**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





OR





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





For
      the
      transition period from  to





Commission
      file number: **000-50394**





**Rio
      Vista Energy Partners L.P.**


(Exact
      Name of Registrant as Specified in Its Charter)





**Delaware**
            
            **20-0153267**(State
                or Other Jurisdiction of 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.










1





**RIO
      VISTA ENERGY PARTNERS L.P. AND
      SUBSIDIARIES**


**TABLE
      OF CONTENTS**





ITEM
            
            PAGE
                NO.Part
                I
            1.
            Financial
                StatementsReport
                of Independent Registered Public Accounting
                Firm
            3Consolidated
                Balance Sheets as of December 31, 2005 and March
                31, 2006 (unaudited)
            4-5Unaudited
                Consolidated Statements of Operations for the three
                months ended March 31, 2005 and 2006
            6Unaudited
                Consolidated Statement of Partners’ Capital for the
                three months ended March 31, 2006
            7Unaudited
                Consolidated Statements of Cash Flows for the three
                months ended March 31, 2005 and 2006
            8Notes
                to Consolidated Financial Statements
                (unaudited)
            9-322.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            33-523.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            534.
            Controls
                and Procedures
            53Part
                II
            1.
            Legal
                Proceedings
            541A.
            Risk
                Factors
            54-552.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            553.
            Defaults
                Upon Senior Securities
            554.
            Submission
                of Matters to a Vote of Security
                Holders
            555.
            Other
                Information
            556.
            Exhibits
            56-57Signatures
            58




2
 *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





3
 *Table
            of Contents*


**Rio
        Vista Energy Partners L.P. and
        Subsidiaries**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 
 **ASSETS**
  December
                  31,2005
              
              March
                  31,2006
                (Unaudited)Current
                  AssetsCash
              
              $
              26,000
              
              $
              10,000Restricted
                  cash
              
              
              1,907,000
              
              
              855,000Trade
                  accounts receivable (less allowance for doubtful accounts of $0)
              
              
              10,926,000
              
              
              4,811,000Inventories
              
              
              262,000
              
              
              236,000Prepaid
                  expenses and other current assets
              
              
              5,000
              
              
              27,000Total
                  current assets
              
              
              13,126,000
              
              
              5,939,000Property,
                  plant and equipment - net
              
              
              13,394,000
              
              
              13,198,000Other
                  non-current assets
              
              
              15,000
              
              
              17,000Total
                  assets
              
              $
              26,535,000
              
              $
              19,154,000
 
 The
        accompanying notes and accountants’ report are an integral part of these
        statements.
  4
 *Table
            of Contents*
  **Rio
        Vista Energy Partners L.P. and Subsidiaries**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 
 **LIABILITIES
        AND PARTNERS’ CAPITAL**
  December
                  31,2005
              
              March
                  31,2006
                (Unaudited)Current
                  LiabilitiesNote
                  payable
              
              $
              1,300,000
              
              $
              1,300,000Due
                  to Penn Octane Corporation, net
              
              
              11,582,000
              
              
              4,754,000Accounts
                  payable
              
              
              670,000
              
              
              323,000Mexican
                  taxes payable
              
              
              22,000
              
              
              14,000Accrued
                  liabilities
              
              
              762,000
              
              
              785,000Total
                  current liabilities
              
              
              14,336,000
              
              
              7,176,000Commitments
                  and contingencies
              
              
              -
              
              
              -Partners’
                  CapitalCommon
                  units
              
              
              11,955,000
              
              
              11,739,000General
                  partner’s equity
              
              
              244,000
              
              
              239,000Total
                  partners’ capital
              
              
              12,199,000
              
              
              11,978,000Total
                  liabilities and partners’ capital
              
              $
              26,535,000
              
              $
              19,154,000
 
 The
        accompanying notes and accountants’ report are an integral part of these
        statements.
  5
 *Table
            of Contents*
  **Rio
        Vista Energy Partners L.P. and
        Subsidiaries**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 **(Unaudited)**
 
 Three
                  Months EndedMarch
                  31,
                2005
              
              March
                  31,
                2006Revenues
              
              $
              28,557,000
              
              $
              39,237,000Cost
                  of goods sold
              
              
              27,238,000
              
              
              38,551,000Gross
                  profit
              
              
              1,319,000
              
              
              686,000Selling,
                  general and administrative expensesLegal
                  and professional fees
              
              
              242,000
              
              
              237,000Salaries
                  and payroll related expenses
              
              
              394,000
              
              
              195,000Other
              
              
              391,000
              
              
              360,0001,027,000
              
              
              792,000Operating
                  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
              
