Re: Amendment and Waiver Agreement

Wachovia Capital Finance Corporation (Western) (“Wachovia”), in its capacity as agent (“Agent”) for the Lenders from time to time party to the Loan Agreement referred to below, the Lenders and Kinergy Marketing LLC, an Oregon limited liability company (“Borrower”), have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated as of July 28, 2008, by and among Agent, Lenders and Borrower (the “Loan Agreement”), and the other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, the Letter re: Amendment and Forbearance Agreement, dated February 13, 2009 (the “Forbearance Agreement”), the Amendment No. 1 to Letter re: Amendment and Forbearance Agreement, dated as of February 26, 2009 (the “Amendment No. 1 to Forbearance Agreement”), the Amendment No. 2 to Letter re: Amendment and Forbearance Agreement, dated as of March 27, 2009 (the “Amendment No. 2 to Forbearance Agreement”), and this Letter re: Amendment and Waiver Agreement (this “Agreement”) (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the “Financing Agreements”).  Wachovia is currently both the Agent and the sole Lender under the Loan Agreement and is hereinafter referred to in this Agreement in both such capacities, as “Wachovia”.

Borrower and Pacific Ethanol, Inc., a Delaware corporation, as Guarantor (“Parent”) have requested that Wachovia (a) waive the Specified Defaults (as defined in the Forbearance Agreement), (b) waive the Event of Default under Section 10.1(a)(i) of the Loan Agreement resulting from the failure of Borrower to maintain EBITDA in the amount required by Section 9.17 for the two (2) consecutive month period ending February 28, 2009, (c) waive the Event of Default under Section 10.1(a)(i) of the Loan Agreement resulting from the failure of Borrower to maintain EBITDA in the amount required by Section 9.17 for the three (3) consecutive month period ending March 31, 2009, (d) waive the Event of Default under Section 10.1(a)(i) of the Loan Agreement resulting from the failure of Borrower to maintain EBITDA in the amount required by Section 9.17 for the four (4) consecutive month period ending April 30, 2009, (e) waive the Event of Default under Section 10.1(a)(i) of the Loan Agreement resulting from the failure of Borrower to deliver certified financial statements of Borrower and its Subsidiaries for the fiscal month ended March 31, 2009 within the time period specified in, and in accordance with, Section 9.6(a)(i), (f) waive the Event of Default under Section 10.1(a)(i) of the Loan Agreement resulting from the failure of Borrower to deliver audited financial statements of Borrower and its Subsidiaries and Parent and its Subsidiaries for the fiscal year ended December 31, 2008 (together with an unqualified opinion of independent certified public accountants with respect thereto) within the time period specified in, and in accordance with, Section 9.6(a)(iii), (g) waive the Events of Default under Section 10.1(a)(i) of the Loan Agreement resulting from various liens filed, and pre-judgment writs of attachment ordered, against Borrower and its assets in connection with the action filed on January 9, 2009 by Western Ethanol Company, LLC against Borrower in the Superior Court of California, County of Orange (the Events of Default identified in clauses (b) through (g) hereof, together with the Specified Defaults, collectively, the “Existing Defaults”), (h) consent to an amendment to the Parent/Borrower Operating Agreement substantially in the form attached hereto as Exhibit A , and (i) make certain amendments to the Loan Agreement and other Financing Agreements as set forth herein, which Wachovia is willing to do subject to the terms and conditions set forth in this Agreement.

In consideration of the foregoing, the mutual agreements and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.   Interpretation.   All capitalized terms used in this Agreement shall have the meanings assigned thereto in the Loan Agreement and the other Financing Agreements, unless otherwise defined herein.

2.   Amendments to Loan Agreement.

(a)   Additional Definitions .  As used herein, the following terms shall have the meanings given to them below, and the Loan Agreement and the other Financing Agreements are hereby amended to include, in addition and not in limitation, the following definitions:

“Agreement and Waiver” shall mean the Letter re: Amendment and Waiver Agreement, dated as of May 17, 2009, by and among Borrower, Parent, Agent and the Lenders, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

“PE Holding Debtors” shall mean, collectively, Pacific Ethanol Holding Company, LLC and each of its subsidiaries that have commenced, or will commence, a case under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware.

“Western Ethanol Agreement” shall mean the Agreement, dated as of May 14, 2009, by and among Borrower, Agent and Western Ethanol Company, LLC.

(b)   EBITDA .  The definition of “EBITDA” in Section 1.29 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“1.29    “EBITDA” shall mean, as to any Person, with respect to any period, an amount equal to: (a) the Consolidated Net Income of such Person and its Subsidiaries for such period, plus (b) depreciation and amortization (including amortization of deferred financing fees), non-cash impairment charges, imputed interest, deferred compensation, non-cash inventory valuation adjustments and bank fees for such period (all to the extent deducted in the computation of Consolidated Net Income of such Person), all in accordance with GAAP, plus (c) Interest Expense for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), plus (d) the Provision for Taxes for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), plus (e) any costs and expenses incurred, and any amounts paid in cash (whether pursuant to settlement or a final order of a court of competent jurisdiction), in connection with any litigation or judgment, to the extent of the amount received by Borrower (whether by contribution or loan) from Parent to finance such costs, expenses and payments.”

