EXHIBIT 99.222
CONFIDENTIAL
VERSION 1, OM TECHNOLOGY
December __, 1999
California Power Exchange
Attn: _________________
Xxxxx Systems
Attn: _________________
Re: Non-Binding Letter of Intent -- Subject to Contract
Ladies and Gentlemen:
The purpose of this non-binding letter of intent ("Letter of Intent") is
to confirm certain understandings and agreements between the California Power
Exchange Corporation ("CalPX"), OM Technology AB ("OM Technology") and Xxxxx
Systems Corporation ("Xxxxx Systems") (together the "Parties") relating to the
proposed establishment of a Pan-American clearinghouse for on and off-exchange
electricity trading (the "Project").
The general proposal and approach for the establishment of the
clearinghouse is set forth below under the heading "Part A: General Proposal And
Approach"; the additional terms and conditions of this Letter of Intent are set
out under the heading "Part B: Additional Terms and Conditions".
Details of the required funding of the business of the proposed
corporate vehicle ("ClearCo") for the initial 12-18 month period will be set
forth in a business plan to be agreed between the Parties (the "Business Plan")
[a draft of which is attached as Schedule 1].
PART A: GENERAL PROPOSAL AND APPROACH
1. BACKGROUND
The Parties have for some time been exploring the potential for an
energy product clearinghouse in North America. The purpose of this document is
to confirm the present mutual intentions of the Parties to enter into an
agreement to form a Pan-American clearinghouse for energy through ClearCo.
The mission of ClearCo is to become the leading energy clearinghouse in
North America, serving multiple energy exchanges as well as the OTC-market.
Furthermore, ClearCo will have the capability to handle any energy contract or
instrument.
ClearCo is to be formed as an independent company with its own board and
management. The operation will be for-profit and any relation between ClearCo
and the Parties as founding partners is to be on a strictly commercial basis.
This implies that services rendered from a Party to ClearCo will be compensated
for on market terms. At the start, ClearCo will acquire initial services from
the Parties.
ClearCo will have to be sufficiently capitalized in order to fund the
project and the first 12-18 months of operation. The Business Plan will provide
the required figure. The Parties, if they choose to continue with this venture,
will provide capital, including in-kind contribution, in relation to the
subscribed equity share and value provided.
2. VALUE PROPOSITION
The value proposition to the market participants will primarily be:
Counterparty risk management
In its final form and if Parties shall agree, ClearCo is intended to be
the central counterparty to all market participants, i.e. it will act seller to
the buyer and buyer to the seller. The net position of ClearCo will therefore
always be zero, anything else will suggest a default of a market participant.
The concept of a central counterparty is of great value to market participants
as it means that, rather than having to evaluate the creditworthiness of every
counterparty, the creditworthiness of only one counterparty has to be dealt
with. In addition, it means that the number of potential counterparties is
vastly increased, as many companies currently are prohibited from dealing with
small and low capitalized market participants.
During the initial stages of implementation, as regulatory issues are
being resolved, ClearCo is unlikely to be the central counterparty. Rather,
ClearCo will function as the credit source of last resort during the case of
default. The details of any necessary staging will be addressed as part of the
development of the detailed Business Plan.
Facilitated administration
ClearCo will handle all payments and settlement as well as the
associated administration. Thereby market participants can get all trades,
irrespective of origin marketplace, registered on a single account. This greatly
facilitates risk management and the efficiency of margin collateral; a
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trade made on-exchange that is offset OTC will imply a zero position as well as
zero margin collateral requirement. In addition, other cross-product netting
schemes can be implemented further enhancing the efficiency of the funds tied up
as margin collateral.
As with Credit Risk management, there may be some regulatory issues to
be resolved that would lead to a staged implementation of this venture. For
example, initially on-exchange trades may not be nettable against OTC trades
without certain regulatory approvals. In that case, an initial implementation
may require that these two credit pools be kept separate. The details of any
necessary staging will be addressed as part of the development of the Business
Plan.
Although ClearCo will assume the aggregate counterparty exposure of the
market it will be a limited liability company. It will have three lines of
defense in the case of a market participant default;
- The margin collateral posted by the defaulting participant
- The capital of the company
- Any insurance or external coverage
3. OBJECTIVES
The long-term objective is to create a stand-alone fully developed
clearing organization for the North American energy markets by Q4 2000, offering
clearing solutions for trading taking place both on and off-exchange. The
structure of this organization will be specified in the Business Plan. Although
the service offerings to the participants might be introduced in several stages,
the project should from day one focus on setting up the mature solution when it
comes to the legal framework, capital structure and banking relationship. The
objective has two initial sub-objectives:
Clearing for BFM
CalPX presently operates a market for block forwards (the "BFM").
Currently the CalPX performs a fully administrative clearing service to the BFM
participants but since no central entity is taking on the financial counterparty
risk the participants themselves face the financial risk of a major default.
Several market participants have cited the collateral requirements as either
preventing or limiting their participation in the BFM market. One objective for
the ClearCo project is to offer counterparty clearing to the participants in the
BFM market.
OTC market
As in any derivative market most of the trading will take place in the
bilateral market and in a mature market an exchange could capture 30-50% of the
total derivatives trading. Traditionally, OTC trades are not cleared and
positions in the bilateral market require considerable back-office resources for
settlement administration as well as credit surveillance of the various
counterparties. The Nordic electricity market pioneered by offering clearing of
these OTC contracts. This service has been a success and now most trades in the
OTC market are cleared through the same central clearing organization as for the
exchange. The second objective is to offer clearing service to the OTC market
for electricity contracts in the US and offer counterparty risk management,
administration as well as netting possibilities through the central clearing
organization. Initial focus will be on WSCC.
