**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM
      10-Q**








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





For
      the
      quarterly period ended September 30, 2005





OR





o
            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 an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


Yes No x





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


Yes Nox




The
      number of common units outstanding on October 31, 2005 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, 2004
                and September 30, 2005 (unaudited)
            4-5Unaudited
                Consolidated Statements of
                Operations for the three months and nine months ended September 30,
                2004
                and 2005
            6Unaudited
                Consolidated Statement of
                Partners’ Capital for the nine months ended September 30,
                2005
            7Unaudited
                Consolidated Statements of Cash Flows for the
                nine months ended September 30, 2004 and 2005
            89-29Notes
                to Consolidated Financial Statements
                (unaudited)2.
            Management’s
                Discussion and Analysis of Financial
                Condition and Results of Operations
            30-513.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            524.
            Controls
                and Procedures
            52Part
                II
            1.
            Legal
                Proceedings
            532.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            533.
            Defaults
                Upon Senior Securities
            534.
            Submission
                of Matters to a Vote of Security
                Holders
            535.
            Other
                Information
            536.
            Exhibits
            54-55Signatures
            56





2





**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 September 30, 2005, the consolidated statements
      of operations for the three months and nine months ended September 30, 2004
      and
      2005, the consolidated statement of partners’ capital for the nine months ended
      September 30, 2005, and the consolidated statements of cash flows for the nine
      months ended September 30, 2004 and 2005. 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, 2004 and
      the
      related consolidated statements of operations, partners’ capital and cash flows
      for the year ended December 31, 2004 (not presented herein); and in our report
      dated February 2, 2005, 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, 2004, is fairly
      stated.





Our
      auditors’ report on Rio Vista’s financial statements as of December 31, 2004
      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 L 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


November
      4, 2005





3





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





**CONSOLIDATED
      BALANCE SHEETS**






**ASSETS**







December
                31,
              2004
            
            September
                30,
              2005
              (Unaudited)Current
                AssetsCash
            
            $
            13,000
            
            $
            37,000Restricted
                cash
            
            
            3,983,000
            
            
            5,430,000Trade
                accounts receivable (less allowance for doubtful accounts of
                $0)
            
            
            5,785,000
            
            
            5,985,000Inventories
            
            
            198,000
            
            
            244,000Prepaid
                expenses and other current assets
            
            
            9,000
            
            
            116,000Total
                current assets
            
            
            9,988,000
            
            
            11,812,000Property,
                plant and equipment - net
            
            
            14,244,000
            
            
            13,435,000Other
                non-current assets
            
            
            12,000
            
            
            8,000Total
                assets
            
            $
            24,244,000
            
            $
            25,255,000





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





4





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





**CONSOLIDATED
      BALANCE SHEETS**








**LIABILITIES
      AND PARTNERS’ CAPITAL**







December
                31,
              2004
            
            September
                30,
              2005
              (Unaudited)Current
                LiabilitiesNote
                payable
            
            $
            -
            
            $
            1,300,000Due
                to Penn Octane Corporation, net
            
            
            8,632,000
            
            
            9,781,000Accounts
                payable
            
            
            290,000
            
            
            670,000Mexican
                taxes payable
            
            
            27,000
            
            
            6,000Accrued
                liabilities
            
            
            382,000
            
            
            768,000Total
                current liabilities
            
            
            9,331,000
            
            
            12,525,000Commitments
                and contingencies
            
            
            -
            
            
            -Partners’
                CapitalCommon
                units
            
            
            14,615,000
            
            
            12,475,000General
                partner’s equity
            
            
            298,000
            
            
            255,000Total
                partners’ capital
            
            
            14,913,000
            
            
            12,730,000Total
                liabilities and partners’ capital
            
            $
            24,244,000
            
            $
            25,255,000





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





5





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





**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**





**(Unaudited)**





Three
                Months Ended
            
            Nine
                months endedSeptember
                30,
              2004
            
            September
                30,
              2005
            
            September
                30,
              2004
            
            September
                30,
              2005Revenues
            
            $
            -
            
            $
            22,649,000
            
            $
            -
            
            $
            69,516,000Cost
                of goods sold
            
            
            -
            
            
            22,481,000
            
            
            -
            
            
            67,490,000Gross
                profit
            
            
            -
            
            
            168,000
            
            
            -
            
            
            2,026,000Selling,
                general and administrative expensesLegal
                and professional fees
            
            
            -
            
            
            459,000
            
            
            -
            
            
            1,102,000Salaries
                and payroll related expenses
            
            
            -
            
            
            215,000
            
            
            -
            
            
            964,000Other
            
            
            -
            
            
            334,000
            
            
            -
            
            
            1,056,000-
            
            
            1,008,000
            
            
            -
            
            
            3,122,000Operating
                loss
            
            
            -
            
            
            (
                840,000
            )
            
            -
            
            
            (
                1,096,000
            )Other
                income (expense)Interest
                and LPG financing expense
            
            
            -
            
            
            (
                217,000
            )
            
            -
            
            
            (
                490,000
            )Loss
                before taxes
            
            
            -
            
            
            (
                1,057,000
            )
            
            -
            
            
            (
                1,586,000
            )Provision
                for Mexican income taxes
            
            
            -
            
            
            (
                17,000
            )
            
            -
            
            
            (
                44,000
            )Net
                loss
            
            $
            -
            
            $
            (
                1,074,000
            )
            $
            -
            
            $
            (
                1,630,000
            )Net
                loss allocable to the partners
            
            $
            -
            
            $
            (
                1,074,000
            )
            $
            -
            
            $
            (
                1,630,000
            )Less
                general partner’s interest in net loss
            
            
            -
            
            
            21,000
            
            
            -
            
            
            32,000Net
                loss allocable to the common units
            
            $
            -
            
            $
            (
                1,053,000
            )
            $
            -
            
            $
            (
                1,598,000
            )Net
                loss per common unit
            
            $
            -
            
            $
            (
                0.55
            )
            $
            -
            
            $
            (
                0.84
            )Net
                loss per common unit assuming dilution
            
            $
            -
            
            $
            (
                0.55
            )
            $
            -
            
            $
            (
                0.84
            )Weighted
                average common units outstanding
            
            
            -
            
            
            1,910,656
            
            
            -
            
            
            1,910,656





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





6





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





**CONSOLIDATED
      STATEMENT OF PARTNERS’
CAPITAL**





**(Unaudited)**







**Common
                Units****Units**
            
            **Amount**
            
            **General**
              **Partner**
            
            **Total**
              **Partners’**
              **Capital****Balance
                as of December 31, 2004**
            
            
            1,910,656
            
            $
            14,615,000
            
            $
            298,000
            
            $
            14,913,000Net
                loss
            
            
            -
            
            
            (
                1,598,000
            )
            
            (
                32,000
            )
            
            (
                1,630,000
            )Cash
                distribution to partners
            
            
            **-**
            
            
            (
                955,000
            )
            
            (
                20,000
            )
            
            (
                975,000
            )Loan
                discount on Penn Octane Corporation’s debt related to detachable
                warrants
            
            
            -
            
            
            413,000
            
            
            9,000
            
            
            422,000**Balance
                as of September 30, 2005 (unaudited)**
            
            
            1,910,656
            
            $
            12,475,000
            
            $
            255,000
            
            $
            12,730,000





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





7





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





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Unaudited)**





Nine
                months endedSeptember
                30,
              2004
            
            September
                30,
              2005Cash
                flows from operating activities:Net
                loss
            
            $
            -
            
            $
            (1,630,000
            )Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
            
            
            -
            
            
            626,000Amortization
                of loan discount related to detachable warrants
            
            
            -
            
            
            326,000Gain
                on sale of assets
            
            
            -
            
            
            (
                24,000
            )Changes
                in current assets and liabilities:Trade
                accounts receivable
            
            
            -
            
            
            (
                200,000
            )Inventories
            
            
            -
            
            
            45,000Prepaid
                expenses and other current assets
            
            
            -
            
            
            (
                10,000
            )Due
                to Penn Octane Corporation, net
            
            
            -
            
            
            1,149,000Accounts
                payable and accrued liabilities
            
            
            -
            
            
            764,000Mexican
                taxes payable
            
            
            -
            
            
            (
                21,000
            )Net
                cash provided by (used in) operating activities
            
            
            -
            
            
            1,025,000Cash
                flows from investing activities:Capital
                expenditures
            
            
            -
            
            
            (
                58,000
            )Proceeds
                from the sale of land
            
            
            -
            
            
            175,000Other
                non-current assets
            
            
            -
            
            
            4,000Net
                cash used in investing activities
            
            
            -
            
            
            121,000Cash
                flows from financing activities:Increase
                in restricted cash
            
            
            -
            
            
            (
                1,447,000
            )Cash
                distributions to partners
            
            
            -
            
            
            (
                975,000
            )Issuance
                of debt
            
            
            -
            
            
            1,300,000Net
                cash provided by (used) in financing activities
            
            
            -
            
            
            (
                1,122,000
            )Net
                increase in cash
            
            
            -
            
            
            24,000Cash
                at beginning of period
            
            
            2,000
            
            
            13,000Cash
                at end of period
            
            $
            2,000
            
            $
            37,000Supplemental
                disclosures of cash flow information:Cash
                paid during the year for:Interest
                and LPG financing expense
            
            $
            -
            
            $
            -Cash
                paid for Mexican taxes
            
            $
            -
            
            $
            181,000Supplemental
                disclosures of noncash transactions:Units
                and warrants issued and other
            