(c)   Material Adverse Effect .  The definition of “Material Adverse Effect” in Section 1.73 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“1.73    “Material Adverse Effect” shall mean any condition, change, effect or circumstance that, individually or when taken together with all such conditions, changes, effects or circumstances, has or would reasonably be expected to have an adverse effect on the financial condition, assets, properties, business, operations or results of operations of the Borrower which is material to the Borrower, excluding (a) any changes or effects that are not unique to the Borrower and do not adversely affect the Borrower disproportionately compared to its competitors, directly resulting from general changes in economic, financial or capital market, regulatory, political or national security conditions (including acts of war or terrorism), (b) any changes in conditions generally applicable to the industries in which the Borrower is involved, (c) any changes that result from the announcement or the consummation of the transactions contemplated hereby, (d) any changes or effects, individually or when taken together with all such changes or effects, that result from or could reasonably be expected to result from the Chapter 11 cases filed, or to be filed, by the PE Holding Debtors, so long as such changes or effects do not, in fact, have an adverse effect on the financial condition, assets, properties, business, operations or results of operations of the Borrower which is material to the Borrower; provided , that , the mere filing by the PE Holding Debtors of the Chapter 11 cases shall not be deemed to have a Material Adverse Effect as to Borrower, (e) any “going concern” or similar qualification to the opinion of Borrower’s or Parent’s independent certified public accountants with respect to the financial statements of Borrower or Parent, unless such “going concern” or similar qualification to any such opinion relates solely to Borrower (independent of Parent), and (f) any changes or effects that have been disclosed to Agent and Lenders as of the date of the Agreement and Waiver that has or could reasonably be expected to have a material adverse effect on the financial condition, assets, properties, business, operations or results of operations of Borrower (the foregoing exclusion in this clause (f) shall not apply to any changes or effects that have not been disclosed to Agent and Lenders as of the date of the Waiver and Amendment or any changes or affects arising after the date of the Waiver and Amendment).”

(d)   Unused Line Fee .  Section 3.2(a) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“(a)   Effective as of the date of the Amendment and Waiver, Borrower shall pay to Agent, for the account of Lenders, monthly an unused line fee at a rate equal to one-half of one (0.50%) percent per annum calculated upon the amount by which the Maximum Credit exceeds the average daily principal balance of the outstanding Revolving Loans and Letters of Credit during the immediately preceding month (or part thereof) while this Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on the first day of each month in arrears.”

(e)   Servicing Fee .  Section 3.2 of the Loan Agreement is hereby amended by adding the following new Section 3.2(e) at the end thereof:

“(e)   Effective as of the date of the Amendment and Waiver, Borrower shall pay to Agent, for its own account, a servicing fee in an amount equal to $5,000 per month in respect of the services of Agent for each month (or part thereof) while the Loan Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding.  Such fee shall be fully earned as of and payable in advance on the date of the Amendment and Waiver and on the first day of each month thereafter for so long as any of the Obligations are outstanding.”

(f)   Collateral Reporting .  Section 7.1(a)(ii) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“(ii)           within fifteen (15) Business Days after the end of each fiscal month, on a monthly basis or more frequently as Agent may reasonably request:  (A) perpetual inventory reports, (B) agings of accounts receivable (together with a reconciliation to the previous month’s aging and general ledger), (C) agings of accounts payable (and including information indicating the amounts owing to owners and lessors of leased premises, warehouses, processors and other third parties from time to time in possession of any Collateral) and (D) a schedule of all ethanol purchase and sale contracts or agreements constituting a Material Contract entered into, amended or terminated during the previous month;”

(g)   Encumbrances .  Section 9.8 of the Loan Agreement is hereby amended by deleting the “and” from the end of clause (i) thereof, replacing the period at the end of clause (j) with “; and” and adding the following new clause (k):

“(k)   liens expressly permitted pursuant to the terms of the Western Ethanol Agreement.”

(h)   Payments to Parent .  Section 9.12(b) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“(b)   make any payments (whether by dividend, loan or otherwise) of management, consulting or other fees for management or similar services, or of any Indebtedness owing to any officer, employee, shareholder, director or any other Affiliate of Borrower, except (i) reasonable compensation to officers, employees and directors of Borrower and its affiliates for any services rendered to Borrower in the ordinary course of business, (ii) payment by Borrower to Parent on the date hereof of an amount not to exceed $6,000,000 on account of intercompany Indebtedness due and owing by Borrower to Parent as of the date hereof, and (iii) payments by Borrower to Parent for those services provided by Parent to Borrower pursuant to the Parent/Borrower Operating Agreement as in effect on the date hereof; provided , that , (A) such payments (other than payments expressly provided for in clause (iii)(B) below) under this clause (iii) shall not exceed $600,000 in the aggregate during any three (3) consecutive month period and $2,400,000 in the aggregate during any twelve (12) consecutive month period, and (B) with respect to any reimbursement payment by Borrower to Parent on account of any margin call due in connection with any hedging position created by Parent for or on behalf of Borrower pursuant to the Parent/Borrower Operating Agreement, Borrower shall have Excess Availability of not less than $1,000,000 after giving effect to such payment.

(i)   Event of Default .  Section 10.1 of the Loan Agreement is hereby amended as follows:

(i)   Section 10.1(d) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“(d)  (i) any judgment for the payment of money is rendered against Borrower or any Obligor (other than Parent) in excess of $100,000 in any one case or in excess of $250,000 in the aggregate (to the extent not covered by insurance where the insurer has assumed responsibility in writing for such judgment) and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against Borrower or any Obligor (other than Parent) or any of the Collateral having a value in excess of $100,000 or (ii) any judgment for the payment of money is rendered against Parent or any of its subsidiaries (other than Borrower, Pacific Ethanol Imperial LLC or the PE Holding Debtors) in excess of $500,000 in any one case or in excess of $1,000,000 in the aggregate (to the extent not covered by insurance where the insurer has assumed responsibility in writing for such judgment) and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment ot