EXHIBIT 10.6
 
ETHANOL MARKETING AGREEMENT

 
 
by and between
 

 
 
AE ADVANCED FUELS KEYES, INC.
 
 
and
 
 
KINERGY MARKETING, LLC
 

 
 
Dated as of October 29, 2010
 

 
 

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ETHANOL MARKETING AGREEMENT
 
This ETHANOL MARKETING AGREEMENT (this “Agreement”) is entered into by and
between AE ADVANCED FUELS KEYES, INC., a Delaware Corporation (“AEAFK”), and
KINERGY MARKETING, LLC, an Oregon limited liability company (“Kinergy”), as of
this 29th day of October, 2010.  AEAFK and Kinergy are each individually
referred to herein as a “Party”, and collectively are referred to herein as the
“Parties”.
 
RECITALS
 
A.           Kinergy provides marketing services for denatured fuel ethanol
production facilities.
 
B.           AEAFK is the Lessee of an approximately 55 million gallon-per-year
denatured fuel ethanol production facility in AEAFK, California (the “Facility”)
and AEAFK has requested that Kinergy provide denatured fuel ethanol marketing
services for the Facility.
 
C.           Kinergy desires to provide such marketing services in accordance
with and subject to the terms and conditions of this Agreement.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of the agreements and covenants hereinafter set
forth, and intending to be legally bound, the Parties hereto covenant and agree
as follows:
 
ARTICLE I
MARKETING ACTIVITIES
 
1.1 Marketing of Ethanol Production.
 
(a) Subject to the terms hereof, AEAFK shall sell and make available for
delivery and Kinergy shall purchase and take delivery in accordance with Section
1.3 of 100% of the Ethanol produced by the Facility.
 
(b) AEAFK shall provide Ethanol to Kinergy free and clear of all liens and
encumbrances and otherwise operate the Facility as required to allow Kinergy to
perform its obligations hereunder.
 
(c) Kinergy shall perform its obligations hereunder in accordance with this
Agreement, applicable Laws, applicable Permits and Good Industry Practice and
with the intent to maximize the proceeds generated from the sale of Ethanol.
 
(d) Kinergy shall confer with AEAFK no less frequently than weekly regarding
marketing strategy.  AEAFK will have the option to participate in the “Pool”
described in Section 2 herein by stating its election to participate on the
execution of this Agreement.  If AEAFK later desires to opt out of the Pool,
AEAFK may due so on thirty (30) days written notice, in which event AEAFK’s
Ethanol will continue to be marketed by Kinergy at AEAFK’s direction, but the
provisions of Section 2.2 shall supersede the “Pool” pricing and other
provisions of Section 2.1.
 
 
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1.2 Obligations of AEAFK.
 
(a) AEAFK shall provide Kinergy with all information reasonably requested by
Kinergy.
 
(b) AEAFK shall provide Kinergy with a best estimate of a projected Date of
First Delivery covering a range of seven (7) days. AEAFK shall use reasonable
best efforts to update this estimate as more accurate information is available,
but shall not be liable to Kinergy for a failure to achieve the projected Date
of First Delivery.
 
(c) AEAFK shall provide a best estimate of the amount of Ethanol production on a
daily basis for the six (6) month period following the estimated Date of First
Delivery.  After the Date of First Delivery, AEAFK shall provide monthly updates
to Kinergy, by the 15th day of each month, estimating the daily production for
the next six (6) month period beginning the first month following the date of
the last estimate.  AEAFK shall promptly notify Kinergy of any adjustments to
the Ethanol production schedule that has been most recently given to Kinergy or
of any actual or anticipated production downtime or disruption to Ethanol
availability.  In the event (1) the Facility is unable to produce sufficient
Ethanol quantities to meet the production estimates delivered to Kinergy, (2)
such inability to produce is not the result of Force Majeure, and (3) Kinergy
would otherwise suffer a loss as a result of being unable to deliver Ethanol to
a Third Party customer to whom Kinergy is contractual committed to deliver
Ethanol, then in such case Kinergy may purchase or arrange for the purchase of
such shortfall from other sources and incur additional transportation and
similar expense to the extent necessary to cover contractual commitments Kinergy
has made in respect of AEAFK’s anticipated production.  Kinergy shall use
reasonable commercial efforts to mitigate the cost of such cover.  Kinergy will
provide AEAFK written substantiation of such costs reasonably satisfactory to
AEAFK as soon as reasonably possible. AEAFK shall be obligated to pay Kinergy
the net cost of such cover within seven (7) days thereafter.
 
(d) AEAFK shall provide storage tank capacity at the Facility for Ethanol in an
amount of one million gallons. AEAFK’s Ethanol production at 109% of nameplate
design and 100% of permitted capacity is 170,454 gallons per day for 352 days
per year.
 
(e) Kinergy shall be given reasonable access to the delivery point(s) at the
Facility during normal business hours upon reasonable prior notice; provided,
that Kinergy’s access shall be without disruption to AEAFK’s business operations
at the Facility.  Kinergy will provide AEAFK with delivery schedules and, at the
sole cost of Kinergy, make arrangements for transportation of the
Ethanol.  AEAFK shall handle and supervise the loading and delivery of Ethanol,
prepare delivery documentation and generally be responsible for all matters
ancillary to such activities.  All equipment necessary to load trucks at the
delivery point shall be supplied by AEAFK without charge to Kinergy.  Kinergy
shall require the transportation companies it employs to comply with the
Facility’s safety regulations.
 
(f) AEAFK shall deliver Ethanol to Kinergy under this Agreement that meets the
specifications set forth in Exhibit B.  If any government entity requires a
change in the specifications set forth in Exhibit B, Kinergy shall notify AEAFK
of the change in specifications.  AEAFK and Kinergy agree to change the
specifications of Ethanol in this Agreement within a reasonable time as agreed
to by Kinergy and AEAFK.  If the Ethanol Delivered by AEAFK does not meet the
specifications as set forth above when delivered by AEAFK and quality claims
arise as a result thereof, such quality claims will be administered by Kinergy
upon notice and consultation with AEAFK.  Such claims shall be solely for
AEAFK’s account and Kinergy shall not be responsible in any manner whatsoever
for such claims.
 