            $
            -
            
            $
            422,000Transfer
                of line fill to inventory
            
            $
            -
            
            $
            92,000





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





8


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      A - ORGANIZATION**





Rio
      Vista
      Energy Partners L.P. (Rio Vista), a Delaware limited partnership, was formed
      by
      Penn Octane Corporation (Penn Octane) on July 10, 2003 and was a wholly owned
      subsidiary of Penn Octane until September 30, 2004, the date that Penn
      Octane completed a series of transactions involving (i) the transfer of
      substantially all of its owned pipeline and terminal assets in Brownsville,
      Texas and Matamoros, Mexico and certain immaterial liabilities (Assets) to
      Rio
      Vista Operating Partnership L.P. (RVOP) (ii) the transfer of its 99.9% interest
      in RVOP to Rio Vista and (iii) the distribution of all of its limited
      partnership interests (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. Rio Vista Energy Partners L.P. and its consolidated
      subsidiaries are collectively 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. PMI sells the LPG
      purchased from Rio Vista to PEMEX which distributes the LPG 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 as provided for in Rio Vista’s
      partnership agreement (Agreement). The General Partner has sole responsibility
      for conducting Rio Vista’s business and for managing Rio Vista’s operations in
      accordance with the Agreement. Other than the foregoing distributions, the
      General Partner does not receive a management fee or other compensation 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,
      up until the date of the Spin-Off, Penn Octane has sold LPG primarily to PMI.
      Penn Octane has a long-term lease agreement, expiring in December 2013, for
      approximately 132 miles of 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 (Leased Pipeline). In addition at the discretion of Exxon, Penn Octane
      has access to a twelve-inch pipeline which connects Exxon’s Viola valve station
      in Nueces County, Texas to the inlet of the King Ranch Gas Plant (ECCPL) as
      well
      as existing and other potential propane pipeline suppliers which have the
      ability to access the ECCPL. In connection with Penn Octane’s lease agreement
      for the Leased Pipeline, Penn Octane has access to storage in Markham, Texas
      (Markham Storage) which has a capacity of up to approximately 21,000,000 gallons
      of 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
      September 30, 2005 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 during the nine months ended
      September 30, 2005 were approximately 9,000,000 gallons per month.





9


**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 September 30, 2005, the unaudited
      consolidated statements of operations for the three and nine months ended
      September 30, 2004 and 2005 and the unaudited consolidated statement of cash
      flows for the nine months ended September 30, 2004 and 2005, have been prepared
      by Rio Vista without audit. In the opinion of management, the unaudited
      consolidated financial statements include all adjustments (which include only
      normal recurring adjustments) necessary to present fairly the unaudited
      consolidated financial position of Rio Vista as of September 30, 2005, the
      unaudited consolidated results of operations for the three months and nine
      months ended September 30, 2004 and 2005 and the unaudited consolidated
      statement of cash flows for the nine months ended September 30, 2004 and 2005.
      Rio Vista was inactive until September 30, 2004, the date of the Spin-Off and
      operations did not commence until October 1, 2004. Accordingly, there are no
      results of operations during the three months and nine months ended September
      30, 2004.





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,
      2004 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 COMPENSATION**





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





10


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      B - UNIT BASED COMPENSATION - 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 (loss), and net income (loss) per
      common unit would have been as follows for the three months and nine months
      ended September 30,:




Three
                  Months Ended
              
              Nine
                  months ended2004
              
              2005
              
              2004
              
              2005Net
                  income (loss) as reported
              
              $
              -
              
              $
              (1,074,000
              )
              $
              -
              
              $
              (1,630,000
              )Add:
                  Unit-based employee compensation expense included in reported net
                  lossLess:
                  Total unit-based employee compensation expense determined under
                  fair value
                  based method for all awards
              
              
              -
              
              
              (12,000
              )
              
              -
              
              
              (309,000
              )Net
                  income (loss) pro forma
              
              $
              -
              
              $
              (1,086,000
              )
              $
              -
              
              $
              (1,939,000
              )Net
                  income (loss) allocable to the common units pro forma
              
              $
              -
              
              $
              (1,064,000
              )
              $
              -
              
              $
              (1,900,000
              )Net
                  income (loss) per common unit, as reported
              
              $
              -
              
              $
              $(0.55
              )
              $
              -
              
              $
              (0.84
              )Net
                  income (loss) per common unit, pro forma
              
              $
              -
              
              $
              (0.56
              )
              $
              -
              
              $
              (0.99
              )Net
                  income (loss) per common unit assuming dilution, as
                  reported
              
              $
              -
              
              $
              (0.55
              )
              $
              -
              
              $
              (0.84
              )Net
                  income (loss) per common unit assuming dilution, pro forma
              
              $
              -
              
              $
              (0.56
              )
              $
              -
              
              $
              (0.99
              )




The
      following assumptions were used for grants of warrants to employees in the
      nine
      months ended September 30, 2005, to compute the fair value of the warrants
      using
      the Black-Scholes option-pricing model; dividend yield of 7.7%; expected
      volatility of 48.4%; risk free interest rate of 3.05%; and expected life of
      3
      years.





During
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard No. 123 (revised 2004) “Share-Based Payment”
(SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-Based
      Compensation”, and supercedes APB Opinion 25, “Accounting for Stock Issued to
      Employees” (APB 25). SFAS 123R requires that the cost of share-based payment
      transactions (including those with employees and non-employees) be recognized
      in
      the financial statements as compensation cost. That cost will be measured based
      on the fair value of equity or liability instrument issued. SFAS 123R is
      effective for Rio Vista beginning January 1, 2006. Rio Vista will apply the
      modified prospective method as provided for in SFAS 123R, and therefore the
      financial statements of Rio Vista for interim and annual periods prior to the
      adoption of SFAS 123R will not reflect any restatements.





11


**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 I for the warrants):





For
                the three months ended September 30, 2005Income
                (Loss)
              (Numerator)
            
            Shares
              (Denominator)
            
            Per-Unit
              AmountNet
                income (loss) allocable to the common units
            
            $
            (1,053,000
            )**Basic
                EPS**Net
                income (loss) allocable to the common units
            
            
            (
                1,053,000
            )
            
            1,910,656
            
            $
            (
                0.55
            )**Effect
                of Dilutive Securities**Warrants
            
            
            -
            
            
            -**Diluted
                EPS**Net
                income (loss) allocable to the common units
            
            
            N/A
            
            
            N/A
            
            
            N/A








For
                the nine months ended September 30, 2005Income
                (Loss)
              (Numerator)
            
            Shares
              (Denominator)
            
            Per-Unit
              AmountNet
                income (loss) allocable to the common units
            
            $
            (
                1,598,000
            )**Basic
                EPS**Net
                income (loss) allocable to the common units
            
            
            (
                1,598,000
            )
            
            1,910,656
            
            $
            (
                0.84
            )**Effect
                of Dilutive Securities**Warrants
            
            
            -
            
            
            -**Diluted
                EPS**Net
                income (loss) allocable to the common units
            
            
            N/A
            
            
            N/A
            
            
            N/A





12


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      D - PURCHASE AND SALE AGREEMENT**





On
      August
      15, 2005, Penn Octane and Rio Vista 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 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 Pipeline Lease, PMI sales agreement and
      Exxon Supply Contract (LPG Asset Sale). Penn Octane’s agreement with
      TransMontaigne does not include any assets related to the Fuel Sales Business.
      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 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 (TransMontaigne Note). The
      TransMontaigne Note is secured by the tank farm and certain LPG storage tanks
      located at the Brownsville Terminal Facility. The TransMontaigne Note begins
      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.





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, the approval of Penn Octane’s
      stockholders and Rio Vista’s unit holders (see below), 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 does 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.





If
      the
      LPG Asset Sale is completed, Penn Octane intends to use a portion of its
      proceeds to pay off the Restructured Notes and $280,000 Notes plus accrued
      interest.





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





If
      the
      LPG Asset Sale is completed, Rio Vista intends to use its proceeds to fund
      working capital requirements, pursue potential acquisitions and to resume the
      minimum quarterly distributions to its unitholders and to pay all arrearages.
      Rio Vista intends to pursue potential acquisitions which produce “qualifying
      income”.





In
      connection with the LPG Asset Sale, Rio Vista filed a definitive proxy statement
      with the SEC on September 27, 2005 in connection with 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 which requires dissolution 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


**RIO
          VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


**NOTE
      E - PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consists of the following:





December
                  31,
              2004
            
            September
                  30,
              2005Brownsville
                Terminal FacilityBuilding
            
            $
            173,000
            
            $
            173,000Terminal
                facilities
            
            
            3,631,000
            
            
            3,631,000Tank
                Farm
            
            
            374,000
            
            
            374,000Leasehold
                improvements
            
            
            319,000
            
            
            319,000Equipment
            
            
            226,000
            
            
            226,000Truck
            
            
            26,000
            
            
            26,0004,749,000
            
            
            4,749,000US
                - Mexico Pipelines and Matamoros Terminal Facility: (a)U.S.
                Pipelines and Rights of Way
            
            
            6,775,000
            
            
            6,730,000Mexico
                Pipelines and Rights of Way
            
            
            993,000
            
            
            993,000Matamoros
                Terminal Facility
            
            
            5,876,000
            
            
            5,876,000Land
            
            
            856,000
            
            
            705,00014,500,000
            
            
            14,304,000Total
            
            
            19,249,000
            
            
            19,053,000Less:
                accumulated depreciation and amortization
            
            
            (5,005,000
            )
            
            (5,618,000
            )$
            14,244,000
            
            $
            13,435,000





(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 $5,745,000 and
      $5,435,000 of costs, located in Mexico at December 31, 2004 and September 30,
      2005, respectively.








**NOTE
      F - INVENTORIES**





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





December
                31, 2004
            
            September
                30, 2005Gallons
            
            LCM
            
            Gallons
            
            LCMLPG:Brownsville
                Terminal Facility and Matamoros Terminal Facility
            
            
            239,000
            
            $
            198,000
            
            
            239,000
            
            $
            244,000





14


**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 and nine months ended September 30, 2005 was
      $17,000 and $44,000, respectively. No deferred Mexican income tax expense was
      recorded for the nine months ended September 30, 2005.







**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
      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.





15


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      H - PARTNERS’ CAPITAL - Continued**





**Options
      and Warrants**





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




**Common
      Unit Warrants**




In
      connection with an employment agreement with Mr. Shore, Shore Capital received
      warrants to acquire 97,415 common units of Rio Vista with an exercise price
      of
      $8.47 per common unit. The warrants are exercisable beginning on October 1,
      2004
      and expire on July 10, 2006.




