JONAH ENERGY LLC, a Delaware limited liability company v. WYOMING DEPARTMENT OF REVENUE
S-22-0271
IN THE SUPREME COURT, STATE OF WYOMING
August 29, 2023
2023 WY 87
Before FOX, C.J., and KAUTZ, BOOMGAARDEN, FENN, JJ, and CAMPBELL, DJ.
APRIL TERM, A.D. 2023.
Representing Appellant/Petitioner:
Randall B. Reed, Long Reimer Winegar LLP, Cheyenne, Wyoming; Judith M. Matlock, Davis, Graham & Stubbs, LLP, Denver, Colorado. Argument by Ms. Matlock.
Representing Appellee/Respondent:
Bridget Hill, Wyoming Attorney General; Brandi Monger, Deputy Attorney General; Karl D. Anderson, Supervising Attorney General; James Peters, Senior Assistant Attorney General. Argument by Mr. Anderson.
NOTICE: This opinion is subject to formal revision before publication in Pacific Reporter Third. Readers are requested to notify the Clerk of the Supreme Court, Supreme Court Building, Cheyenne, Wyoming 82002, of typographical or other formal errors so correction may be made before final publication in the permanent volume.
KAUTZ, Justice.
[¶1] Jonah Energy LLC (Jonah) appeals from the Board of Equalization’s (Board) decision which upheld the Department of Revenue’s (DOR) final determinations increasing the taxable value of Jonah’s natural gas liquids (NGL) production for 2014 through 2016. Jonah challenges the Board’s refusal to account for deficiency fees it paid the purchaser of its NGL, Enterprise Products Operating LLC (Enterprise Products), in determining the NGL’s taxable value. We affirm the Board’s decision.
ISSUES
[¶2] The issues on appeal are:
- Did the Board misinterpret the NGL Purchase Agreement (Purchase Agreement) between Jonah and Enterprise Products?
- Did the Board err by failing to take the facts and circumstances surrounding execution of the Purchase Agreement into account when interpreting it?
FACTS
[¶3] Jonah sold NGL it produced from gas wells in Sublette County to Enterprise Products under the terms of the Purchase Agreement, which provides definitions necessary to understand the facts and issues in this case. Gas from wells operating prior to June 1, 2012, was classified in the Purchase Agreement as “Base Production”; gas from wells that began producing after that date was classified as “New Production.” The gas was transported from Jonah’s wellheads to the Pioneer Gas Processing Plant (Pioneer Plant) in Lincoln County owned by Enterprise Gas Processing, LLC (Enterprise Processing). At the Pioneer Plant, the gas was processed by separating it into NGL1 and residue gas. Enterprise Products purchased Jonah’s New Production NGL, which we will refer to as “New Production,” at the “upstream side of the flange connection between the MAPL Pipeline and the Pioneer Plant,” i.e., the outlet of the Pioneer Plant.2 The Purchase Agreement established a price for the New Production at the outlet of the Pioneer Plant. Enterprise Products then transported the New Production on the Mid-America Pipeline (MAPL) to its fractionation plant in Mont Belvieu, Texas. The Purchase Agreement authorized Enterprise Products to separately charge Jonah a Shortfall Capacity Deficiency Fee if Jonah did not provide enough New Production to fully utilize Enterprise Product’s capacity on the MAPL. At the fractionation plant, the New Production was “fractionated” (separated) into various components which could be sold commercially, such as ethane, butane, propane, and gasoline.