              
              14,000Net
                  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.
  6
 *Table
            of Contents*
  **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
              
              $
              12,199,000Net
                  loss
              
              
              -
              
              
              (
                  246,000
              )
              
              (
                  5,000
              )
              
              (
                  251,000
              )Cash
                  distribution to partners
              
              
              **-**
              
              
              -
              
              
              -
              
              
              **-**Unit-based
                  payment expense
              
              
              **-**
              
              
              8,000
              
              
              -
              
              
              8,000Loan
                  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.
  7
 *Table
            of Contents*
  **Rio
        Vista Energy Partners L.P. and
        Subsidiaries**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **(Unaudited)**
 
 Three
                  months endedMarch
                  31,
                2005
              
              March
                  31,
                2006Cash
                  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
              
              
              200,000Amortization
                  of loan discount related to detachable warrants
              
              
              57,000
              
              
              22,000Unit-based
                  payment expense
              
              
              -
              
              
              8,000Changes
                  in current assets and liabilities:Accounts
                  receivable
              
              
              (
                  879,000
              )
              
              6,115,000Inventories
              
              
              2,000
              
              
              26,000Prepaid
                  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
              )
              
              23,000Mexican
                  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
              
              
              1,052,000Cash
                  distributions to partners
              
              
              (
                  487,000
              )
              
              -Net
                  cash provided by financing activities
              
              
              2,574,000
              
              
              1,052,000Net
                  increase (decrease) in cash
              
              
              13,000
              
              
              (
                  16,000
              )Cash
                  at beginning of period
              
              
              13,000
              
              
              26,000Cash
                  at end of period
              
              $
              26,000
              
              $
              10,000Supplemental
                  disclosures of cash flow information:Cash
                  paid during the year for:Interest
                  and LPG financing expense
              
              $
              -
              
              $
              20,000Supplemental
                  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.




8
 *Table
            of Contents*


**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.





R io
      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.





9
 *Table
            of Contents*


**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.





10
 *Table
            of Contents*


**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
            
            $
            172,000Add:
                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
            
            $
            .09Net
                income (loss) per common unit, pro forma
            
            $
            (
                .06
            )Net
                income (loss) per common unit assuming dilution, as
                reported
            
            $
            .08Net
                income (loss) per common unit assuming dilution, pro forma
            
            $
            (
                .06
            )




11
 *Table
            of Contents*




**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, 2005Income
                  (Loss)
              
              Shares
              
              Per-Unit(Numerator)
              
              (Denominator)
              
              AmountNet
                  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, 2006Income
                  (Loss)
              
              Shares
              
              Per-Unit(Numerator)
              
              (Denominator)
              
              AmountNet
                  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
  12
 *Table
            of Contents*


**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.


13
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          of Contents*


**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
                  AssetsCash
              
              $
              10,000
              
              $
              17,400,000
              (1)
              $
              15,751,000(1,326,000
              )(1)(333,000
              )(1)Restricted
                  cash
              
              
              855,000
              
              
              
              
              
              855,000Trade
                  accounts receivable
              
              
              4,811,000
              
              
              
              
              
              4,811,000Inventories
              
              
              236,000
              
              
              (236,000
              )(1)
              
              -Prepaid
                  expenses and other current assets
              
              
              27,000
              
              
              
              
              
              27,000Total
                  current assets
              
              
              5,939,000
              
              
              15,505,000
              
              
              21,444,000Property,
                  plant and equipment — net
              
              
              13,198,000
              
              
              (13,198,000
              )(1)
              
              -Other
                  non-current assets
              
              
              17,000
              
              
              —
              
              
              17,000Total
                  assets
              
              $
              19,154,000
              
              $
              2,307,000
              
              $
              21,461,000**LIABILITIES
                  AND PARTNERS’ CAPITAL**Current
                  LiabilitiesNote
                  Payable
              
              $
              1,300,000
              
              $
              (1,300,000
              )(1)
              $
              -Due
                  to Penn Octane Corporation, net
              
              
              4,754,000
              
              
              336,000
              (4)
              
              5,090,000Mexican
                  taxes payable
              
              
              14,000
              
              
              —
              
              
              14,000Accounts
                  payable
              
              
              323,000
              
              
              —
              
              
              323,000Accrued
                  liabilities
              
              
              785,000
              
              
              (333,000
              )(1)
              
              521,000(26,000
              )(1)95,000
              (3)Total
                  current liabilities
              
