Document:

exv10w1

 

Exhibit 10.1

PERFORMANCE
SHARE AGREEMENT

UNDER THE

PINNACLE WEST CAPITAL CORPORATION 2002

LONG-TERM INCENTIVE PLAN

     THIS AWARD AGREEMENT is made and entered into as of _________, 200___(the “Date of Grant”),
by and between Pinnacle West Capital Corporation (the “Company”), and «Name» (“Employee”).

BACKGROUND

	 	A.	 	The Board of Directors of the Company (the “Board of Directors”) has adopted,
and the Company’s shareholders have approved, the Pinnacle West Capital Corporation
2002 Long-Term Incentive Plan (the “Plan”), pursuant to which performance share
incentive awards may be granted to employees of the Company and its subsidiaries and
certain other individuals.
	 
	 	B.	 	The Company desires to grant to Employee a performance share award under the
terms of the Plan.
	 
	 	C.	 	Pursuant to the Plan, the Company and Employee agree as follows:

AGREEMENT

	 	1.	 	Grant of Award. Pursuant to action of the Committee
(as defined herein) which was taken on the Date of Grant, the Company grants to
Employee «Shares» performance shares (“Performance Shares”), subject to the
terms, conditions, and adjustments set forth in this Award Agreement. The
Performance Shares granted under this Section 1 are referred to in this Award
Agreement as the “Base Grant.”
	 
	 	2.	 	Award Subject to Plan. This award is granted under and
is expressly subject to, all of the terms and provisions of the Plan, which
terms are incorporated herein by reference, and this Award Agreement. The
Committee described in Section 4 of the Plan (the “Committee”) has been
appointed by the Board of Directors, and designated by it, as the Committee to
make awards.
	 
	 	3.	 	Performance Period. The performance period for this
award begins _________, 20___, and ends _________, 20___(the
“Performance Period”).

 

 

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Performance Share Agreement

	 	4.	 	Payment.

	 	(a)	 	Performance Shares Payable In Common
Stock. Subject to early termination of this Award Agreement
pursuant to Section 7 below, as soon as practicable following the end
of the Performance Period and the determination of the Company’s
Earnings Per Share Growth Rate (as defined herein) as compared to the
Earnings Per Share Growth Rate of the Index set forth on Attachment A
(the “Index”) over such Performance Period but in no event later than
December 31, 20___, the Company will deliver to Employee one (1) share
of the Company’s Common Stock for each then-outstanding Performance
Share under this Award Agreement. If the Employee terminates
employment after the end of the Performance Period but before
distribution of any shares pursuant to this Award Agreement, the
distribution of the shares will not be made until six (6) months
following the Employee’s termination of employment if required by
Section 409A of the Code.
	 
	 	(b)	 	Retirement. In the case of Employee’s
Retirement (as defined herein) Employee shall have been deemed to have
been employed by the Company through the end of the Performance Period.
For purposes of this Award Agreement, “Retirement” means a termination
of employment which constitutes an “Early Retirement” or a “Normal
Retirement” under the Pinnacle West Capital Corporation Retirement
Plan.
	 
	 	(c)	 	Dividend Equivalents. At the time of
the Company’s delivery of Common Stock to Employee pursuant to
Subsection 4(a) above, the Company will also deliver to Employee a cash
payment equal to the amount of dividends that Employee would have
received if Employee had directly owned all of such Common Stock during
the Performance Period, plus interest on such amount at the rate of
___percent, compounded quarterly.
	 
	 	(d)	 	Maximum Award. Employee may not
receive more than 120,000 shares of Common Stock under this Award
Agreement.

	 	5.	 	Performance Criteria and Adjustments.
	 
	 	 	 	Adjustment of Base Grant. The Base Grant will increase or decrease
based upon the Company’s “Earnings Per Share Growth Rate” as compared to the
Earnings Per Share Growth Rate of the Index during the Performance Period,
as follows:

 

 

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Performance Share Agreement

	 	 	 
	If the Company's Earnings Per Share	 	 
	Compound Growth Rate Over The Performance	 	The Number of
	Period As Compared to the Index is:	 	Performance Shares will be:
	___th Percentile or Greater
	 	___X Base Grant
	___th Percentile
	 	___X Base Grant
	___th Percentile
	 	Base Grant
	___th Percentile
	 	___X Base Grant
	Less than ___th Percentile
	 	[None / ___X Base Grant]

     If intermediate percentiles are achieved, the number of Performance
Shares awarded will be prorated (partial shares will be rounded down to the
nearest whole share when applicable). For example, if the Company’s Earnings
Per Share Growth Rate during the Performance Period places the Company’s
performance in the ___th percentile, then the number of Performance Shares
would be increased to ___multiplied by the Base Grant. In no event will
Employee be entitled to receive a number of Performance Shares greater than
___times the Base Grant, even if the Company’s Earnings Per Share Growth
Rate during the Performance Period places the Company’s performance higher
than the ___th percentile. Attachment B provides a generic example
of the operation of an award granted under this Award Agreement.

	 	6.	 	Earnings Per Share Growth Rate. “Earnings Per Share
Growth Rate” for the Performance Period is the compounded annual-growth rate
(CAGR) of a company’s earnings per share from continuing operations, on a fully
diluted basis, during the Performance Period provided, however, that for
purposes of calculating the Company’s Earnings Per Share Growth Rate, SunCor
Development Company’s earnings from discontinued operations will be considered
earnings from continuing operations for each fiscal year during the Performance
Period. Only those companies which were in the Index at both the beginning and
the ending of the Performance Period will be considered. The Earnings Per
Share Growth Rate of the companies in the Index will be determined using an
independent third party data system. If the Index is discontinued, the
Committee shall select the most comparable index then in use for the sector
comparison. In addition, if the sector comparison is no longer representative
of the Company’s industry or business, the Committee shall replace the index
with the most representative index then in use. Once the CAGR of the Company
and all relevant companies in the Index have been determined, the member
companies will be ranked from greatest to least CAGR. Percentiles will be
calculated based on a company’s relative ranking. For example, company 1 out
of 26 companies is given a

 

 

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Performance Share Agreement

	 	 	 	percentile of 96.2% (1.0 — 1/26). Percentiles will be carried out to one
(1) decimal place. If the Company is not in the Index, then its percentile
will be interpolated between the companies listed in the relative ranking.
These calculations will be verified by the Company’s internal auditors.
	 
	 	7.	 	Termination of Award. This Award Agreement will
terminate and be of no further force or effect on the date that Employee is no
longer actively employed by the Company or any of its subsidiaries, whether due
to voluntary or involuntary termination, death, retirement, disability, or
otherwise, except as specifically set forth in Section 4. Subject to Section 4,
Employee will, however, be entitled to receive any Common Stock and dividend
equivalents payable under Section 4 of this Award Agreement if Employee’s
employment terminates after the Performance Period but before Employee’s
receipt of such Common Stock and dividend equivalents. For avoidance of doubt,
no acceleration of Performance Shares or the Performance Period will occur on a
change of control of the Company.
	 
	 	8.	 	Tax Withholding. Employee must pay, or make
arrangements acceptable to the Company for the payment of any and all federal,
state, and local income and payroll tax withholding that in the opinion of the
Company is required by law. Unless Employee satisfies any such tax withholding
obligation by paying the amount in cash or by check, the Company will withhold shares
of Common Stock having a Fair Market Value on the date of withholding
sufficient to cover the withholding obligation.
	 
	 	9.	 	Non-Transferability. Neither this award nor any rights
under this Award Agreement may be assigned, transferred, or in any manner
encumbered except by will or the laws of descent and distribution, and any
attempted assignment, transfer, mortgage, pledge or encumbrance except as
herein authorized, will be void and of no effect.
	 
	 	10.	 	Definitions: Copy of Plan and Plan Prospectus. To the
extent not specifically defined in this Award Agreement, all capitalized terms
used in this Award Agreement will have the same meanings ascribed to them in
the Plan. By signing this Award Agreement, Employee acknowledges receipt of a
copy of the Plan and the related Plan Prospectus.
	 
	 	11.	 	Choice of Law. This Agreement will be governed by the
laws of the State of Arizona, excluding any conflicts or choice of law rule or
principle that might otherwise refer construction or interpretation of this
Agreement to another jurisdiction.

 

 

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Performance Share Agreement

     An authorized representative of the Company has signed this Award Agreement, and Employee has
signed this Award Agreement to evidence Employee’s acceptance of the award on the terms specified
in this Award Agreement, all as of the Date of Grant.

	 	 	 	 	 
	 

	 	PINNACLE WEST CAPITAL CORPORATION
	 
	 	 
	 
	 	 
	 

	 	By:
	 

	 	 
	 

	 	Its: Vice President and Treasurer
	 
	 	 
	 
	 	 
	 
	 	 
	 	 	 
	 

	 	Employee

 

 

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Performance Share Agreement

Attachment A

     The Index will be the S&P 1500 Super Composite Electric Utility Index.

 

 

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Performance Share Agreement

Attachment B

Generic Example

(Performance Share Award)

ASSUMPTIONS:

	 	•	 	Employee is granted 500 Performance Shares, which constitutes Employee’s “Base Grant.”
	 
	 	•	 	During the Performance Period, the Company’s Earnings Per Share Growth Rate is in the
88.3 percentile compared to the Index.

CALCULATION OF EMPLOYEE’S COMMON STOCK PAYMENT:

	 	•	 	Based on the Company’s achievement of the 88.3 Percentile during the Performance Period,
in April of the fiscal year immediately following the end of the Performance Period,
Employee will receive ___ shares of Common Stock, calculated as follows:

	 	•	 	___ shares of Common Stock as a result of the Company’s Earnings Per
Share Growth Rate meeting at least the ___th Percentile (___X Base Grant) plus
	 
	 	•	 	___ shares of Common Stock as a result of the Company’s Earnings Per
Share Growth Rate achieving ___ of the Percentile increase between the ___th and
___th Percentile (___X ___)
shares, with the ___ shares representing the
Common Stock opportunity between the ___th and ___th Percentiles). (Note:
___X ___ shares = ___ shares and
must be rounded down to ___ shares.)<PAGE>
EXHIBIT 10.1

                             HUDSON UNITED CAPITAL
                        A Division of Hudson United Bank

Post Road East
Westport, Cr 06880
(243) 291-6664
FAX (203) 291-6652
www.hudsonunitedcapital.com

January 23, 2006

Mr. Ryan Turner
Chief Operating Officer
Pacific Ethanol, Inc
5711 N. West Avenue
Fresno, CA 93711

Dear Ryan:

Hudson United Bank ("United") has received approval from its senior management,
and is pleased to issue this Formal Commitment (the "Commitment") to provide to
Pacific Ethanol Madera LLC, Inc ("PEM" or "Borrower") its portion of senior loan
facilities (the "Facilities") for the construction and term financing of the
Madera Ethanol Project. United's Commitment to provide this loan facility is
conditioned upon the terms and conditions set forth in the Summary of Indicative
Terms and Conditions dated November 28, 2005 attached hereto (the "Proposal")
with the following modifications;

1.   The "Project Cost" defined on page 4 of the Proposal is changed to read
     "not to exceed $65,069,113'".

2.   Borrower defined on pages 6, 12, and 20 of the Proposal is changed to read
     as follows: "Pacific Ethanol Madera LLC ("PEM")".