[¶4] Jonah reported the taxable value of its Sublette County gas production to the DOR using the Netback valuation method authorized by
[¶5] The Board held a contested case hearing on the discrete issue of whether the DOR erroneously prohibited Jonah from deducting the Shortfall Capacity Deficiency Fee in calculating the sales price for its New Production. The Board concluded the DOR had correctly determined Jonah was not entitled to the deduction and affirmed the DOR’s valuation. Jonah filed a petition for review of the Board’s decision with the district court. Jonah and the DOR filed a joint motion asking the district court to certify the case directly to this Court under
STANDARD OF REVIEW
[¶6] “When an administrative agency case is certified to this Court under
[¶7] “We review an agency’s conclusions of law de novo and affirm when they are in accordance with the law. However, when the agency has failed to properly invoke and apply the correct rule of law, we correct the agency’s error.” Id., ¶ 15, 387 P.3d at 730 (citing Dale, ¶ 26, 188 P.3d at 561-62). This case requires interpretation of the relevant statutes and the Purchase Agreement. Interpretation of a statute involves a question of law and is reviewed de novo. Id.; DB v. State (In re CRA), 2016 WY 24, ¶ 15, 368 P.3d 294, 298 (Wyo. 2016). Likewise, interpretation of an unambiguous contract is a matter of law subject to de novo review. Ecocards v. Tekstir, Inc., 2020 WY 38, ¶ 18, 459 P.3d 1111, 1118 (Wyo. 2020) (citing Fix v. Forelle, 2014 WY 79, ¶ 16, 327 P.3d 745, 749 (Wyo. 2014), and Finley Res., Inc. v. EP Energy E&P Co., L.P., 2019 WY 65, ¶ 7, 443 P.3d 838, 842 (Wyo. 2019)).
DISCUSSION
A. Natural Gas Taxation
[¶8] Mineral taxation is governed by statute. To interpret the relevant statutes, “[w]e seek the legislature’s intent ‘as reflected in the plain and ordinary meaning of the words used in the statute[s].’” In re Est. of Britain, 2018 WY 101, ¶ 15, 425 P.3d 978, 982-83 (Wyo. 2018) (quoting TW v. State, 2017 WY 26, ¶ 12, 390 P.3d 357, 360 (Wyo. 2017), and Butler v. State, 2015 WY 119, ¶ 7, 358 P.3d 1259, 1262 (Wyo. 2015)) (some quotation marks omitted).
Where legislative intent is discernible a court should give effect to the most likely, most reasonable, interpretation of the statute, given its design and purpose. In light of this objective . . . [,]
[w]e . . . construe each statutory provision in pari materia, giving effect to every word, clause, and sentence according to their arrangement and connection. To ascertain the meaning of a given law, we also consider all statutes relating to the same subject or having the same general purpose and strive to interpret them harmoniously. . . . When the words used convey a specific and obvious meaning, we need not go farther and engage in statutory construction.
Id., ¶ 15, 425 P.3d at 983 (quoting Blevins v. State, 2017 WY 43, ¶ 27, 393 P.3d 1249, 1256 (Wyo. 2017)) (other citations and quotation marks omitted).
[¶9] Wyoming statutes authorize levies of severance and ad valorem taxes on the fair market value of gross natural gas production.
[¶10] The dispute in this case is whether the Board should have accounted for the Shortfall Capacity Deficiency Fee in calculating the “sales price” for Jonah’s New Production under the Purchase Agreement to determine the fair market value for tax purposes. “Sales price” is statutorily defined as “the transaction price determined in connection with a bona fide arm’s length sale.”
B. Contract Sales Price
[¶11] To determine the sales price of Jonah’s New Production under the Purchase Agreement, we must interpret the contractual language. A court’s goal in interpreting a contract is to determine “the parties’ intent[.]” Hassler v. Circle C Res., 2022 WY 28, ¶ 12, 505 P.3d 169, 173 (Wyo. 2022) (citing P&N Invs., LLC v. Frontier Mall Assocs., LP, 2017 WY 62, ¶ 10, 395 P.3d 1101, 1104 (Wyo. 2017) (the court interprets a contract to discern the intention of the parties)) (other citation omitted). Interpretation of a contract begins with an analysis of its plain language. Thornock v. Pacificorp, 2016 WY 93, ¶ 13, 379 P.3d 175, 180 (Wyo. 2016) (citing Claman v. Popp, 2012 WY 92, ¶ 26, 279 P.3d 1003, 1013 (Wyo. 2012)).
“[T]he words used in the contract are afforded the plain meaning that a reasonable
person would give to them. Doctors’ Co. v. Insurance Corp. of America, 864 P.2d 1018, 1023 (Wyo. 1993). When the provisions in the contract are clear and unambiguous, the court looks only to the “four corners” of the document in arriving at the intent of the parties. Union Pacific Resources Co. [v. Texaco], 882 P.2d [212,] 220 [(Wyo.1994)]; Prudential Preferred Properties [v. J and J Ventures], 859 P.2d [1267,] 1271 [(Wyo. 1993)]. In the absence of any ambiguity, the contract will be enforced according to its terms because no construction is appropriate. Sinclair Oil Corp. v. Republic Ins. Co., 929 P.2d 535, 539 (Wyo. 1996).”
