended and Restated Agreement of Limited Partnership of Rio Vista Operating Partnership L.P. dated as of October 26, 2005. (Incorporated by reference to Rio Vista’s 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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The following Exhibits are filed as part of this report:

Exhibit No.

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

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

All of the Exhibits are available from the SEC’s 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 a request) together with a request addressed to Ian T. Bothwell, Rio Vista Energy Partners L.P., 820 Gessner Road, Suite 1285, Houston, Texas 77024.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	RIO VISTA ENERGY PARTNERS L.P.


May 22, 2006	By:	/s/Ian T. Bothwell
		Ian T. Bothwell
		Chief Financial Officer (principal accounting and financial officer) of Rio Vista GP LLC, general partner of Rio Vista Energy Partners L.P.