 
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(g) Kinergy shall generate and deliver Renewable Identification Numbers (RINs)
and Low Carbon Fuel Standard (LCFS) credits for Ethanol delivered under this
Agreement as per Good Industry Practice.  AEAFK is responsible for submitting
quarterly and annual reports to the US EPA or California ARB related to RIN and
LCFS programs.
 
1.3 Title; Delivery Point; Nominations; Measurement.
 
(a) AEAFK shall deliver Ethanol to Kinergy at the inlet flange of the applicable
receiving truck that will remove such Ethanol from the Facility.  Title to, risk
of loss with respect to and the obligation to transport such Ethanol shall pass
from AEAFK to Kinergy at such delivery point.
 
(b) Prior to the Date of First Delivery, Kinergy and AEAFK shall agree on an
operating protocol with respect to the mechanics, timing and process for (i)
determining how much Ethanol is available to be sold on any particular day, (ii)
determining the quantity of Ethanol to be stored by AEAFK in its storage
facilities, (iii) identifying Persons to transport the Ethanol, and (iv)
implementing the Ethanol sales contemplated by this Agreement.  By mutual
agreement, such operating protocol shall be updated from time to time
thereafter.
 
(c) AEAFK agrees to collect representative “batch” samples of Ethanol it
delivers to Kinergy hereunder pursuant to Good Industry Practice.  Kinergy shall
have the right, upon reasonable notice and at reasonable times and at its
expense, to test such samples to confirm that the Ethanol delivered to it
hereunder meets the requirements of this Agreement.
 
(d) The quantity of Ethanol delivered to Kinergy by AEAFK from the Facility
shall be established by outbound meter tickets expressed in net
temperature-corrected gallons in accordance with Good Industry Practice.  The
meter tickets shall be obtained from meters which are certified as of the time
of loading and which comply with all applicable laws, rules and
regulations.  The outbound meter tickets shall be determinative in the absence
of manifest error (greater than 0.5% variation) of the quantity of Ethanol for
which Kinergy is obligated to pay pursuant to Section 2.
 
1.4 Plant Startup Services.  Kinergy shall provide consulting services to AEAFK
during the retrofit and startup period, including but not limited to advice on
operations, inventory management, laboratory services, employee training, safety
& environmental policies and training, engineering review, and project
management.
 
 
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ARTICLE II
PAYMENTS
 
2.1 Pool Price, Fees and Payments.
 
(a) The per gallon sale price AEAFK shall receive for the Ethanol sold to
Kinergy under this Agreement shall be the Net Pool Price (as defined below), as
it may be adjusted each month by the Pool True-Up.
 
(b) The “Net Pool Price” shall be, with respect to any month:
 
(i) the weighted average gross price per gallon received by Kinergy for all
Ethanol that was sold by Kinergy during such month and delivered to Third
Parties within the Pool Area (as defined below), whether produced by Affiliates
of Kinergy or imported into the Pool Area from producers outside the Pool Area
(“Gross Pool Price”); minus
 
(ii) the weighted average of all costs (on a per gallon basis) incurred by
Kinergy in conjunction with the handling, movement and sale of Ethanol for Pool
Producers (as defined below) during such month (“Pool Expenses”), including but
not limited to terminal lease charges, throughput charges, terminal shrinkage
costs, freight charges, tariffs, costs of leasing railcars and trucks,
government taxes and assessments (other than taxes on net income, business taxes
paid by Kinergy, or tax on the sale of Ethanol (such sales taxes to be paid
directly by AEAFK for Ethanol from the Facility), but including all other taxes
and governmental charges and assessments), costs to cover of the type described
in Section 1.2(c) and any other similar costs; minus
 
(iii) a marketing fee (the “Marketing Fee”) equal to one percent (1%) of the
product of the number of gallons of Ethanol sold to Kinergy multiplied by (i)
the Gross Pool Price, less (ii) the Pool Expenses.
 
(c) The “Pool Area” shall be defined by the set of Ethanol delivery points set
forth in Exhibit C, all of which are located in that portion of the Central
Valley of California extending north from Grapevine (south of Bakersfield,
California). A “Pool Producer” shall be any Ethanol producers located within the
Pool Area with whom Kinergy has a marketing agreement, including specifically
Calgren Renewables, Pacific Ethanol Madera, LLC; Pacific Ethanol Stockton, LLC,
and AE Advanced Fuels Keyes, Inc.
 
(d) In the event that the actual Net Pool Price for a given month is different
from the estimated Net Pool Price used in calculating payments under Section
2.1(f), then an adjustment to the Net Pool Price in a later month shall be made
by as provided in Section 2.1(f).  Such adjustment is the “Pool True-Up.”
 
(e) For all quantities of Ethanol purchased by Kinergy within the first thirty
days of production from AEAFK and shipped from the Facility, Kinergy shall pay
an estimated Net Pool Price to AEAFK by ACH or wire no later than one (1)
business day following delivery to Kinergy.  For all quantities purchased and
shipped from the Facility thereafter, Kinergy shall pay an estimated Net Pool
Price to AEAFK by ACH or wire no later than three (3) business days following
delivery to Kinergy. If at calendar month’s end, the actual Net Pool Price for
that month’s deliveries exceeds the estimated Net Pool Price for that month’s
deliveries, Kinergy shall pay AEAFK on or before the 15th business day of the
following calendar month an amount equal to the product of (x) the difference
between the actual and estimated Net Pool Price and (y) the aggregate quantity
of Ethanol purchased by Kinergy from AEAFK and shipped from the Facility under
this Agreement during the prior calendar month.  If the actual Net Pool Price
for that month’s deliveries is less than the estimated Net Pool Price for that
month’s deliveries, AEAFK shall pay Kinergy and Kinergy shall have the right to
withhold and set off from future payments to AEAFK on the 15th business day of
the following calendar month, an amount equal to the product of (x) the
difference between the actual and estimated Net Pool Price and (y) the aggregate
quantity of Ethanol purchased by Kinergy from AEAFK and shipped from the
Facility under this Agreement during such month. Kinergy shall provide AEAFK a
parent guaranty of Kinergy’s payment obligations hereunder.
 
