THIRD FORBEARANCE AGREEMENT

THIS THIRD FORBEARANCE AGREEMENT (this “Agreement”) is entered into as of March 31, 2009, by and among Pacific Ethanol Holding Co. LLC (“Holding”), Pacific Ethanol Madera LLC (“Madera”), Pacific Ethanol Columbia, LLC (“Columbia”), Pacific Ethanol Stockton, LLC (“Stockton”) and Pacific Ethanol Magic Valley, LLC (“Magic Valley” and together with Holding, Madera, Columbia and Stockton, the “Borrowers”), WestLB AG, New York Branch, as administrative agent for the Senior Secured Parties (in such capacity, the “Administrative Agent”), WestLB AG New York Branch, as collateral agent for the Senior Secured Parties (in such capacity, the “Collateral Agent” and, collectively with the Administrative Agent, the “Agent”) and Amarillo National Bank, as accounts bank for the Senior Secured Parties (the “Accounts Bank”), as parties to the Credit Agreement (defined below).  Capitalized terms used in this Agreement which are not otherwise defined herein, shall have the meanings given such terms in the Credit Agreement.

WHEREAS, the Borrowers, Administrative Agent, Collateral Agent, Accounts Bank and the lenders party thereto from time to time are parties to that certain Credit Agreement dated as of February 27, 2007 (as amended by that certain Successor Accounts Bank and Amendment Agreement dated as of August 27, 2007, as further amended by that certain Waiver and Third Amendment to Credit Agreement dated as of March 25, 2008, as further amended by that certain Fourth Amendment to Credit Agreement dated as of April 24, 2008, as further amended by that certain Fifth Amendment to Credit Agreement dated as of October 24, 2008 and as further amended by that certain Sixth Amendment to Credit Agreement dated as of December 30, 2008, the “ Credit Agreement ”);

WHEREAS, the Borrowers, Administrative Agent, Collateral Agent and the Senior Secured Parties entered into that certain Limited Waiver and Forbearance Agreement dated as of February 17, 2009 and that certain Second Limited Waiver and Forbearance Agreement dated as of February 27, 2009;

WHEREAS, the Borrowers were unable to pay the Term Loan interest payment due and payable on the scheduled payment date in accordance with Section 9.01(a) of the Credit Agreement, which nonpayment constituted an Event of Default (the “ Interest Payment Event of Default ”);

WHEREAS, the Borrowers have advised Agent that they will be unable to pay the Term Loan principal and interest payment due and payable on the scheduled payment date in accordance with Section 9.01(a) of the Credit Agreement, which nonpayment will constitute an Event of Default  (the “ Anticipated Principal Payment Default ”);

WHEREAS, the Defaults and Events of Default set forth on Schedule I attached hereto have occurred and are continuing under the Credit Agreement (collectively, the “ Existing Events of Default ”);

WHEREAS, the Borrowers have advised Agent that they do not expect to be in compliance with certain other provisions of the Credit Agreement which would give rise during the Forbearance Period (as defined below) to the Events of Default set forth on Schedule II attached hereto (collectively, the “ Anticipated Defaults ”);

WHEREAS, as a result of the occurrence of the Existing Events of Default and pursuant to the Credit Agreement and other Financing Documents, (i) the Senior Secured Parties are under no further obligation to make Loans or other financial accommodations to Borrowers under the Credit Agreement and (ii) the Agent and the Senior Secured Parties are entitled, among other things, to enforce their rights and remedies against the Borrowers and the Collateral, including, without limitation, accrual of default interest, the right to accelerate and immediately demand payment in full of the Obligations and foreclose on the Collateral;

WHEREAS, the Borrowers have requested that the Agent and the Senior Secured Parties agree and, subject to the terms and conditions of this Agreement, the Agent and the Senior Secured Parties have agreed, to forbear from demanding immediate payment of certain amounts and exercising their right to foreclose on any or all of the Collateral from the date hereof through the earliest to occur of (i) April 30, 2009; (ii) the date of termination of the Forbearance Period pursuant to Section 6 hereof; and (iii) the date on which all of the Obligations have been paid in full and the Credit Agreement has been terminated (the “ Forbearance Period ”);