Id. (quoting Claman, ¶ 26, 279 P.3d at 1013). We review a contract in its entirety and consider each provision in light of the others, avoiding an interpretation that makes any provision inconsistent or meaningless. Id., ¶ 13, 379 P.3d at 180.
[¶12] In § 3.1 of the Purchase Agreement, Jonah agreed “to sell and ratably deliver . . . the New Production to . . . Enterprise [Products] each [d]ay during the [t]erm of th[e] [a]greement and Enterprise [Products agreed to] purchase the New Production” at the outlet of the Pioneer Plant. The Purchase Agreement delineated the volume of New Production Enterprise Products committed to buy from Jonah (Committed Volume). The Committed Volume of New Production was determined by adding “Primary Capacity” and “Secondary Capacity” and then subtracting Base Production. Primary Capacity was generally set at 16,000 barrels per day, which came first from Base Production. If Base Production did not provide the full 16,000 barrels of Primary Capacity, the deficiency would be filled by New Production. Once Primary Capacity was satisfied, additional New Production would be allocated to Secondary Capacity. Secondary Capacity was limited to 4000 barrels per day and could only be utilized for New Production and after Primary Capacity was fully utilized.
[¶13] Article 4 of the Purchase Agreement was titled: “Component Purchase Price; Shortfalls & Payments.” Section 4.1 set the price Enterprise Products paid for Jonah’s New Production, which was called the “Monthly Component Purchase Price” (MCPP). The MCPP was calculated by subtracting the “Transportation Fee” and “Fractionation Fee” from the “Index Price,” i.e., “MCPP = IP – TF – FF.” Each of the MCPP variables was defined in a particular section of the Purchase Agreement. The Index Price was generally defined in § 4.2(A) as the sum of the prices for the individual components, such as ethanol, butane, propane, and gasoline, derived from fractionation of the New Production at the Texas plant.
[¶14] The Transportation Fee was defined in § 4.3 as the fee for transportation of “each [g]allon
[¶15] The Fractionation Fee was defined in § 4.4 of the Purchase Agreement as the fee for fractionation of each “[g]allon of New Production delivered by Jonah Energy and accepted by Enterprise [Products]” at the outlet of the Pioneer Plant. The Fractionation Fee was calculated with the following formula: “$0.0080/Gallon x (Fuel Index/$3.60) + Fixed Fee.” The means of calculating the Fuel Index and Fixed Fee were set out in the Purchase Agreement. The following table shows the Fixed Fee:
[¶16] There is no dispute in this case over the proper deductions from the Index Price for the Transportation and Fractionation Fees on the New Production Jonah actually delivered to Enterprise Products. The dispute is over whether the Shortfall Capacity Deficiency Fee (SCDF) should be deducted from the Index Price to determine the “sales price” and taxable value of the New Production Jonah sold to Enterprise Products. The SCDF was not referenced in § 4.1 which defined the MCPP. Rather, the SCDF was separately addressed in § 4.5 of the Purchase Agreement, which was titled “Shortfalls and Deficiency Payments.” In general, the SCDF was a fee Jonah paid to Enterprise Products any month it failed to deliver the full volume
[¶17] The SCDF had two parts – the Transportation Shortfall Fee and the Fixed Fee portion of the Fractionation Fee. The SCDF was defined as:
For each Month in which the Secondary Capacity Shortfall Volume is a positive number, Enterprise [Products] will invoice Jonah . . . and Jonah . . . will pay Enterprise [Products] an amount (“the Shortfall Capacity Deficiency Fee Payment”) equal to the product obtained by multiplying (i) the sum of (a) the then in effect Fixed Fee portion of the Fractionation Fee associated with Secondary Capacity plus (b) the then in effect Transportation Shortfall Fee associated with Secondary Capacity by (ii) the Secondary Capacity Shortfall Volume.