**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, in the future, an aggregate of 110,250 warrants
      to
      purchase Rio Vista common units (Rio Vista Warrants). The exercise price of
      the
      warrants was to be determined based on the amount of the first quarterly
      distribution paid by Rio Vista. As a result of the approval of the payment
      of
      Rio Vista’s first cash distribution on January 14, 2005 (see below), Rio Vista
      granted the immediately exercisable warrants having an exercise price of $5.00
      and recorded a discount of approximately $422,000 which is 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. For the three months and
      nine months ended September 30, 2005 amortization expense was $153,000 and
      $326,000, respectively. The Rio Vista Warrants will expire on December 15,
      2006.




**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 Agreement and applicable rules of the Nasdaq Stock Market, no
      approval 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 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.





16


**RIO
          VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


**NOTE
      H - PARTNERS’ CAPITAL - Continued**





**Distributions
      of Available Cash**




All
      Rio
      Vista unitholders have the right to receive distributions from Rio Vista of
      “available cash” as defined in the partnership agreement in an amount equal to
      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 receives a distribution corresponding to its
      2%
      General Partnership Interest. The distributions are to be paid 45 days after
      the
      end of each calendar quarter. However, Rio Vista is prohibited from making
      any
      distributions to unitholders if it would cause an event of default, or an event
      of default is existing, under **** any
      obligation of Penn Octane which Rio Vista has guaranteed (see note
      I).





Cash
      distributions from Rio Vista are shared by the holders of the common units
      and
      the General Partner interest as described in the partnership agreement 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. Because of insufficient available cash, Rio Vista has not declared
      a
      distribution for the quarters ended June 30, 2005 and September 30,
      2005.






**NOTE
      I - COMMITMENTS AND CONTINGENCIES**




**Credit
      Facility, Letters of Credit and Other**





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





As
      of
      September 30, 2005, 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 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 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 for LPG and Fuel
      Products (effective July 21, 2005, the Fuel Products rate was reduced to 2%),
      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 (6.75%
      at September 30, 2005) 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 at any time, 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.





17


**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 - Continued**





Mr.
      Richter had personally guaranteed all of Penn Octane’s and Rio Vista’s payment
      obligations with respect to the RZB Credit Facility. On July 21, 2005 in
      connection with the annual March 31, 2005 renewal of the RZB Credit Facility,
      RZB agreed to no longer require Mr. Richter’s personal guarantee.





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 is
      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.





**Concentrations
      of Credit Risk**





Financial
      instruments that potentially subject Rio Vista to credit risk include cash
      balances at banks which at times exceed the federal deposit
      insurance.





**Tax
      obligations of Penn Octane resulting from the Spin-Off**





Rio
      Vista
      has agreed to indemnify Penn Octane for a period of three years from December
      31, 2004 for any federal income tax liabilities resulting from the Spin-Off
      in
      excess of $2,500,000. Penn Octane does not believe that it has a federal income
      tax in connection with the Spin-Off in excess of $2,500,000. However, the
      Internal Revenue Service (IRS) may review Penn Octane’s federal income tax
      returns and challenge positions that it may take with respect to the Spin-Off.





**Partnership
      Tax Treatment**





Rio
      Vista
      is not a taxable entity 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 are 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 tax basis in Rio
      Vista.





18


**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, as a general rule, are 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 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 downward
      to reflect the impact of that law on Rio Vista.





19


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      I - COMMITMENTS AND CONTINGENCIES - Continued**




**Litigation**


Penn
        Octane International, L.L.C. (Penn Octane International), a wholly-owned
        subsidiary of Rio Vista, has been named as the defendant in lawsuit 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, Penn Octane International,
        Rio
        Vista nor any of Rio Vista’s subsidiaries in Mexico owned or operated the tanker
        truck or employed or controlled the driver of the tanker truck. Further,
        none of
        the Penn Octane or Rio Vista companies owned or had custody of the LPG on
        the
        tanker truck at the time and location of the accident.
 
 Even
        though the accident took place in Mexico, the lawsuit was filed in the District
        Court for Cameron County, Texas, on September 26, 2005 and was served on
        September 28, 2005. The case is captioned *Lesly
        Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
        International LLC* .
        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 27, 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 on October 19, 2005. A hearing
        on
        the plaintiffs’ application for a temporary injunction is expected in late
        November 2005.
 
 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
        lawsuit, 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.
  Management
        believes that the lawsuit against Penn Octane International is 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 this case.
        If,
        however, a court found liability on the part of Penn Octane, Rio Vista or
        their
        subsidiaries, a judgment or settlement in excess of insurance coverage could
        have a material adverse effect on Penn 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, 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.
      Rio Vista is currently appealing the award.





20


**RIO
          VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        I - COMMITMENTS AND CONTINGENCIES - Continued**




**Litigation**





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 statements. Pursuant to the Omnibus Agreement, Penn Octane has agreed
      to indemnify Rio Vista for claims related to the Assets arising from events
      or
      conditions occurring or existing before completion of the Spin-Off.





**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 (the “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, the
      companies agreed to pay the following fees (Fees) to Mr. Richter: an amount
      equal to two percent (2%) of (i) the net proceeds to the companies
      resulting from a sale of assets to a third party, and (ii) the net proceeds
      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).





The
      companies may, in their 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 the Company, including without limitation, any
      amounts owed by Mr. Richter to Penn Octane pursuant to his promissory note
      payable to Penn Octane.





The
      term
      of this consulting agreement shall continue until the earlier of one year from
      the date of the agreement or termination of the agreement upon 30 days written
      notice to the other party.





**Long-Term
      Debt**





Long-term
      debt of Penn Octane guaranteed by Rio Vista and on which certain of its assets
      are pledged totaled $1,805,000 at September 30, 2005. This debt is due on
      December 15, 2005. Interest is payable quarterly at a rate of 16.5% per annum.
      The payments due June 15, 2005 and September 15, 2005 each in the amounts of
      approximately $103,000 have not been made on these notes.





**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 $18,500,000 at September 30, 2005
      based on Penn Octane’s most recently filed Quarterly Report on Form 10-Q and the
      unaudited amounts were as follows:





LPG
                and Fuel Products trade accounts payable
            
            $
            13,400,000Total
                debt, net of discount
            
            $
            1,800,000Lines
                of credit
            
            $
            2,600,000Letters
                of credit in excess of LPG and fuel products trade accounts
                payable
            
            $
            700,000





21


**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 -
      Continued**




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 $36,000,000
      at September 30, 2005 and the unaudited amounts were as follows:





Accounts
                receivable
            
            $
            11,000,000Restricted
                cash
            
            $
            7,300,000Inventory
            
            $
            2,600,000Property,
                plant and equipment, net
            
            $
            15,100,000





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





Accounts
                receivable
            
            $
            6,000,000Restricted
                cash
            
            $
            5,400,000Inventory
            
            $
            200,000Property,
                plant and equipment, net
            
            $
            13,400,000







**NOTE
      J - CONTRACTS**





**LPG
      Sales to PMI**





During
      December 2004, Rio Vista and PMI entered into a three month agreement for the
      period January 1, 2005 to March 31, 2005 for the minimum sale of 11,700,000
      gallons of LPG for the months of January and February 2005 and 11,050,000
      gallons of LPG for the month of March 2005 (Quarterly Agreement) at reduced
      margins compared with those in effect during 2004. Actual volumes sold were
      12,700,000 gallons, 9,900,000 gallons and 9,600,000 gallons for January,
      February and March 2005, respectively. In April 2005, Rio Vista entered into
      a
      one month contract with PMI for the sale of a minimum of 10,450,000 gallons
      at a
      further reduction in margin. One May 5, 2005, Rio Vista entered into a contract
      with PMI for the sale of a minimum of 6,000,000 gallons of LPG for the period
      May 5, 2005 to May 31, 2005 at the reduced margin received in April 2005. For
      the period May 1, 2005 to May 4, 2005, PMI did not purchase any LPG from Rio
      Vista. Actual volumes of LPG sold to PMI for April and May 2005 were 10,800,000
      gallons and 6,100,000 gallons, respectively.





The
      shortfall for the month of February 2005 was attributable to Penn Octane not
      having a sufficient supply of LPG to meet the minimum contract volume. The
      shortfall for the month of March 2005 was attributable to PMI not purchasing
      the
      minimum contract volume. In accordance with the Quarterly Agreement, PMI paid
      approximately $104,000 representing the total amount due associated with the
      shortfall volumes for March 2005.





22


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      J - CONTRACTS - Continued**





**LPG
      Sales to PMI - Continued**





Effective
      June 4, 2005, Rio Vista entered into an agreement with PMI for the period June
      4, 2005 through March 31, 2006 for the purchase of LPG (PMI Agreement). PMI
      did
      not purchase LPG from Rio Vista during the period June 1 - June 3, 2005. The
      following table sets forth the minimum monthly volume of LPG that PMI has
      committed to purchase from Rio Vista pursuant to the PMI Agreement and the
      actual volumes purchased for the months June 2005 through October
      2005.






Month
            Minimum
                Volumes
              (gallons)
            Actual
                Volumes
              (gallons)June
                2005
            3,500,000
            3,508,000July
                2005
            3,500,000
            3,515,000August
                2005
            3,500,000
            7,382,000September
                2005
            5,700,000
            10,135,000October
                2005
            8,100,000
            12,316,000November
                2005
            11,700,000
            *December
                2005
            11,700,000
            *January
                2006
            11,700,000
            *February
                2006
            11,700,000
            *March
                2006
            8,100,000
            *




*
      Actual
      volumes not yet determined.




Under
      the
      terms of the PMI Agreement, the sale price of LPG will be at the same margins
      in
      effect during April and May 2005.





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.





23


**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 for LPG and allocated costs of $21,900,000 and $39,700,000 for the three
      months and nine months ended September 30, 2005.








**Intercompany
      Purchase Agreement for LPG**





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


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




24


**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, the provision of
      general administration and support services by Penn Octane.