 
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2.2 Alternate Price, Fees and Payments.  In the event AEAFK elects to withdraw
from the Pool pursuant to Section 1.1(d), then the following provisions shall
supersede the provisions of Section 2.1:
 
(a) The per gallon sale price AEAFK shall receive for the Ethanol sold to
Kinergy under this Agreement shall be the Net Purchase Price (as defined below),
as it may be adjusted each month by the True-Up.
 
(b) The “Net Purchase Price” shall be, with respect to any month:
 
(i) the gross price per gallon received by Kinergy for all Ethanol originating
from the Facility that was sold by Kinergy during such month and delivered to
Third Parties (“Monthly Gross Price”); minus
 
(ii) all third party costs (on a per gallon basis) incurred by Kinergy in
conjunction with the handling, movement and sale of Ethanol originating from the
Facility during such month, including but not limited to terminal lease charges,
throughput charges, terminal shrinkage costs, freight charges, tariffs, costs of
leasing railcars and trucks, government taxes and assessments (other than taxes
on net income, business taxes paid by Kinergy, or tax on the sale of Ethanol
(such sales taxes to be paid directly by AEAFK for Ethanol from the Facility),
but including all other taxes and governmental charges and assessments) and any
other similar costs (“Monthly Expenses”); minus
 
(iii) a marketing fee (the “Marketing Fee”) equal to one percent (1%) of (i) the
Monthly Gross Price, less (ii) Monthly Expenses.
 
(c) In the event that the actual Net Purchase Price for a given month is
different from the estimated Net Purchase Price used in calculating payments
under Section 2.2(d), then an adjustment to the Net Purchase Price in a later
month shall be made by as provided in Section 2.2(d).  Such adjustment is the
“True-Up.”
 
(d) For all quantities of Ethanol purchased by Kinergy from AEAFK and shipped
from the Facility, Kinergy shall pay an estimated Net Purchase Price to AEAFK by
ACH or wire no later than three (3) days following delivery to Kinergy.  If at
calendar month’s end, the actual Net Purchase Price for that month’s deliveries
exceeds the estimated Net Purchase Price for that month’s deliveries, Kinergy
shall pay AEAFK on or before the 15th business day of the following calendar
month an amount equal to the product of (x) the difference between the actual
and estimated Net Purchase Price and (y) the aggregate quantity of Ethanol
purchased by Kinergy from AEAFK and shipped from the Facility under this
Agreement during the prior calendar month.  If the actual Net Purchase Price for
that month’s deliveries is less than the estimated Net Purchase Price for that
month’s deliveries, AEAFK shall pay Kinergy and Kinergy shall have the right to
withhold and set off from future payments to AEAFK on the 15th business day of
the following calendar month, an amount equal to the product of (x) the
difference between the actual and estimated Net Purchase Price and (y) the
aggregate quantity of Ethanol purchased by Kinergy from AEAFK and shipped from
the Facility under this Agreement during such month.
 
 
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2.3 Overdue Payments.  If any Party shall fail to make any payment when due
hereunder, such overdue payment shall accrue interest at 12% per annum from the
date originally due until the date paid.
 
2.4 Billing Dispute.  If AEAFK or Kinergy, in good faith, disputes the amount of
any payment received by it or to be paid by it pursuant to Section 2.1 or
Section 2.2 above, the disputing Party shall immediately notify the other Party
of the basis for the dispute.  The Parties will then meet and use their best
efforts to resolve any such dispute.  If any amount is ultimately determined to
be due by AEAFK or Kinergy (as the case may be), to the extent not previously
paid, (a) Kinergy shall pay such amount to AEAFK within five Business Days of
such determination or (b) Kinergy may then set-off such amount (as the case may
be).
 
2.5 Audit.  Notwithstanding the payment of any amount pursuant to this
Article II, AEAFK shall remain entitled (upon reasonable prior notice, at
reasonable times and at Kinergy’s corporate offices) to conduct a subsequent
audit and review of (a) transactions and related records to verify the amount of
gross payments, Marketing Fees, Pool Expenses, all other expenses and damage
payments and (b) the determination and calculation of the per gallon sale price,
in each case for a period of two years from and after the end of the applicable
month.  If, pursuant to such audit and review, it is determined that any amount
previously paid by Kinergy to AEAFK did not constitute all of the amounts which
should have been paid to AEAFK, AEAFK shall advise Kinergy indicating such
amount and reason the amount should have been paid to AEAFK and, subject to the
next two sentences, Kinergy shall pay such amount to AEAFK within five Business
Days of such request along with interest accrued at the rate of 12% per annum
from the date originally due until the date paid.  If there is not agreement of
any item so noted, the Parties will then meet and use their best efforts to
resolve the dispute.  If Parties are not able to resolve issues raised by such
an audit and review, any disputed items will be resolved in accordance with the
provisions of Article VII.
 
2.6 Startup Advance.  If requested in writing by AEAFK at any time during the
period commencing at the start of continuous production of on-spec Ethanol at
the Facilities and continuing for ninety (90) days thereafter (the “Pre-payment
Period”), Kinergy shall pre-pay for Ethanol that is to be delivered to Kinergy
within five (5) days following such pre-payment; provided, that (a) the Ethanol
for which pre-payment is made is in storage at the Facility; (b) AEAFK shall
deliver to Kinergy an assignment of such Ethanol in form and substance
satisfactory to Kinergy; (c) Kinergy’s obligation to pre-pay shall terminate if
Ethanol produced at the Facility ceases to conform to ASTM specifications; (d)
the pre-payments outstanding to AEAFK at any time shall not exceed $1,000,000;
(e) Kinergy’s obligation to make pre-payments shall terminate at the end of the
Pre-payment Period; and (f) at the termination of Kinergy’s pre-payment
obligation, AEAFK shall make the Ethanol for which pre-payment has been made
immediately available for delivery to Kinergy.
 
