##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 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: 000-24394
 Penn Octane Corporation
  Delaware
    
    52-1790357(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)77-530 Enfield Lane, Bldg. D, Palm Desert, California
    
    92211(Address of Principal Executive Offices)
    
    (Zip Code)
 (760) 772-9080
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company þ
 Yes o No þ




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##### 



PENN OCTANE CORPORATION
 TABLE OF CONTENTS
 ITEM
    
    PAGE NO.PART I FINANCIAL INFORMATION1. Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    3Consolidated Balance Sheets as of December 31, 2007 and
September 30, 2008 (unaudited)
    
    
    4-5Unaudited Consolidated Statements of Operations for the three
months and nine months ended September 30, 2007 and 2008
    
    
    6Unaudited Consolidated Statements of Cash Flows for the nine
months ended September 30, 2007 and 2008
    
    
    7-8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9-362. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    37-493. Quantitative and Qualitative Disclosures About Market Risk
    
    
    494T. Controls and Procedures
    
    
    49-50PART II OTHER INFORMATION1. Legal Proceedings
    
    
    511A. Risk Factors
    
    
    512. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    513. Defaults Upon Senior Securities
    
    
    514. Submission of Matters to a Vote of Security Holders
    
    
    515. Other Information
    
    
    516. Exhibits
    
    
    52Signatures
    
    
    53Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 15Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1.
 
 Report of Independent Registered Public Accounting Firm
 
       
  3




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED BALANCE SHEETS
 ASSETS
 December 31,
    
    
    September 30,2007
    
    
    2008(Unaudited)Current AssetsCash
    
    $
    4,339,000
    
    
    $
    978,000Restricted cash
    
    
    2,500,000
    
    
    
    1,342,000Trade accounts receivable (less allowance for
doubtful accounts of $255,000 and $0 at
December 31, 2007 and September 30, 2008,
respectively)
    
    
    4,261,000
    
    
    
    2,182,000Inventories
    
    
    2,563,000
    
    
    
    Deferred tax asset
    
    
    608,000
    
    
    
    665,000Prepaid expenses and other current assets
    
    
    744,000
    
    
    
    522,000Total current assets
    
    
    15,015,000
    
    
    
    5,689,000Oil and gas properties and related equipment
(successful efforts method)  net
    
    
    26,197,000
    
    
    
    28,256,000Property, plant and equipment  net
    
    
    12,983,000
    
    
    
    12,828,000Other non-current assets
    
    
    11,000
    
    
    
    26,000Goodwill
    
    
    6,463,000
    
    
    
    6,463,000Total assets
    
    $
    60,669,000
    
    
    $
    53,262,000
   4




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 CONSOLIDATED BALANCE SHEETS  CONTINUED
 LIABILITIES AND STOCKHOLDERS EQUITY
 December 31,
    
    
    September 30,2007
    
    
    2008(Unaudited)Current LiabilitiesCurrent maturities of long-term debt
    
    $
    3,498,000
    
    
    $
    5,876,000Short-term debt
    
    
    5,493,000
    
    
    
    5,875,000Fuel Products trade accounts payable
    
    
    4,526,000
    
    
    
    Other accounts payable
    
    
    2,879,000
    
    
    
    3,715,000Taxes payable
    
    
    618,000
    
    
    
    713,000Accrued liabilities
    
    
    2,157,000
    
    
    
    4,604,000Total current liabilities
    
    
    19,171,000
    
    
    
    20,783,000Commitments and contingencies
    
    
    
    
    
    
    Long-term debt, less current maturities
    
    
    21,250,000
    
    
    
    19,688,000Deferred income tax  non-current
    
    
    3,238,000
    
    
    
    2,924,000Minority interest
    
    
    11,574,000
    
    
    
    6,514,000Stockholders EquitySeries A  Preferred stock-$.01 par value, 5,000,000
shares authorized; No shares issued and outstanding at
December 31, 2007 and September 30, 2008
    
    
    
    
    
    
    Series B  Senior preferred stock-$.01 par value, $10
liquidation value, 5,000,000 shares authorized; No shares
issued and outstanding at December 31, 2007 and September
30, 2008
    
    
    
    
    
    
    Common stock  $.01 par value, 25,000,000 shares
authorized; 15,386,187 and 15,406,187 shares issued and
outstanding at December 31, 2007 and September 30, 2008
    
    
    154,000
    
    
    
    154,000Additional paid-in capital
    
    
    29,271,000
    
    
    
    30,026,000Accumulated deficit
    
    
    (23,989,000
    )
    
    
    (26,827,000
    )Total stockholders equity
    
    
    5,436,000
    
    
    
