Technology Development And Transfer Agreement, Dated December 13, 2000

Exhibit 10.26


Technology Development and Transfer Agreement


between


Kawasaki Heavy Industries, Ltd.


and


Catalytica Energy Systems, Incorporated


This Agreement is made as of this 13th day of December, 2000, by and between Kawasaki Heavy Industries, Ltd. (hereinafter referred to as "KHI"), a Japanese corporation and having its principal place of business at 1-1 Higashi-Kawasaki- cho 3-chome, Chuo-ku, Kobe, Japan; and Catalytica Energy Systems, Incorporated (hereinafter referred to as "CESI"), a Delaware corporation and having its principal place of business at 430 Ferguson Drive, Mountain View, California, U.S.A., either or both of which shall also be hereinafter referred to as a "Party", and together as the "Parties", respectively.


WHEREAS, CESI has developed expertise and technology of the catalytic combustion system (hereinafter defined as "XONON Combustion System"), which incorporates catalytic module(s) which are utilized to oxidize hydrocarbon fuels in the XONON Combustion System for gas turbines, and CESI has reduced to practice and commercially demonstrated expertise and technology relating to such system and module(s) as applied to a Kawasaki model M1A-13A gas turbine at Silicon Valley Power;


WHEREAS, KHI desires to obtain from CESI the right to use such expertise and technology to modify and adapt the XONON Combustion System for installation on Kawasaki gas turbines of output up to [*] nameplate rating developed and/or to be developed by KHI, including but not limited to Kawasaki model M1A-13A gas turbine, (hereinafter defined as "Kawasaki Gas Turbines"), and to obtain from CESI the right to manufacture and sell Adapted Kawasaki Gas Turbines (as defined below) based upon the expertise and technology which are reduced to practice and demonstrated by CESI as applied to the Kawasaki model M1A-13A gas turbine at Silicon Valley Power;


WHEREAS, the Parties wish to collaborate in the modification and adaptation of the XONON Combustion System to the Kawasaki Gas Turbines and to the development and commercialization of Kawasaki Gas Turbines in accordance with terms and conditions as set forth herein;


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NOW, THEREFORE, in consideration of these premises and of the mutual
covenants herein contained, the parties agree as follows:


1.0 DEFINITIONS
-----------


All capitalized words or phrases used throughout this Agreement shall have
the meanings as defined in this section.


1.1 "Adaptation Program" means the collaborative program, using the
Applied CESI Technology (as hereinafter defined), of application
engineering to modify, adapt and metricate the XONON Combustion
System, including the XONON Modules (as hereinafter defined) to
Kawasaki Gas Turbines.


1.2 "Adaptation Program Technology" means the Technology (as hereinafter
defined) conceived during the Adaptation Program.


1.3 "Adapted Kawasaki Gas Turbines" means Kawasaki Gas Turbines not
larger than [*] adapted and modified under the Adaptation Program.


1.4 "Adapted M1A-13A" means Kawasaki model M1A-13A gas turbine adapted
under the Adaptation Program.


1.5 "Affiliates" mean, with respect to any Person as hereinafter defined,
any other Person which directly or indirectly controls, is controlled
by, or is under common control with, such Person. A Person shall be
regarded as in control of another Person if it owns, or directly or
indirectly controls, at least fifty percent (50%) of the voting stock
or other ownership interest of the other Person, or if it directly or
indirectly possesses the power to direct or cause the direction of
the management and policies of the other Person by any means
whatsoever.


1.6 "Applied CESI Technology" means the CESI Technology as hereinafter
defined that CESI has reduced to practice and commercially
demonstrated as applied to a Kawasaki model M1A-13A gas turbine at
Silicon Valley Power.


1.7 "Background" means, with respect to the Patents (as hereinafter
defined) and the Technical Information (as hereinafter defined) that
a Party or its Affiliates has acquired or acquires prior to the
Effective Date (as hereinafter defined) or otherwise not (i) in
connection with its work under this Agreement, or (ii) from the other
Party.


1.8 "Catalytic Combustion System" means a gas turbine combustion system
that employs a catalyst upstream of the turbine inlet which is
associated with the combustion process, and shall not include SCR,
SNCR, SCONOx/TM/ or other catalytic devices employed in pollution
clean-up.