              
              7,176,000
              
              
              (1,228,000
              )
              
              5,948,000Partners’
                  Capital
              
              
              11,978,000
              
              
              
              
              
              11,978,0003,966,000
              (1)(95,000
              )(3)(336,000
              )(4)
              
              3,535,000Total
                  partners’ capital
              
              
              11,978,000
              
              
              3,535,000
              
              
              15,513,000Total
                  liabilities and partners’ capital
              
              $
              19,154,000
              
              $
              2,307,000
              
              $
              21,461,000
  14
  **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 expensesLegal
                  and professional fees
              
              
              237,000
              
              
              (70,000
              )(2)
              
              167,000Salaries
                  and payroll related expenses
              
              
              195,000
              
              
              (30,000
              )(2)
              
              165,000Other
              
              
              360,000
              
              
              (46,000
              )(2)
              
              314,000792,000
              
              
              (146,000
              )
              
              646,000Operating
                  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
              
              
              2,759,000Provision
                  for Mexican income taxes
              
              
              14,000
              
              
              (14,000
              )(2)
              
              -Net
                  income (loss)
              
              $
              (251,000
              )
              $
              3,010,000
              
              $
              2,759,000Net
                  income (loss) allocable to the partners
              
              $
              (251,000
              )
              $
              3,010,000
              
              $
              2,759,000Less
                  general partner’s interest in net income(loss)
              
              
              (5,000
              )
              
              60,000
              
              
              55,000Net
                  income (loss) allocable to the commonunits
              
              $
              (246,000
              )
              $
              2,950,000
              
              $
              2,704,000Net
                  income (loss) per common unit
              
              $
              (0.13
              )
              
              
              
              $
              1.42Net
                  income (loss) per common unit assumingdilution
              
              $
              (0.13
              )
              
              
              
              $
              1.42Weighted
                  average common units outstanding
              
              
              1,910,656
              
              
              
              
              
              1,910,656


15
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          of Contents*


**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).


16
 *Table
          of Contents*


**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
            
            2006Brownsville
                Terminal Facility
            
            $
            173,000
            
            $
            173,000Building
            
            
            3,631,000
            
            
            3,631,000Terminal
                facilities
            
            
            374,000
            
            
            374,000Tank
                Farm
            
            
            319,000
            
            
            319,000Leasehold
                improvements
            
            
            226,000
            
            
            226,000Equipment
            
            
            26,000
            
            
            26,000Truck
            
            
            4,749,000
            
            
            4,749,000US
                - Mexico Pipelines and Matamoros Terminal Facility: (a)U.S.
                Pipelines and Rights of Way
            
            
            6,915,000
            
            
            6,919,000Mexico
                Pipelines and Rights of Way
            
            
            993,000
            
            
            993,000Matamoros
                Terminal Facility
            
            
            5,876,000
            
            
            5,876,000Land
            
            
            705,000
            
            
            705,000Total
            
            
            14,489,000
            
            
            14,493,00019,238,000
            
            
            19,242,000Less:
              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, 2006Gallons
            
            LCM
            
            Gallons
            
            LCMLPG:Brownsville
                Terminal Facility and Matamoros Terminal Facility
            
            
            239,000
            
            $
            262,000
            
            
            239,000
            
            $
            236,000




17
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          of Contents*


**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.


18
 *Table
          of Contents*


**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.


19
 *Table
          of Contents*


**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.


20
 *Table
          of Contents*


**RIO
      VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**NOTE
      I - COMMITMENTS AND CONTINGENCIES**




**Litigation**





P enn
      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.


21
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          of Contents*


**RIO
      VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**





**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.


22
 *Table
          of Contents*


**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.


23
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          of Contents*


**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.


24
 *Table
          of Contents*


**RIO
      VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**





**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.


25
 *Table
          of Contents*


**RIO
      VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**





**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
            
            $
            8,975,000Total
                debt
            
            $
            1,259,000Lines
                of credit
            
            $
            4,716,000Letters
                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
            
            $
            10,683,000Restricted
                cash
            
            $
            3,528,000Inventory
            
            $
            2,737,000Property,
                plant and equipment, net
            
            $
            14,739,000





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





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


26
 *Table
          of Contents*


**RIO
      VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**





**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
            
            
            14,757,646February
                2006
            
            
            11,700,000
            
            
            11,940,257March
                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.




27
 *Table
          of Contents*


**RIO
      VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**NOTE
      J - CONTRACTS - Continued**





**LPG
      Sales to PMI - Continued**




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. The
      following table sets forth the minimum monthly volume of LPG contained in the
      PMI Confirmation.