 
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ARTICLE III
TERM; TERMINATION
 
3.1 Term.  This Agreement shall be effective on the date hereof and, unless
earlier terminated in accordance with its terms, shall continue in effect until
and including the first anniversary of the Date of First Delivery; provided that
the term of this Agreement shall automatically renew and be extended for
additional one-year periods thereafter unless a Party elects to terminate this
Agreement in a writing delivered to the other Party at least 90 days prior to
the end of the original or renewal term.
 
3.2 Termination by Kinergy.  Kinergy may unilaterally terminate this Agreement
by written notice to AEAFK, upon the occurrence of any of the following events,
provided that no such notice shall be required for a termination pursuant to
clause (c) of this Section 3.2:
 
(a) the failure by AEAFK to make any payment, deposit or transfer as and when
specified in Section 2.1(f) or Section 2.2(d) or otherwise in this Agreement (or
if a payment is properly disputed, then when specified in Section 2.4), and such
default remains uncured five (5) Business Days following Kinergy’s written
notice of default; provided, that AEAFK may only cure such failure on three (3)
occasions, after which Kinergy shall be entitled to terminate this Agreement
upon AEAFK’s failure to make the required payment;
 
(b) the failure of any statement, representation or warranty made by AEAFK in
this Agreement to have been correct in any material respect when made if such
failure could reasonably be expected to have a material adverse effect on
AEAFK’s ability to perform its obligations under this Agreement;
 
(c) the occurrence of an Act of Insolvency with respect to AEAFK; or
 
(d) the failure of AEAFK to perform any other of its material obligations under
this Agreement and such failure continues for 30 days after receipt of written
notice from Kinergy of such failure; provided, that such 30-day period shall be
extended for up to an aggregate of 90 days so long as AEAFK is diligently
attempting to cure such failure.
 
 
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3.3 Termination by AEAFK.  AEAFK may terminate this Agreement by written notice
to Kinergy, upon the occurrence of any of the following events, provided, that
no such notice shall be required for a termination pursuant to clause (c) of
this Section 3.3:
 
(a) the failure by Kinergy to make any payment, deposit or transfer as and when
specified in Section 2.1(f) or Section 2.2(d) or otherwise in this Agreement (or
if a payment is properly disputed, then when specified in Section 2.4), and such
default remains uncured five (5) Business Days following AEAFK’s written notice
of default; provided, that Kinergy may only cure such failure on three (3)
occasions, after which AEAFK shall be entitled to terminate this Agreement upon
Kinergy’s failure to make the required payment;
 
(b) the failure of any statement, representation or warranty made by Kinergy in
this Agreement to have been correct in any material respect when made if such
failure could reasonably be expected to have a material adverse effect on
Kinergy’s ability to perform its obligations under this Agreement;
 
(c) the occurrence of an Act of Insolvency with respect to Kinergy; or
 
(d) the failure of Kinergy to perform any other of its material obligations
under this Agreement and such failure continues for 30 days after receipt of
written notice from AEAFK of such failure; provided, that such 30-day period
shall be extended for up to an aggregate of 90 days so long as Kinergy is
diligently attempting to cure such failure.
 
3.4 Effect of Termination.  No termination under this Article III shall release
any of the Parties from any obligations arising hereunder prior to such
termination.  The exercise of the right of a Party to terminate this Agreement,
as provided herein, does not preclude such Party from exercising other remedies
that are provided herein or are available at law or in equity; provided,
however, that no Party shall have a right to terminate, revoke or treat this
Agreement as repudiated other than in accordance with the other provisions of
this Agreement; and provided, further, that the Parties’ respective rights upon
termination shall be subject to the liability limitations of Article IV.  Except
as otherwise set forth in this Agreement, remedies are cumulative, and the
exercise of, or the failure to exercise, one or more remedies by a Party shall
not, to the extent provided by Law, limit or preclude the exercise of, or
constitute a waiver of, other remedies by such Party.
 
ARTICLE IV
LIMITATIONS ON LIABILITY
 
4.1 Maximum Liability of Kinergy.  The total aggregate liability of Kinergy to
AEAFK under this Agreement during the term of this Agreement shall not exceed
the aggregate amount of Marketing Fees received by Kinergy.  The liability of
Kinergy to AEAFK under this Agreement during any calendar year shall not exceed
the aggregate amount of Marketing Fees received by Kinergy during such
year.  Notwithstanding the foregoing, such limitations on liability shall not
apply with respect to any net loss, damage or liability resulting from or
arising out of the gross negligence or willful misconduct of Kinergy.
 
4.2 No Consequential or Punitive Damages.   In no event shall either Party be
liable to any other Party by way of indemnity or by reason of any breach of
contract or of statutory duty or by reason of tort (including negligence or
strict liability) or otherwise for any loss of profits, loss of revenue, loss of
use, loss of production, loss of contracts or for any incidental, indirect,
special or consequential or punitive damages of any other kind or nature
whatsoever that may be suffered by such other Party, including any losses for
which such other Party has insurance to the extent proceeds of insurance have
been recovered for such losses.
 
 
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
 
5.1 Kinergy’s Representations and Warranties.  Kinergy represents and warrants
to AEAFK, as of the date hereof, as follows:
 
(a) Due Formation.  Kinergy (i) is a limited liability company duly formed and
validly existing under the laws of the State of Oregon, (ii) has the requisite
power and authority to own its properties and carry on its business as now being
conducted and currently proposed to be conducted and to execute, deliver and
perform its obligations under this Agreement, and (iii) is qualified to do
business in the State of California and in every other jurisdiction in which
failure so to qualify could be reasonably be expected to have a material adverse
effect on Kinergy’s ability to perform its obligations hereunder.
 