1.9 "CESI Technology" means the Technology relating to the XONON
Combustion System and the Xonon Module, including the Background
Technology, Applied CESI Technology, and the Adaptation Program
Technology which is now or


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hereafter may be owned by CESI and/or possessed by CESI (but
excluding the Adaptation Program Technology developed by KHI
hereunder and jointly developed by CESI and KHI hereunder) with
rights to grant others the developmental and/or commercialization
rights set forth herein.


1.10 "Effective Date" means the date of this Agreement as first set forth
above.


1.11 "Kawasaki Gas Turbines" means Kawasaki designed and manufactured gas
turbines of output up to [*] nameplate rating, both new and retrofit
(that is, installed) developed and/or to be developed by KHI,
including but not limited to Kawasaki model M1A-13A gas turbine.


1.12 "Patents" mean patents (including patents of importation, patents of
confirmation, patents of improvements, patents and certificates of
addition and utility models, as well as divisions, reissues,
continuations, continuations-in-part, renewals and extensions of any
of the foregoing) and provisional and regular applications therefor,
and patents which may be issued on such applications covering
inventions with respect to which the first application for patent
anywhere was filed prior to the date of any termination of this
Agreement.


1.13 "Person" means an individual, corporation, partnership, trust,
business trust, association, joint stock company, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization,
governmental authority or any other form of entity not specifically
listed herein.


1.14 "Products" mean the XONON Module and the XONON Component.


1.15 "Technical Information" means all technical information, know-how,
trade secrets, experience, manufacturing techniques, software and
other copyrightable works, engineering and other data, drawings,
material and process specifications, whether patented or unpatented,
whether in written, printed, oral or other form, relating to, in the
case of KHI, industrial gas turbines having ratings up to [*], and,
in the case of CESI, the XONON Combustion System and the XONON
Module.


1.16 "Technology" means the Patents and the Technical Information.


1.17 "Third Party" means any Person other than CESI, KHI and their
respective Affiliates.


1.18 "XONON Component" means the fuel/air mixer package, the pre-burner,
and other elements such as combustor hardware components, which are
necessary combustion system modifications to enable optimum operation
of the XONON Module.


1.19 "XONON Module" means CESI catalyst structure as used in gas turbines,
including its container and supporting structure for fixing the
catalyst structure, containing and including the catalytically active
elements for oxidizing hydrocarbon fuels in the container.


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1.20 "XONON Module Technology", abbreviated XMT, means all Technology
relating to the XONON Module.


1.21 "XONON Combustion System", abbreviated XCS, means a fuel combustion
apparatus or system to implement XMT for use in gas turbines
including those components, operating processes, and methods of
control, testing, and operation for pre-heating fuel, mixing fuel and
air, combusting or oxidizing fuel, controlling power output, and
control of NOx, Carbon Monoxide(CO) and unburned hydrocarbon
pollutants, comprising in the XONON Module and the XONON Components.


1.22 "XONON Combustion System Technology" means all Technology relating to
the XONON Combustion System.


1.23 "XONON Control Algorithm(s)" mean the logic developed by or on behalf
of CESI as of the Effective Date to provide necessary control of the
start up, operation, management and protection of the XONON
Combustion System or XONON Module in a gas turbine.


2.0 PROGRAM OBJECTIVES
------------------


2.1 CESI and KHI each shall conduct, at their own expense, their
respective scope of work as set forth in Exhibit 1 attached hereto as
an integral part of this Agreement in a sound scientific manner, and
in compliance in all material respects with all requirements of
applicable laws and regulations and all applicable good research and
manufacturing practices to attempt to achieve the Adaptation Program
objective efficiently and expeditiously. CESI and KHI each shall
proceed diligently with the works allocated respectively which are
set out in Exhibit 1 (hereinafter referred to as "Allocated Works")
by using their respective good faith efforts to provide, among
others, the following resources: (a) allocation of sufficient time,
effort, equipment and facilities to the Adaptation Program and as
each reasonably believes is necessary carry out its Allocated Works
and to accomplish the objectives thereof, and (b) use of personnel
with sufficient skills and experience as are required to carry out
its Allocated Works and to accomplish the objectives thereof. Works
requested by KHI and performed by CESI outside the Allocated Works
under this Agreement shall be chargeable to KHI and billed on an
agreed upon-costs basis, due in 30 days. Each Party is an independent
contractor.