    3,353,000Total liabilities and stockholders equity
    
    $
    60,669,000
    
    
    $
    53,262,000
   5




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Revenues
    
    $
    42,631,000
    
    
    $
    4,698,000
    
    
    $
    114,994,000
    
    
    $
    55,121,000Cost of goods sold
    
    
    42,078,000
    
    
    
    3,702,000
    
    
    
    112,997,000
    
    
    
    52,467,000Gross profit
    
    
    553,000
    
    
    
    996,000
    
    
    
    1,997,000
    
    
    
    2,654,000Selling, general and administrative expenses and
otherLegal and professional fees
    
    
    1,028,000
    
    
    
    314,000
    
    
    
    1,987,000
    
    
    
    1,905,000Salaries and payroll related expenses
    
    
    206,000
    
    
    
    543,000
    
    
    
    1,350,000
    
    
    
    2,148,000Other
    
    
    635,000
    
    
    
    693,000
    
    
    
    1,644,000
    
    
    
    2,874,0001,869,000
    
    
    
    1,550,000
    
    
    
    4,981,000
    
    
    
    6,927,000Operating loss from operations
    
    
    (1,316,000
    )
    
    
    (554,000
    )
    
    
    (2,984,000
    )
    
    
    (4,273,000
    )Other income (expense)Interest and Fuel Products financing expense
    
    
    (312,000
    )
    
    
    (984,000
    )
    
    
    (611,000
    )
    
    
    (2,836,000
    )Interest income
    
    
    11,000
    
    
    
    3,000
    
    
    
    30,000
    
    
    
    17,000Minority interest in loss
    
    
    1,145,000
    
    
    
    924,000
    
    
    
    2,290,000
    
    
    
    4,506,000Loss from operations before taxes
    
    
    (472,000
    )
    
    
    (611,000
    )
    
    
    (1,275,000
    )
    
    
    (2,586,000
    )(Benefit) provision for income taxes
    
    
    (10,000
    )
    
    
    7,000
    
    
    
    (412,000
    )
    
    
    (91,000
    )Loss from continuing operations
    
    $
    (462,000
    )
    
    $
    (618,000
    )
    
    $
    (863,000
    )
    
    $
    (2,495,000
    )Loss on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (343,000
    )Net loss
    
    $
    (462,000
    )
    
    $
    (618,000
    )
    
    $
    (863,000
    )
    
    $
    (2,838,000
    )Net loss from continuing operations per common
share
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.16
    )Loss from discontinued operations per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net loss per common share
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.18
    )Weighted average common shares outstanding
    
    
    15,386,187
    
    
    
    15,406,187
    
    
    
    15,386,187
    
    
    
    15,406,187
   6




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine months ended September 30,2007
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (863,000
    )
    
    $
    (2,838,000
    )Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation, depletion and amortization
    
    
    585,000
    
    
    
    1,539,000Amortization of loan discount
    
    
    10,000
    
    
    
    54,000Discount on Richter Note
    
    
    378,000
    
    
    
    Share-based compensation
    
    
    370,000
    
    
    
    1,225,000Minority interest
    
    
    (2,291,000
    )
    
    
    (4,416,000
    )Beneficial conversion amortization
    
    
    
    
    
    
    18,000Loss on sale of discontinued operations
    
    
    
    
    
    
    343,000Gain on sale of asset
    
    
    
    
    
    
    (20,000
    )Other
    
    
    3,000
    
    
    
    Changes in current assets and liabilities:Trade accounts receivable
    
    
    (4,324,000
    )
    
    
    2,079,000Inventories
    
    
    1,230,000
    
    
    
    2,563,000Prepaid expenses and other current assets
    
    
    (349,000
    )
    
    
    126,000Deferred tax asset, net
    
    
    (446,000
    )
    
    
    (371,000
    )LPG and Fuel Products trade accounts payable
    
    
    1,826,000
    
    
    
    (4,526,000
    )Other accounts payable and accrued liabilities
    
    
    1,961,000
    
    
    
    3,375,000U.S. and foreign taxes payable
    
    
    (15,000
    )
    
    
    81,000Net cash used in operating activities
    
    
    (1,925,000
    )
    
    
    (768,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (175,000
    )
    
    
    (3,605,000
    )Costs to acquire Regional Enterprizes, Inc.
    