[¶18] The Board determined the SCDF was not a component of the sales price under the terms of the Purchase Agreement, and consequently was not “to be considered in determining the fair market value of Jonah’s production under the Netback Method. Rather, it [was] a separate fee that Enterprise [Products] charge[d] Jonah.” In justifying its decision, the Board noted that the Purchase Agreement’s MCPP formula for calculating the price Enterprise Products paid for Jonah’s New Production did not include the SCDF. Instead, Enterprise Products separately invoiced Jonah for the SCDF each month it did not deliver the full volume of Secondary Capacity, which the Board said “further distance[d] the SCDF from the sales price.”
[¶19] Jonah claims that the Board’s interpretation of the Purchase Agreement was faulty and, when the contract is interpreted in its entirety, it is clear Jonah should be allowed to deduct the SCDF in determining the New Production sales price. According to Jonah, the SCDF was “negotiated as part of the parties’ purchase price in order for Jonah to secure priority firm transportation on the MAPL pipeline and at the [f]ractionation [p]lant” for its Secondary Capacity New Production. Jonah argues the Board erred by failing to take into account the “total consideration in the transaction,” which included the SCDF. There are several errors in Jonah’s argument.
[¶20] First, the Purchase Agreement clearly set out the formula for the sales price of Jonah’s New Production, and it did not include the SCDF. In § 3.1 of the Purchase Agreement, Jonah agreed to “sell” and “deliver” its New Production to Enterprise Products at the outlet of the Pioneer Plant. Section 4.1 stated that Enterprise Products would purchase Jonah’s New Production for a price referred to as the MCPP. In other words, the MCPP was the “sales” or “transaction” price the parties contractually agreed in the Purchase Agreement represented the cost of the New Production. The MCPP was defined as the Index Price (prices of the components) minus the Transportation and Fractionation Fees as shown in the formula -- MCPP = IP – TF – FF. The MCPP/sales price was based on the value of, and costs associated with, the New Production actually delivered by Jonah to Enterprise Products. The MCPP formula did not include the SCDF because it was not charged when Jonah delivered New Production to Enterprise Products but rather when Jonah did not deliver the full amount of Secondary Capacity for the month.
[¶21] Jonah maintains the SCDF should have been considered part of the Transportation and Fractionation Fees deducted from the Index Price to arrive at the MCPP. This argument ignores that the Transportation and Fractionation Fees were expressly charged for “each [g]allon of New Production delivered by Jonah . . . and accepted by Enterprise [Products]” at the outlet of the Pioneer Plant. (Emphasis added). The SCDF was separately addressed in § 4.5 of the Purchase Agreement, which was titled “Shortfalls and Deficiency Payments.” Under § 4.5, the SCDF applied only when Jonah failed to deliver the full amount of Secondary Capacity for the month. The only reference to shortfall fees outside of § 4.5 was in the table in § 4.3 setting Transportation Fees and Transportation Shortfall Fees for Primary and Secondary Capacity. However, the mention of the Transportation Shortfall Fee in § 4.3 did not mean it was part of the Transportation Fee used in calculating the
[¶22] Second, Jonah did not “secure” transportation or fractionation space for the New Production on the MAPL or at the fractionation plant. Under the terms of the Pioneer Plant processing agreement between Jonah and Enterprise Processing, Jonah was responsible for making “downstream arrangements” for transportation of the New Production when it left the Pioneer Plant. This makes sense because the New Production came from Jonah’s wells and the Pioneer Plant simply processed the gas by separating the NGL from residue gas.3 Jonah needed to arrange for what would happen to the New Production after it left the Pioneer Plant. It did so by entering into the Purchase Agreement to sell the New Production to Enterprise Products, which took title to it at the outlet of the Pioneer Plant and arranged for its transportation on MAPL and fractionation at the plant in Texas. The Purchase Agreement simply recognized the reality that the value of the New Production could not be determined until it was fractionated into its individual components. To arrive at a sales price for the New Production at the point of sale (outlet of the Pioneer Plant), the parties had to account for the value of the components and the expenses incurred in determining that value, i.e., transportation to the fractionation plant and fractionation, which is exactly what they did in the MCPP/sales price formula.