3.   The "Construction Loan Amount" defined on page 12 of the Proposal is
     changed in its entirety to read as follows:

          "Not to exceed $34,000,000, which amount can be supported by the
          Closing Pro forma, or such lesser amount as determined by the
          provisions of Senior Term Loan Amount defined herein (the "Senior
          Construction Loan Amount")". United proposes to underwrite up to
          $22,100,000 of the Senior Construction Loam Amount and arrange the
          balance of the financing on a best efforts basis".

4.   The section covering the "Senior Term Loan Amount" defined on page 20 of
     the Proposal is changed in its entirety to read as follows:

          "The Senior Term Loan Amount will be the lesser of $34,000,000, (b)
          52.25% of Project Cost at Senior Term Loan Conversion as herein
          defined, and (c) an amount equal the present value. of up to 43.67%
          (based upon a 2.29X senior debt service coverage ratio) of the
          Operating Casks distributable to and received by the

<PAGE>

          Borrower supported by the Closing Pro Forma (which will include the
          results from the Senior Lender's Engineer's Report and due diligence
          review by Senior Lender), from the Conversion Date as defined below
          through the seventh (7th) anniversary of the Conversion Date
          discounted at 9.5% (the "Senior Term Loan Amount'). For the purposes
          of this proposal, the Senior Loan Amount is assumed to be $34,000,000
          based upon current pro forma assumptions. United proposes to
          underwrite up to $22,100,000 of the Senior Term Loan Amount and
          arrange the balance of the financing on a best efforts basis.

5.   The Sweep Percentage pursuant to the Supplemental Principal Payments
     provisions as contained on page 25 of the Proposal is changed from 40% to
     25%.

6.   All revenues derived by PAP through its use of the Grain Facility will be
     placed in the Senior Lender controlled interest bearing Lock-Box (the
     "Project Revenue Account" or "PRA"). The withdrawal of any funds
     contributed by PAP from the PRA shall be in accordance with the Priority of
     Payments provisions (item 7) contained on page 28 of the Proposal.

7.   All applicable Material Project Documents will be modified to reflect the
     revised project pro forma dated January 10, 2006 and reviewed by Harris.

8.   As an additional condition to any funding by the Senior Construction Lender
     of the Construction Draw Account with Senior Construction Loan proceeds, an
     "Appraiser" shall provide an "Independent Appraisal" of (1) the Grain
     Facility, (2) Phase I work completed to date and (3) the Project, all as
     acceptable to Senior Construction Lender.

9.   Contractor's performance guarantee and performance bond shall cover both
     the Phase I and Phase II construction and completion so that any condition
     of the Phase I construction that would cause a failure of the Project to
     successfully meet the conditions of substantial completion and final
     completion shall be covered by delay and performance liquidated damages.

10.  Exhibit I of the Proposal, Sources and Uses of Funds is hereby changed to
     read as follows:

                                 Sources of Fund
                                 ---------------
     Senior Debt - HUB:         $ 22,100,000   (33.96%)
     Senior Debt - Comerica:      11,900,000   (18.29%)
     Sponsor Equity:              22,000,000   (33.81%)
     Contributed Assets:           9,069,113   (13.94%)
     --------------------------------------------------
     Total Sources:             $ 65,069,113  (100.00%)

                                 Uses of Funds
                                 -------------
Construction Costs
------------------
     Plant Construction                                  $ 45,467,887
     Site, Rail, Silos, and Engineer:                       9,069,113
     Capitalized Fees and Interest                          2,345,904
                                                         ------------
Sub Total Construction:                                  $ 56,882,904
     Corn Inventory:                                        1,318,324
     Ethanol and WDG Inventory:                               265,705
     Enzymes, Chemicals:                                      136,000
     Spare Parts                                              350,000
     Operating Expenses:                                      395,338
     Other Working Capital:                                   182,458
     Contingency and Cash:                                  2,708,837
     6 mos. DSRA Deposit:                                   3,005,993
     Interest Income:                                        (176,446)
                                                         ------------
Total Project Cost:                                      $ 65,069,113

                                        2

<PAGE>

11. Exhibit II is hereby modified in its entirety to read as follows:

                                   EXHIBIT II

                       Loan Amortization Schedule ($000s)

(This Amortization Schedule assumes a $34,000,000 loan amount which is subject
to change. Loan Amortization will be established on the Conversion Date based
upon the Operating Cash projected to be available to the Borrower from the
Project as determined by the Closing Pro forma.)

--------------------------------------------------------------------------------
                    Beginning               Principal
   Payment #          Balance                Payment            Ending Balance
--------------------------------------------------------------------------------
       1            $34,000,000              $772,630             $33,227,370
       2            $33,227,370              $790,980             $32,436,390
       3            $32,436,390              $809,766             $31,626,624
       4            $31,626,624              $828,998             $30,797 626
       5            $30,797,626              $885,207             $29,912 419
       6            $29,912,419              $906,231             $29,006,189
       7            $29,006,189              $927,753             $28,078,435
       8            $28,078,435              $949,788             $27,128,647
       9            $27,128,647             $1,008,929            $26,119,718
      10            $26,119,718             $1,032,891            $25,086,827
      11            $25,086,827             $1,057,423            $24,029,404
      12            $24,029,404             $1,082,536            $22,946,867
      13            $22,946,867             $1,144,888            $21,801,979
      14            $21,801,979             $1,172,079            $20,629,900
      15            $20,629,900             $1,199,916            $19,429,984
      16            $19,429,984             $1,228,414            $18,201,570
      17            $18,201,570             $1,294,280            $16,907,290
      18            $16,907,290             $1,325,019            $15,582,270
      19            $15,582,270             $1,356,489            $14,225,782
      20            $14,225,782             $1,388,705            $12,837,076
      21            $12,837,076             $1,458,421            $11,378,656
      22            $11,378,656             $1,493,058             $9,885,597
      23             $9,885,597             $1 528,519             $8,357,079
      24             $8,357,079             $1,564,821             $6,792,258
      25             $6,792,258             $1,638,754             $5,153,504
      26             $5,153,504             $1,677,674             $3,475,829
      27             $3,475,829             $1,717,519             $1,758,310
      28             $1,758,310             $1,758,310                 $0

                          Total:           $34,000,000

                                       3

<PAGE>

The closing of documentation and funding of the loan facilities contemplated by
this Commitment is subject to (i) the negotiation, execution and delivery of
documentation satisfactory in form and substance to United and its counsel and
(ii) no material adverse change in the financial condition of the Borrower or
the Project (as defined in the Proposal) having occurred since the date of this
letter.

To indicate your acceptance of this Commitment, please have an authorized
officer sign in the spaces provided below and return this letter by the close of
business on or before January 30, 2006 in order to (i) confirm your acceptance
of the terms and conditions of this Commitment, (ii) confirm your desire for
United to begin, the documentation of the Facilities and (iii) agree to work
exclusively with United to complete documentation of the Facilities contemplated
by this Commitment.

We look forward to working with you to complete the Facilities.

Sincerely,
Hudson United Bank

/s/ James E. Wells

James E. Wells
Vice President

Agreed and accepted by:

PACIFIC ETHANOL, INC.

By: /s/ William Langley
    -------------------------------
    Name: William Langley
    Title: CFO
    Date: 1/26/06

PACIFIC ETHANOL MADERA, LLC.

By: /s/ William Langley
    -------------------------------
    Name: William Langley
    Title: Treasurer
    Date: 1/26/06

                                       4

<PAGE>

                   SUMMARY OF INDICATIVE TERMS AND CONDITIONS
                   FOR THE HUDSON UNITED CAPITAL COMPREHENSIVE
           CREDIT FACILITY FOR THE CONSTRUCTION AND TERM FINANCING OF
                  THE MADERA ETHANOL PROJECT (the "Financing")
                                November 28, 2005

I. TRANSACTION OVERVIEW

Pacific Ethanol, Inc., presently a Delaware corporation ("PEI") was founded in
January 2003 as a California corporation, and was established to become a
California-based producer and marketer of renewable fuels. In June 2003 it
purchased a grain facility and site upon which PEI through its wholly owned
subsidiary, Pacific Ethanol California, a California corporation ("PEC") intends
to first construct the Madera Ethanol Project. The. Madera Ethanol Project will
be the first of up to five ethanol production facilities PEI will construct to
bring existing ethanol technology to California to address the State's expanding
market need for ethanol.

Company
Background:       In March 2005, Pacific Ethanol, Inc., a Delaware corporation
                  ("PEI") completed a Share Exchange Transaction with the
                  shareholders of PEC, and the holders of the membership
                  interests of each of Kinergy Marketing, LLC, ("Kinergy") and
                  Reenergy, LLC, ("Reenergy"). Upon completion of the Share
                  Exchange Transaction, PEI acquired all of the issued and
                  outstanding shares of capital stock of PEC and all of the
                  outstanding membership interests of each of Kinergy and
                  Reenergy. Immediately prior to the consummation of the Share
                  Exchange Transaction, PEI's predecessor, Accessity Corp., a
                  New York corporation ("Accessity"), reincorporated in the
                  State of Delaware under the name Pacific Ethanol, Inc. PEI has
                  three principal wholly-owned subsidiaries: PEC, Kinergy, and
                  Reenergy.