    
    (7,981,000
    )
    
    
    Acquisition of GP interest
    
    
    (1,400,000
    )
    
    
    Decrease in other non-current assets
    
    
    (11,000
    )
    
    
    (15,000
    )Purchase price adjustments  Oklahoma assets
    
    
    
    
    
    
    83,000Net cash used in investing activities
    
    
    (9,567,000
    )
    
    
    (3,537,000
    )Cash flows from financing activities:Decrease (increase) in restricted cash
    
    
    1,342,000
    
    
    
    1,158,000Revolving credit facilities
    
    
    (164,000
    )
    
    
    Issuance of debt in common units of RVEP
    
    
    5,000,000
    
    
    
    Distributions paid to minority interests
    
    
    (1,439,000
    )
    
    
    (1,945,000
    )Distributions paid to the minority owners of the general partner
    
    
    (15,000
    )
    
    
    Refundable deposit
    
    
    6,500,000
    
    
    
    Stockholders note
    
    
    1,310,000
    
    
    
    Reduction in debt
    
    
    
    
    
    
    (350,000
    )Increase in debt
    
    
    
    
    
    
    1,575,000Exercise of options of Rio Vista
    
    
    
    
    
    
    774,000Costs of registration
    
    
    
    
    
    
    (314,000
    )Other
    
    
    
    
    
    
    46,000Net cash provided by (used in) financing activities
    
    
    12,534,000
    
    
    
    944,000Net change in cash
    
    
    1,042,000
    
    
    
    (3,361,000
    )Cash at beginning of period
    
    
    8,766,000
    
    
    
    4,339,000Cash at end of period
    
    $
    9,808,000
    
    
    $
    978,000
   7




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 CONSOLIDATED STATEMENTS OF CASH FLOWS  CONTINUED
 (Unaudited)
 Nine months ended September 30,2007
    
    
    2008Supplemental disclosures of cash flow information:Cash paid for:Interest and LPG and Fuel Products financing expense
    
    $
    480,000
    
    
    $
    3,269,000Supplemental disclosures of noncash transactions:Equity  common stock and warrants issued and other
    
    $
    370,000
    
    
    $
    Sellers Note, net of discount
    
    $
    884,000
    
    
    $
    Unit based compensation
    
    $
    259,000
    
    
    $
    414,000Share based compensation
    
    $
    111,000
    
    
    $
    811,000Exchange of assets for note reduction
    
    $
    
    
    
    $
    100,000
   8




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE A  ORGANIZATION
      9




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE A  ORGANIZATION   Continued
    Basis of Presentation
       10




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE B  LOSS PER COMMON SHARE
  For the three months September 30, 2007Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (462,000
    )Basic EPSNet loss available to common stockholders
    
    
    (462,000
    )
    
    
    15,386,187
    
    
    $
    ( 0.03
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 For the three months September 30, 2008Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (618,000
    )Basic EPSNet loss available to common stockholders
    
    
    (618,000
    )
    
    
    15,406,187
    
    
    $
    ( 0.04
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 For the nine months September 30, 2007Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (863,000
    )Basic EPSNet loss available to common stockholders
    
    
    (863,000
    )
    
    
    15,386,187
    
    
    $
    ( 0.06
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  11




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE
B  LOSS PER COMMON SHARE  Continued
 For the nine months September 30, 2008Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (2,438,000
    )Basic EPSNet loss available to common stockholders
    
    
    (2,438,000
    )
    
    
    15,406,187
    
    
    $
    ( 0.16
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 NOTE C  SHARE-BASED AND UNIT-BASED PAYMENTS
 Share-Based Payments
 Share-Based
   12




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Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE C  SHARE-BASED AND UNIT-BASED PAYMENTS  Continued
 Unit-Based Payments
    13




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE D  A FORMER OFFICER OF THE COMPANY NOTES
 Note Receivable
  Note Payable
  NOTE E  PROPERTY, PLANT AND EQUIPMENT
  December 31,
    
    
    September 30,2007
    
    
    2008Oklahoma:Pipelines and equipment
    
    $
    6,756,000
    
    
    $
    7,507,000Regional:Land
    
    
    237,000
    
    
    
    237,000Terminal and improvements
    
    
    3,825,000
    
    
    
    4,041,000Automotive equipment
    
    
    2,438,000
    
    
    
    2,438,0006,500,000
    
    
    
    6,716,00013,256,000
    
    
    
    14,223,000Other
    
    
    338,000
    
    
    
    388,00013,594,000
    
    
    
    14,611,000Less: accumulated depreciation and amortization
    
    
    (611,000
    )
    
    
    (1,783,000
    )$
    12,983,000
    
    
    $
    12,828,000
  14




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE E  PROPERTY, PLANT AND EQUIPMENT  Continued
   NOTE F  OIL AND GAS PROPERTIES AND RELATED EQUIPMENT, NET
 Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
  Development costs of leased properties:
    