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




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




**NOTE
      L - REALIZATION OF ASSETS**





The
      accompanying consolidated balance sheet has been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation of Rio Vista as a going concern. Rio Vista has a loss
      from operations for the nine months ended September 30, 2005 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 a short-term sale agreement with PMI which provides
      for monthly volumes 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 additional
      reductions in gross profit. If the LPG Asset Sale does not close, the
      TransMontaigne Note may be due as early as March 15, 2006, including interest
      beginning November 15, 2005.





The
      PMI
      Agreement expires on March 31, 2006 unless it is renewed or extended. If the
      LPG
      Asset Sale does not close, Rio Vista’s gross profit from operations beginning
      October 1, 2005, including the minimum volumes and the margins provided for
      in
      the PMI Agreement, may provide sufficient cash flow for Rio Vista to pay its
      operating expenses through March 31, 2006. However, cash flow may not be
      sufficient to allow Rio Vista to pay the TransMontaigne Note, to pay costs
      of
      maintenance and repairs and professional fees related to the LPG Asset Sale,
      to
      pay arrearages or make future distributions to Rio Vista’s unitholders and/or to
      make payments in connection with guarantees of Penn Octane's
      obligations assming Penn Octane's inability to meet its obligations. If the
      LPG Asset Sale does not close, subsequent to March 31, 2006, Rio Vista’s gross
      profits on sales may be insufficient to pay its operating expenses if it cannot
      sell LPG to PMI or other customers at acceptable margins and volumes and/or
      sufficiently reduce its other expenses.





25


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      L - 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 $1,805,000 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 July 31, 2004 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 unaudited consolidated balance
      sheet is dependent upon closing the LPG Asset Sale, or if the LPG Asset Sales
      does not close, the ability of Penn Octane to continue as a going concern and
      the continued sale of LPG to PMI or other customers at acceptable 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 unaudited consolidated balance
      sheet does not include any adjustments related to the recoverability and
      classification of recorded asset amounts or amounts and classification of
      liabilities that might be necessary should Rio Vista be unable to continue
      in
      existence.





To
      provide Rio Vista with the ability it believes necessary to continue in
      existence, management is taking steps to close the LPG Asset Sale. If the LPG
      Asset Sales does not close, management intends to continue to negotiate with
      PMI
      for the continued sale of LPG at acceptable volumes and margins upon the
      termination of the PMI Agreement. Management may also to continue to attempt
      to
      sell its LPG and refined products assets.





**NOTE
      M - PRO FORMA FINANCIAL INFORMATION**





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 September 30, 2005. The unaudited pro forma consolidated
      statement of operations for the nine months ended September 30, 2005 assumes
      that the LPG Asset Sale was consummated as of January 1, 2005.





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 unaudited consolidated financial statements and notes thereto included
      herein.





26


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      M - PRO FORMA FINANCIAL INFORMATION - Continued**





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


**PRO
      FORMA CONSOLIDATED BALANCE SHEET**


**(Unaudited)**




**As
                Reported**
              **September
                30, 2005**
            
            **Pro
                Forma**
              **Adjustments**
            
            **Pro
                Forma**
              **September 30,
                2005****ASSETS**Current
                AssetsCash
            
            $
            37,000
            
            $
            15,877,000
            (1)
            $
            21,344,0005,430,000
            (2)Restricted
                cash
            
            
            5,430,000
            
            
            (5,430,000
            )(2)
            
            —Trade
                accounts receivable
            
            
            5,985,000
            
            
            
            
            
            5,985,000Inventories
            
            
            244,000
            
            
            (244,000
            )(1)
            
            —Prepaid
                expenses and other current assets
            
            
            116,000
            
            
            
            
            
            116,000Total
                current assets
            
            
            11,812,000
            
            
            15,633,000
            
            
            27,445,000Property,
                plant and equipment — net
            
            
            13,435,000
            
            
            (13,435,000
            )(1)
            
            —Other
                non-current assets
            
            
            8,000
            
            
            —
            
            
            8,000Total
                assets
            
            $
            25,255,000
            
            $
            2,198,000
            
            $
            27,453,000**LIABILITIES
                AND PARTNERS’ CAPITAL**Current
                LiabilitiesNote
                Payable
            
            $
            1,300,000
            
            $
            (1,300,000
            )(1)
            $
            —Due
                to Penn Octane Corporation, net
            
            
            9,781,000
            
            
            334,000
            (4)
            
            10,115,000Mexican
                taxes payable
            
            
            6,000
            
            
            —
            
            
            6,000Accounts
                payable
            
            
            670,000
            
            
            —
            
            
            670,000Accrued
                liabilities
            
            
            768,000
            
            
            (223,000
            )(1)
            
            1,020,000475,000
            (3)Total
                current liabilities
            
            
            12,525,000
            
            
            (714,000
            )
            
            11,811,000Commitments
                and Contingencies
            
            
            —
            
            
            —
            
            
            —Partners’
                Capital
            
            
            12,730,000
            
            
            3,721,000
            (1)
            
            15,642,000(475,000
            )(3)(334,000
            )(4)Total
                partners’ capital
            
            
            12,730,000
            
            
            2,912,000
            
            
            15,642,000Total
                liabilities and partners’ capital
            
            $
            25,255,000
            
            $
            2,198,000
            
            $
            27,453,000





27


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      M - PRO FORMA FINANCIAL INFORMATION - Continued**





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


**PRO
      FORMA CONSOLIDATED STATEMENT OF OPERATIONS**


**(Unaudited)**




**As
                Reported**
              **September
                30, 2005**
            
            **Pro
                Forma**
              **Adjustments**
            
            **Pro
                Forma**
              **September
                30, 2005**Revenues
            
            $
            69,516,000
            
            $
            (
                69,516,000
            )(5)
            $
            -Cost
                of Goods Sold
            
            
            67,490,000
            
            
            (
                67,490,000
            )(5)
            
            -Gross
                Profit
            
            
            2,026,000
            
            
            (2,026,000
            )
            
            -Selling,
                general and administrative expensesLegal
                and professional fees
            
            
            1,102,000
            
            
            (317,000
            )(5)
            
            785,000Salaries
                and payroll related expenses
            
            
            964,000
            
            
            (141,000
            )(5)
            
            823,000Other
            
            
            1,056,000
            
            
            -
            
            
            1,056,0003,122,000
            
            
            (458,000
            )
            
            2,664,000Operating
                income (loss)
            
            
            (1,096,000
            )
            
            (1,568,000
            )
            
            (2,664,000
            )Other
                income (expense)Interest
                and LPG financing expense
            
            
            (490,000
            )
            
            490,000
            (5)
            
            -Gain
                on LPG Asset Sale
            
            
            -
            
            
            2,958,000
            (1)
            
            2,149,000(475,000
            )(3)(334,000
            )(4)Income
                (loss) before taxes
            
            
            (1,586,000
            )
            
            1,071,000
            
            
            (515,000
            )Provision
                for Mexican income taxes
            
            
            (44,000
            )
            
            44,000
            (5)
            
            -Net
                income (loss)
            
            $
            (1,630,000
            )
            $
            1,115,000
            
            $
            (515,000
            )Net
                income (loss) allocable to the partners
            
            $
            (1,630,000
            )
            $
            1,115,000
            
            $
            (515,000
            )Less
                general partner’s interest in net income(loss)
            
            
            32,000
            
            
            (22,000
            )
            
            10,000Net
                income (loss) allocable to the commonunits
            
            $
            (1,598,000
            )
            $
            1,093,000
            
            $
            (505,000
            )Net
                income (loss) per common unit
            
            $
            (0.84
            )
            
            
            
            $
            (0.26
            )Net
                income (loss) per common unit assumingdilution
            
            $
            (0.84
            )
            
            
            
            $
            (0.26
            )Weighted
                average common units outstanding
            
            
            1,910,656
            
            
            
            
            
            1,910,656





28


**RIO
        VISTA ENERGY PARTNERS L.P. AND SUBIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




**NOTE
      M - PRO FORMA FINANCIAL INFORMATION - Continued**





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


**Notes
      to Pro Forma Consolidated Financial Information**


**September 30,
      2005**


**(Unaudited)**





(1)
            To
                reflect the LPG Asset Sale, including net records received, the payment
                by
                Rio Vista of the Mexican subsidiaries net working capital deficit
                estimated at $223,000, the payment of the TransMontaigne Note 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
                reflect the settlement of net obligations guaranteed by or owed to
                RZB in
                connection with LPG purchases collateralized by the LPG assets and
                refined
                products sold.





(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.





(5)
            To
                eliminate revenues and expenses related to the LPG
                operations.





29




**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 2005) refer to Rio Vista’s
      fiscal year ending December 31.*





**Forward-Looking
      Statements**





*The
      statements contained in this Quarterly Report that are not historical facts
      are
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
      forward-looking statements may be identified by the use of forward-looking
      terms
      such as “believes,” “expects,” “may,” “will”, “should” or “anticipates” or by
      discussions of strategy that inherently involve risks and uncertainties. From
      time to time, 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,
      guarantees, cash distributions, Qualifying Income, Penn Octane, the Spin-Off
      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, 2004, 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, Penn Octane and Rio Vista each entered into separate purchase and
      sale
      agreements (the “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 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 Pipeline Lease, PMI
      sales agreement and Exxon Supply Contract (the “LPG Asset Sale”). Penn Octane’s
      agreement with TransMontaigne does not include any assets related to the Fuel
      Sales Business. 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 agreed to loan Rio Vista $1.3 million 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”). The TransMontaigne Note is secured by the tank farm and certain LPG
      storage tanks located at the Brownsville Terminal Facility. The TransMontaigne
      Note begins 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.





30





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, the approval of Penn Octane’s
      stockholders and Rio Vista’s unit holders (see below), assignment of LPG related
      contracts, and the modification of LPG related permits and the related Mexican
      governmental approvals. Certain of the conditions were not met by October 31,
      2005. The PSA’s provide that any party may terminate the agreement if closing
      does 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.