(b) Authorization; Enforceability.  Kinergy has taken all action necessary to
authorize it to execute, deliver and perform its obligations under this
Agreement.  This Agreement constitutes a legal, valid and binding obligation of
Kinergy enforceable in accordance with its terms, subject to bankruptcy,
reorganization, moratorium or other similar laws affecting the enforcement of
the rights of creditors generally and subject to general principles of equity.
 
(c) No Conflict.  The execution, delivery and performance by Kinergy of this
Agreement does not and will not (i) violate any Law applicable to Kinergy, (ii)
result in any breach of Kinergy’s constituent documents or (iii) conflict with,
violate or result in a breach of or constitute a default under any agreement or
instrument to which Kinergy or any of its properties or assets is bound or
result in the imposition or creation of any lien or security interest in or with
respect to any of Kinergy’s property or assets, other than in each case any such
violations, conflicts, breaches or impositions which could not be reasonably be
expected to have a material adverse effect on Kinergy’s ability to perform its
obligations hereunder.
 
(d) No Authorization.  No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority (other than those which
have been obtained) is required for the due execution, delivery and performance
by Kinergy of this Agreement, other than any such authorizations, approvals or
actions the failure of which to obtain could not be reasonably be expected to
have a material adverse effect on Kinergy’s ability to perform its obligations
hereunder.
 
(e) Litigation.  Kinergy is not a party to any legal, administrative,
arbitration or other proceeding, and, to Kinergy’s knowledge, no such proceeding
is threatened, which could be reasonably be expected to have a material adverse
effect on Kinergy’s ability to perform its obligations hereunder.
 
5.2 AEAFK’s Representations and Warranties.  AEAFK represents and warrants to
Kinergy, as of the date hereof, as follows:
 
(a) Due Formation.  AEAFK (i) is a corporation duly formed and validly existing
under the laws of the State of Delaware, (ii) has the requisite power and
authority to own its properties and carry on its business as now being conducted
and currently proposed to be conducted and to execute, deliver and perform its
obligations under this Agreement, and (iii) is qualified to do business in the
State of California and in every other jurisdiction in which failure so to
qualify could be reasonably be expected to have a material adverse effect on
AEAFK’s ability to perform its obligations hereunder.
 
 
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(b) Authorization; Enforceability.  AEAFK has taken all action necessary to
authorize it to execute, deliver and perform its obligations under this
Agreement.  This Agreement constitutes a legal, valid and binding obligation of
AEAFK enforceable in accordance with its terms, subject to bankruptcy,
reorganization, moratorium or other similar laws affecting the enforcement of
the rights of creditors generally and subject to general principles of equity.
 
(c) No Conflict.  The execution, delivery and performance by AEAFK of this
Agreement does not and will not (i) violate any Law applicable to AEAFK, (ii)
result in any breach of AEAFK’s constituent documents or (iii) conflict with,
violate or result in a breach of or constitute a default under any agreement or
instrument to which AEAFK or any of its properties or assets is bound or result
in the imposition or creation of any lien or security interest in or with
respect to any of AEAFK’s property or assets, other than in each case any such
violations, conflicts, breaches or impositions which could not be reasonably be
expected to have a material adverse effect on AEAFK’s ability to perform its
obligations hereunder.
 
(d) No Authorization.  No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority (other than those which
have been obtained) is required for the due execution, delivery and performance
by AEAFK of this Agreement, other than any such authorizations, approvals or
actions the failure of which to obtain could not be reasonably be expected to
have a material adverse effect on AEAFK’s ability to perform its obligations
hereunder.
 
(e) Litigation.  AEAFK is not a party to any legal, administrative, arbitration
or other proceeding, and, to AEAFK’s knowledge, no such proceeding is
threatened, which could be reasonably be expected to have a material adverse
effect on AEAFK’s ability to perform its obligations hereunder.
 
ARTICLE VI
FORCE MAJEURE
 
6.1 Definition.  As used herein, “Force Majeure Event” means any cause(s) which
render(s) a Party wholly or partly unable to perform its obligations under this
Agreement (other than obligations to make payments when due), and which are
neither reasonably within the control of such Party nor the result of the fault
or negligence of such Party, and which occur despite all reasonable attempts to
avoid, mitigate or remedy, and shall include acts of God, war, riots, civil
insurrections, cyclones, hurricanes, floods, fires, explosions, earthquakes,
lightning, storms, chemical contamination, epidemics or plagues, acts or
campaigns of terrorism or sabotage, blockades, embargoes, accidents or
interruptions to transportation, trade restrictions, acts of any Governmental
Authority after the date of this Agreement, strikes and other labor
difficulties, and other events or circumstances beyond the reasonable control of
such Party.  Mechanical breakdown (including a forced outage of the Facility)
that continues for more than five consecutive days shall be deemed not to be
“Force Majeure Event” unless such mechanical breakdown resulted from or was
caused by a separate “Force Majeure Event.”
 
 
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6.2 Effect.  A Party claiming relief as a result of a Force Majeure Event shall
give the other Parties written notice within five Business Days of becoming
aware of the occurrence of the Force Majeure Event, or as soon thereafter as
practicable, describing the particulars of the Force Majeure Event, and will use
reasonable efforts to remedy its inability to perform as soon as possible.  If
the Force Majeure Event (including the effects thereof) continues for fifteen
consecutive days, the affected Party shall report to the other Parties the
status of its efforts to resume performance and the estimated date thereof.  If
the Force Majeure Event (including the effects thereof) continues for 180
consecutive days, the affected Party may terminate this Agreement for
convenience.  If the affected Party was not able to resume performance prior to
or at the time of the report to the other Parties of the onset of the Force
Majeure Event, then it will report in writing to the other Parties when it is
again able to perform.  If a Party fails to give timely notice, the excuse for
its non-performance shall not begin until notice is given.
 