WHEREAS, an Event of Default has occurred under Sections 5(a)(vi) and 5(a)(vii)(2) (together, the “ Interest Rate Protection Agreement Events of Default ”) of the ISDA Master Agreement dated February 26, 2007 (the “ Interest Rate Protection Agreement ”) between Holding and WestLB, New York Branch (in such capacity, the “ Interest Rate Protection Provider ”);

WHEREAS, Holding has advised the Interest Rate Protection Provider that it will be unable to pay the interest payment due and payable on the scheduled payment date in accordance with Section 5(a)(i) of the Interest Rate Protection Agreement, which nonpayment will constitute an Event of Default  (the “ Anticipated Swap Interest Payment Default ”);

WHEREAS, Holding has requested that the Interest Rate Protection Provider agree and, subject to the terms and conditions of this Agreement, the Interest Rate Protection Provider has agreed, to refrain from terminating the Interest Rate Protection Agreement from the date hereof through the Forbearance Period subject to the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Agent and Senior Secured Parties hereby agree as follows:

1.   Incorporation of Preliminary Statements .  The preliminary statements set forth above are hereby incorporated into this Agreement as accurate and complete statements of fact.  Without limiting the foregoing, each Borrower hereby acknowledges and agrees that (a) the Interest Payment Event of Default and the Existing Events of Default have occurred and are continuing under the terms of the Credit Agreement and the Interest Rate Protection Agreement Events of Default have occurred and are continuing under the terms of the Interest Rate Protection Agreement, and none of the Borrowers has any disputes, defenses or counterclaims of any kind with respect thereto; (b) the Senior Secured Parties are under no obligation to make Loans or other financial accommodations to the Borrowers under the Credit Agreement; (c) the Interest Rate Protection Provider has the right to terminate the Interest Rate Protection Agreement on the date hereof; (d) the Agent, on behalf of the Senior Secured Parties has, and shall continue to have, valid, enforceable and perfected security interests in and liens upon the Collateral heretofore granted by Borrowers to the Collateral Agent and Senior Secured Parties pursuant to the Financing Agreements or otherwise granted to or held by the Collateral Agent or the Senior Secured Parties; (e) absent the effectiveness of this Agreement, the Agent and Senior Secured Parties have the right to immediately enforce their security interest in, and liens on, the Collateral; and (f) the outstanding Loans and all other Obligations are payable pursuant to the Credit Agreement or Interest Rate Protection Agreement, as applicable, without defense, dispute, offset, withholding, recoupment, counterclaim or deduction of any kind.

2.   Covenant re Interest Payment Event of Default and Anticipated Principal Payment Default .

Provided that no Forbearance Default (as defined below) occurs, and subject in all respects to the terms and conditions of this Agreement including satisfaction of the conditions precedent to the effectiveness of this Agreement set forth in Section 4 below, during the Forbearance Period each Senior Secured Party agrees that it shall not (i) direct the Administrative Agent to declare all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable or (ii) direct the Collateral Agent to exercise any or all remedies provided for under the Credit Agreement or the other Financing Documents solely on account of the Interest Payment Event of Default and the Anticipated Principal Payment Default.  Nothing contained herein shall limit the right of a Senior Secured Party to exercise remedies with respect to the obligations under its Note(s).  Upon termination of the Forbearance Period, the Senior Secured Parties shall have the right to enforce any and all remedies with respect to the Anticipated Principal Payment Default.

3.   Forbearance .

(a)            Credit Agreement .

(i)  Each Borrower agrees and acknowledges that the Existing Events of Default set forth on Schedule I have occurred and are continuing.

(ii) Each Borrower has advised Agent that such Borrower does not expect to be in compliance with certain provisions of the Credit Agreement which would give rise to the Anticipated Defaults set forth on Schedule II .

(iii) Each Borrower hereby agrees and acknowledges that (A) Schedule I represents a complete and accurate list of all Existing Events of Default (other than the Interest Payment Event of Default) which are in existence as of the Effective Date (as hereinafter defined); and (B) Schedule II represents a complete and accurate list of all provisions in the Credit Agreement which it reasonably believes may give rise to an Anticipated Default (other than the Anticipated Principal Payment Default).