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4. OWNERSHIP
The proportion of ownership of ClearCo will be in relation to each
Party's contribution of value. A methodology will be developed for assessing
value contribution. This methodology will include, but not be limited to, the
following elements: clearing experience, clearing systems and processes that fit
the US energy markets, clearing capital, neutral market operations, existing
marketplace connections, system integration capability, expertise in organizing
& operating ClearCo under US law.
Because of OM Technology's experience in clearing power markets, OM
Technology will become the majority owner of ClearCo subject two conditions:
- CalPX believes OM Technology's clearing systems and processes are
reliably compatible, or can be made reliably compatible within the
desired timeframe, with US energy market clearing practices and laws,
and
- The marketing of ClearCo's services is done either under the name of
CalPX Trading Services (or some other market-based unit of CalPX) or
under the name of an LLC parent of ClearCo in which CalPX Trading
Services (or equivalent) is the managing partner and at least equal
owner.
- All liabilities associated with ClearCo shall be borne by the Majority
Owner.
Because of the likelihood of OM Technology being the majority owner of
ClearCo, OM Technology will be project leader.
PART B: ADDITIONAL TERMS AND CONDITIONS
5. NEGOTIATION AND EXECUTION OF THE DEFINITIVE AGREEMENTS.
The Parties hereby confirm their intention to negotiate in good faith
definitive agreements governing the establishment of ClearCo and the
Pan-American Clearinghouse (the "Definitive Agreements") in accordance with this
Letter of Intent during a the period commencing on the date hereof and ending on
January 14, 2000??? (the "Expiration Date"), unless this Letter of Intent is
terminated earlier in accordance with Section 5.
6. EXPENSES.
Each of the Parties shall bear its own costs and expenses (including
fees and disbursements of legal counsel and/or other professional advisors)
incurred in connection with this Letter of Intent and the negotiation,
preparation, and execution of the Definitive Agreements, whether or not the
Parties execute any Definitive Agreements. Neither Party shall have any
liability to the other as a result of any determination not to execute any
Definitive Agreement.
7. CONFIDENTIALITY.
All Confidential Information relating to or obtained from any Party
shall be held in confidence by the recipient to the same extent and in at least
the same manner as the recipient protects its own confidential or proprietary
information. The Parties further undertake to use the Confidential Information
strictly for the purposes of this Agreement and not to make any commercial use
thereof.
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Without limiting the foregoing, and except as required by law, no public
announcements or similar publicity with regard to the existence, content or
substance of this Letter of Intent, the Term Sheet and/or the negotiations
hereunder shall be made unless approved in writing by both Parties prior to
issuance.
"Confidential Information" shall mean all confidential or proprietary
information and documentation of the Parties including (1) information relating
to each Party's customers, suppliers, contractors and other third parties doing
business with such Party, (2) information relating to business operations or
strategies of either Party.
8. BINDING EFFECT.
Except for the provisions of Sections 6, 7, 8, 9 and 10 hereof, which
constitute binding agreements of the Parties, this Letter of Intent constitutes
only an expression of the Parties' non-binding current intent to negotiate in
good faith the Definitive Agreements based on the terms and conditions set forth
above and in the Business Plan, and do not constitute any binding or legally
enforceable obligations of either Party, nor any obligation or commitment of any
Party to enter into the Definitive Agreements or otherwise proceed with the
Project. A binding commitment to proceed with the Project shall only arise upon
the execution and delivery of the Definitive Agreements by each Party, which
shall be subject to such Party's satisfaction, in its sole discretion, with the
results of the negotiation of the Definitive Agreements. If the negotiations
between the Parties are discontinued for any reason and no Definitive Agreements
are entered into by the Parties, such discontinuation and/or failure to enter
into the Definitive Agreements shall not give rise to any claim on the part of
either Party on any grounds whatsoever. Without limiting the foregoing, no
representations or warranties are made hereby by either Party to the other
Party.
9. TERMINATION; SURVIVAL.
Unless extended by the Parties, this Letter of Intent will automatically
terminate (without any liability or obligation on the part of either Party to
the other Party) upon the earliest of: (i) the execution of the Definitive
Agreements; (ii) the Expiration Date. If this Letter of Intent terminates for
any reason and the Definitive Agreements are not executed at such time, the
provisions of Sections 6 through 10 shall survive and shall continue to apply.
10. GOVERNING LAW; AMENDMENT; COUNTERPARTS.
This Letter of Intent shall be governed by, and construed in accordance
with, the laws of the State of California, United States of America, without
regard to conflict-of-law rules thereof. This Letter of Intent may be amended or
modified only by a written agreement signed by each Party. This Letter of Intent
may be executed in any number of counterparts, each of which will be an
original, but all of which together will constitute one agreement.
* * * * *
Please confirm that the foregoing is in accordance with your
understanding of our agreement by signing and returning to us a copy of this
letter.
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Very truly yours,
OM Technology AB
By:
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Xxxxxx Xxxxxxxx
President and CEO
Confirmed and agreed:
California Power Exchange
By:
-----------------------------------
Name:
Title:
Confirmed and agreed:
Xxxxx Systems Corporation
By:
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Name:
Title:
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