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
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
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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
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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
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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.
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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.
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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
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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
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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
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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,
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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.
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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,
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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").
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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
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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;
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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
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
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
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
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
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
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
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
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
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
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
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
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
(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
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
(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
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
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
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
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
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
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