If
      the
      LPG Asset Sale is completed, Penn Octane intends to use a portion of its
      proceeds to pay off the Restructured Notes and $280,000 Notes plus accrued
      interest.





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





If
      the
      LPG Asset Sale is completed, Rio Vista intends to use its proceeds to fund
      working capital requirements, pursue potential acquisitions and to resume the
      minimum quarterly distributions to its unitholders and to pay all arrearages.
      Rio Vista intends to pursue potential acquisitions which produce “qualifying
      income”.





In
      connection with the LPG Asset Sale, Rio Vista filed a definitive proxy statement
      with the SEC on September 27, 2005 in connection with 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 which requires dissolution 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.





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





**Risk
      Factors**





*Business
      Factors.* Beginning
      with the expiration of the liquefied petroleum gas (“LPG”) sales contract
      between Penn Octane and PMI effective March 31, 2004 and continuing through
      the
      contract recently entered into between Rio Vista and PMI effective June 4,
      2005
      (the “PMI Agreement”), Penn Octane and Rio Vista have experienced materially
      lower LPG sales volumes and margins since April 1, 2004 between Penn Octane
      and
      PMI through the date of the Spin-Off and Rio Vista and PMI after the Spin-off
      which have adversely affected Rio Vista’s results of operations. Rio Vista has
      only one customer for LPG in Mexico, PMI. There is no assurance that upon
      expiration of the PMI Agreement that PMI will continue to purchase LPG from
      Rio
      Vista or in quantities or at prices that are profitable. 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 as they become
      due. 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 and suppliers (including
      Penn Octane) were interrupted.





31





*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 the industry and individual consumers. Rio Vista competes with other
      companies including Valero, L.P. (“Valero”) 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-based nature of many 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
      ocurrs, the results may hinder Rio Vista’s ability to negotiate acceptable
      contracts with distributors.





*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.





*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 acquisitions 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 acquisitions; the ability
      of the Rio Vista’s management to manage such acquisitions; 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.





*NASDAQ
      Listing.*  As
      a
      result of the LPG Asset Sale, NASDAQ may consider Rio Vista a “shell company”
with insufficient operations immediately following the LPG Asset Sale, and
      NASDAQ may take steps to delist Rio Vista based on NASDAQ’s discretionary
      authority over listed companies. Rio Vista intends to pursue potential
      acquisitions upon the completion of the LPG Asset Sale. There can be no
      assurance, however, that Rio Vista will be able to complete a potential
      acquisition or that the value of the acquisition, the nature of the operations
      acquired and any conditions to closing of the acquisition would be satisfactory
      to NASDAQ in order to prevent delisting.





If
      Rio
      Vista is delisted from the NASDAQ National Market, Rio Vista will continue
      to
      file all required reports with the Securities and Exchange Commission and
      intends to seek quotation in the OTC Bulletin Board through a market maker.
      The
      OTC Bulletin Board is a regulated quotation service that displays real-time
      quotes, last sale prices and volume information in over-the-counter securities.
      If Rio Vista is delisted from NASDAQ, Rio Vista intends to reapply for listing
      on NASDAQ if Rio Vista subsequently acquires additional operations. Delisting
      by
      NASDAQ may result in decreased market interest in Rio Vista common units,
      investors and unitholders may experience more difficulty in buying and selling
      Rio Vista common units, and Rio Vista’s unit price may decline. In addition, Rio
      Vista may experience greater difficulty in obtaining necessary debt and equity
      capital for potential acquisitions or the operation of its business.





32





*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 will be 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. As Rio Vista continues,
      Rio
      Vista will need to strengthen its internal control systems. 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 herein are forward-looking statements. Actual future results could
      differ materially due to, among other things, the factors discussed above and
      elsewhere in this report.





**Overview**





Rio
      Vista
      Energy Partners L.P. (“Rio Vista”), a Delaware limited partnership, was formed
      by Penn Octane Corporation (“Penn Octane”) on July 10, 2003 and was a wholly
      owned subsidiary of Penn Octane until September 30, 2004, the date that Penn
      Octane completed a series of transactions involving (i) the transfer of
      substantially all of its owned pipeline and terminal assets in Brownsville,
      Texas and Matamoros, Mexico and certain immaterial liabilities (the “Assets”) to
      Rio Vista Operating Partnership L.P. (“RVOP”) (ii) the transfer of its 99.9%
      interest in RVOP to Rio Vista and (iii) the distribution of all of its limited
      partnership interests (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. Rio Vista Energy
      Partners L.P. and its consolidated subsidiaries are collectively 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 terminal
      facilities in Brownsville, Texas (the “Brownsville Terminal Facility”) and in
      Matamoros, Tamaulipas, Mexico (the “Matamoros Terminal Facility”) and
      approximately 23 miles of pipelines (the “US - Mexico Pipelines”) which connect
      the Brownsville Terminal Facility to the Matamoros Terminal Facility. The
      primary market for Rio Vista’s LPG is the northeastern region of Mexico, which
      includes the states of Coahuila, Nuevo Leon and Tamaulipas.





Rio
      Vista
      believes it has a competitive advantage in the supply of LPG for the
      northeastern region of Mexico because of Rio Vista’s pipeline and terminal
      facilities and its long term LPG supply agreement with Penn Octane which allow
      Rio Vista to bring supplies of LPG close to consumers of LPG in major cities
      in
      that region at competitive prices. Rio Vista’s primary customer for LPG is PMI.
      PMI is the exclusive importer of LPG into Mexico. PMI sells the LPG purchased
      from Rio Vista to PEMEX which distributes the LPG 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 as provided for 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. Other than the foregoing
      distributions, the General Partner does not receive a management fee or other
      compensation 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.





33





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,
      up until the date of the Spin-Off, Penn Octane has sold LPG primarily to PMI.
      Penn Octane has a long-term lease agreement, expiring in December 2013, for
      approximately 132 miles of 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 (the “Leased Pipeline”). In addition at the discretion of Exxon, Penn
      Octane has access to a twelve-inch pipeline which connects Exxon’s Viola valve
      station in Nueces County, Texas to the inlet of the King Ranch Gas Plant (the
      “ECCPL”), as well as existing and other potential propane pipeline suppliers
      which have the ability to access the ECCPL. In connection with Penn Octane’s
      lease agreement for the Leased Pipeline, Penn Octane has access to storage
      in
      Markham, Texas (the “Markham Storage”) which has a capacity of up to
      approximately 21.0 million gallons of 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 September 30, 2005 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
      agreements during the nine months ended September 30, 2005 were approximately
      9.0 million gallons per month.





**LPG
      Sales**





The
      following table shows Rio Vista's actual volumes sold to PMI in gallons and
      average sales price for the nine months ended September 30, 2005 and actual
      sales to PMI by Penn Octane in gallons and average sales price for the nine
      months ended September 30, 2004.





2004
            
            2005Volume
                SoldLPG
                (millions of gallons) - PMI
            
            
            134.2
            
            
            74.0Average
                sales priceLPG
                (per gallon) - PMI
            
            $
            0.79
            
            $
            0.94




***Recent
      Trends.*** Since
      April 2004, PMI had contracted with Penn Octane and Rio Vista (subsequent to
      the
      Spin-Off) for volumes which were significantly lower than amounts purchased
      by
      PMI from Penn Octane in similar periods during previous years and beginning
      April 2005 margins have been significantly lower than historical levels. See
      Liquidity and Capital Resources - Sales to PMI below. Rio Vista believes that
      the reduction of volume commitments or 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 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.





34





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
      Monterrey, Mexico to terminal facilities operated by TransMontaigne 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 warranted that it will not transport LPG through October 15,
      2017.





**Results
      of Operations**





**Three
      Months Ended September 30, 2005 Compared With Penn Octane’s Sales to PMI for the
      Three Months Ended September 30, 2004.**





*Revenues.* Revenues
      for the three months ended September 30, 2005, were $22.7 million compared
      with
      $32.5 million for the comparative period one year earlier, a decrease of $9.8
      million or 30.3%. Of this decrease, $16.7 million was attributable to decreased
      volumes of LPG sold to PMI during the three months ended September 30, 2005,
      partially offset by $6.8 million attributable to increases in average sales
      prices of LPG sold to PMI during the three months ended September 30, 2005.





*Cost
      of goods sold.* Cost of
      goods sold for the three months ended September 30, 2005 was $22.4 million.
      The
      cost of goods sold for LPG purchased from Penn Octane was determined in
      accordance with the LPG Supply Agreement. Costs of goods sold also included
      other direct costs related to Rio Vista’s LPG operations, including costs
      associated with operating the Brownsville and Matamoros terminal
      facilities.





*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses were $1.0 million for the three months
      ended
      September 30, 2005. 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.





*Other
      income (expense).* Other
      income (expense) was $(217,000) for the three months ended September 30, 2005
      and is 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.





*Mexican
      Income tax.* Rio
      Vista incurred $17,000 of Mexican income tax expense related to its Mexican
      subsidiaries.





**Nine
      months ended September 30, 2005 Compared With Penn Octane’s Sales to PMI for the
      Nine months ended September 30, 2004.**





*Revenues.* Revenues
      for the nine months ended September 30, 2005, were $69.5 million compared with
      $106.1 million for the comparative period one year earlier, a decrease of $36.7
      million or 34.6%. Of this decrease, $56.9 million was attributable to decreased
      volumes of LPG sold to PMI during the nine months ended September 30, 2005,
      partially offset by $20.2 million attributable to increases in average sales
      prices of LPG sold to PMI during the nine months ended September 30, 2005.





*Cost
      of goods sold.* Cost of
      goods sold for the nine months ended September 30, 2005 was $67.5 million.
      The
      cost of goods sold for LPG purchased from Penn Octane was determined in
      accordance with the LPG Supply Agreement. Costs of goods sold also included
      other direct costs related to Rio Vista’s LPG operations, including costs
      associated with operating the Brownsville and Matamoros terminal
      facilities.





35




*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses were $3.1 million for the nine months ended
      September 30, 2005. 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.