    $
    2,265,000Capitalized pipeline infrastructure costs:
    
    $
    700,000
   NOTE G  INVENTORIES
 December 31, 2007
    
    
    September 30, 2008Gallons
    
    
    LCM
    
    
    Gallons
    
    
    LCMFuel Products
    
    
    1,043,000
    
    
    $
    2,563,000
    
    
    
    
    
    
    $
    
  15




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS
  December 31,
    
    
    September 30,2007
    
    
    2008RZB Note
    
    $
    5,000,000
    
    
    $
    5,000,000Moores Note
    
    
    493,000
    
    
    
    300,000Richter Note Payable (see note D)
    
    
    
    
    
    
    575,000$
    5,493,000
    
    
    $
    5,875,000Long-term debt obligations were as follows:TCW Credit Facility
    
    $
    23,689,000
    
    
    $
    24,700,000Sellers Note  Regional
    
    
    922,000
    
    
    
    727,000Other
    
    
    137,000
    
    
    
    137,00024,748,000
    
    
    
    25,564,000Less current portion
    
    
    3,498,000
    
    
    
    5,876,000$
    21,250,000
    
    
    $
    19,688,000
 RZB Amendment
    16




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS  Continued
 Moores Note
  TCW Credit Facility
 wholly-owned
   17




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS  Continued
 TCW Credit Facility  Continued
    Sellers Note  Regional
  Other
   18




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS  Continued
 Beneficial Conversion Features
  NOTE I  STOCK WARRANTS
 2001 Warrant Plan
   NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA
 Common Units
   19




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Common Units  Continued
  Private Placement of Common Units
    20




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Private Placement of Common Units  Continued
        21




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Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Distributions of Available Cash
    Amounts PaidQuarter
    
    Payment
    
    
    Distribution
    
    
    Common
    
    
    GeneralEnded
    
    Date
    
    
    Per Unit
    
    
    Units
    
    
    PartnerDecember 2007
    
    
    02/14/08
    
    
    $
    0.25
    
    
    $
    607,000
    
    
    $
    12,000March 2008
    
    
    05/16/08
    
    
    $
    0.25
    
    
    $
    629,000
    
    
    $
    13,000June 2008
    
    
    08/14/08
    
    
    $
    0.25
    
    
    $
    679,000
    
    
    $
    14,000
  Common Unit Options
   22




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Common Unit Options  Continued
  NOTE K  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
   Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
International LLC, et al th
  23




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
 Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et
al. th
      24




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
   Credit Facility and Letters of Credit
       25




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Credit Facility and Letters of Credit  Continued
  Leases
 Norfolk Southern Leases
    Consulting Agreement
   26




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 CEOcast
  Strategic Growth International
  Concentrations of Credit Risk
  Partnership Tax Treatment and Regional and MV Income Taxes
   27




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Partnership Tax Treatment and Regional and MV Income Taxes  Continued
       28




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE L  OIL AND GAS SALES CONTRACTS
   Date
    
    Terms April 2008  October 2008:
    
    1.0 MMcf/d @ $6.35/Mcf (MV Pipeline production) April 2008  October 2008:
    
    0.5 MMcf/d @ $7.97/Mcf (Brooken Pipeline production) November 2008  March 2009:
    
    1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production) November 2008  March 2009:
    
    0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)
  NOTE M  RELATED PARTY TRANSACTIONS
   Sale  Purchase of Rio Vista Common Units
   29




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE M  RELATED PARTY TRANSACTIONS  Continued
 Loans To Rio Vista
  Omnibus Agreement
    Guarantees
 Debt Guarantee .
 Tax Guarantee.
  30




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE N  401K
  NOTE O  REALIZATION OF ASSETS
      31




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE O  REALIZATION OF ASSETS  Continued
  NOTE P  SEGMENT INFORMATION
    32




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  TransportingandTerminaling
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    1,650,000
    
    
    $
    40,981,000
    
    
    $
    42,631,000Interest expense
    
    
    205,000
    
    
    
    103,000
    
    
    
    308,000Interest income
    
    
    5,000
    
    
    
    
    
    
    
    5,000Depreciation and amortization
    
    
    288,000
    
    
    
    
    
    
    
    288,000Segment gross profit
    
    
    379,000
    
    
    
    174,000
    
    
    
    553,000Segment assets
    
    
    30,334,000
    
    
    
    9,347,000
    
    
    
    39,681,000Segment liabilities
    
    
    18,096,000
    
    
    
    6,437,000
    
    
    