2.2 KHI and CESI each may subcontract portions of the Adaptation Program
to be performed by it in the normal course of its business without
the prior consent of the other, provided, however, that every
subcontracted or delegated party shall enter into a confidentiality
agreement with the subcontracting party in accordance with Article
7.0 below and each Party shall be fully responsible for any
activities of its subcontractors or delegated party under this
Agreement.


2.3 KHI and CESI each shall appoint a person (a "Program Manager") to
coordinate its part of the Adaptation Program. The Program Managers
shall be the primary contacts between the parties with respect to the
Adaptation Program. Each Party shall notify the other within thirty
(30) days after the date of this Agreement of the appointment of its
Program Manager and shall notify


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the other Party as soon as practicable upon changing this
appointment.


2.4 Each Party shall make its employees and relevant reports of non-
employee consultants available, upon reasonable notice during normal
business hours, at each Party's respective places of employment to
consult with the other party on issues arising during the Adaptation
Program and in connection with any request from any regulatory
agency, including regulatory, scientific, and technical testing
issues.


2.5 KHI and CESI each shall keep the other informed of the progress of
their tasks under Allocated Works during the Adaptation Program.
Within thirty (30) days following the end of each quarter during the
term of the Adaptation Program, KHI and CESI shall each prepare, and
provide to the other, a written summary report which shall describe
the application engineering activities performed by such party during
such quarter.


3.0 PAYMENT OF TECHNICAL FEE BY KHI TO CESI
---------------------------------------


KHI will pay CESI, as the consideration for the CESI Technology to be
provided by CESI to KHI under this Agreement, the amounts of [*] for each
of the [*] through [*] Adapted Kawasaki Gas Turbines and of [*] for each of
the [*] through [*] Adapted Kawasaki Gas Turbines, sold by KHI and/or its
Affiliates for installation anywhere in the world, provided, however, that
such payments become due and payable thirty (30) days after KHI's receipt
of the initial payment for each Adapted Kawasaki Gas Turbines respectively
sold. Should [*] Adapted Kawasaki Gas Turbines not be sold during the term
of the Agreement, the balance of payment by KHI shall be forgiven. However,
in case of earlier termination of the Agreement by KHI prior to the term of
the Agreement, due to the reason not attributable to CESI under Article
10.2, the balance of payment by KHI shall be due and payable. KHI agrees to
make commercially reasonable efforts to sell Adapted Kawasaki Gas Turbines
during the term of this Agreement and CESI agrees to cooperate with KHI in
support of KHI's sales efforts.


4.0 TECHNOLOGY AND USE RIGHTS TRANSFERS
-----------------------------------


4.1 Technology Transfer. Within thirty (30) days after the Effective
Date, CESI shall provide KHI with all the available Technical
Information, including but not limited to those as set forth in
Exhibit 3 attached hereto as an integral part of this Agreement,
required to enable KHI to perform its Allocated Works and
manufacture, have manufactured, use and sell the Adapted M1A-13A and
the Adapted Kawasaki Gas Turbines, under this Agreement. KHI shall
provide CESI with all the Technical Information required to enable
CESI to perfrom its Allocated Works.


In the event CESI and/or any third party who enters into
collaboration agreement with CESI and which agreement contains
provisions permitting CESI to sub-license or otherwise transfer such
Technical Information to KHI, conceives inventions and/or
improvements in CESI Technology, Adaptation Program Technology and
Products solely or jointly with CESI during the term of this
Agreement, CESI shall provide KHI, [*], with Technical Information
concerning to such inventions and/or improvements.