(iv) Provided that no Forbearance Default (as defined below) occurs, subject to the terms and conditions of this Agreement and satisfaction of the conditions precedent to the effectiveness of this Agreement set forth in Section 4 below, during the Forbearance Period, the Agent and the Senior Secured Parties hereby forbear from exercising, on account of the Existing Events of Default and the Anticipated Defaults, those rights and remedies afforded to them under the Credit Agreement, the other Financing Documents and applicable law.

(b)            Interest Rate Protection Agreement .

(i) Holding acknowledges that the Interest Rate Protection Agreement Events of Default have occurred and are continuing.

(ii) Holding has advised the Interest Rate Protection Provider that it does not expect to be in compliance with Section 5(a)(i) of the Interest Rate Protection Agreement which would give rise to the Anticipated Swap Interest Payment Default.

(iii) Holding hereby agrees and acknowledges that (A) the Interest Rate Protection Agreement Events of Default completely and accurately represent all of the Events of Default (as defined in the Interest Rate Protection Agreement) or Termination Events (as defined in the Interest Rate Protection Agreement) which are in existence under the Interest Rate Protection Agreement as of the Effective Date; and (B) the Anticipated Swap Interest Payment Default completely and accurately represents all of the provisions of the Interest Rate Protection Agreement which it reasonably believes may give rise to an Event of Default under the Interest Rate Protection Agreement during the Forbearance Period;

(iv) Provided that no Forbearance Default (as defined below) occurs, subject to the terms and conditions of this Agreement and satisfaction of the conditions precedent to the effectiveness of this Agreement set forth in Section 4 below, during the Forbearance Period, the Interest Rate Protection Provider hereby agrees to not exercise, on account of the Interest Rate Protection Agreement Events of Default and the Anticipated Swap Interest Payment Default, those rights and remedies afforded it under the Interest Rate Protection Agreement, Credit Agreement, the other Financing Documents and applicable law; provided however , notwithstanding anything to the contrary set forth in the Credit Agreement, to the extent that the Interest Rate Protection Provider postpones or reschedules any accrued and unpaid interest payment due and payable under the Interest Rate Protection Agreement (whether during the term of this Agreement or at any time hereafter), upon termination of the Interest Rate Protection Agreement, such amounts shall be (A) excluded from the calculation of the Swap Termination Value and (B) included in the portion of the Obligations payable under Section 9.04(c) of the Credit Agreement.

4.   Conditions of Effectiveness of this Agreement .   This Agreement shall become effective as of the date hereof (the “ Effective Date ”) when, and only when:

(a)           The Agent shall have received counterparts of this Agreement duly executed and delivered by the Borrowers and the Accounts Bank;

(b)           The Agent shall have received the Updated 13-Week Cash Flow Forecast (as defined below) in form and substance acceptable to the Agent;

(c)           The Agent shall have received an agreement, in form and substance satisfactory to the Agent, pursuant to which Wachovia, as agent, and the other lenders party thereto have agreed to continue to forbear from exercising their rights against Pacific Ethanol Inc. (“ Pacific Ethanol ”) and Kinergy Marketing, LLC (“ Kinergy ”) pursuant to the terms of their financing arrangements with Pacific Ethanol and Kinergy co-terminous with the Forbearance Period and such forbearance shall be in full force and effect;

(d)           The Agent shall have received an agreement, in form and substance satisfactory to the Agent, pursuant to which Lyles United, LLC agrees to forbear from exercising its rights against Pacific Ethanol, Pacific Ethanol California, Inc., and Pacific Ag Products, LLC, pursuant to the terms of that certain Loan Restructuring Agreement dated as of November 7, 2008 and the other instruments referred to therein, for a forbearance period co-terminous with the Forbearance Period and such forbearance shall be in full force and effect;

(e)           The Agent shall have received evidence satisfactory to it that Pacific Ethanol has received proceeds of not less than $2,000,000 from the issuance of notes (the “ Junior Notes ”) which Notes shall be satisfactory in all respects (including, without limitation, term and ranking) to the Agent.  The Borrowers shall have concurrently provided the Agent and the Agent’s financial and legal advisors with a Updated 13-Week Cash Flow Forecast (as defined below) satisfactory in all respects to the Agent setting forth how Pacific Ethanol, Kinergy and the Borrowers will use such proceeds.