    24,533,000Expenditure for segment assets
    
    
    7,000
    
    
    
    
    
    
    
    7,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    $
    42,631,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    $
    42,631,000Profit (loss)Total gross profit for reportable
segments
    
    
    
    
    
    
    
    
    
    $
    553,000Selling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,869,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    (312,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    11,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    1,145,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before
taxes
    
    
    
    
    
    
    
    
    
    $
    (472,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    $
    39,681,000Other assets
    
    
    
    
    
    
    
    
    
    
    4,295,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    $
    43,976,000
  33




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  TransportationandTerminalling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    2,279,000
    
    
    $
    2,419,000
    
    
    $
    
    
    
    $
    4,698,000Interest expense
    
    
    143,000
    
    
    
    766,000
    
    
    
    
    
    
    
    909,000Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    278,000
    
    
    
    287,000
    
    
    
    
    
    
    
    565,000Segment gross profit
    
    
    559,000
    
    
    
    448,000
    
    
    
    
    
    
    
    1,007,000Segment assets
    
    
    12,179,000
    
    
    
    37,109,000
    
    
    
    1,045,000
    
    
    
    50,333,000Segment liabilities
    
    
    4,384,000
    
    
    
    28,465,000
    
    
    
    2,277,000
    
    
    
    35,126,000Expenditure for segment assets
    
    
    26,000
    
    
    
    540,000
    
    
    
    
    
    
    
    566,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,269,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (571,000
    )Other revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,698,000Profit (loss)Total gross profit for reportable
segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,007,000Total other gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,000
    )Selling, general and administrative expense
and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,550,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (984,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Minority interest in loss of RVEP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    924,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (611,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,333,000Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,929,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    53,262,000
  34




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  TransportationandTerminaling
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    2,765,000
    
    
    $
    112,229,000
    
    
    $
    114,994,000Interest expense
    
    
    257,000
    
    
    
    343,000
    
    
    
    600,000Interest income
    
    
    6,000
    
    
    
    
    
    
    
    6,000Depreciation and amortization
    
    
    576,000
    
    
    
    1,000
    
    
    
    577,000Segment gross profit
    
    
    698,000
    
    
    
    1,299,000
    
    
    
    1,997,000Segment assets
    
    
    30,334,000
    
    
    
    9,347,000
    
    
    
    39,681,000Segment liabilities
    
    
    18,096,000
    
    
    
    6,437,000
    
    
    
    24,533,000Expenditure for segment assets
    
    
    7,000
    
    
    
    2,000
    
    
    
    9,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    $
    114,994,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    $
    114,994,000Profit (loss)Total gross profit for reportable
segments
    
    
    
    
    
    
    
    
    
    $
    1,997,000Selling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (4,981,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    (611,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    30,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    2,290,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before
taxes
    
    
    
    
    
    
    
    
    
    $
    (1,275,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    $
    39,681,000Other assets
    
    
    
    
    
    
    
    
    
    
    4,295,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    $
    43,976,000
  35




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  TransportationandTerminalling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    6,539,000
    
    
    $
    5,264,000
    
    
    $
    43,318,000
    
    
    $
    55,121,000Interest expense
    
    
    531,000
    
    
    
    2,063,000
    
    
    
    129,000
    
    
    
    2,723,000Interest income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    7,000Depreciation and amortization
    
    
    818,000
    
    
    
    712,000
    
    
    
    3,000
    
    
    
    1,533,000Segment gross profit
    
    
    1,448,000
    
    
    
    968,000
    
    
    
    238,000
    
    
    
    2,654,000Segment assets
    
    
    12,179,000
    
    
    
    37,109,000
    
    
    
    1,045,000
    
    
    
    50,333,000Segment liabilities
    
    
    4,384,000
    
    
    
    28,465,000
    
    
    
    2,277,000
    
    
    
    35,126,000Expenditure for segment assets
    
    
    226,000
    
    
    
    3,333,000
    
    
    
    
    
    
    
    3,559,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57,248,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,127,000
    )Other revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    55,121,000Profit (loss)Total gross profit for reportable
segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,654,000Total other gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative expense
and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,927,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,836,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,506,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations
before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,586,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,333,000Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,929,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    53,262,000
  36