II. THE FINANCING

PEI and PEC, through a wholly owned subsidiary, Pacific Ethanol Madera LLC
("PEM") has begun construction of an ethanol production plant at its Madera
site, located in the heart of California's Central Valley. A limited notice to
proceed with construction in the amount of $15,000,000 was issued in May, 2005
for the completion of "Phase I of Project construction.

PEI is seeking up to $44,000,000 of senior loan facilities for the construction
and term financing of the Project (the "Senior Loan Facilities"). The Senior
Loan Facilities will consist of a "Senior Construction Loan" and a "Senior Term
Loan" as described herein, and in no event will the Senior Loan Facilities as
defined herein exceed 60% of Project Cost as defined herein.

                                       3

<PAGE>

III. PROJECT DESCRIPTION

PROJECT:          The Project will be a dry mill ethanol production facility
                  with a design capacity to produce the following on an annual
                  basis:
                  (i)      Up to 35,000,000 gallons of denatured fuel grade
                           ethanol per year, and
                  (ii)     290,000 tons per year of wet distiller's grain
                           ("WDGS"), which will be sold as a feed supplement.

                  For its intended production, the Project will consume
                  approximately 12.5 million bushels of corn per year (i.e. a
                  yield of 2.68 gallons of ethanol and 47.1 pounds of WDGS per
                  bushel). At a steady state, the Project is expected to produce
                  more than 40,000,000 gallons of denatured ethanol per year as
                  designed.

PROJECT COST:     Assumed to be approximately $74,000,000 (See Exhibit I,
                  Sources and Uses).

PROJECT SITE:     The Project will be located on a 137-acre site owned by PEM
                  (the "Project Site").

GRAIN PROCESSING
FACILITY:         A state-of the art grain processing and storage facility (the
                  "Grain Facility") is located on the Project Site, including
                  two rail loops serviced directly by the adjacent Burlington
                  Northern Santa Fe Railroad ("BNSF"). The Grain Facility has
                  eight silos with a capacity to store 1.750MM bushels of corn,
                  which provides up to a 52 day corn inventory for the Project.

                  The Grain Facility is owned by PEM, and will operated by PAP
                  (the "Grain Operator") pursuant to a "Corn Procurement and
                  Processing Agreement" and "Shared Facilities Agreement" (the
                  Grain Agreements"), all reasonably acceptable to United. Under
                  the Grain Agreements, PAP will provide at least 25-days of
                  corn storage capacity (25,000 tons) and processing services
                  for the Project. PAP will agree as a first priority of its
                  operation of the Grain Facility to meet 100% of the
                  requirements of the Project pursuant to the Grain Agreements.

                  PAP will assign and pledge its leasehold interest in the Grain
                  Handling Agreement to the Senior Lender as collateral.

                                       4

<PAGE>

LDI LOAN:         Presently, Lyles Diversified Inc. ("LDI") holds a mortgage on
                  the Grain Facility pursuant to a loan with PEI as the borrower
                  (the "LDI Loan"). The LDI Loan matures in 2008. As a condition
                  precedent to the financing contemplated herein, PEM will
                  retire the LDI Loan and acquire the Grain Facility. PEM and
                  PEI will pledge all rights, title and interest in the Grain
                  Facility as collateral to the Senior Lender as defined herein.

MARGIN
PROTECTION:       The Project will employ long-term hedging and price management
                  strategies which are customary and usual for the ethanol
                  industry for 1) the procurement of feed stocks, energy and
                  fuel necessary for the Projects operations and 2) the sale of
                  ethanol, WDGS and/or DDGS as the case may be, produced by the
                  Project. Such hedging and price management strategies will be
                  employed to minimize any reductions in (i) the Project's
                  operating margin, and (ii) its ability to repay the loan
                  facilities contemplated by this Proposal (the "Margin
                  Strategies").

ETHANOL SALES:    PEM will market its ethanol through Kinergy according to the
                  terms and conditions of the Ethanol Marketing Agreement (the
                  "EMA"). PEI expects that ethanol will be sold to both major
                  and independent oil customers on a combination of fixed,
                  indexed, and spot market arrangements that are usual and
                  customary within the ethanol industry.

WDGS SALES:       WDGS will be marketed by Western Milling pursuant to a
                  Distillers Grain Marketing Agreement (the "WMGA"), and sold
                  locally at market prices.

CORN PROCUREMENT: Corn required for the Project operations will be procured by
                  PAP from local and Midwestern corn producers. To secure corn
                  at favorable prices, the Project will utilize Margin
                  Strategies usual and customary for the ethanol industry,
                  including among other things cash (spot) contracts, forward
                  purchase contracts, price later arrangements, basis contracts,
                  and joint venture contracts.

NATURAL GAS:      The natural gas required for process heating needs of the
                  Project will be obtained through competitive bids from
                  reasonably acceptable gas providers under reasonably
                  acceptable long-term hedging and price management strategies
                  reasonably acceptable to Senior Lender. Borrower will employ

                                       5

<PAGE>

                  hedging strategies to protect against volatility in natural
                  gas prices. Pacific Gas and Electric Company will provide
                  electricity and gas transmission service to the Project.

MAKEUP WATER:     The Project Site has two deep-water wells on the property able
                  to supply nearly twice the annual requirements of the Project.
                  A third well is being drilled for additional capacity.

                  In addition, PEM may be able to procure water from the Madera
                  Irrigation District (MID). Having the site in the water
                  district would allow PEM to buy water from MID if water
                  quality degradation issues arise from drawing down the water
                  table on the property.

IV. PARTICIPANTS AND DEFINITIONS

OWNER:            The Project will be owned by PEM a special purpose limited
                  liability company ("Owner") structured as a bankruptcy remote
                  entity on or prior to closing. PEM is wholly owned by Pacific
                  Ethanol Finance Co. LLC ("PEF"). PEF is wholly owned by
                  another of PEI's subsidiaries, Pacific Ethanol Holding Co. LLC
                  (PEHCO"). See Exhibit III for complete ownership structure.

SPONSOR:          PEI.

BORROWER:         PEF (the "Borrower").

SENIOR LENDER:    Hudson United Capital ("United" and/or "Senior Lender"), a
                  division of Hudson United Bank, a New Jersey banking
                  corporation ("HUB").

AGENT:            United ("Agent").

ESCROW AGENT:     Wealth Management Services, a division of HUB (the "Trustee"
                  and/or "Escrow Agent").

INSURANCE
CONSULTANT:       Bollinger Insurance ("BI") or another insurance consultant
                  selected by United.

ARRANGED AMOUNTS: Based upon the Project Cost assumed herein, Sponsor has
                  contributed assets as part of the initial construction worth
                  approximately $10,000,000 (the "Contributed Assets"). Sponsor
                  will arrange cash equity (the "Contributed Capital") in an
                  amount that, when combined with the Contributed Assets would
                  be equal to no less than the difference between the

                                       6

<PAGE>

                  Senior Construction Loan Amount the total Project Cost
                  determined at Senior Term Loan Conversion as these terms are
                  defined herein (the "Contributed Amount"). It is anticipated
                  that the Contributed Amount will be approximately that amount
                  contained in Exhibit I.

                  In the event that the Contributed Amount is insufficient to
                  cover any shortfall between Project Cost and the Senior Loan
                  Facilities as defined herein. (the "Shortfall Amount"), then
                  Sponsor shall be required to provide additional proceeds to
                  cover such Shortfall Amount.

CONTRACTOR:       W.M. Lyles Co., a wholly owned subsidiary of LDI, has been
                  selected as the design-builder of the Project (the
                  "Contractor").

PROCESS ENGINEER: Delta-T Corporation will be the technology provider, design
                  and process engineer for the Project ("DTC" and/or the "Design
                  Engineer") pursuant to a Technology License and Transfer
                  Agreement between DTC and PEI. DTC will also enter into a
                  Design Services Agreement with Contractor.

EPC CONTRACT:     Borrower and Contractor have entered into a fixed price, lump
                  sum turnkey design, engineering, procurement, and construction
                  contract which will be reasonably acceptable to United and
                  Senior Lender's Engineer defined herein (the "EPC Contract").
                  The EPC Contract contains such performance tests, liquidated
                  damages and completion and performance guarantees that are
                  standard in the industry, which will be acceptable to United
                  and its engineer. Contractor will guarantee the timely
                  completion of the Project including, among other things,

                  (i)      substantial completion,
                  (ii)     performance testing,
                  (iii)    the successful achievement of performance guarantee
                           criteria, and.
                  (iv)     final completion.

                  Pursuant to the terms and conditions of the EPC Contract,
                  Contractor will construct and complete the Project for a lump
                  sum fixed cost of $48.75MM and modified by a change order to
                  $48.89MM (the "EPC Contract Cost"). Contractor will "wrap"
                  both its and DTC's obligations/guarantees under the EPC
                  Contract and Design Service Agreement through the successful
                  achievement of performance guarantee criteria in a

                                       7

<PAGE>

                  manner acceptable to United and its engineer. Delay and
                  liquidated damages for Contractor's failure to meet the
                  substantial completion and performance guarantee criteria
                  shall be acceptable to United and its engineer.

PHASE II
CONSTRUCTION:     A notice to proceed for Phase II of construction will be
                  issued . upon (i) the completion of Phase I construction, (ii)
                  the full release of any mechanic's liens that may exist for
                  Phase I as certified by the independent engineer, and (iii)
                  financial closing, ((i) and (ii) being the "Phase I
                  Completion").

PERFORMANCE AND
COMPLETION BOND:  Contractor will be required to submit a Construction
                  Performance and Completion Bond from a bonding company
                  acceptable to Senior Lender (the "Completion Bond") prior to
                  the Senior Construction Loan Closing Date.

CONSTRUCTION
MANAGER:          Sponsor will employ a "Construction Manager" in house
                  acceptable to United. The Construction Manager will be
                  experienced in the construction of ethanol facilities similar
                  to that of the Project, and will oversee the performance of
                  the Contractor.

OPERATOR:         PEC will perform operations and maintenance pursuant to an
                  operations and maintenance agreement (the "O&M Agreement").
                  Process Engineer and Contractor will train PEC personnel as
                  part of the scope of the EPC Contract. O&M Agreement and
                  Owner's operations and maintenance plan (the "O&M Plan") and
                  cost will be reasonably acceptable to United and Senior
                  Lender's Engineer. Sponsor will provide oversight for
                  operations and maintenance.