Month
              
              Minimum
                  Volume(gallons)May
                  2006
              
              4,500,000June
                  2006
              
              4,500,000July
                  2006
              
              4,500,000August
                  2006
              
              4,500,000September
                  2006
              
              4,500,000October
                  2006
              
              8,100,000November
                  2006
              
              8,100,000December
                  2006
              
              9,000,000January
                  2007
              
              9,000,000February
                  2007
              
              8,100,000March
                  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.


28
 *Table
          of Contents*


**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
      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.





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.




29
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          of Contents*


**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.


30
 *Table
          of Contents*


**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.




31
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          of Contents*


**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.


32
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          of Contents*


**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.


33
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          of Contents*


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.





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.





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.





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”.


34
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          of Contents*


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.
      T he
      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.


35
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          of Contents*


**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, 2006Volume
                SoldLPG
                (millions of gallons) - PMI
            
            
            32.3
            
            
            38.3Average
                sales priceLPG
                (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.


36
 *Table
          of Contents*


**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).


37
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          of Contents*


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.





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 threemonths
                endedMarch
                31, 2005
            
            For
                the threemonths
                endedMarch
                31, 2006Net
                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
            
            
            1,052Net
                increase (decrease) in cash
            
            $
            13
            
            $
            (16
            )


38
 *Table
          of Contents*


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.





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 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.


39
 *Table
          of Contents*


**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
            
            $
            9.0Total
                debt
            
            $
            1.3Lines
                of credit
            
            $
            4.7Letters
                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
            
            $
            10.7Restricted
                cash
            
            $
            3.5Inventory
            
            $
            2.7Property,
                plant and equipment, net
            
            $
            14.7





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




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


40
 *Table
          of Contents*


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
              
              AfterContractual
                  Obligations
              
              Total
              
              1
                  Year
              
              Years
              
              Years
              
              5
                  YearsLong-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
              
              OverCommercial
                  Commitments
              
              Committed
              
              1
                  Year
              
              Years
              
              Years
              
              5
                  YearsLines
                  of Credit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Standby
                  Letters of Credit
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Guarantees
              
              
              17.2
              
              
              17.2
              
              
              -
              
              
              -
              
              
              -Standby
                  Repurchase Obligations
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/AOther
                  Commercial Commitments
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ATotal
                  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.


41
 *Table
          of Contents*


*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.





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.* 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.





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.





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.





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.


42
 *Table
          of Contents*


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 EndedMarch
                31,2005
            
            March
                31,2006Net
                income (loss)
            
            $
            172,000
            
            $
            (
                251,000
            )Plus
                interest and LPG financingexpense
                and taxes, net
            
            
            119,000
            
            
            145,000Plus
                depreciation and amortization
            
            
            205,000
            
            
            200,000Earnings
                before interest, taxes,depreciation
                and amortization(“EBITDA”)
            
            
            496,000
            
            
            94,000Plus
                other non-cash expenses
            
            
            -
            
            
            8,000Less
                cash interest, LPG financingexpense
                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
              
              
              14,757,646February
                  2006
              
              
              11,700,000
              
              
              11,940,257March
                  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.




43
 *Table
          of Contents*




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.




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. The following table sets forth the minimum
      monthly volume of LPG contained in the PMI Confirmation.




Month
              
              Minimum
                  Volume(gallons)May
                  2006
              
              
              4,500,000June
                  2006
              
              
              4,500,000July
                  2006
              
              
              4,500,000August
                  2006
              
              
              4,500,000September
                  2006
              
              
              4,500,000October
                  2006
              
              
              8,100,000November
                  2006
              
              
              8,100,000December
                  2006
              
              
              9,000,000January
                  2007
              
              
              9,000,000February
                  2007
              
              
              8,100,000March
                  2007
              
              
              8,100,000


44
 *Table
          of Contents*





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.





*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).


46
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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.





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.





**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**





***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.




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.




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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.




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.




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.




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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.




**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.


50
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          of Contents*


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.


51
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          of Contents*


**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.


52
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          of Contents*


**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.


53
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          of Contents*




**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.


55
 *Table
          of Contents*


**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).


56
 *Table
          of Contents*


**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
 
 32
              
              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.


57
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          of Contents*


**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. BothwellIan
                T. BothwellChief
                Financial Officer (principal accounting and financial officer) of
                Rio
                Vista GP LLC, general partner of Rio Vista Energy Partners
                L.P.






58