6.3 Limitations.  Any obligation(s) of a Party (other than an obligation to make
payments when due) may be temporarily suspended during any period such Party is
unable to perform such obligation(s) by reason of the occurrence of a Force
Majeure Event, but only to the extent of such inability to perform, provided,
that:
 
(a) the suspension of performance is of no greater scope and of no longer
duration than is reasonably required by the Force Majeure Event; and
 
(b) the Party claiming the occurrence of the Force Majeure Event bears the
burden of proof.
 
ARTICLE VII
DISPUTE RESOLUTION
 
7.1 Attempts to Settle.  In the event that a Dispute among the Parties arises
under, out of or in relation to, this Agreement, the Parties shall attempt in
good faith to settle such Dispute by mutual discussions within fifteen Business
Days after the date that an aggrieved Party gives written notice of the Dispute
to the other Parties.  In the event that a Dispute is not resolved by discussion
in accordance with the preceding sentence within the time period set forth
therein, the Parties shall refer the Dispute to their respective senior officers
for further consideration and attempted resolution within fifteen Business Days
after the Dispute has been referred to such individuals (or such longer period
as the Parties may agree).
 
7.2 Resolution by Expert.  If the Parties shall have failed to resolve the
Dispute within fifteen Business Days after the date that the Parties referred
the Dispute to their senior officers, then, provided the Parties shall so agree,
the Dispute may be submitted for resolution by an Expert, such Expert to be
appointed by the mutual agreement of the Parties.  Proceedings before an Expert
shall be held in Sacramento, California (or any other location agreed to by the
Parties).  The Expert shall apply to such proceedings the substantive law of the
State of California in effect at the time of such proceedings.  The decision of
the Expert shall be final and binding upon the Parties.  In the event that (a)
the Parties cannot agree on the appointment of an Expert within ten Business
Days after the date that the Parties agreed to submit the Dispute for resolution
by the Expert or (b) the Expert fails to resolve such Dispute within 60 days
after the Parties have submitted such Dispute to the Expert, then any Party may
file a demand for arbitration in writing in accordance with Section 7.3.
 
 
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7.3 Arbitration.  Any Dispute that has not been resolved following the
procedures set forth in Section 7.1 or 7.2 shall be settled by binding
arbitration in Sacramento, California (or any other location agreed to by the
Parties) before a panel of three arbitrators.  Such arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association as in effect on the date of execution of this
Agreement.  Such arbitration shall be governed by the laws of the State of
California.  If arbitration proceedings have been initiated pursuant to this
Section 7.3 and raise issues of fact or law which, in whole or in part, are
substantially the same as issues of fact or law already pending in arbitration
proceedings involving the applicable Parties, such issues shall be consolidated
with the issues in the ongoing proceedings.  THE PARTIES HEREBY AGREE THAT THE
PROCEDURES SET FORTH IN THIS ARTICLE VII SHALL BE THE EXCLUSIVE DISPUTE
RESOLUTION PROCEDURES APPLICABLE TO ANY DISPUTE, CONTROVERSY OR CLAIM UNDER THIS
AGREEMENT AND, EXCEPT AS SET FORTH IN SECTION 7.5, THE PARTIES HEREBY WAIVE ALL
RIGHTS TO A COURT TRIAL OR TRIAL BY JURY WITH RESPECT TO ANY DISPUTE,
CONTROVERSY OR CLAIM UNDER THIS AGREEMENT.
 
7.4 Consequential and Punitive Damages.  Awards of Experts and arbitral panels
shall be subject to the provisions of Article IV.
 
7.5 Finality and Enforcement of Decision.  Any decision or award of an Expert or
a majority of an arbitral panel, as applicable, shall be final and binding upon
the Parties.  Each of the Parties agrees that the arbitral award may be enforced
against it or its assets wherever they may be found and that a judgment upon the
arbitral award may be entered in any court having jurisdiction thereof.  The
Parties hereby waive any right to appeal or to review the decision or award of
an Expert or an arbitral panel by any court or tribunal and also waive any
objections to the enforcement of such decision or award.
 
7.6 Costs.  The costs of submitting a Dispute to an Expert shall be shared
equally among the Parties involved in the Dispute, unless the arbitral panel or
the Expert determines otherwise.  The costs of arbitration shall be paid in
accordance with the decision of the arbitral panel pursuant to the Commercial
Arbitration Rules of the American Arbitration Association as in effect on the
date of execution of this Agreement.
 
7.7 Continuing Performance Obligations.  While a Dispute is pending, each Party
shall continue to perform its obligations under this Agreement, unless such
Party is otherwise entitled to suspend its performance hereunder or terminate
this Agreement in accordance with the terms hereof.
 
 
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ARTICLE VIII
CONFIDENTIALITY
 
Each Party and its Affiliates shall treat as confidential the data and
information in their possession regarding the Facility, the other Parties or any
Affiliate of any other Party, unless:  (a) the applicable other Party agrees in
writing to the release of such data or information; (b) such data or information
becomes publicly available other than through the wrongful actions of the
disclosing Party or the disclosing Party’s Affiliate; (c) such data or
information was in the possession of the receiving Party or the receiving
Party’s Affiliate prior to receipt thereof from the disclosing Party with no
corresponding confidentiality obligation; or (d) such data or information is
required by Law to be disclosed.  Notwithstanding the generality of the
foregoing, any Party may disclose data and information to (i) the officers,
directors, managers, partners, members, employees and Affiliates of such Party,
(ii) any successors in interest and permitted assigns of such Party, (iii) any
actual or potential financing parties or actual or potential lenders to such
Party or to PEI or any subsidiary thereof, and (iv) any potential equity
investors in such Party or to PEI or any subsidiary thereof; provided, that any
Person who receives confidential data and information pursuant to an exception
contained in clauses (ii) – (iv) of this Article agrees to similar
confidentiality provisions.
 