SENIOR LENDER'S
ENGINEER:         The Harris Group. Senior Lender's Engineer will prepare an
                  "Engineer's Report" (after United has issued its Commitment to
                  provide the Financing) addressing certain technical issues
                  concerning the Project which will include, among other things,
                  the following;

                  a.       existing environmental damage/liability (if any),
                  b.       the projected availability of the Project,
                  c.       a satisfactory review of the EPC Contract and EPC
                           Contractor's and Process Engineer's ability to
                           perform,

                                       8

<PAGE>

                  d.       the adequacy of the O&M Plan and staffing to provide
                           Project availability as assumed in the Closing Pro
                           forma,
                  e.       a review of the cost and expenses for performing the
                           operation and maintenance services for the Project
                           pursuant to the O&M Plan and confirmation that there
                           exist third parry operators capable of performing
                           such services at comparable cost,
                  f.       a review of the acceptance, completion and
                           performance test criteria,
                  g.       Borrower's and Contractor's ability to perform under
                           all the Material Project Documents as herein defined,
                  h.       Borrower's and Project's ability to comply with the
                           requirements of all leases, easements, permits, etc.,
                  i.       an opinion that the construction, completion,
                           operation and revenues (based upon the price
                           assumptions contained in the Closing Pro Forma) of
                           the Project are reasonably obtainable within the cost
                           and timeframe anticipated,
                  j.       the ability of the Project as designed and
                           constructed (a) to produce the quantities of ethanol
                           and WDGS from (b) the quantities of corn, natural
                           gas, water, electricity, and other feed stocks at the
                           cost of production, as all are assumed in the Closing
                           Pro forma,
                  k.       the capability of the Grain Facility and Grain
                           Operator to service the requirements of the Project
                           as intended,
                  1.       the capability of the deep water wells to provide
                           sufficient quantities of make-up water,
                  m.       Phase I Completion has been achieved, and
                  n.       any other technical/environmental issues which may
                           arise pursuant to the proposed. Financing.

                  The results of the Engineer's Report will be incorporated into
                  a 10-year projection of the net operating revenue produced by
                  the Project (the "Closing Pro forma"). The Closing Pro Forma
                  will be used by United to establish the actual Senior Loan
                  Amount and Loan Amortization. Sponsor may request that United
                  engage Senior Lender's Engineer prior to United's delivery of
                  its Formal Commitment, provided Sponsor will be responsible
                  for paying all costs of Senior Lender's Engineer associated
                  with work performed in connection with its review of the
                  Project in the event that United is unable to deliver its
                  formal commitment. Sponsor will have rights to the Senior
                  Lender's Engineer's work product.

                                       9

<PAGE>

COMPLETION
CERTIFICATE:      Upon completion of the Project's construction, Senior Lender's
                  Engineer shall provide a certificate (the "Completion
                  Certificate") satisfactory to the Senior Lender that states
                  that the Project (including Phase I) and Grain Facility

                  (i)      are complete,
                  (ii)     have passed all performance and acceptance tests,
                  (iii)    are available for commercial operation as intended,
                  (iv)     the Project is capable of achieving the operation
                           revenue as projected in the Closing Pro forma, and
                  (v)      all permits required to operate the Project and the
                           Grain Facility are in full force and effect.

CONSULTANTS'
REPORTS:          United shall require certain "Consultant Reports" from
                  qualified "Consultants" satisfactory to United covering the
                  following:

                  1.       The historical and projected availability and price
                           of the Project's corn, natural gas, and electrical
                           requirements.
                  2.       The historical and projected price for ethanol and
                           WDGS.
                  3.       A review of the agreements and/or arrangements for
                           the purchase and supply of corn, natural gas and
                           electricity utilized by the Project.
                  4.       A review of the agreements and/or arrangements for
                           the sale of ethanol, WDGS, and carbon dioxide.
                  5.       A review and satisfactory opinion concerning the
                           Margin Strategies and the ability of these Strategies
                           to reasonably protect the Project's operating margin.

MATERIAL PROJECT
DOCUMENTS:        "Material Project Documents" include the following:

                  A.       "Pre-construction Material Project Documents" will
                           include, among other things,
                           1.       the EPC Contract,
                           2.       the Technology License and Transfer
                                    Agreement between DTC and PEI,
                           3.       the Design Services Agreement between DTC
                                    and Contractor.
                           4.       The Completion Bond,
                           5.       the O&M Agreement and O&M Plan,

                                       10

<PAGE>

                           6.       water, natural gas and electrical supply and
                                    interconnection arrangements (including PG&E
                                    obligations to serve the Project),
                           7.       The Grain Agreements and all corn
                                    procurement, storage and processing
                                    agreements
                           8.       the WMGA,
                           9.       the EMA,
                           10.      all related operating and environmental
                                    permits, easements, Site Lease(s) and other
                                    agreements materially related and necessary
                                    for the construction, completion, use of,
                                    and access to the Project Site and for the
                                    operation of the Project in the manner
                                    projected in the Closing Pro Forma (as
                                    hereinafter defined) and,

                  B.       "Operating Material Project Documents" will include,
                           among other things,

                           1.       all Pre-Construction Material Project
                                    Documents,
                           2.       all transportation arrangements,
                           3.       all equipment manufacturers warranties
                                    and/or guarantees,
                           4.       all off take agreements and arrangements,
                           5.       Carbon dioxide sales agreements (if
                                    applicable), and
                           6.       any other agreements and/or arrangements as
                                    reasonably required.

MATERIAL ADVERSE
CHANGE:           Any material adverse effect upon (i) the business, operations,
                  properties, assets or condition (financial or otherwise) of
                  Sponsor and Borrower, (ii) the business, operations,
                  properties, assets or condition (financial or otherwise) of
                  the Contractor, (iii) the business, operations, properties,
                  assets or condition (financial or otherwise) of the Grain
                  Operator as they relate to the Project, (iv) the ability of
                  the Borrower to perform its material obligations under the
                  Senior Loan Facility Documents (as hereinafter defined) and
                  the Material Project Documents, (v) the ability of the Senior
                  Lender to enforce its material security rights under the
                  Senior Loan Documents and, (vi) the ability of the Project to
                  produce the quality and quantity of ethanol, WDGS as
                  originally intended(collectively, "Material Adverse Change").

                                       11

<PAGE>

OPERATING COSTS:  The qualified operating and maintenance expenses of the
                  Project as approved by Senior Lender and Senior Lender's
                  Engineer (the "Operating Costs").

OPERATING CASH:   All revenues produced by the Project less Operating Costs (the
                  "Operating Cash").

INVENTORIES:      All feedstock delivered to the Project including (1) corn,
                  enzymes, Project consumables, denaturant plus all prepaid
                  items (together the "Feedstock Inventory") (2) all products
                  produced by the Project which reside in inventory at the plant
                  including ethanol, wet and dry distillers grains and any other
                  product which may be produced by the plant from time to time
                  ("Product Inventory") (3) all accounts receivable owed to the
                  Borrower ("Accounts Receivable"), (1, 2, and 3 above
                  collectively the "Inventories").

IV. THE SENIOR CONSTRUCTION LOAN:

BORROWER:         PEF.

SENIOR
CONSTRUCTION
LENDER:           United (the "Senior Construction Lender").

CONSTRUCTION
LOAN AMOUNT:      Not to exceed $44,000,000, which amount can be supported by
                  the Closing Pro forma, or such lesser amount as determined by
                  the provisions of Senior Term Loan Amount defined herein (the
                  "Senior Construction Loan Amount"). United proposes to
                  underwrite up to [$30,000,000] of the Senior Construction Loan
                  Amount and arrange the balance of the financing on a best
                  efforts basis.

CONSTRUCTION
START DATE:       PEM started initial construction in May, 2005. A final notice
                  to proceed ("NTP") is to be issued to Contractor upon closing
                  of the construction and term financing, which is expected on
                  or before January 31, 2006. Substantial Completion of the
                  Project is scheduled to occur within 425 days from the NTP.

FINAL COMPLETION
DATE:             The date that the Project:

                           1.       has successfully been constructed and
                                    completed,
                           2.       has passed all performance and acceptance
                                    tests reasonably acceptable to United and
                                    Senior Lender's Engineer, and

                                       12

<PAGE>

                           3.       the Senior Lender's Engineer has provided an
                                    acceptable Completion Certificate.

                           Such date is to occur within 545 days from the NTP
                           (the "Final Completion Date").

DATE CERTAIN:     The Final Completion Date.

SENIOR
CONSTRUCTION LOAN
CLOSING DATE:     The date when all of the Conditions Precedent to the Senior
                  Construction Loan Closing are satisfied, such date expected to
                  be on or before January 31, 2006 (the "Senior Construction
                  Loan Closing Date").

SENIOR CONSTRUCTION
LOAN MATURITY
DATE:             The Senior Construction Loan shall mature on or before the
                  Date Certain.

SENIOR CONSTRUCTION
LOAN PRICING:     The Senior Construction Loan interest rate will float for the
                  Senior Construction Loan term at a rate equal to the 30 day
                  LIBOR rate plus 400 basis points. The Construction Borrower
                  will be required to pay Senior Construction Loan interest
                  monthly during the Senior Construction Loan term.

LETTERS OF
CREDIT:           Providers of the Contributed Amount will be required to
                  provide Senior Lender with

                  (i)      acceptable commitments for providing the Contributed
                           Capital in the Contributed Amount and,
                  (ii)     if all required amounts of Contributed Capital are
                           not funded prior to Senior Construction Loan Amounts,
                           irrevocable Letters. of Credit (or such other
                           security reasonably acceptable to Senior Lender) with
                           Senior Lender as sole beneficiary in an amount equal
                           to the Subordinated Amounts from a U.S. Bank with
                           offices in New York, New Jersey or Connecticut with a
                           S&P rating of "A" or better (the "LOCs").

LOC DRAWS:        The LOC can be drawn in full on the earliest to occur of:

                  1.       The Conversion Date (as herein defined);
                  2.       A Default having occurred and the cure period expired
                           with respect to the Senior Construction Loan
                           Agreement, and;

                                       13

<PAGE>

                  3.       The Date Certain.

DRAW ACCOUNT
FUNDING:          PEI and providers of the Subordinated Amounts will provide
                  reasonably acceptable commitments for providing the
                  Subordinated Amounts at closing of the Senior Construction
                  Loan contemplated herein. Subsequently, 100% of the
                  Contributed Capital will be fully funded into a Construction
                  Draw Account (the "CDA"). Senior Lender shall have no
                  obligation to provide any portion of the Senior Construction
                  Loan until the Contributed Capital has been provided in full
                  and deposited into the CDA and fully drawn as certified by
                  Senior Lender's Engineer.