(f)           All of the representations and warranties of the Borrowers contained in this Agreement shall be true and correct on and as of the Effective Date (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and

(g)           The Agent shall have received payment in full of all fees and expenses due and payable in accordance with the terms of this Agreement and the Credit Agreement (including reasonable and documented legal fees and expenses of the Agent’s counsel and other advisors).

5.   Representations and Warranties .  To induce the Agent and the Senior Secured Parties to enter into this Agreement, each Borrower represents and warrants to the Agent and the Senior Secured Parties (which representations and warranties shall be made on and as of the Effective Date):

(a)           Such Borrower has the requisite corporate power and authority and the legal right to execute and deliver this Agreement, and to perform the transactions contemplated hereby.  The execution, delivery and performance by such Borrower of this Agreement, (i) are within the Borrower’s corporate power; (ii) have been duly authorized by all necessary corporate or other action; (iii) do not contravene or cause the Borrower or any other Loan Party to be in default under (x) any provision of the Borrower’s or other Loan Party’s formation documents or bylaws, (y) any contractual restriction contained in any indenture, loan or credit agreement, lease, mortgage, security agreement, bond, note or other agreement or instrument binding on or affecting the Borrower or other Loan Party or its property, or (z) any law, rule, regulation, order, license requirement, writ, judgment, award, injunction, or decree applicable to, binding on or affecting the Borrower or other Loan Party or its property; (iv) will not result in the creation or imposition of any Lien upon any of the property of the Borrower or other Loan Party or any Subsidiary thereof other than those in favor of the Agent or any Senior Secured Party, all pursuant to the Financing Documents; and (e) do not require the consent or approval of any Governmental Authority or any other Person, other than those which have been duly obtained, made or complied with and which are in full force and effect.

(b)           This Agreement has been duly executed and delivered by such Borrower.  Each of this Agreement, the Credit Agreement (as modified herein), the Interest Rate Protection Agreement (as modified herein) and the other Financing Documents (as modified hereby) to which each Borrower is a party is the legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, subject, as to enforceability, to (A) any applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the enforceability of creditors’ rights generally and (B) general equitable principles, whether applied in a proceeding at law or in equity, and is in full force and effect.

(c)           Except as to those representations and warranties now made inconsistent with the terms of this Agreement or which constitute the Interest Payment Event of Default, an Existing Event of Default, the Anticipated Principal Payment Default, an Anticipated Default, the Anticipated Swap Interest Payment Default or the Interest Rate Protection Agreement Events of Default, the representations and warranties of each Borrower and Loan Party contained in each Financing and Project Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof.

(d)           No Default or Event of Default under the Credit Agreement or Interest Rate Protection Agreement arising other than as a result of the Interest Payment Event of Default, Existing Events of Default, the Anticipated Defaults, the Anticipated Principal Payment Default, the Anticipated Swap Interest Payment Default or the Interest Rate Protection Agreement Events of Default shall have occurred and be continuing or would result after giving effect to any of the transactions contemplated on the date hereof.

(e)           No Forbearance Default (as defined below) has occurred.

6.   Forbearance Defaults :  The following events shall constitute “ Forbearance Defaults ”):

(a)           any failure to pay principal payments (other than the Anticipated Principal Payment Default), interest payments (other than the Interest Payment Event of Default and the Anticipated Swap Interest Payment Default) or any other payments in accordance with the terms of the Credit Agreement or the Interest Rate Protection Agreement; or

(b)           any Borrower or Loan Party shall fail to observe or perform any other term, covenant, or agreement binding on it contained in this Agreement, or any other agreement, instrument, or document executed in connection with this Agreement; or

(c)           the occurrence of an Event of Default under the Credit Agreement, the Interest Rate Protection Agreement or any of the other Financing Documents or any Project Document, other than an Existing Event of Default, an Anticipated Default, the Interest Payment Event of Default, the Anticipated Principal Payment Default, the Anticipated Swap Interest Payment Default or either of the Interest Rate Protection Agreement Events of Default;

(d)           any instrument, document, report, schedule, agreement, representation or warranty, oral or written, made or delivered to the Agent or any Senior Secured Parties by any  Borrower or Loan Party shall be false or misleading in any material respect when made, or deemed made, or delivered; or

(e)           the proceeds of the Junior Notes shall have been fully utilized by Pacific Ethan