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##### Table of Contents



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Penn Octane Corporation (Penn Octane) and its consolidated subsidiaries which includes Rio Vista
Energy Partners L.P. and its subsidiaries (Rio Vista) are collectively hereinafter referred to as
the Company.
 The following discussion of the Companys results of operations and liquidity and capital
resources should be read in conjunction with the unaudited consolidated financial statements of the
Company and related notes thereto appearing elsewhere herein. References to specific years
proceeded by fiscal (e.g. fiscal 2008) refer to the Companys fiscal year ended December 31.
 Cautionary Statement Regarding Forward-Looking Statements
  
    
    the volatility of realized natural gas prices;
    
    the discovery, estimation, development and replacement of oil and natural gas reserves;
    
    our business and financial strategy;
    
    our drilling locations;
    
    technology;
    
    our cash flow, liquidity and financial position;
    
    our production volumes;
    
    our lease operating expenses, general and administrative costs and finding and
development costs;
    
    the availability of drilling and production equipment, labor and other services;
    
    our future operating results;
    
    our prospect development and property acquisitions;
    
    the marketing of oil and natural gas;
    
    competition in the oil and natural gas industry and the transportation and terminalling
business;
    
    the impact of weather and the occurrence of natural disasters such as fires, floods,
hurricanes, earthquakes and other catastrophic events and natural disasters;
    
    governmental regulation of the oil and natural gas industry and the transportation and
terminalling business;
    
    required capital expenditures;
    
    cash distributions and qualified income;
    
    developments in oil producing and natural gas producing countries; and
    
    our strategic plans, objectives, expectations and intentions for future operations.
    37




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##### Table of Contents



Overview
 Historical Assets and Operations
    Current Assets and Operations
    38




---



##### Table of Contents



Liquidity and Capital Resources
  General
      39




---



##### Table of Contents



Credit Arrangements
  Debt Obligations
 RZB Loan Agreement
     40




---



##### Table of Contents



TCW Credit Facility
    Moores Note
   41




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##### Table of Contents



Sellers Note  Regional
  A Former Officer of the Company Note
  Distributions of Available Cash.
   Amounts PaidQuarter
    
    Payment
    
    
    Distribution
    
    
    Common
    
    
    GeneralEnded
    
    Date
    
    
    Per Unit
    
    
    Units
    
    
    PartnerDecember 2007
    
    
    02/14/08
    
    
    $
    0.25
    
    
    $
    607,000
    
    
    $
    12,000March 2008
    
    
    05/16/08
    
    
    $
    0.25
    
    
    $
    629,000
    
    
    $
    13,000June 2008
    
    
    08/14/08
    
    
    $
    0.25
    
    
    $
    679,000
    
    
    $
    14,000
   42




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##### Table of Contents



Leases
 Norfolk Southern Leases.
   CEOcast Agreement
  Strategic Growth International
   43




---



##### Table of Contents



Related Party Transactions
   Realization of Assets
       44




---



##### Table of Contents



Results of Operations
  Three months ended September 30, 2008 Compared with Three Months ended September 30, 2007
 THREE MONTHS ENDED SEPTEMBER 30, 2008
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    
    
    
    
    2,419,000
    
    
    
    2,279,000
    
    
    
    
    
    
    
    
    
    
    
    4,698,000Cost Of Goods Sold
    
    
    
    
    
    
    1,971,000
    
    
    
    1,720,000
    
    
    
    
    
    
    
    11,000
    
    
    
    3,702,000Gross Profit
    
    
    
    
    
    
    448,000
    
    
    
    559,000
    
    
    
    
    
    
    
    (11,000
    )
    
    
    996,000Selling, General And
Administrative
Expenses
    
    
    (90,000
    )
    
    
    (9,000
    )
    
    
    (246,000
    )
    
    
    
    
    
    
    (1,205,000
    )
    
    
    (1,550,000
    )Operating Income (loss)
    
    
    (90,000
    )
    
    
    439,000
    
    
    
    313,000
    
    
    
    
    
    
    
    (1,216,000
    )
    
    
    (554,000
    )Interest and Fuel
Products Financing
Expense
    
    
    
    
    
    
    (766,000
    )
    
    
    (143,000
    )
    
    
    
    
    
    
    (75,000
    )
    
    
    (984,000
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    3,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    924,000
    
    
    
    924,000Income (Loss) From
Operations Before
Taxes
    
    
    (90,000
    )
    
    
    (327,000
    )
    
    
    170,000
    
    
    
    
    
    
    
    (364,000
    )
    
    
    (611,000
    )Provision (Benefit)
For Income Taxes
    
    
    
    
    
    
    (32,000
    )
    
    
    39,000
    
    
    
    
    
    
    
    
    
    
    
    7,000Net income (loss)
    
    
    (90,000
    )
    
    
    (295,000
    )
    
    
    131,000
    
    
    
    
    
    
    
    (364,000
    )
    