                  The face value of the LOCs will be reduced by the amounts
                  funded into the CDA on each Draw Date. Failure to place such
                  funds in the CDA will allow the Senior Lender to draw such
                  amounts from the LOCs.

CONSTRUCTION
PROGRESS REPORT:  Borrower will submit a Project construction and Draw Schedule
                  that is reasonably acceptable to Senior Lender and Senior
                  Lender's Engineer (the "Approved Project Construction and Draw
                  Schedule and/or "Draw Schedule"). Senior Lender's Engineer
                  will be required to submit a "Construction Progress Report" 90
                  days, 180 days and 270 days subsequent to the Senior
                  Construction Loan Closing Date, certifying that the Project is
                  currently on or ahead of Draw Schedule and that there is no
                  event(s) or anticipated event(s) that would cause the Project
                  not to be completed on the Final Completion Date as defined in
                  the Draw Schedule prior to any subsequent draws by
                  Construction Borrower and future fundings by Senior
                  Construction Lender from and to the CDA. Borrower must also
                  submit a monthly construction progress report to Senior
                  Lender. If Senior Lender's Engineer reports that the Project
                  is behind schedule by at least 30 days then Construction
                  Borrower will have 60 days to bring the Project's construction
                  schedule back in line with the Draw Schedule. Construction
                  Borrower's failure to do so will constitute default under the
                  Senior Construction Loan.

                  In addition, failure to achieve the Final Completion prior to
                  the Date Certain will constitute default under the Senior
                  Construction Loan.

                                       14

<PAGE>

PERMITTED USE OF
SENIOR CONSTRUCTION
LOAN PROCEEDS:    The Senior Construction Loan will be used to finance a portion
                  of Qualified Project Construction Expenses as approved by the
                  Borrower and Senior Lender's Engineer ("QPCEs") not covered by
                  the Subordinated Amounts.

                  On the Senior Construction Loan Closing Date, the Subordinated
                  Amounts will be funded (the "Initial Funding") into the CDA
                  pursuant to a yet to be determined Approved Project
                  Construction and Draw Schedule (the "Draw Schedule")
                  acceptable to United and Senior Lender's Engineer.

                  Beginning on the Senior Construction Loan Closing Date, and
                  including all future draws which will be scheduled according
                  to the Draw Schedule, Borrower will be allowed to withdraw
                  monthly, up to 100% of the QPCEs (the "Draws"), including
                  amounts necessary to pay Subordinated Construction Loan
                  interest but only up to the amount held in the CDA, provided
                  that (1) no event of default has occurred and is continuing
                  and (2) the withdrawal doesn't exceed the amount referenced in
                  the Draw Schedule.

                  Subsequent to the Initial Funding, Senior Lender's Engineer
                  must certify at the end of each 90 day period that the Project
                  is on schedule and that all previous Draws were made in
                  accordance with the Draw Schedule prior to the Senior Lender
                  funding additional amounts into the CDA.

                  Once the Subordinated Amounts have been fully drawn as
                  described herein, then Senior Construction Lender will fund
                  the CDA with Senior Construction Loan proceeds proportional
                  for that Draw request. On each Draw subsequent to Senior
                  Lender's funding of amounts into the CDA, the Senior Lender
                  will withdraw from the CDA the accrued Senior Construction
                  Loan Interest ("CLI"). The CLI is defined as the interest
                  accrued on the Senior Construction Loan Amount funded into the
                  CDA minus interest earned on the portion of the Senior
                  Construction Loan Amount held in the CDA that has not been
                  disbursed.

                  As a condition precedent to Senior Construction Lender
                  providing any funds contemplated herein, the Subordinated
                  Amounts shall have been provided. Failure to provide any
                  portion of the Subordinated Amounts as required shall

                                       15

<PAGE>

                  constitute Default under the terms and conditions of the
                  Senior Construction Loan agreement contemplated herein.

COMPLETION BOND:  Contractor will be required to submit the Completion Bond from
                  a bonding company acceptable to Senior Lender prior to the
                  Senior Construction Loan Closing Date.

SENIOR CONSTRUCTION
LOAN COLLATERAL
SECURITY:         The Senior Construction Loan would be secured by the
                  following:

                  1.       A perfected first priority security lien on all of
                           the assets of PEF and PEM, including Inventories and
                           all right title and interest in all tangible and
                           intangible assets of the Project.
                  2.       A perfected first priority security lien on the Grain
                           Facility, including all of PEM's (and other PEI's
                           related affiliates') right title and interest in all
                           tangible and intangible assets of the Grain Facility.
                  3.       A pledge of 100% of PEHCO's ownership interest in
                           PEF;
                  4.       A pledge of 100% of PEF's ownership interest in PEM
                           (the "Owners' Pledge");
                  5.       A pledge of the PEM's ownership interests in the
                           Project (the "Borrowers Pledge");
                  6.       An assignment of all revenues produced by the Project
                           and Borrower;
                  7.       The pledge and assignment of the Material Project
                           Documents to the extent assignable;
                  8.       The Completion Bond;
                  9.       All contractual cash flows associated with these
                           agreements, and;
                  10.      Any other collateral security as Senior Lender shall
                           reasonably request.

CONSTRUCTION
LOAN REPAYMENT:   Borrower shall repay the Senior Construction Loan through the
                  proceeds of the Senior Term Loan Conversion as defined herein.
                  In the event that Senior Term Loan Conversion does not occur
                  and the Borrower elects to repay the Construction Loan, then
                  the Borrower shall be subject to a Termination Fee equal to 5%
                  of the Senior Construction Loan Amount.

                                       16

<PAGE>

IV. CONDITIONS PRECEDENT TO SENIOR CONSTRUCTION LOAN CLOSING

The Conditions Precedent to Senior Construction Loan Closing which must be
satisfied prior to closing the Financing, among other things, will include:

                  a.       Final credit approval and issuance of a formal
                           commitment by Senior Lender;

                  b.       No material adverse change in the condition or
                           operation, financial or otherwise, of the
                           Borrower/Sponsor or the Project since the date of
                           acceptance of this Proposal;

                  c.       Demonstration to United's satisfaction that (i)
                           Borrower's and Project's operations comply, in all
                           respects deemed material by United, with all
                           applicable environmental, health and safety statutes
                           and regulations, (ii) the operations of Borrower and
                           Project are not subject to any federal or state
                           investigation evaluating whether remedial action,
                           involving any expenditure deemed material by United,
                           is needed to respond to any release of any toxic or
                           hazardous waste, and (iii) Borrower or Project have
                           no contingent liabilities deemed material by United
                           in connection with the release of any toxic or
                           hazardous waste. United will require a "Phase 1
                           Environmental Audit" or other acceptable
                           environmental due diligence associated with the
                           Project site, by an environmental auditor
                           satisfactory to United, which will provide evidence
                           that the Borrower is in compliance with the
                           provisions of (ii) and (iii) above;

                  d.       The Senior Lenders' Engineer shall have reviewed and
                           favorably reported on the relevant technical aspects
                           of the Project, including, without limitation,
                           historical and projected Project availability and
                           useful life for similar Projects, projected operation
                           and maintenance costs, maintenance plan and schedule,
                           terms of Project documents, permits, expected
                           availability, net capacity degradation (if any), the
                           Project's ability to produce quantities of ethanol
                           and WDGS as intended in the Closing Pro forma, and
                           the Project ability to comply with permit conditions;

                                       17

<PAGE>

                  e.       Delivery of a Closing Pro forma on the Project
                           operating cash flow for a period extending out 12
                           years from the Loan Closing Date or 133% of the
                           Senior Loan Term as determined by the Closing Pro
                           forma (which shall incorporate the results from the
                           Engineer's Report) demonstrating annual net operating
                           cash flow which is available for Senior Debt Service.
                           The assumptions contained in the Closing Pro forma
                           must be approved by Senior Lender and Senior Lender's
                           Engineer and will incorporate the terms and
                           conditions imposed by the Project documents;

                  f.       United shall be satisfied with the form and substance
                           of the insurance available to United which is
                           intended to protect United's collateral and interests
                           in this Financing;

                  g.       Senior Lender shall have implemented legal mechanisms
                           including structuring the Project Borrower with
                           bankruptcy remote provisions, acceptable to United,
                           which will include, among other provisions, the
                           appointment of an "Independent Member" and the
                           requirement that the Independent Member's vote is
                           needed for certain actions by the Borrower including
                           but not limited to the filing of voluntary
                           bankruptcy, selling some or all of the Project assets
                           and other similar actions;

                  h.       Delivery of the executed EPC Contract between
                           Contractor and Borrower in form and substance
                           acceptable to Senior Lender;

                  i.       Delivery of the Completion Bond;

                  j.       Delivery of the executed Management Agreement between
                           Borrower and Operator in form and substance
                           satisfactorily acceptable to Senior Lender;

                  k.       The LDI Loan has been repaid;

                  1.       Borrower has executed all Material Project Documents
                           in connection with the Financing;

                                       18

<PAGE>

                  m.       All Material Project Documents are in full force and
                           effect and that no event of default has occurred and
                           is continuing and that the Borrower has all required
                           documents and permits to allow the Project to operate
                           in a manner which will neither violate said permits
                           nor violate manufactures normal operating parameters
                           and be able to achieve the net operating revenue as
                           projected in the Closing Pro forma;

                  n.       The Project has all permits and other regulatory
                           approvals necessary for the plant to begin
                           construction and to operate at projected levels upon
                           construction completion. Borrower must demonstrate,
                           and Senior Lender's Engineer must opine, that any
                           permits which are not possible to obtain prior to
                           completion of construction can be obtained as a
                           matter of administrative application;

                  o.       Senior Lender has received an opinion of legal
                           counsel in form and substance acceptable to Senior
                           Lender that, among other things, states that all
                           Material Project Documents are in full force and
                           effect and that the Senior Lender has a valid first
                           security interest in all of the Project assets;

                  p.       Senior Lender has received Contractor's Completion
                           Bond in form and substance acceptable to Senior
                           Lender;

                  q.       The Draw Account shall have been funded to the
                           Contributed Amount;

                  r.       If applicable, Senior Lender shall have received the
                           LOC(s) in form and substance acceptable to Senior
                           Lender;

                  s.       Senior Lender shall have received the Consultant's
                           Reports, and Consultants shall have opined favorably
                           on the Project's corn and feedstock arrangements,
                           arrangements for the sale of ethanol, WDGS and carbon
                           dioxide, and the purchase and supply of natural gas,
                           electricity, and other materials in a manner
                           satisfactory to United;

                  t.       The LIBOR Protection (as defined herein) is in place;

                                       19

<PAGE>

                  u.       Phase I Completion has occurred, and;

                  v.       Any such other conditions as Senior Lender and its
                           legal counsel shall reasonably request after
                           completing their due diligence review of the Project
                           and related Documents.