*Other
      income (expense).* Other
      income (expense) was $(490,000) for the nine months ended September 30, 2005
      and
      is 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.





*Mexican
      Income tax.* Rio
      Vista incurred $44,000 of Mexican income tax expense related to its Mexican
      subsidiaries.








**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
      has a loss from operations for the nine months ended September 30, 2005 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 a short-term sale agreement with PMI which
      provides for monthly volumes 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
      additional reductions in gross profit. If the LPG Asset Sale does not close,
      the
      TransMontaigne Note may be due as early as March 15, 2006, including interest
      beginning November 15, 2005.





The
      PMI
      Agreement expires on March 31, 2006 unless it is renewed or extended. If the
      LPG
      Asset Sale does not close, Rio Vista’s gross profit from operations beginning
      October 1, 2005, including the minimum volumes and the margins provided for
      in
      the PMI Agreement, may provide sufficient cash flow for Rio Vista to pay its
      operating expenses through March 31, 2006. However, cash flow may not be
      sufficient to allow Rio Vista to pay the TransMontaigne Note, to pay costs
      of
      maintenance and repairs and professional fees related to the LPG Asset
      Sale, to pay arrearages or make future distributions to Rio Vista’s
      unitholders and/or to make payments in connection with guarantees of Penn
      Octane's obligations assuming Penn Octane's inability to meet its
      obligations.  If the LPG Asset Sale does not close, subsequent to
      March 31, 2006, Rio Vista’s gross profits on sales may be insufficient to pay
      its operating expenses if it cannot sell LPG to PMI or other customers at
      acceptable margins and volumes and/or sufficiently reduce its other expenses.





Rio
      Vista
      has guaranteed certain of Penn Octane’s obligations. Substantially all of Rio
      Vista’s and Penn Octane’s assets are pledged or committed to be pledged as
      collateral on $1,805,000 of Penn Octane’s existing debt, 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 July 31, 2004 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.





Although
      Rio Vista is not required to do so, if Penn Octane is unable to pay its
      obligations when they become due, Rio Vista may lend the necessary funds to
      Penn
      Octane. Conversely, if Rio Vista does not have the funds necessary to pay its
      obligations and to make its distributions, to the extent that Penn Octane has
      sufficient cash to do so, it may lend such amounts to Rio Vista.





36





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, Penn Octane’s management 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 and Penn Octane
      and/or Rio Vista would likely be required to seek other alternatives which
      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 December 31, 2004 for any federal
      income tax liabilities resulting from the Spin-Off in excess of $2.5 million.
      Consequently, Rio Vista may be unable to obtain financing using these pledged
      assets as collateral and Rio Vista’s inability to borrow on these assets may
      adversely affect Rio Vista’s results of operations and ability to make
      distributions to its unitholders. Rio Vista may also be prohibited from making
      any distributions to unitholders if it would cause an event of default, or
      if an
      event of default is existing, under **** Penn
      Octane’s revolving credit facilities, or any other covenant which may exist
      under any other credit arrangement or other regulatory requirement at the time.





The
      following table reflects cash flows for the nine months ended September 30,
      2004
      and 2005. All information is in thousands.





2004
            
            2005Net
                cash provided by (used in) operating activities
            
            $
            -
            
            $
            1,025Net
                cash used in investing activities
            
            $
            -
            
            
            121Net
                cash provided by (used in) in financing activities
            
            
            -
            
            
            (1,122
            )Net
                increase in cash
            
            $
            -
            
            $
            24





37





The
      following is a discussion of the guaranteed obligations:





**RZB
      Obligation**





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





As
      of
      September 30, 2005, 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 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 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 for LPG and Fuel
      Products (effective July 21, 2005, the Fuel Products rate was reduced to 2%),
      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 (6.75%
      at September 30, 2005) 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 at any time, 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.





Jerome
      B.
      Richter, former Chief Executive Officer of Penn Octane, had personally
      guaranteed all of Penn Octane’s and Rio Vista’s payment obligations with respect
      to the RZB Credit Facility. On July 21, 2005 in connection with the annual
      March
      31, 2005 renewal of the RZB Credit Facility, RZB agreed to no longer require
      Mr.
      Richter’s personal guarantee.





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 is
      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 $164,000 for the nine months ended September 30,
      2005.





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.





38




**Long-Term
      Debt**





Long-term
      debt of Penn Octane guaranteed by Rio Vista and on which certain of its assets
      are pledged totaled $1.8 million at September 30, 2005. This debt is due on
      December 15, 2005. Interest is payable quarterly at a rate of 16.5% per annum.
      The payments due June 15, 2005 and September 15, 2005 each in the amounts of
      approximately $103,000 have not been made on these notes.





**Obligations
      and Assets Pledged**





The
      dollar amounts of Penn Octane obligations which Rio Vista guarantees and/or
      for
      which Rio Vista’s assets are pledged total $18.5 million at September 30, 2005,
      based on Penn Octane’s most recently filed Quarterly Report on Form 10-Q, and
      the unaudited amounts were as follows (in millions):


LPG
                and Fuel Products trade payables
            
            $
            13.4Total
                debt, net of discount
            
            $
            1.8Lines
                of credit
            
            $
            2.6Letters
                of credit in excess of LPG and fuel products trade
                payables
            
            $
            .7





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 $36.0
      million at September 30, 2005 and the unaudited amounts were as follows (in
      millions):


Accounts
                receivable
            
            $
            11.0Restricted
                cash
            
            $
            7.3Inventory
            
            $
            2.6Property,
                plant and equipment, net
            
            $
            15.1





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


Accounts
                receivable
            
            $
            6.0Restricted
                cash
            
            $
            5.4Inventory
            
            $
            .2Property,
                plant and equipment, net
            
            $
            13.4





The
      following is a summary of Rio Vista’s estimated minimum contractual obligations
      as of September 30, 2005.





**Payments
                due by Period**
              **(Amounts
                in Millions)**Contractual
                Obligations
            
            Total
            
            Less
                than
              1
                Year
            
            1
                -
                3
              Years
            
            4
                -
                5
              Years
            
            After
              5
                YearsNote
                Payable
            
            $
            1.3
            
            $
            1.3
            
            $
            -
            
            $
            -
            
            $
            -Operating
                Leases
            
            
            .1
            
            
            .1
            
            
            -
            
            
            -
            
            
            -LPG
                Purchase Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                Long-Term Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Contractual Cash Obligations
            
            $
            1.4
            
            $
            1.4
            
            $
            -
            
            $
            -
            
            $
            -





39




The
      following is a summary of Rio Vista’s estimated minimum commercial obligations
      as of September 30, 2005, based on Penn Octane’s most recently filed Quarterly
      Report on Form 10-Q as of September 30, 2005.





**Amount
                of Commitment Expiration**
              **Per
                Period**
              **(Amounts
                in Millions)**CommercialCommitments
            
            Total
                Amounts
              Committed
            
            Less
                than
              1
                Year
            
            1
                -
                3
              Years
            
            4
                -
                5
              Years
            
            Over
              5
                YearsLines
                of Credit
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Standby
                Letters of Credit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Guarantees
            
            
            18.5
            
            
            18.5
            
            
            -
            
            
            -
            
            
            -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
            
            $
            18.5
            
            $
            18.5
            
            $
            -
            
            $
            -
            
            $
            -




*Income
      Taxes.* Rio
      Vista has agreed to indemnify Penn Octane for a period of three years from
      December 31, 2004 for any federal income tax liabilities resulting from the
      Spin-Off in excess of $2.5 million. Penn Octane does not believe that it has
      a
      federal income tax in connection with the Spin-Off in excess of $2.5 million.
      However, the Internal Revenue Service (the “IRS”) may review Penn Octane’s
      federal income tax returns and challenge positions that it may take with respect
      to the Spin-Off.





*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 are 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
      tax basis in Rio Vista.





Section
      7704 of the Internal Revenue Code (Code) provides that publicly traded
      partnerships, as a general rule, are taxed as corporations despite the fact
      that
      they are not classified as corporations under Section 7701 of the Code. Section
      7704 of the Code provides an exception to this general rule for a publicly
      traded partnership if 90% or more of its gross income for every taxable year
      consists of “qualifying income” (the “Qualifying Income Exception”). For
      purposes of this exception, “qualifying income” includes income and gains
      derived from the exploration, development, mining or production, processing,
      refining, transportation (including pipelines) or marketing of any mineral
      or
      natural resource. Other types of “qualifying income” include interest (other
      than from a financial business or interest based on profits of the borrower),
      dividends, real property rents, gains from the sale of real property, including
      real property held by one considered to be a “dealer” in such property, and
      gains from the sale or other disposition of capital assets held for the
      production of income that otherwise constitutes “qualifying
      income”.





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





If
      Rio
      Vista 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.





40




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 Agreement provides that, if a law is enacted or existing law
      is
      modified or interpreted in a manner that subjects Rio Vista to taxation as
      a
      corporation or otherwise subjects Rio Vista to entity-level taxation for
      federal, state or local income tax purposes, then the minimum quarterly
      distribution amount and the target distribution amount will be adjusted downward
      to reflect the impact of that law on Rio Vista.





*Litigation.* Penn
      Octane International, L.L.C. ("Penn Octane International"), a wholly-owned
      subsidiary of Rio Vista, has been named as the defendant in lawsuit 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, Penn Octane International,
      Rio
      Vista nor any of Rio Vista’s subsidiaries in Mexico owned or operated the tanker
      truck or employed or controlled the driver of the tanker truck. Further, none
      of
      the Penn Octane or Rio Vista companies owned or had custody of the LPG on the
      tanker truck at the time and location of the accident.


Even
        though the accident took place in Mexico, the lawsuit was filed in the District
        Court for Cameron County, Texas, on September 26, 2005 and was served on
        September 28, 2005. The case is captioned *Lesly
        Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
        International LLC* .
        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 27, 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 on October 19, 2005. A hearing
        on
        the plaintiffs’ application for a temporary injunction is expected in late
        November 2005.
 