    
    (618,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008  45




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##### Table of Contents



THREE MONTHS ENDED SEPTEMBER 30, 2007
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    40,981,000
    
    
    
    
    
    
    
    1,211,000
    
    
    
    439,000
    
    
    
    
    
    
    
    42,631,000Cost Of Goods Sold
    
    
    40,808,000
    
    
    
    
    
    
    
    827,000
    
    
    
    443,000
    
    
    
    
    
    
    
    42,078,000Gross Profit
    
    
    173,000
    
    
    
    
    
    
    
    384,000
    
    
    
    (4,000
    )
    
    
    
    
    
    
    553,000Selling, General and
Administrative
Expenses
    
    
    (152,000
    )
    
    
    
    
    
    
    (123,000
    )
    
    
    (42,000
    )
    
    
    (1,552,000
    )
    
    
    (1,869,000
    )Operating Income (Loss)
    
    
    21,000
    
    
    
    
    
    
    
    261,000
    
    
    
    (46,000
    )
    
    
    (1,552,000
    )
    
    
    (1,316,000
    )Interest and Fuel
Products Financing
Expense
    
    
    (103,000
    )
    
    
    
    
    
    
    (174,000
    )
    
    
    (31,000
    )
    
    
    (4,000
    )
    
    
    (312,000
    )Interest Income
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    11,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,145,000
    
    
    
    1,145,000Income (Loss) From
Operations Before
Taxes
    
    
    (77,000
    )
    
    
    
    
    
    
    87,000
    
    
    
    (77,000
    )
    
    
    (405,000
    )
    
    
    (472,000
    )Provision (Benefit)
For Income Taxes
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    (45,000
    )
    
    
    (10,000
    )Net Income (Loss)
    
    
    (77,000
    )
    
    
    
    
    
    
    52,000
    
    
    
    (77,000
    )
    
    
    (360,000
    )
    
    
    (462,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008  46




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##### Table of Contents



Nine months ended September 30, 2008 Compared with Nine months ended September 30, 2007
 NINE MONTHS ENDED SEPTEMBER 30, 2008
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    43,318,000
    
    
    
    5,264,000
    
    
    
    6,539,000
    
    
    
    
    
    
    
    
    
    
    
    55,121,000Cost Of Goods Sold
    
    
    43,080,000
    
    
    
    4,296,000
    
    
    
    5,091,000
    
    
    
    
    
    
    
    
    
    
    
    52,467,000Gross Profit
    
    
    238,000
    
    
    
    968,000
    
    
    
    1,448,000
    
    
    
    
    
    
    
    
    
    
    
    2,654,000Selling, General And
Administrative
Expenses
    
    
    (668,000
    )
    
    
    (90,000
    )
    
    
    (688,000
    )
    
    
    
    
    
    
    (5,481,000
    )
    
    
    (6,927,000
    )Operating Income (loss)
    
    
    (430,000
    )
    
    
    878,000
    
    
    
    760,000
    
    
    
    
    
    
    
    (5,481,000
    )
    
    
    (4,273,000
    )Interest and Fuel
Products Financing
Expense
    
    
    (129,000
    )
    
    
    (2,063,000
    )
    
    
    (531,000
    )
    
    
    
    
    
    
    (113,000
    )
    
    
    (2,836,000
    )Interest Income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    17,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,506,000
    
    
    
    4,506,000Income (Loss) From
Operations Before
Taxes
    
    
    (559,000
    )
    
    
    (1,178,000
    )
    
    
    229,000
    
    
    
    
    
    
    
    (1,078,000
    )
    
    
    (2,586,000
    )Provision (Benefit)
For Income Taxes
    
    
    
    
    
    
    (98,000
    )
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    (91,000
    )Income (Loss) from
continuing operations
    
    
    (559,000
    )
    
    
    (1,080,000
    )
    
    
    222,000
    
    
    
    
    
    
    
    (1,078,000
    )
    
    
    (2,495,000
    )Loss on sale of
discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (343,000
    )
    
    
    
    
    
    
    (343,000
    )Net Income (Loss)
    
    
    (559,000
    )
    
    
    (1,080,000
    )
    
    
    222,000
    
    
    
    (343,000
    )
    
    
    (1,078,000
    )
    
    
    (2,838,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008  47




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##### Table of Contents



NINE MONTHS ENDED SEPTEMBER 30, 2007
 Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    112,229,000
    
    
    
    
    
    
    
    1,211,000
    
    
    
    1,554,000
    
    
    
    
    
    
    
    114,994,000Cost Of Goods Sold
    
    
    110,930,000
    
    
    
    
    
    
    
    827,000
    
    
    