[¶23] Finally, the SCDF was a separately invoiced expense. Section 4.6 of the Purchase Agreement stated that “Enterprise [Products would] invoice Jonah . . . once a [m]onth for the charges associated with Shortfall Volumes, Jonah[’s] Emission Cost Allocation and Pipeline Off-Spec Fees.” The Emission Cost Allocation and Pipeline Off-Spec Fees were not included in calculating the MCPP/sales price of Jonah’s New Production. Jonah does not argue those other expenses should have been counted in determining the sales price and offers no explanation for why the parties would lump the SCDF together with the other non-deductible fees in the Purchase Agreement if the SCDF was actually a part of the MCPP/sales price. We recognize Enterprise Products “netted” the invoiced expenses against the amount Enterprise Products owed Jonah for the New Production in each month’s settlement statement. However, there is no indication that by using this billing procedure, the parties intended the separately invoiced expenses to be part of the MCPP/sales price. Enterprise Products simply accounted for the separate charges in the final monthly bill.
[¶24] Much of Jonah’s argument is focused on the value it received from having the Secondary Capacity available for its New Production. It directs us to various provisions of the Purchase Agreement which show the Secondary Capacity had “priority” for pipeline and fractionation services when the MAPL or the fractionation plant curtailed service. We agree that, under the terms of the Purchase Agreement, the Secondary Capacity was advantageous to Jonah because it provided assurance that Enterprise Products would be able to fulfill its obligation to purchase Jonah’s New Production in the event of a curtailment. The Purchase Agreement recognized that Enterprise Products provided this advantage to Jonah, and in consideration for it, Jonah agreed to pay the SCDF when it did not deliver the full amount of Secondary Capacity. That does not mean, however, that the SCDF was necessarily a component of
[¶25] Jonah also maintains the Board’s interpretation of the sales price for Jonah’s New Production imposes an inappropriate “unit-based” sales price which is inconsistent with WPX Energy Rocky Mountain, LLC v. Wyo. Dep’t of Revenue, 2022 WY 104, 516 P.3d 449 (Wyo. 2022). WPX Energy reported the taxable value of its natural gas production using the Netback valuation method, which allows a deduction from the sales price for “‘expenses incurred by the producer for transporting produced minerals to the point of sale[.]’” Id., ¶ 7, 516 P.3d at 452 (quoting
[¶26] WPX Energy is distinguishable from this case because it addressed the statutory definitions of “transport” and “expense” from
[¶27] As we recognized in WPX Energy, the legislature specifically addressed transportation fees incurred prior to the point of sale in the Netback statute. The legislature did not, however, address the deductibility of costs incurred by the producer after the point of sale, which recognizes that the producer and purchaser balance the product value and costs in arriving at an arms-length sales price. If the legislature intended to allow all fees, regardless of when, where, or how incurred, to be deductible from the sales price, there would have been no reason to specifically address fees incurred by the producer prior to the point of sale in
[¶28] Jonah also cites to Indep. Petroleum Ass’n v. DeWitt, 279 F.3d 1036 (D.C. Cir. 2002), as support for its argument that the SCDF should be deducted from the MCPP to arrive at the sales price for its New Production. The D.C. Circuit affirmed the lower court’s ruling that federal regulations, which did not allow mineral lessees to deduct unused firm demand pipeline charges from royalties as transportation costs, were unlawful. Indep. Petroleum, 279 F.3d at 1038-39, 1042-43. As the Board correctly observed, Independent Petroleum is inapposite to our interpretation of the Purchase Agreement because it considered whether a federal agency’s regulation of royalties and transportation costs complied with federal statutes.
[¶29] We conclude the plain language of the Purchase Agreement did not make the SCDF a component of the MCPP/sales price for New Production. The Board correctly determined it was a separate fee Jonah paid when it did not tender the full amount of Secondary Capacity to Enterprise Products.