V. THE SENIOR TERM LOAN

BORROWER:         PEF.

LENDER:           United.

SENIOR TERM
LOAN AMOUNT:      The Senior Term Loan Amount will be the lesser of (a)
                  $44,000,000, (b) 60.0% of Project Cost at Senior Term Loan
                  Conversion as herein defined, and (c) an amount equal the
                  present value of up to 50.00% (based upon a 2.OOX senior debt
                  service coverage ratio) of the Operating Cash distributable to
                  and received by the Borrower supported by the Closing Pro
                  Forma (which will include the results from the Senior Lender's
                  Engineer's Report and due diligence review by Senior Lender),
                  from the Conversion Date as defined below through the seventh
                  (7th) anniversary of the Conversion Date discounted at 8.5%
                  (the "Senior Term Loan Amount").

                  For the purposes of this proposal, the Senior Loan Amount is
                  assumed to be $44,000,000 based upon current pro forma
                  assumptions. United proposes to underwrite up to [$30,000,OOO]
                  of the Senior Term Loan Amount and arrange the balance of the
                  financing on a best efforts basis.

SENIOR TERM
LOAN CONVERSION
DATE:             Funding of the Senior Term Loan (the "Conversion") will occur
                  on the Conversion Date. The Conversion Date will occur on the
                  date when all the Conditions Precedent to Senior Term Loan
                  Conversion have been achieved, and which date is expected to
                  be on or before the Final Completion Date, but in no event
                  later than the Date Certain (the "Conversion Date" or "Senior
                  Term Loan Funding Date").

SHORTFALL LETTER
OF CREDIT:        In the event that it is determined by the Closing Pro forma
                  that a Shortfall Amount is anticipated upon Senior Term Loan
                  Funding Date, then the Sponsor will either provide such

                                       20

<PAGE>

                  Shortfall Amount in addition to the Subordinated Amounts, or
                  be required to provide United with an irrevocable letter of
                  credit (or such other security reasonably acceptable to
                  United) with United as sole beneficiary in an amount equal to
                  the projected Shortfall Amount (the "SLOC"). Such SLOC will be
                  issued from a U.S. Bank with offices in New York, New Jersey
                  or Connecticut with a S&P rating of "A" or better, and/or such
                  other security/assurances ("Investors' Assurances") as
                  reasonably acceptable to United.

SLOC DRAWS:       The SLOC can be drawn in full on the earliest occurrence of

                  1.       The Conversion Date,
                  2.       A Default having occurred and the cure period expired
                           with respect to the Senior Construction Loan
                           Agreement, and
                  3.       The Date Certain.

CONTRIBUTIONS AT
CONVERSION:       On the Conversion Date, and prior to funding of the Senior
                  Loan Amount, Sponsors and other third party investors (if any)
                  shall have provided the Contributed Amount and if applicable,
                  the Shortfall Amount.

LOAN MATURITY
DATE:             The Senior Loan shall mature on the seventh (7th) anniversary
                  of the Conversion Date.

TERM LOAN
CLOSING DATE:     The Term Loan Closing Date will occur on the Conversion Date,
                  which date is expected to be the Final Completion Date.

SENIOR TERM
LOAN PRICING:     The Interest Rate on the Senior Term Loan will float during
                  the Loan Term at a rate equal to the 90-day LIBOR rate ("LIBOR
                  Rate" or the "Loan Index") in effect from time to time plus
                  375 basis points (the "Applicable Margin").

INTEREST RATE
PROTECTION:       Borrower would be required to purchase interest rate
                  protection in the form of a LIBOR Rate cap of no more than
                  5.00% (the "LIBOR Cap Rate") from a provider on terms and
                  conditions reasonably acceptable to United, and in an amount
                  of no less than 70% of the principal outstanding on any loan
                  payment date commencing on the Senior Construction Loan
                  Closing Date through the fifth anniversary of the Term Loan
                  Conversion Date (the "LIBOR Protection").

                                       21

<PAGE>

LOAN PAYMENTS:    Loan Payments would be due in quarterly in arrears for a total
                  of twenty-eight (28) payments beginning on the Term Loan
                  Closing Date and ending on the Term Loan Maturity Date (the
                  "Loan Payments").

LOAN
AMORTIZATION:     The Loan Amortization for the Project will be established on
                  the Conversion Date based upon the Operating Cash (as defined
                  herein) projected to be available to the Borrower from the
                  Project as determined by the Closing Pro forma ("Senior Debt
                  Service"). On the Senior Term Loan Maturity Date the Borrower
                  will be required to repay all principal plus accrued interest
                  outstanding on the Senior Term Loan (see Exhibit 11).
                  Scheduled Senior Term Loan payments of principal and interest
                  (the "Senior Debt Service") will be paid out of Operating
                  Cash.

SENIOR
OBLIGATION:       The Senior Construction and Term Loans will be the only
                  permitted debt of the Project. The Loans will be senior to all
                  obligations of the Project (other than direct Project
                  operating expenses and expenses incurred as in the ordinary
                  course of business) and Borrower. All direct and out-of-pocket
                  expenses of PEI and/or Owner related to work performed as
                  Managing Member/Owner of the Project will be reimbursed to PEI
                  and/or Owner only after the payment of the Senior Debt
                  Obligations.

SENIOR TERM
LOAN COLLATERAL
SECURITY:         The Senior Term Loan would be secured by the following:

                  1.       A perfected first security interest lien against all
                           of the assets of PEF and PEM, including all of PEF's
                           and PEM's right title and interest in Inventories and
                           all tangible and intangible assets of the Project
                           including all installed equipment, control, and
                           monitoring systems.
                  2.       A perfected first security lien on the Grain
                           Facility, including all of PEM's (and any other PEI's
                           related affiliates') right title and interest in all
                           tangible and intangible assets of the Grain Facility.
                  3.       A pledge of 100% of PEHCO's ownership interest in PEF
                           (the "Owners' Pledge"
                  4.       A pledge of 100% of PEF's ownership interests in PEM;
                  5.       A pledge of the PEM's ownership interests in the
                           Project;
                  6.       The assignment of all revenues produced by the
                           Project;

                                       22

<PAGE>

                  7.       The assignment of the Material Project Documents, and
                           all contractual cash flows associated with these
                           agreements, and;
                  8.       Any other collateral security as Senior Lender shall
                           reasonably request.

DEBT SERVICE
RESERVE:          On the Senior Term Loan Funding Date, Borrower shall fund a
                  Debt Service Reserve Account ("DSRA") in an amount equal to
                  the scheduled Senior Debt Service which would be due over the
                  subsequent 6 months (the "First Required Balance"). On the
                  first anniversary of the Senior Term Loan Funding Date,
                  Borrower shall increase the funds in the DSRA to a total
                  amount equal to the scheduled Senior Debt Service which would
                  be due over the subsequent 12 months (the "Second Required
                  Balance" and collectively, the "Required Balances").

                  Once funded, the Borrower shall maintain funds in the DSRA in
                  an amount equal to the Required Balances as follows.

                           Subsequent to the Loan Closing Date, should there
                           exist at any time a shortfall between the amount
                           contained in the DSRA and the Required Balances, then
                           the amount of the shortfall (the "DSRA Shortfall
                           Amount") would be funded from 100% of Operating Cash
                           after the payment of scheduled Senior Debt Service.
                           Borrower shall be restricted from making any
                           distributions or any payment until the DSRA is fully
                           funded to the Required Balances. Calculations of the
                           DSRA Shortfall Amount would be made quarterly based
                           upon the subsequent 12 months worth of scheduled
                           Senior Debt Service. The Borrower would only be
                           required to fund the DSRA Shortfall Amounts beginning
                           the first month after each quarterly calculation of
                           the DSRA Shortfall Amount (the "Calculation Date").

                  The Borrower may invest the funds in the DSRA only in
                  Permitted Investments as defined herein.

                  At such time when the Required Balances in the DSRA equals or
                  exceeds the outstanding Loan balance plus accrued interest,
                  the Senior Lender shall first apply such funds to retire the
                  remaining outstanding debt and refund any excess funds in the
                  DSRA to the Borrower; provided however, no penalty shall apply
                  to such retirement.

                                       23

<PAGE>

MINIMUM COVERAGE
RATIO:            The Minimum Coverage Ratio (the "MCR") would be no less than
                  1.25 to 1. The definition of the Debt Service Coverage Ratio
                  ("DSCR') for the Loan shall be as follows:

                           The preceding 12 months of Operating Cash securing
                           the Loan (only measured after the project has
                           operated for at least 12 months) divided by Debt
                           Service for the next 12 months.

                  In the event the DSCR should fall below the MCR, all excess
                  fiords in the Project Revenue Account (as herein defined)
                  after Senior Debt Service and the payment of operating
                  expenses shall be deposited in the DSRA until such time as the
                  DSRA has reached the Required Balances plus any Additional
                  Required Balance (the "ARB").

                  The ARB on any payment date that the MCR is less than 1.50 to
                  1 shall be calculated as follows:

                  (1)      An Adjusted Pro. Forma Forecast, reasonably
                           acceptable to Senior Lender, would be created
                           utilizing the methodology employed in the Closing Pro
                           Forma, which reflects the event or events that gave
                           rise to the lower than anticipated net operating cash
                           flow; and

                  (2)      An Adjusted Loan Amortization would be calculated
                           utilizing the cash flows forecasted in the Adjusted
                           Pro forma Forecast over the remaining life of the
                           outstanding Senior Term Loan assuming the original
                           amortization period (the "Adjusted Loan").