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4.2 Use Rights Under CESI Technology. In consideration for and upon KHI's
payment of the Technology Fee to CESI provided in Article 3.0 herein,
CESI hereby grants to KHI for the purposes and term of this Agreement
a royalty-free, worldwide, right for KHI and its Affiliates to use
CESI Technology and the inventions and/or improvements as set forth
in Article 4.1:


(a) to perform KHI's Allocated Works in the Adaptation Program;


(b) to make, have made, use, lease, and sell the Adapted M1A-13A
incorporating the Products purchased from CESI;


(c) to make, have made, use, lease and sell the Adapted Kawasaki Gas
Turbines incorporating Products purchased from CESI; and


(d) to use and sell the Products to be incorporated into the Adapted
Kawasaki Gas Turbines including Adapted M1A-13A.


4.3 The rights granted in Section 4.1 shall be exclusive during the term
of this Agreement and any subsequent Supply Agreement term, subject
to KHI and its Affiliates and suppliers purchasing all of their
respective requirements for the Products for Gas Turbines from CESI,
and in case that CESI is unable to consistently meet KHI's and its
Affiliates' requirement for Products from a quality or delivery
standpoint, CESI shall promptly establish a second source of supply
(as a vendor to CESI) with a Third Party manufacturer designated by
CESI and approved by KHI (which approval shall not be unreasonably
withheld), solely for the purpose of satisfying CESI's obligations to
supply Products to KHI and its Affiliates.


4.4 The limited field exclusive rights granted in Section 4.2 shall be
limited to Kawasaki Gas Turbines, and CESI retains and reserves the
rights, to itself or through its licensees, to design, adapt, make
and have made, import, export, use, sell, offer to sell, service,
repair and reconstruct the Products for sale, lease or transfer to
Third Parties non-Kawasaki Gas Turbines applications employing the
CESI Technology.


4.5 Grant Back. KHI and its Affiliates and subcontractors hereby grant
back to CESI an irrevocable and fully paid-up license to make, sell,
lease, have made, use, export and import, service, repair,
reconstruct the Xonon Combustion System and Xonon Module including
rights to sublicense, to all improvements thereof, whether made
solely by KHI or jointly with its Affliates and/or subcontractors,
which are conceived during the term of this Agreement and the term of
the Supply Agreement to be concluded between KHI and CESI with
respect to supply of the Xonon Module. Such license shall be i)
exclusive with respect to improvements of the Xonon Module, and ii)
Non-exclusive with respect to improvements of the Xonon Combustion
System and Xonon Control Algorithm. Such license will permit CESI to
sublicense said improvements to third parties only to the extent that
as far as there is in effect a reciprocal agreement between CESI and
such third party which reciprocity shall provides similar benefits to
KHI respecting improvements made by that third party.


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CESI shall notify KHI prior to transferring such Technical Information or
granting a sub-license. Such Technology or Technical Information as KHI
must provide to CESI under this section shall be provided without cost to
CESI and in a reasonable period of time, however, this clause shall not be
construed so as to unreasonably burden KHI by requiring additional design
work on its part to fulfil its obligation under this Article 4.5.


KHI and its Affiliates shall have no responsiblity for any damages incurred
by CESI and third party including Product Liability arising out of such
grant back, except for intellectual property infringement.


4.6 Requirement and Obligation to Use Xonon/TM/ Trademark. CESI hereby
grants to KHI and its Affiliates for the term of this Agreement, a
royalty-free, non-exclusive, worldwide right under CESI's Xonon
trademark, to use the trademark "Xonon/TM/" in connection with KHI's
and its Affiliates' marketing and sales activities related to the
Products. In this regard, KHI agrees to market the Xonon Modules
and/or Xonon Components under CESI's Xonon trademark, and to state in
its literature that Xonon is technology used under license from CESI,
in language and format to be agreed between CESI and KHI. This
agreement on the part of KHI to use the Xonon trademark also requires
KHI to use the designation "-X" at the end of the model number of all
Kawasaki Gas Turbines employing CESI Technology. In connection with
this grant of trademark use rights, KHI agrees that it will submit
samples of all Xonon trademark usage to CESI for approval prior to
use in KHI advertising, promotion and/or sales activities and that
KHI will promptly discontinue any usage of the Xonon trademark which
CESI specifically objects to and so informs KHI in writing in a
timely manner. This right to use grant does not confer ownership of
any rights in the mark(s) to KHI.