[¶30] Jonah argues the Board erred by refusing to consider the facts and circumstances surrounding execution of the Purchase Agreement as evidence of the parties’ intent to include the SCDF as part of the MCPP/sales price for the New Production. The facts and circumstances referenced by Jonah were primarily provided through the expert testimony of Christopher Barr, an attorney with extensive experience in natural gas and NGL pipeline regulation. Mr. Barr recited the history of interstate pipelines and explained how the federal government regulated the price charged by pipeline companies. He testified NGL shippers could ensure access to pipeline capacity by contracting for “priority service” or “priority rights” using a specific regulatory process. A shipper with priority service paid for volumes of NGL it transported and a deficiency charge for committed volumes it did not transport. Mr. Barr testified Enterprise Products had priority service on MAPL for the Secondary Capacity, and Jonah did not have the ability to acquire shipper rights on MAPL because it was fully subscribed.
[¶31] Evidence of facts and circumstances surrounding execution of a contract is not routinely admissible in interpreting the contractual language. We explained in Thornock v. Pacificorp, ¶ 19, 379 P.3d at 181, this rule of contract interpretation is used only in limited circumstances “where an otherwise unambiguous term had a different, special, or technical usage at the time the contract was executed.” Facts and circumstances outside the four corners of the contract cannot be used to explain, in general terms, what parties must have intended when they executed the contract. Id., ¶ 21, 379 P.3d at 182; Gumpel v. Copperleaf Homeowners Assoc., Inc., 2017 WY 46, ¶¶ 58-59, 393 P.3d 1279, 1296 (Wyo. 2017). Extrinsic evidence is only admissible to “provid[e] an industry standard or a specialized meaning to a particular term.” Thornock, ¶ 21, 379 P.3d at 182.
[¶32] Examples of cases appropriately applying the extrinsic evidence rule include Hickman v. Groves, 2003 WY 76, ¶¶ 14-15, 71 P.3d 256, 261-62 (Wyo. 2003), and Mullinnix LLC v. HKB Royalty Tr., 2006 WY 14, ¶¶ 6, 13-29, 126 P.3d 909, 916-22 (Wyo. 2006), where we considered whether the circumstances surrounding execution of deeds in the 1940s showed the term “oil rights” had a specific trade meaning which included “gas rights” even though the word “gas” was not used in the deeds. In Caballo Coal Co. v. Fidelity Expl. & Prod. Co., 2004 WY 6, ¶¶ 8-11, 84 P.3d 311, 314-17 (Wyo. 2004), we allowed evidence of the facts and circumstances surrounding execution of deeds in 1975 conveying “all other minerals, metallic or nonmetallic contained in or associated with the deposits of coal” to determine if the grantor intended to include coal bed methane in the conveyance. In Ecosystem Res., L.C. v. Broadbent Land & Res., LLC, 2012 WY 49, ¶¶ 8, 12, 20, 33-34, 275 P.3d 416-18, 420, 423 (Wyo. 2012), we reviewed evidence of the facts and circumstances surrounding a grantor’s execution of deeds in the early 1900s which reserved its right to the “timber” on the property to determine whether the reservation was limited to the then-existing trees which could be harvested within a reasonable time or was perpetual and included future tree growth. In Boley v. Greenough, 2001 WY 47, ¶¶ 20-21, 22 P.3d 854, 860 (Wyo. 2001), this Court considered evidence of the trade usage of the term “overriding royalty” at the time of execution of the deeds to determine the grantors’ intent.
[¶33] Jonah does not identify any terms in the Purchase Agreement having different, special, or technical meanings which would warrant the use of extrinsic evidence of surrounding facts and circumstances. Mr. Barr’s testimony about the history and regulation of pipeline transportation of natural gas and NGL was outside the four corners of the contract and did not explain the meaning of any particular term. Instead, Jonah attempted to use facts and circumstances evidence to add language to the Purchase Agreement making the SCDF part of the MCPP/sales price. Such evidence is contrary to the plain language of the agreement which stated the MCPP/sales price was the Index Price minus the Transportation and Fractionation Fees for the New Production Jonah actually sold to Enterprise Products. Jonah’s evidence was
[¶34] The Board properly discounted Mr. Barr’s testimony because there was no basis for looking outside the four corners of the Purchase Agreement to determine its meaning.
CONCLUSION
[¶35] The Board correctly ruled the plain language of the Purchase Agreement did not include the SCDF as a component of the sales price for Jonah’s New Production and extrinsic evidence of the circumstances surrounding execution of the Purchase Agreement was not admissible to interpret it.
[¶36] Affirmed.