ARTICLE IX
ASSIGNMENT AND TRANSFER
 
No Party shall assign this Agreement or any of its rights or obligations
hereunder without first obtaining the prior written consent of (a) in the case
of AEAFK, Kinergy, or (b) in the case of Kinergy, AEAFK, provided, that any
Party shall be entitled to assign its rights hereunder (as collateral security
or otherwise) for financing purposes (including a collateral assignment to any
financing parties) without the consent of any other Party.
 
ARTICLE X
MISCELLANEOUS
 
10.1 Entire Agreement.  This Agreement, including the Exhibits hereto, contains
the entire agreement between the Parties with respect to the subject matter
hereof and supersedes all prior agreements, negotiations and understandings
among the Parties with respect to such subject matter.  Nothing in this
Agreement shall be construed as creating a partnership or joint venture between
the Parties.
 
10.2 Counterparts.  This Agreement may be executed in any number of counterparts
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute one and the same agreement.
 
10.3 Survival.  Cancellation, expiration or earlier termination of this
Agreement shall not relieve the Parties of obligations that by their nature
should survive such cancellation, expiration or termination, including remedies,
limitations on liability, promises of indemnity and payment, and
confidentiality.
 
10.4 Severability.  In the event any one or more of the provisions contained in
this Agreement should be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.  The Parties shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions, the economic and practical
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
 
 
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10.5 Governing Law.  This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California, as applied to
contracts made and performed within the State of California, without regard to
its conflicts of law principles.
 
10.6 Binding Effect.  This Agreement shall be binding upon and shall inure to
the benefit of the Parties hereto and their respective successors and permitted
assigns.  This Agreement is not made for the benefit of any Person or entity not
a party hereto, and nothing in this Agreement shall be construed as giving any
Person or entity, other than the Parties and their respective successors and
permitted assigns, any right, remedy or claim under or in respect of this
Agreement or any provision hereof.
 
10.7 Notices.  All notices or other communications which are required or
permitted hereunder shall be in writing and shall be deemed sufficiently given
(a) upon delivery, if delivered personally, (b) the day the notice is received,
if it is delivered by overnight courier or certified or registered mail, postage
prepaid, or (c) upon the effective receipt of electronic transmission,
facsimile, telex or telegram (with effective receipt being deemed to occur upon
the sender’s receipt of confirmation of successful transmission of such notice
or communication), to the addresses set forth below or such other address as the
addressee may have specified in a notice duly given to sender as provided
herein:
 
If to Kinergy:
 
 
Kinergy Marketing, LLC

400 Capitol Mall, Suite 2060
Sacramento, CA  95814
Attention:       Mr. Greg DiBiase
Telephone:     (916) 403-2123
Facsimile:        (916) 446-3937
 
With a copy to:
 
 
Pacific Ethanol, Inc.

400 Capitol Mall, Suite 2060
Sacramento, CA  95814
Attention:      General Counsel
Telephone:     (916) 403-2130
Facsimile:        (916) 446-3936
 
If to AEAFK:
 
 
AE Advanced Fuels Keyes, Inc.

20400 Stevens Creek Blvd., Suite 700
Cupertino, CA  95014
Attention:     Mr. Todd Waltz, CFO
Telephone:   (408) 213-0940
Facsimile:      (408) 255-8044
 
 
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10.8 Amendment.  No Party hereto shall be bound by any termination, amendment,
supplement, waiver or modification of any term hereof unless such Party shall
have consented thereto in writing.
 
10.9 No Implied Waiver.  No delay or failure on the part of any Party in
exercising any rights hereunder, and no partial or single exercise thereof,
shall constitute a waiver of such rights or of any other rights hereunder.
 
10.10 Interpretation.  The following interpretations and rules of construction
shall apply to this Agreement:
 
(a) titles and headings are for convenience only and will not be deemed part of
this Agreement for purposes of interpretation;
 
(b) unless otherwise stated, references in this Agreement to “Sections” or
“Articles” refer, respectively, to Sections or Articles of this Agreement;
 
(c) “including” means “including, but not limited to”, and “include” or
“includes” means “include, without limitation” or “includes, without
limitation”;
 
(d) “hereunder”, “herein”, “hereto” and “hereof”, when used in this Agreement,
refer to this Agreement as a whole and not to a particular Section or clause of
this Agreement;
 
(e) in the case of defined terms, the singular includes the plural and vice
versa;
 
(f) unless otherwise indicated, all accounting terms not specifically defined
shall be construed in accordance with generally accepted accounting practices in
the United States;
 
(g) unless otherwise indicated, each reference to a particular Law is a
reference to such Law as it may be amended, modified, extended, restated or
supplemented from time to time, as well as to any successor Law thereto;
 
(h) unless otherwise indicated, references to agreements shall be deemed to
include all subsequent amendments, supplements and other modifications thereto;
and
 
(i) unless otherwise indicated, each reference to any Person shall include such
Person’s successors and permitted assigns.
 
[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]
 
 
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IN WITNESS WHEREOF, this Ethanol Marketing Agreement has been duly executed by
the Parties hereto as of the date first written above.
 
 
 

 
AE ADVANCED FUELS KEYES, INC.
         
 
By:
/s/ Eric A. McAfee       Name: Eric A. McAfee       Title: CEO                  
  KINERGY MARKETING, LLC             By:  /s/ Byron T. McGregor       Name:
Byron T. Mc McGregor       Title: Chief Financial Officer          

 
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Exhibit A
 
CERTAIN DEFINITIONS
 
For purposes of the Agreement (including this Exhibit A):
 
“Act of Insolvency” means, with respect to any Person, any of the
following:  (a) commencement by such Person of a voluntary proceeding under any
jurisdiction’s bankruptcy, insolvency or reorganization law; (b) the filing of
an involuntary proceeding against such Person under any jurisdiction’s
bankruptcy, insolvency or reorganization law which is not vacated within 60 days
after such filing; (c) the admission by such Person of the material allegations
of any petition filed against it in any proceeding under any jurisdiction’s
bankruptcy, insolvency or reorganization law; (d) the adjudication of such
Person as bankrupt or insolvent or the winding up or dissolution of such Person;
(e) the making by such Person of a general assignment for the benefit of its
creditors (assignments for a solvent financing excluded); (f) such Person fails
or admits in writing its inability to pay its debts generally as they become
due; (g) the appointment of a receiver or an administrator for all or a
substantial portion of such Person’s assets, which receiver or administrator, if
appointed without the consent of such Person, is not discharged within 60 days
after its appointment; or (h) the occurrence of any event analogous to any of
the foregoing with respect to such Person occurring in any jurisdiction.
 
