Management's Discussion and Analysis of Financial Condition and Results of Operations

Letter of Intent for Retained Assets

Effective as of September 12, 2007, RVOP entered into a binding letter of intent (Letter of Intent) with TransMontaigne Partners L.P. (TLP), an affiliate of TransMontaigne regarding TLP’s acquisition of the Retained Assets (TLP Transaction).  The total purchase price for the Retained Assets is $10.5 million, subject to adjustment as provided in the Letter of Intent.  The net book value of the Retained Assets totaled $10.3 million at September 30, 2007.  The purchase price is payable as an initial deposit of $6.5 million (as described below) upon execution of the Letter of Intent, with the remaining $4.0 million payable at closing (subject to adjustments). 

Pursuant to the Letter of Intent, RVOP has also entered into the following agreements or instruments with TLP (the Collateral Documents), each dated as of September 12, 2007:

  • Restated and Amended Promissory Note (the Restated Promissory Note), in the principal amount of $1.0 million, payable to TPSI by RVOP on or before December 31, 2007.
  • Restated and Amended Security Agreement (the Restated Security Agreement), granting TLP and TPSI a first priority security interest in the Assets in order to secure the obligations of RVOP under the Letter of Intent and the Restated Promissory Note.
  • First Priority Equity Interest Pledge Agreement, granting TLP and TPSI a first priority security interest in the corporate capital of POM.
  • First Priority Equity Interest Pledge Agreement, granting TLP and TPSI a first priority security interest in the corporate capital of Termatsal.
  • Assignment Agreement, assigning TLP and TPSI the existing rights of RVOP in the equity interests of Tergas in the event of a default by RVOP in its obligations under the Letter of Intent or the Restated Promissory Note.

Under the terms of the Letter of Intent and the Collateral Documents, TLP advanced a refundable deposit to RVOP in an amount equal to $6.5 million (the Refundable Deposit), which is to be repaid to TLP, with interest at the rate of 8% per annum, in the event the TLP Transaction does not close prior to December 31, 2007 or upon earlier termination of the Letter of Intent prior to the closing of the TLP Transaction. If the Refundable Deposit is not repaid by December 31, 2007, in addition to its rights under the Restated Security Agreement, TLP has the right to offset an amount equal to $0.0120 per gallon of LPG in transportation and terminaling fees currently paid by TLP or its affiliates to RVOP.  In addition, under the terms of the Letter of Intent, the maturity date of the $1.0 million promissory note due from RVOP to TPSI was extended to December 31, 2007.  In the event the TLP Transaction is completed, the Restated Promissory Note shall be repaid by RVOP from the net proceeds resulting from the TLP Transaction.
The obligation to repay the Refundable Deposit and Promissory Note are secured by first priority security interests in the US Pipelines, a collateral assignment of the US Easements, and a pledge of the equity interests of the Included Subsidiaries.  RZB has consented to the encumbrance of the Retained Assets pursuant to the Restated Security Agreement and has agreed to the subordination of its existing security interest in the Retained Assets to the security interest granted in favor of TLP, pursuant to a Lender’s Consent and Subordination Agreement dated as of September 12, 2007 executed by RZB.
Under the terms of the Letter of Intent, the parties have agreed to negotiate a final, definitive written stock and asset purchase agreement containing all of the terms of the TLP Transaction.  The TLP Transaction is subject to completion of mutually acceptable definitive documentation and satisfactory completion of due diligence by TLP.  RVOP has also agreed for a period extending through December 31, 2007 to negotiate exclusively with TLP for the sale of all or any part of the  Retained Assets or any controlling interest in the equity of RVOP.

Potential Factors Affecting Future Demand For The Retained Assets:

Trends

PMI has historically used the Matamoros Terminal Facility to load LPG by truck for product destined for the northeastern part of Mexico.  Since April 2004, through the date of the Restated LPG Asset Sale, PMI contracted with either Penn Octane or Rio Vista (subsequent to the Spin-Off), for LPG volumes which were significantly lower than amounts purchased by PMI in similar periods during previous years.  The contract between TransMontaigne and PMI which expired on March 31, 2007, provided for minimum volumes lower than historical amounts.  From April 1, 2007 through September 30, 2007 TransMontaigne has continued to sell LPG to PMI which has been transported using the Retained Assets in the volumes reflected above. Rio Vista believes that the reduction of volume commitments by PMI 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 the near future.  Rio Vista is also not aware of the capacity at which the current cryogenic facilities are being operated.  Furthermore, Rio Vista is not aware of the actual gas reserves of the Burgos Basin or the gas quality, each of which could significantly impact LPG production amounts. 

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

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

During 2003, PMI constructed and began operations of a refined products cross border pipeline connecting a pipeline running from PEMEX’s Cadereyta Refinery in Monterrey, Mexico to terminal facilities operated by TransMontaigne, Inc. in Brownsville, Texas.  The pipeline crosses the US-Mexico border near the proximity of Rio Vista’s 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 easement.  Under the terms of the easement, PMI has agreed that it will not transport LPG through October 15, 2017.

Dependence on TransMontaigne

The ability of Rio Vista to transport LPG using the Retained Assets is dependent on TransMontaigne, including TransMontaigne’s future contracts with PMI, and TransMontaigne’s ability to bring supplies of LPG into the Retained Assets.  Currently, Rio Vista believes that TransMontaigne’s options to obtain and deliver significant additional volumes of LPG in excess of the maximum volume committed under the Exxon Supply Agreement depends on TransMontaigne’s ability to bring shipments of LPG into the port of Brownsville via barges or ships to be delivered to its Brownsville terminal, railcar deliveries of LPG to its Brownsville Terminal and/or access to new pipelines which are capable of transporting LPG from other LPG suppliers into the Seadrift pipeline.

 

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