                  The Adjusted Loan would then be discounted at the Interest
                  Rate in effect at the time and added together with the
                  outstanding loan balance to produce the "Adjusted Loan
                  Balance." The ARB shall be the excess of the outstanding
                  Senior Term Loan balance over the Adjusted Loan Balance. At
                  Borrower's option, all amounts constituting the ARB may be
                  used to prepay the Senior Term Loan without penalty.

                  All excess funds in the DSRA over the Required Balance plus
                  the ARB would be released immediately to the Borrower. The ARB
                  would be released immediately once both the current and
                  two-year forecasted MCRs are equal to or greater than 1.50 to

                                       24

<PAGE>

                  1, provided no material event of default has occurred and is
                  continuing under the Senior Term Loan.

MANDATORY
PREPAYMENTS:      Borrower will be required to prepay the entire principal
                  amount of the Senior Loan in the event that the Projects are
                  totally destroyed or sold. In addition if any Material Project
                  Document is amended or terminated without Senior Lender's
                  consent, or if any material Project asset is sold resulting in
                  a cash payment to the Borrower, then all proceeds from such
                  payment will be applied to the repayment of the loan as
                  described above.

                  After the Loan Closing Date, Borrower will make the following
                  "Mandatory Prepayments":

                  A. Supplemental Amortization Payments
                  -------------------------------------
                  In the event that the DSCR for any fiscal year falls below the
                  MCR as scheduled for such fiscal year, then in addition to the
                  scheduled Loan Amortization, the Borrower would make a
                  mandatory Supplemental Amortization Payment (the "SAP") on the
                  Senior Loans without penalty. Such SAP would be equal to 100%
                  of "SAP Free Cash Flow". SAP Free Cash Flow is defined as
                  Distributable Cash less (i) all Debt Service, including all
                  commitment fees, interest rate protection fees and any other
                  fees payable to lenders and (ii) DSRA contributions, if any.
                  The SAP would be applied proportionately against the scheduled
                  Loan Amortization of the Project in inverse order of maturity.

                  B. Supplemental Principal Payments
                  ----------------------------------
                  In addition, Borrower shall be required to make a supplemental
                  principal payment (the "SPP") on each Loan Payment date. Each
                  SPP will be equal to 40% (the "Sweep Percentage") of Operating
                  Cash less

                  (i)      Senior Debt Service plus
                  (ii)     any required deposits to the DSRA as defined herein.

                  The Sweep Percentage will be determined on the Conversion Date
                  based upon the Closing Pro Forma which will incorporate the
                  results of the performance test. The Sweep Percentage will not
                  exceed 40%.

                                       25

<PAGE>

                  Such SPPs will be applied to the principal balance of the
                  Senior Term Loan in inverse order of maturity in order to
                  reduce the Loan Maturity Date to no more than five (5) years
                  from the Conversion Date.

                  In the event that the Volumetric Ethanol Excise Tax Credit
                  ("VEETC") is either repealed or is not extended beyond 2010 by
                  January 1, 2008, then the Sweep Percentage will immediately
                  increase to 75%.

                  Borrower will not be required to pay a prepayment penalty for
                  Mandatory Prepayments except if Borrower, without Senior
                  Lender's consent, (i) amends or terminates a Material Project
                  Document and/or (ii) sells a material Project asset.

VI. CONDITIONS PRECEDENT TO SENIOR TERM LOAN CLOSING

Conditions Precedent to Senior Term Loan Closing which must be satisfied prior
to the Conversion Date will include, among other things, the following:

                  (a)      All of the Conditions Precedent to Senior
                           Construction Loan Closing remain satisfied;
                  (b)      No material adverse change in the condition or
                           operation, financial or otherwise, of the Borrower or
                           the Project;
                  (c)      There exists no default or event that upon notice or
                           the passage of time would result in default under the
                           Senior Construction Loan Agreement;
                  (d)      There exists no default or event that upon notice or
                           the passage of time would result in default under the
                           Senior Term Loan agreement;
                  (e)      The Amounts and Shortfall Amount (if applicable) have
                           been provided;
                  (f)      All Material Project Documents are in place and in
                           effect;
                  (g)      The LIBOR Protection is in place;
                  (h)      Delivery of the Engineer's Completion Certificate
                           satisfactory to the Senior Lender that states that
                           the Project and Grain Facility):
                           (i)      are complete,
                           (ii)     have passed all acceptance tests,
                           (iii)    are available for commercial operation,

                                       26

<PAGE>

                           (iv)     the Project is capable of achieving the
                                    operational production levels at the
                                    Operating Cost as projected in the Closing
                                    Pro forma, and
                           (v)      all permits required to operate the Project
                                    and Grain Facility are in full force and
                                    effect.
                  (i)      Any such other conditions as Senior Lender and its
                           legal counsel shall reasonably request after
                           completing their due diligence review of the Project
                           and related Documents.

VII. OTHER TERMS AND CONDITIONS

OPTIONAL PREPAYMENT AND
PREPAYMENT PENALTY:        No prepayment shall be allowed under the Senior Loan
                           Facilities. However, after the Conversion Date, the
                           Borrower shall have the right to prepay only the
                           Senior Term Loan Amount in whole with the payment of
                           a "Prepayment Penalty" as follows:

              Date of Optional Prepayment                 Penalty as a % of from
              Conversion Date Anniversary                 amount prepaid
              ------------------------------------------------------------------

              Between the First and Second                       3%
              Between Second and Third                           2%
              Between Third and Fourth                           1%
              Thereafter                                         0%

OTHER INDEBTEDNESS:        The Borrower would covenant to the Senior Lender not
                           to incur any other indebtedness than is described
                           herein, vote and/or consent to the Project incurring
                           any indebtedness without the prior written consent of
                           the Senior Lender, not to be unreasonably withheld.

LOCK-BOX AGREEMENT:        All revenue from the Project will be placed in a
                           Senior Lender controlled interest bearing Lock-Box
                           (the "Project Revenue Account" or "PRA"). Senior
                           Lender would designate Escrow Agent as a trustee for
                           the PRA (the "Trustee"). The Borrower shall assign
                           all cash available to the Borrower from the Project
                           to the PRA. Withdrawals can be made from the PRA only
                           for the following:

                                    1.       Qualified operating and maintenance
                                             expenses,
                                    2.       Principal and Interest for the
                                             Senior Debt Service,
                                    3.       Fees and qualified expenses of
                                             Senior Lender (if any),
                                    4.       Amounts necessary to fund reserves
                                             to required levels,
                                    5.       Mandatory Prepayments,

                                       27

<PAGE>

                                    6.       Payment of any qualified budgeted
                                             expense of the Borrower,
                                    7.       Distributions to Borrower/Sponsor.

                           Borrower may withdraw excess funds from the PRA after
                           the payments above have been satisfied. All interest
                           earnings on funds held in the PRA will be applied to
                           the payment of Project obligations. The withdraw of
                           excess funds from the PRA and the application of
                           interest earnings on funds held in the PRA will be in
                           accordance with the Priority of Payments as outlined
                           below.

PRIORITY OF PAYMENTS:      The Trustee, as "Paying Agent" under the Lock Box
                           arrangement, will be required to utilize all
                           Operating Cash towards the payment of all Borrower
                           obligations in the following order of priority:

                           Monthly
                           -------

                           1.       Approved and qualified O&M expenses
                                    respecting the Project, property taxes,
                                    assessments and other expenses approved by
                                    the Senior Lender.

                           Quarterly
                           ---------

                           1.       All interest, fees, and expenses due the
                                    Senior Lender.
                           2.       All scheduled principal payments due under
                                    the Senior Term Loan.
                           3.       Any amount necessary to fund the DSRA to its
                                    Required Balances or Adjusted Required
                                    Balance.
                           4.       Mandatory Prepayments due under the Senior
                                    Term Loan.
                           5.       Supplemental Amortization Payments (SAPs)
                                    due under the Senior Term Loan.
                           6.       Supplemental Principal Payments due under
                                    the Senior Term Loan.
                           7.       Distributions to Borrower/Sponsor.

PERMITTED INVESTMENTS:     The Borrower may invest fluids held in the PRA in the
                           following Permitted Investments:

                           (i)      Direct obligations of the United States of
                                    America, or any agency thereof, or
                                    obligations guaranteed as to principal and
                                    interest by the United States or any agency
                                    thereof,

                                       28

<PAGE>

                           (ii)     Certificates of deposit or Bankers
                                    acceptances issued, or time deposits held,
                                    or investment contracts guaranteed, by the
                                    Agent or any bank or any other commercial
                                    bank or trust company organized under the
                                    laws of a country which is a member of the
                                    OECD, or a political subdivision of any such
                                    country, and in each case having outstanding
                                    unsecured indebtedness that is rated A or
                                    better by Standard & Poor's Corporation and
                                    A or better by Moody's Investors Service,
                                    Inc.,

                           (iii)    Commercial paper rated (on the date of
                                    acquisition thereof) A-1 and P-1 or better
                                    by Standard & Poor's Corporation and Moody's
                                    Investors Service Inc., respectively.

                           With respect to the PRA Agreement, Permitted
                           Investments shall mature no later than 90 days from
                           its acquisition.

INSURANCE:                 During the term of the Financing, the Borrower will
                           be required to maintain, or cause to be maintained,
                           insurance for the Project for coverages and in
                           amounts similar to that insurance maintained by other
                           owners of similar projects, and satisfactory to the
                           Insurance Consultant. At a minimum, the insurance
                           coverage shall include:

                           1.       Project liability insurance for all risks in
                                    an amount totaling not less than $5,000,000.
                           2.       Property insurance to cover all risks in an
                                    amount not less than the full replacement
                                    cost of the Project with customarily related
                                    business interruption protection.

                           The Senior Lender shall be named as Loss Payee for
                           the Property and shall be named as Additional Insured
                           for the Liability Insurance.