“AEAFK” has the meaning given to such term in the preamble hereto.
 
“Affiliate” means, with respect to any Person, any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person.  For purposes of this definition, “control”, when used
with respect to any Person, means the power to direct or cause the direction of
the management and policies of such Person, directly or indirectly, whether
through the ownership or voting securities, by contract or otherwise.
 
“Agreement” has the meaning given to such term in the preamble hereto.
 
“Business Day” means any day other than a Saturday, Sunday or a day on which
commercial banks in California are required or authorized to be closed.
 
“Date of First Delivery” means the date when Ethanol produced at the Facility is
available for delivery to Kinergy under this Agreement.
 
“Dispute” means a dispute, controversy or claim.
 
“Ethanol” means denatured fuel ethanol produced by the Facility satisfying the
American Society for Testing and Materials (ASTM) D4806 specifications for
denatured fuel ethanol.
 
“Expert” means an expert having sufficient technical expertise to address the
matter subject to a Dispute.
 
“Facility” has the meaning given to such term in the recitals hereto.
 
“Force Majeure Event” has the meaning set forth in Section 6.1.
 
 
A-1

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“Good Industry Practice” means any of the practices, methods and acts engaged in
or approved by a significant portion of the ethanol production or marketing (as
the case may be) industry during the relevant time period, or any of the
practices, methods and acts which, in the exercise of reasonable judgment in
light of the facts known at the time the decision was made, could have been
expected to accomplish the desired result at a reasonable cost consistent with
good business practices, reliability, safety and expedition.  Good Industry
Practice is not limited to a single, optimum practice, method or act to the
exclusion of others, but rather is intended to include acceptable practices,
methods or acts generally accepted in the region.
 
“Governmental Authority” means any United States federal, state, municipal,
local, territorial, or other governmental department, commission, board, bureau,
agency, regulatory authority, instrumentality, judicial or administrative body.
 
“Gross Pool Price” has the meaning give to such term in Section 2.1(b)(i).
 
“Kinergy” has the meaning given to such term in the preamble hereto.
 
“Law” means any law, statute, act, legislation, bill, enactment, policy, treaty,
international agreement, ordinance, judgment, injunction, award, decree, rule,
regulation, interpretation, determination, requirement, writ or order of any
Governmental Authority.
 
“Marketing Fee” has the meaning give to such term in Section 2.1(b).
 
“Monthly Date” means the last Business Day of each calendar month.
 
“Monthly Expenses” has the meaning give to such term in Section 2.2(b)(ii).
 
“Monthly Gross Price” has the meaning give to such term in Section 2.2(b)(i).
 
“Net Pool Price” has the meaning give to such term in Section 2.1(b).
 
“Net Purchase Price” has the meaning give to such term in Section 2.2(b).
 
“PEI” means Pacific Ethanol, Inc., a Delaware corporation.
 
“Party” or “Parties” has the meaning given to such term in the preamble hereto.
 
“Permits” means all permits, authorizations, registrations, consents, approvals,
waivers, exceptions, variances, orders, judgments, written interpretations,
decrees, licenses, exemptions, publications, filings, notices to and
declarations of or with, or required by, any Governmental Authority, or required
by any Law, and shall include all environmental and operating permits and
licenses that are required for the full use, occupancy, zoning and operation of
the Facility.
 
“Person” means and includes natural persons, corporations, limited liability
companies, limited partnerships, general partnerships, joint stock companies,
joint ventures, associations, companies, trusts, banks, trust companies and
other organizations, whether or not legal entities, Governmental Authorities and
any other entity.
 
 
A-2

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“Pool Area” has the meaning give to such term in Section 2.1(c).
 
“Pool Expenses” has the meaning give to such term in Section 2.1(b).
 
“Pool Producer” has the meaning give to such term in Section 2.1(d).
 
“Pool True-Up” has the meaning give to such term in Section 2.1(e).
 
“Third Party” means any Person (other than PEI or a subsidiary thereof) that
purchases Ethanol from Kinergy.
 
“True-Up” has the meaning give to such term in Section 2.2(d).

 
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Exhibit B
 
SPECIFICATIONS
 
Fuel Ethanol meets the ASTM D4806-99 “Standard Specification for Denatured Fuel
Ethanol for Blending with Gasolines for Use as Automotive Spark-Ignition Engine
Fuel.” The ASTM specification is as follows:
 
 

Ethanol, volume %, min 92.1 ASTM D5501 Methanol, volume %, max  0.5   Existent
Gum, (solvent washed) mg/100ml., max   5.0 ASTM D381 Water Content, volume %,
max  1.0 ASTM D203 Denaturant content, volume %,             min    1.96
                max   4.96 Chloride Ion Content, mass ppm, max 40 ASTM D512
Copper Content, mg/kg, max 0.1 ASTM D1688 Acidity (as acetic acid), mass %, max 
0.007 ASTM D 6423 pHe 6.5 to 9.0  ASTM D6423 Appearance Visibly free of
suspended or precipitated contaminants, clear and bright

 
Additional CA Specifications (to comply with California Air Resources Board
specs):

 

Sulfur, ppm, max 10 ASTM D5453 Benzene, volume %, max 0.06 ASTM D5580 Aromatics,
volume %, max 1.7 ASTM D5580 Olefins, volume %, max 0.5 ASTM D319

 

 
B-1

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Exhibit C
 
DELIVERY POINTS IN POOL AREA
 

 

 
 
 
C-1