    1,240,000
    
    
    
    
    
    
    
    112,997,000Gross Profit
    
    
    1,299,000
    
    
    
    
    
    
    
    384,000
    
    
    
    314,000
    
    
    
    
    
    
    
    1,997,000Selling, General and
Administrative
Expenses
    
    
    (558,000
    )
    
    
    
    
    
    
    (123,000
    )
    
    
    (156,000
    )
    
    
    (4,144,000
    )
    
    
    (4,981,000
    )Operating Income (Loss)
    
    
    741,000
    
    
    
    
    
    
    
    261,000
    
    
    
    158,000
    
    
    
    (4,144,000
    )
    
    
    (2,984,000
    )Interest and Fuel
Products Financing
Expense
    
    
    (343,000
    )
    
    
    
    
    
    
    (174,000
    )
    
    
    (83,000
    )
    
    
    (11,000
    )
    
    
    (611,000
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    30,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,290,000
    
    
    
    2,290,000Income (Loss) From
Operations Before
Taxes
    
    
    398,000
    
    
    
    
    
    
    
    87,000
    
    
    
    75,000
    
    
    
    (1,835,000
    )
    
    
    (1,275,000
    )Provision (Benefit)
for Income Taxes
    
    
    15,000
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    (462,000
    )
    
    
    (412,000
    )Net Income (Loss)
    
    
    383,000
    
    
    
    
    
    
    
    52,000
    
    
    
    75,000
    
    
    
    (1,373,000
    )
    
    
    (863,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007.(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008 Off-Balance Sheet Arrangements
   48




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##### Table of Contents



Statement by Management Concerning Review of Interim Information by An Independent Registered
Public Accounting Firm.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4T. Controls and Procedures.
     
    
    In May 2008, Penn Octane hired an assistant controller to provide additional assistance
with internal accounting responsibilities and financial reporting. The newly hired
assistant controller has previous oil and gas experience.
    
    In June 2008, Penn Octane hired a vice president, who is primarily responsible for
overseeing the operations of our oil and gas properties.
    
    Penn Octane is continuing to have ongoing discussions with a potential Chief Executive
Officer candidate. This candidate has extensive oil and gas expertise. We are currently
negotiating with this candidate in an effort to have him accept the role as Chief Executive
Officer.
    
    In March 2008 and in connection with the acquisition of the Oklahoma operations, Penn
Octane hired two employees who were previously engaged in accounting functions of those
businesses. We are currently training those employees.
  49




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##### Table of Contents




    
    In May 2008, Penn Octane engaged the services of a software consulting firm to
implement an Oracle ERP accounting software system. This system is intended to enhance
internal controls over the ability to enter transactions into the financial system and
financial reporting. This system will also provide for multiple user access, timely access
to accounting information and additional data security.
    
    Management is currently reviewing employee compensation and incentives to ensure that
it continues to attract and retain qualified employees.
     50




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   51




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##### Table of Contents



Item 6 Exhibits
 The following Exhibits are filed as part of this report:
 Exhibit No.10.1
    
    
    First Amendment to Note Purchase Agreement dated as of September 29, 2008 by
and among Rio Vista Penny LLC, TCW Asset Management Company, and the Holders
party to the Original Note Purchase Agreement.10.2
    
    
    Amended and Restated Management Services Agreement, dated and effective as
of September 29, 2008, is made by and among Rio Vista Operating LLC, Rio
Vista Energy Partners L.P., and Rio Vista Penny LLC.10.3
    
    
    Promissory Note dated April 15, 2008 between Rio Vista Energy Partners L.P.
and Jerome B. Richter.15
    
    
    Accountants Acknowledgment.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.
   52




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##### Table of Contents



SIGNATURES
  PENN OCTANE CORPORATIONNovember 17, 2008
    
    By:
    
    /s/ Ian T. BothwellIan T. Bothwell
Acting Chief Executive Officer,
Acting President, Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Executive, Financial and Accounting Officer)
  53




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    
    First Amendment to Note Purchase Agreement dated as of September 29, 2008 by
and among Rio Vista Penny LLC, TCW Asset Management Company, and the Holders
party to the Original Note Purchase Agreement.10.2
    
    
    Amended and Restated Management Services Agreement, dated and effective as
of September 29, 2008, is made by and among Rio Vista Operating LLC, Rio
Vista Energy Partners L.P., and Rio Vista Penny LLC.10.3
    
    
    Promissory Note dated April 15, 2008 between Rio Vista Energy Partners L.P.
and Jerome B. Richter.15
    
    
    Accountants Acknowledgment.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.
  54