 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
        lawsuit, 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.
  Management
        believes that the lawsuit against Penn Octane International is 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 this case.
        If,
        however, a court found liability on the part of Penn Octane, Rio Vista or
        their
        subsidiaries, a judgment or settlement in excess of insurance coverage could
        have a material adverse effect on Penn 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, 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.
      Rio Vista is currently appealing the award.





41





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 statements. Pursuant to the Omnibus Agreement, Penn Octane has agreed
      to indemnify Rio Vista for claims related to the Assets arising from events
      or
      conditions occurring or existing before completion of the Spin-Off.





*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 (the “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, the
      companies agreed to pay the following fees ("Fees") to Mr. Richter: an amount
      equal to two percent (2%) of (i) the net proceeds to the companies
      resulting from a sale of assets to a third party, and (ii) the net proceeds
      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 to the
      unaudited consolidated financial statements).





The
      companies may, in their 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 the Company, including without limitation, any
      amounts owed by Mr. Richter to Penn Octane pursuant to his promissory note
      payable to Penn Octane.





The
      term
      of this consulting agreement shall continue until the earlier of one year from
      the date of the agreement or termination of the agreement upon 30 days written
      notice to the other party.





*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
      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 receives a distribution corresponding to its
      2%
      General Partnership Interest. The distributions are to be paid 45 days after
      the
      end of each calendar quarter. However, Rio Vista is prohibited from making
      any
      distributions to unitholders if it would cause an event of default, or an event
      of default is existing, under **** any
      obligation of Penn Octane which Rio Vista has guaranteed (see note I to the
      unaudited consolidated financial statements).





Cash
      distributions from Rio Vista are shared by the holders of the common units
      and
      the General Partner interest as described in the partnership agreement 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. Because of insufficient available cash, Rio Vista has not declared
      a
      distribution for the quarters ended June 30, 2005 and September 30,
      2005.





Rio
      Vista’s ability to make distributions may be impacted by sales to PMI at
      acceptable volumes and margins, payments on its guarantees, costs and expenses
      and the inability to obtain additional financing on its pledged assets. Although
      Penn Octane is not required to do so, to the extent that Penn Octane has
      sufficient cash to do so, it 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 required to reduce or eliminate the quarterly
      distributions to unitholders and/or Penn Octane and/or Rio Vista may be required
      to raise additional funds to avoid foreclosure against its assets. 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.





42




The
      following is a reconciliation of net income to distributable cash flow for
      the
      three months ended December 31, 2004, March 31, 2005, June 30, 2005 and
      September 30, 2005.





Three
                Months EndedDecember31,
              2004
            
            March
                31,
              2005
            
            June
                30,
              2005
            
            September
                30,
              2005Net
                income (loss)
            
            $
            (
                63,000
            )
            $
            173,000
            
            $
            (
                728,000
            )
            $
            (
                1,074,000
            )Plus
                interest, LPG financing expense and taxes, net
            
            
            101,000
            
            
            119,000
            
            
            179,000
            
            
            234,000Plus
                depreciation and amortization
            
            
            178,000
            
            
            205,000
            
            
            205,000
            
            
            216,000Earnings
                before interest, taxes, depreciation and amortization
                (“EBITDA”)
            
            
            216,000
            
            
            497,000
            
            
            (
                344,000
            )
            
            (
                624,000
            )Plus
                other non-cash expenses
            
            
            344,000
            
            
            -
            
            
            (
                24,000
            )
            
            -Less
                cash interest, LPG financing expense and taxes
            
            
            (
                101,000
            )
            
            (
                61,000
            )
            
            (
                64,000
            )
            
            (
                81,000
            )Distributable
                cash flow (deficit)
            
            
            459,000
            
            
            436,000
            
            
            (
                432,000
            )
            
            (
                705,000
            )Distributable
                cash flow (deficit) applicable to general partner
            
            
            (
                9,000
            )
            
            (
                9,000
            )
            
            8,000
            
            
            14,000Distributable
                cash flow (deficit) applicable to limited partners
            
            $
            450,000
            
            $
            427,000
            
            $
            (
                424,000
            )
            $
            (
                691,000
            )





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* .
      During
      December 2004, Rio Vista and PMI entered into a three month agreement for the
      period January 1, 2005 to March 31, 2005 for the minimum sale of 11.7 million
      gallons of LPG for the months of January and February 2005 and 11.1 million
      gallons of LPG for the month of March 2005 (the “Quarterly Agreement”) at
      reduced margins compared with those in effect during 2004. Actual volumes sold
      were 12.7 million gallons, 9.9 million gallons and 9.6 million gallons for
      January, February and March 2005, respectively. In April 2005, Rio Vista entered
      into a one month contract with PMI for the sale of a minimum of 10.5 million
      gallons at a further reduced margin. On May 5, 2005, Rio Vista entered into
      a
      contract with PMI for the sale of a minimum of 6.0 million gallons of LPG for
      the period May 5, 2005 to May 31, 2005 at the reduced margin received in April
      2005. For the period May 1, 2005 to May 4, 2005, PMI did not purchase any LPG
      from Rio Vista. Actual volumes of LPG sold to PMI for April and May 2005 were
      10.8 million gallons and 6.1 million gallons, respectively.





The
      shortfall for the month of February 2005 was attributable to Penn Octane, not
      having a sufficient supply of LPG to meet minimum contract volume.  The
      shortfall for the month of March 2005 was attributable to PMI not purchasing
      the
      minimum contract volume. In accordance with the Quarterly Agreement, PMI paid
      approximately $104,000 representing the total amount due associated with the
      shortfall volumes for March 2005.





43





Effective
      June 4, 2005, Rio Vista entered into an agreement with PMI for the period June
      4, 2005 through March 31, 2006 for the purchase of LPG (the “PMI Agreement”).
      PMI did not purchase LPG from Rio Vista during the period June 1 - June 3,
      2005.
      The following table sets forth the minimum monthly volume of LPG that PMI has
      committed to purchase from Rio Vista pursuant to the PMI Agreement and the
      actual volumes purchased for the months of June 2005 through October
      2005.





Month
            Minimum
                Volume
              (in
                millions of gallons)
            Actual
                Volumes
              (in
                million of gallons)June
                2005
            3.5
            3.5July
                2005
            3.5
            3.5August
                2005
            3.5
            7.4September
                2005
            5.7
            10.1October
                2005
            8.1
            12.3November
                2005
            11.7
            *December
                2005
            11.7
            *January
                2006
            11.7
            *February
                2006
            11.7
            *March
                2006
            8.1
            *





*
      Actual
      volumes not yet determined.




Under
      the
      terms of the PMI Agreement, the sale price of LPG will be at the same margins
      in
      effect during April and May 2005.




Rio
      Vista’s management believes that PMI’s reduction of volume commitments 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 including Valero (see Recent Trends above).





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 is 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.





*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 contributed to Rio Vista or
      Penn Octane ceases to have the right to access the Leased Pipeline.





44





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 the Exxon 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 Exxon Supply Contract or
      other suppliers if there are 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;
                and


·
            Rio
                Vista ceases to sell LPG using any of the assets contributed 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 receiving, conveying, storing and
      delivering LPG to final users is prohibited. Foreign ownership is permitted
      in
      the transportation and storage of LPG. Mexican law also provides that an entity
      with a permit to transport LPG is not permitted to obtain permits for the other
      defined LPG activities (storage or distribution). PennMex has a transportation
      permit and Termatsal owns, leases, or is in the process of obtaining the land
      or
      rights of way used in the construction of the Mexican portion of the US-Mexico
      Pipelines, and owns the Mexican portion of the assets comprising the US-Mexico
      Pipelines and the Matamoros Terminal Facility. Rio Vista’s consolidated Mexican
      affiliate, Tergas, S. de R.L. de C.V. (“Tergas”), has been granted the permit to
      operate the Matamoros Terminal Facility and Rio Vista relies on Tergas’ permit
      to continue its delivery of LPG at the Matamoros Terminal Facility. Rio Vista
      pays Tergas its actual cost for distribution services at the Matamoros Terminal
      Facility plus a small profit.





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





During
      July 2003, Penn Octane acquired an option to purchase Tergas, which is 95%
      owned
      by Vicente Soriano, an employee of Penn Octane, and the remaining balance owned
      by Abelardo Mier, a consultant of Penn Octane, for a nominal price of
      approximately $5,000. The option was transferred to Rio Vista on September
      30,
      2004.





*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.





45





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 and should the LPG Asset Sale
      not close, it is Rio Vista’s intention to sell LPG directly to distributors in
      Mexico as well as to PMI.





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





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





**Common
      Units**





In
      connection with the Spin-Off 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
      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.





46





**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 Mr. Richter and to Shore Capital LLC (“Shore Capital”), an
      affiliate of Richard Shore, Jr., former President of Penn Octane and 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**





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





***Common
      Unit Warrants.*** In
      connection with an employment agreement with Mr. Shore, Shore Capital, received
      warrants to acquire 97,415 common units of Rio Vista with an exercise price
      of
      $8.47 per common unit. The warrants are exercisable beginning on October 1,
      2004
      and expire on July 10, 2006.





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
      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 Agreement and applicable rules of the Nasdaq Stock Market, no
      approval by the common unitholders of Rio Vista was required.





47




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 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.





***Loan
      Discount on Penn Octane’s Debt Related to Detachable
      Warrants.*** **** During
      January 2004, in connection with $1.8 million of debt obligations of Penn
      Octane, Penn Octane agreed to issue, in the future, an aggregate of 110,250
      warrants to purchase Rio Vista common units (“Rio Vista Warrants”). The exercise
      price of the warrants was to be determined based on the amount of the first
      quarterly distribution paid by Rio Vista. As a result of the approval of the
      payment of Rio Vista’s first cash distribution on January 14, 2005 (see below),
      Rio Vista granted the immediately exercisable warrants having an exercise price
      of $5.00 and recorded a discount of approximately $422,000 which is 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. For the three
      months and nine months ended September 30, 2005 amortization expense was
      $153,000 and $326,000, respectively. The Rio Vista Warrants will expire on
      December 15, 2006.