FEES:                      The Borrower and Sponsor will be jointly and
                           severally responsible for the payment of the
                           following Fees:

                                       29

<PAGE>

                           1.       "SENIOR CONSTRUCTION LOAN, FEE" equal to
                                    1.0% of the Senior Construction Loan Amount
                                    payable upon the Senior Construction Loan
                                    Closing Date.
                           2.       "SENIOR TERM LOAN CONVERSION FEE" equal to
                                    1.0% of the Senior Term Loan Amount payable
                                    upon the Conversion Date.
                           3.       An "AGENCY FEE" equal to $33,000 per annum
                                    payable to United commencing on the first
                                    anniversary of the Senior Construction Loan
                                    Closing Date.
                           4.       A "WORK FEE" payable to United in an amount
                                    of $30,000. The Work Fee has been paid as of
                                    April 20, 2005 to compensate United for its
                                    efforts pertaining to its previous due
                                    diligence and the preparation of its
                                    proposal' at that time, and will be retained
                                    by United regardless of whether financial
                                    closing occurs. The Work Fee will be
                                    credited towards the payment of the Senior
                                    Construction Loan Fee on the Senior
                                    Construction Loan Closing Date.
                           5.       An "ESCROW AGENT'S SET-UP FEE" equal to
                                    $5,000 payable to Escrow Agent upon Senior
                                    Construction Loan Closing.
                           6.       An "ANNUAL ESCROW AGENT'S FEE" of $4,500 per
                                    annum payable on each anniversary of the
                                    Senior Construction Loan Closing Date.
                           7.       An "INDEPENDENT MEMBER'S FEE" of $3,000 per
                                    annum.
                           8.       An "INSURANCE CONSULTANT'S FEE" of $5,000.

BREAK-UP FEE:              Should Sponsor and/or Borrower accept United's Formal
                           Commitment to provide the Financing contemplated
                           herein, and the Sponsor and/or Borrower decide not to
                           close the transaction with United, then Sponsor
                           and/or Borrower will pay to United a "Break-up Fee"
                           equal to $150,000 plus Transaction Costs. The
                           Borrower and Sponsor will be jointly and severally
                           responsible for the payment of the Break-up Fee. The
                           Breakup Fee will not be payable if the Financing
                           fails to close after Senior Lenders and Sponsors have
                           negotiated in good faith and used their best efforts
                           to close the transaction pursuant to the terms of the
                           Formal Commitment.

TRANSACTION COSTS:         Transaction Costs will be for the account of the
                           Borrower/Sponsor and will include, without
                           limitation, Fees, legal fees, Senior Lenders'
                           Engineer and consultant fees, and

                                       30

<PAGE>

                           the reasonable out-of-pocket expenses of Senior
                           Lender. Once a formal commitment is issued by United
                           and accepted by Borrower, Transaction Costs will be
                           paid by the Borrower/Sponsor regardless of whether
                           financial closing occurs, except for a breach by
                           Senior Lender. The Sponsor and the Borrower shall be
                           jointly and severally liable for the payment of any
                           Transaction Costs. Senior Lender will use its best
                           efforts to solicit and obtain fixed price quotes for
                           engineering, consulting and legal services.

DOCUMENTATION:             The Financing will be subject to acceptable
                           documentation, including those related to
                           representations, warranties, covenants (including
                           covenants for Borrower not to incur additional
                           indebtedness or vote for incurring additional
                           indebtedness for the Project without the consent of
                           the Senior Lender), default provisions, etc., which
                           shall be in form and substance satisfactory to Senior
                           Lender, Borrower, Sponsor and their legal counsels.

ANNUAL BUDGETS:            The Borrower will be required to submit a copy of the
                           annual Operating Budget for the Project to the Senior
                           Lender prior to November 30 (or thirty days prior to
                           such other date mutually agreeable based upon the
                           Project's fiscal year end if other than December 31),
                           for each subsequent calendar year operating period
                           which contains a forecast of the operating profit for
                           the next 3 years. The Borrower will be required to
                           provide quarterly un-audited balance sheets and
                           income statements on the Borrower within 45 days of
                           the close of the quarterly period. The Senior Lender
                           shall review the Operating Budget and un-audited
                           quarterly balance sheets and income statements in a
                           timely manner.

                           In addition the Borrower will be required to provide
                           Senior Lender with audited annual financial
                           statements for the Borrower within 120 days of the
                           close of each fiscal year which annual statements
                           shall contain management representations in form and
                           substance reasonably satisfactory to Senior Lender.

CONSENTS:                  The Senior Lender will require the right to consent
                           to certain actions by Borrower, which are usual and
                           customary in borrowings of this type. The actions
                           requiring consents shall be, among other things, any
                           action that could adversely and materially affect the
                           timing and/or receipt of the Operating Cash.

                                       31

<PAGE>

                           Borrower must make any and all requests for consents
                           by Senior Lender in writing and all replies by Senior
                           Lender will also be in writing and in a timely
                           manner.

SYNDICATION:               United shall have the right to syndicate these Loan
                           Facilities to other parties, provided that any party
                           is a bank or institutional investor with knowledge
                           and experience in project finance and who does not
                           have an existing relationship to the Project
                           including any equity investor and that party is
                           reasonably acceptable to the Borrower. Majority
                           Lender's consent is sufficient for required consents.

TERM SHEET EXPIRATION:     Unless previously accepted by the Sponsor/Borrower,
                           the offer to provide the Financing outlined in this
                           Proposal will expire December 1, 2005.

EXCLUSIVITY EXPIRATION:    Sponsor and Borrower agree to work exclusively with
                           United so long as United provides its Formal
                           Commitment no later than December 20, 2005, or such
                           other later date as Sponsor, Borrower and United
                           mutually agree.

                                       32

<PAGE>

                                    EXHIBIT I
                       Estimated Sources and Uses of Funds

I. SOURCES OF FUNDS
        Senior Loan Facility                              $ 44,000,000  (59.86%)
        Cash Equity                                         19,126,799  (26.02%)
        Non-cash Equity (Contributed Assets)                10,370,460  (14.12%)
                                                          ----------------------
          Total Sources                                   $ 73,497,259 (100.00%)
                                                          ======================

II. USES OF FUNDS
                                                           A. CONSTRUCTION COSTS
        Ethanol Plant Construction                        $ 45,589,540
        Site, Rail, Silos, Engineer (non cash)              10,370,260
        Capitalized Fees
            Lender's Fees                                      880,000
            Interest Rate Cap                                  535,000
            Agent, Consultant, etc                              17,500
        Capitalized Interest                                 1,581,534
                                                          ------------
        Sub Total Construction                                       $58,973,834
  B. INVENTORY
        Corn                                              $  1,455,131
        Ethanol and DWG                                        384,883
        Spare Parts                                            350,000
        Chemicals, Yeast, Denaturant                           136,000
                                                          ------------
        Sub Total Inventory                                          $ 2,326,013
C. OTHER COSTS
        Other Working Capital                             $  1,683,582
        Debt Service Reserve Account                         3,280,000
        Operating Expenses                                     569,875
        Interest Income                                       (106,079)
        LDI Repayment                                        3,600,000
        Cash                                                 1,000,000
        Contingency                                          2,170,034
                                                          ------------
        Sub Total Other Costs                                        $12,732,412
                                                                     -----------

TOTAL PROJECT COSTS                                                  $73,497,259

                                       33

<PAGE>

                                   EXHIBIT II
                              Amortization Schedule

(This Amortization Schedule assumes a $44,000,000 loan amount which is subject
to change. Loan Amortization will be established on the Conversion Date based
upon the Operating Cash projected to be available to the Borrower from the
Project as determined by the Closing Pro forma.)

--------------------------------------------------------------------------------
Payment #        Beginning Balance        Principal Payment       Ending Balance
--------------------------------------------------------------------------------
    1              $44,000,000                   $644,018         $43,355,982
    2              $43,355,982                   $657,704         $42,698,278
    3              $42,698,278                   $671,680         $42,026,598
    4              $42,026,598                   $685,953         $41,340,645
    5              $41,340,645                   $853,740         $40,486,904
    6              $40,486,904                 $1,027,958         $39,458,946
    7              $39,458,946                 $1,049,802         $38,409,145
    8              $38,409,145                 $1,072,110         $37,337,034
    9              $37,337,034                 $1,094,892         $36,242,142
   10              $36,242,142                 $1,301,791         $34,940,351
   11              $34,940,351                 $1,329,454         $33,610,898
   12              $33,610,898                 $1,357,704         $32,253,193
   13              $32,253,193                 $1,386,556         $30,866,638
   14              $30,866,638                 $1,580,627         $29,286,011
   15              $29,286,011                 $1,614,215         $27,671,795
   16              $27,671,795                 $1,648,517         $26,023,278
   17              $26,023,278                 $1,683,548         $24,339,729
   18              $24,339,729                 $1,860,236         $22,479,493
   19              $22,479,493                 $1,899,766         $20,579,726
   20              $20,579,726                 $1,940,136         $18,639,590
   21              $18,639,590                 $1,981,364         $16,658,225
   22              $16,658,225                 $2,157,156         $14,501,069
   23              $14,501,069                 $2,202,996         $12,298,074
   24              $12,298,074                 $2,249,809         $10,048,265
   25              $10,048,265                 $2,297,618          $7,750,647
   26              $7,750,647                  $2,495,318          $5,255,329
   27              $5,255,329                  $2,548,343          $2,706,986
   28              $2,706,986                  $2,706,986               $0

--------------------------------------------------------------------------------
                                Total:        $44,000,000
--------------------------------------------------------------------------------

                                       34

<PAGE>

                                  EXHIBIT III

                              OWNERSHIP STRUCTURE

Pacific Ethanol, Inc.
Organizational Structure
November 4, 2005

                                    PE, Inc.
                                      (DE)
                                        |
                                        |
          --------------------------------------------------------
          |                             |                        |
     ReEnergy LLC                    PEC Inc                 Kinergy LLC
        (CA)                          (CA)                      (OR)
                                        |
          ------------------------------|
          |                             |
       PAP LLC                      PEHC LLC
         (CA)                         (DE)
                                        |
                                        |------------------------
                                        |                        |
                                    PEFC LLC                  PEV LLC
                                      (DE)                      (DE)
                                        |
                                        |
                                     PEM LLC
                                       (DE)

Note: All subsidiaries are wholly-owned

Note: PEI does not have any interest in any company other than those listed here

-------------------------------------------
PEI = Pacific Ethanol, Inc.
PAP = Pacific Ag Products
PEC = Pacific Ethanol California
PEHC = Pacific Ethanol Holding Co.
PEFC = Pacific Ethanol Finance Co.
PEV = Pacific Ethanol Visalia
PEM = Pacific Ethanol Madera

                                       35

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