4.7 Grant of Right to Use Xonon Control Algorithms. CESI hereby grants to
KHI during the term of this Agreement, a non-exclusive, royalty-free,
perpetual and worldwide license (with rights to sub-license)
applicable to those models of Kawasaki Gas Turbine to which Xonon was
adapted during the term of this Agreement, to copy, have copied, use,
sub-license and offer to sub-license the Xonon Control Algorithm(s)
for use with the Products applied to Adapted M1A-13A and/or Kawasaki
Gas Turbines sold during the term of this Agreement.


5.0 PRODUCTS SUPPLIED BY CESI TO KHI
--------------------------------


CESI shall supply all of KHI's requirements for the Xonon Module for
incorporation into the Adapted Kawasaki Gas Turbines pursuant to the terms
and conditions as set forth in the Supply Agreement to be executed
separately between CESI and KHI.


6.0 COMBUSTION SYSTEM DESIGN PACKAGE WARRANTY
-----------------------------------------


6.1 System Design Warranty. CESI warrants to KHI that the Xonon
Combustion System, upon design, manufacture and operations approval
by CESI, will be free of component failure which renders the system
incapable of substantially meeting the performance specification
within the first twelve (12) months after


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placing the initial Xonon Combustion System in commercial service. If
KHI must repair or replace any combustor system components, under its
warranty to its end user customer, that are manufactured to CESI's
approved design, which design has not been modified by any party
other than CESI, except for metrification by KHI, and provided that
KHI can reasonably show that the necessity for repair or replacement
was caused by errors or omissions in the design of the component,
attributable substantially and directly to CESI, then CESI, as CESI's
sole liability for this warranty, will pay a proportionate share of
KHI's costs for the repair or replacement. Such costs shall include
only KHI's direct cost not including overhead burden, margin or
profit.


Further, should KHI pay liquidated damages which arise directly from
the breach of the foregoing system design warranty then CESI shall
reimburse the proportion of KHI's liquidated damages substantially
and directly attributable to CESI's breach of this warranty, subject
to the cumulative limitation of liability provisions of this
Agreement.


6.2 Pressure Drop Warranty. CESI further warrants that, when (a) built to
CESI's design, and (b) installed on a Kawasaki M1A-13A engine
equipped with the "low flow" scroll and transition piece with no
cooling holes, and which engine otherwise meets KHI's performance
specification for a "new & clean engine"; the combustion system
pressure drop and combustor "TAD" (as defined in Appendix "A" to this
Agreement) will meet the performance requirements specified therein.
Should the gas turbine system not meet this warranty, CESI as its
sole liability will pay a portion of the liquidated damages (LD's)
actually paid by Kawasaki for failure to meet kW output and Specific
Fuel Consumption ("heat rate") commitments to KHI's customer, as
follows:


. CESI will pay [*] of liquidated damages actually paid by KHI to Enron on
the VAMC Jamaica Plain project provided that such damages arise
substantially and directly from CESI's failure to meet the pressure drop
warranty set forth above, pursuant to KHI's agreement with Enron as such
agreement exists as of the date hereof.
. Should KHI be able to negotiate full or partial mitigation of any such
LD's then CESI's liability shall be proportionally decreased.
. Recognizing that the total project power output is the parameter of
interest, performance deficiencies on one engine will be netted against
performance gains of any others so that no LD's shall be due if the net
power output of the three engines meets the total project guarantees.
. In all cases CESI shall have the option, at its sole discretion, to make
corrections to the system in order to improve the performance so as to
meet the required performance level in lieu of paying LD's and shall be
given reasonable time and access to make such corrections.


Should warranted air emissions not meet the guaranteed levels, or the
requirements of the site air permit, whichever is less stringent, then CESI
will diligently pursue correction of the problems attributable to its
guaranteed system components, including on-site investigation and support
to KHI.


This warranty shall conclusively be deemed to be satisfied and no further
liability to


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[*] - Confidential information has been deleted from this section.


CESI shall accrue when any Xonon combustion system, version 2.1, has
operated satisfactorily for a total period ...