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





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




The
      General Partner is responsible for managing the operations and activities of
      Rio
      Vista. Common unitholders do not participate in the management of Rio Vista.
      Penn Octane controls Rio Vista by virtue of its current ownership, management
      and voting control of the General Partner. Therefore, Rio Vista is accounted
      for
      as a consolidated subsidiary of Penn Octane for financial accounting
      purposes.




**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, the provision of
      general administration and support services by Penn Octane.




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




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




48





*Realization
      of Assets.*  The
      accompanying consolidated balance sheet has been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation of Rio Vista as a going concern. Rio Vista has a loss
      from operations for the nine months ended September 30, 2005 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 a short-term sale agreement with PMI which provides
      for monthly volumes 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 additional
      reductions in gross profit. If the LPG Asset Sale does not close, the
      TransMontaigne Note may be due as early as March 15, 2006, including interest
      beginning November 15, 2005.




The
      PMI
      Agreement expires on March 31, 2006 unless it is renewed or extended. If the
      LPG
      Asset Sale does not close, Rio Vista’s gross profit from operations beginning
      October 1, 2005, including the minimum volumes and the margins provided for
      in
      the PMI Agreement, may provide sufficient cash flow for Rio Vista to pay its
      operating expenses through March 31, 2006. However, cash flow may not be
      sufficient to allow Rio Vista to pay the TransMontaigne Note, to pay costs
      of
      maintenance and repairs and professional fees related to the LPG Asset, to
      pay
      arrearages or make future distributions to Rio Vista’s unitholders and/or to
      make payments in connection with guarantees of Penn Octane's obligations
      assuming Penn Octane's inability to meet its obligations.  If the LPG Asset
      Sale does not close, subsequent to March 31, 2006, Rio Vista’s gross profits on
      sales may be insufficient to pay its operating expenses if it cannot sell LPG
      to
      PMI or other customers at acceptable margins and volumes and/or sufficiently
      reduce its other expenses.




Rio
      Vista
      has guaranteed certain of Penn Octane’s obligations. Substantially all of Rio
      Vista’s and Penn Octane’s assets are pledged or committed to be pledged as
      collateral on $1,805,000 of Penn Octane’s existing debt, 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 July 31, 2004 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 unaudited consolidated balance
      sheet is dependent upon closing the LPG Asset Sale, or if the LPG Asset Sales
      does not close, the ability of Penn Octane to continue as a going concern and
      the continued sale of LPG to PMI or other customers at acceptable 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 unaudited consolidated balance
      sheet does not include any adjustments related to the recoverability and
      classification of recorded asset amounts or amounts and classification of
      liabilities that might be necessary should Rio Vista be unable to continue
      in
      existence.




To
      provide Rio Vista with the ability it believes necessary to continue in
      existence, management is taking steps to close the LPG Asset Sale. If the LPG
      Asset Sales does not close, management intends to continue to negotiate with
      PMI
      for the continued sale of LPG at acceptable volumes and margins upon the
      termination of the PMI Agreement. Management may also to continue to attempt
      to
      sell its LPG and refined products assets.




49





**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 Mexico
      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**





During
      2004, Rio Vista adopted Financial Accounting Standards Board Interpretation
      No.
      46, “Consolidation of Variable Entities” (“FIN 46”), which was amended by FIN
      46R. This interpretation of Accounting Research Bulletin No. 51, “Consolidated
      Financial Statements”, addresses consolidation by business enterprises of
      variable interest entities (“VIE”) that do not have sufficient equity investment
      at risk to permit the entity to finance its activities without additional
      subordinated financial support. FIN 46R requires the beneficiary of a VIE to
      consolidate in its financial statements the assets, liabilities and results
      of
      operations of the VIE. Tergas, an affiliate of Rio Vista, is a VIE and
      therefore, its assets, liabilities and results of operations have been included
      in the accompanying consolidated financial statements of Rio Vista.





In
      November 2004, the FASB issued Statement of Financial Accounting Standard No.
      151, “Inventory Costs - An Amendment of ARB No. 43 Chapter 4” (“SFAS 151”) which
      clarifies that abnormal amounts of idle facility expense, freight, handling
      costs and spoilage should be expensed as incurred and not included in overhead.
      Further, SFAS 151 requires that allocation of fixed production overheads to
      conversion costs should be based on normal capacity of the production
      facilities. The provisions in SFAS 151 are effective for inventory costs
      incurred during fiscal years beginning after June 15, 2005. Rio Vista has
      determined that SFAS 151 will not have a material impact on their consolidated
      results of operations, financial position or cash flows.





During
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard No. 123 (revised 2004) “Share-Based
      Payment” (“SFAS 123R”). SFAS 123R replaces SFAS 123, “Accounting for Stock-Based
      Compensation”, and supercedes APB Opinion 25, “Accounting for Stock Issued to
      Employees” (“APB 25”). SFAS 123R requires that the cost of share-based payment
      transactions (including those with employees and non-employees) be recognized
      in
      the financial statements as compensation cost. That cost will be measured based
      on the fair value of equity or liability instrument issued. SFAS 123R is
      effective for Rio Vista beginning January 1, 2006. Rio Vista will apply the
      modified prospective method as provided for in SFAS 123R, and therefore the
      financial statements of Rio Vista for interim and annual periods prior to the
      adoption of SFAS 123R will not reflect any restatements.





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.





50




In
      May
      2005, the FASB issued Statement of Financial Accounting Standard No. 154,
“Accounting Changes and Error Corrections” (SFAS154). 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.








**Critical
      Accounting Policies**





The
      consolidated financial statements of Rio Vista reflect the selection and
      application of accounting policies which require management to make significant
      estimates and judgments. See note B to Rio Vista’s consolidated financial
      statements included in its Annual Report on Form 10-K for the fiscal year ended
      December 31, 2004, “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
      compensation - Rio Vista accounts for unit-based compensation using the
      provisions of APB 25 (intrinsic value method), which is permitted by SFAS 123.
      The difference in net income, if any, between the intrinsic value method and
      the
      method provided for by SFAS 123 (fair value method) is required to be disclosed
      in the financial statements on an annual and interim basis as a result of the
      issuance of SFAS 148.





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




**Statement
      by Management Concerning Review of Interim Information by 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.





51




**Item
                3.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk.**





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





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





Rio
      Vista’s TransMontaigne Note provides for a variable market rate of interest
      beginning on November 15, 2005. Trade accounts receivable from PMI and Rio
      Vista’s trade and other accounts payable generally do not bear interest. Penn
      Octane’s credit facility with RZB for which Rio Vista is responsible for some of
      the costs provides for cash advances at a current variable interest rate. Fees
      paid to RZB for letters of credit are based on a fixed schedule as provided
      in
      Penn Octane’s agreement with RZB. Therefore, Rio Vista currently has limited, if
      any, interest rate risk.





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








**Item
                4.**
            **Controls
                and Procedures.**





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





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




52





**Part
      II**





**Item
                1.**
            **Legal
                Proceedings**





See
      note
      I to Rio Vista’s unaudited consolidated financial statements included in its
      Quarterly Report on Form 10-Q for the nine months ended September 30,
      2005.





**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**





A
      special
      meeting of the unitholders of Rio Vista Energy Partners L.P. was held on
      October 26, 2005, at the Hilton Waterfront Beach Resort, 21100 Pacific
      Coast Highway, Huntington Beach, California 92648. The record date for purposes
      of determining unitholders and entitled to notice of and to vote at the special
      meeting was September 26, 2005. As of the record date, a total of 1,910,656
      common units were outstanding. Proxies
      for the meeting were solicited pursuant to Regulation 14A under the Exchange
      Act. There was no solicitation in opposition to management’s proposals. All
      proposals were approved by holders of at least a majority of the outstanding
      common units. The results of the voting by the unitholders for each proposals
      are presented below :





**Proposal
      #1**  To
      approve the purchase and sale agreement, dated as of August 15, 2005,
      between Rio Vista and TransMontaigne Product Services, Inc. (referred to in
      the
      proxy statement as TransMontaigne) and the sale to TransMontaigne of Rio Vista’s
      liquefied petroleum gas (“LPG”) assets.





For
            Against
            Abstain1,213,918
            6,972
            225





**Proposal
      #2**  To
      approve an amendment to Rio Vista’s limited partnership agreement to permit Rio
      Vista’s continued operation after the sale of substantially all of Rio Vista’s
      assets.





For
            Against
            Abstain1,179,664
            40,969
            482





**Proposal
      #3**  To
      approve a proposal to adjourn the special meeting, if necessary, to solicit
      additional proxies in favor of approval of Rio Vista’s purchase and sale
      agreement with TransMontaigne and the sale of substantially all of Rio Vista’s
      assets to TransMontaigne .





For
            Against
            Abstain1,199,978
            18,856
            2,281






**Item
                5.**
            **Other
                Information**





None.





53





**Item
                6**.
            **Exhibits**





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





Exhibit
      No.





10.1*   Rio
      Vista
      Energy Partners L.P. 2005 Equity Incentive Plan (incorporated by reference
      to
      Rio Vista’s Annual Report on Form 10-K for the year ended December 31, 2004
      filed on April 12, 2005, SEC File No. 000-50394).





10.2   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).





10.3   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).





10.4   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).




*
      indicates management contract or compensatory plan or arrangement.





54





**The
      following Exhibits are filed as part of this report:**





Exhibit
      No.





3.1
            First
                Amendment to theFirst
                Amended and Restated Agreement of Limited Partnership of Rio Vista
                Energy
                Partners L.P. dated as of October 26,
                2005.





3.2
            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.




10.6
            Amended
                and Restated Consulting Agreement dated November 15, 2005 between
                Penn
                Octane Corporation, Rio Vista Energy Partners and Jerome B.
                Richter.





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





55




**SIGNATURES**





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




**RIO
                VISTA ENERGY PARTNERS L.P.**November
                21, 2005
            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.




56