South Mississippi Electric Power Ass'n v. Delhi Gas Pipeline Corp. (436 F. Supp. 244, 1977)

OPINION

DAN M. RUSSELL, Jr., Chief Judge.

South Mississippi Electric Power Association (SMEPA), a Mississippi non-profit corporation headquartered at Hattiesburg, Mississippi, initially sued Delhi Gas Pipeline Corporation, (Delhi) a Delaware corporation domiciled at Dallas, Texas, in the Chancery Court of Forrest County, Mississippi, for specific performance and damages. Delhi removed the action to this Court on the grounds of diversity of citizenship, and both parties have agreed that this Court has jurisdiction. The cause was tried to the Court without a jury.

SMEPA is engaged in the generation and transmission of electricity for sale at wholesale to its distribution members consisting of electric power associations in several localities in the southeastern part of Mississippi. SMEPA owns three electric generating plants, only two of which are involved herein, its main plant at Moselle in Jones County, and a smaller gas turbine plant moved from Sylvarena, to Paulding in Jasper County, and which is approximately forty miles from the Moselle plant. SME-PA’s primary source of fuel for its generating plants is natural gas, with fuel oil being utilized as an alternate source. The chief function of Delhi, a wholly owned subsidiary of Texas Oil and Gas Corporation, Dallas, is to operate gas gathering systems in a number of southwestern states and also in Mississippi. One of these systems is known as Delhi’s “Harmony Gas Gathering System” located in the counties of Jasper, Clarke and Wayne. The defendant purchases residue gas from oil fields in the area, places such gas in its gathering system, processes it at what is known as Delhi’s Harmony Processing Plant, and sells the gas to customers such as SMEPA.

Having reviewed the evidence both as to documentation and live testimony, the Court chronicles the events leading up to the contractual dispute giving rise to this litigation, noting that SMEPA no longer seeks specific performance but damages against Delhi for the alleged breach of its contractual obligations.

In December 1970, George B. Taylor, general manager of SMEPA, contacted T. E. Lohman, a vice-president of Delhi seeking a source of gas for SMEPA’s turbine plant to be relocated at Paulding, some fifteen miles from Delhi’s Harmony plant. Following approval by SMEPA’s Board of Directors to relocate the turbine plant at Paulding near Delhi’s gathering system, negotiations culminated in a six-months’ gas purchase contract dated June 16, 1971, between Delhi and SMEPA whereby Delhi agreed to make its reserves in the West Paulding Field available to SMEPA for 27$ per MMBTU (one million British Thermal Units), providing SMEPA would agree to take up to 3500 MCFD (one thousand cubic feet daily). Unavailability of reserves prevented the delivery of any gas under this contract.

Negotiations began again in April 1972 resulting in a gas sales contract, dated May 17,1972 between Delhi and SMEPA, whereby for a term of eighteen months beginning August 1, 1972 and ending January 31, 1974, Delhi obligated itself to make a quantity of gas available to SMEPA of up to 6,500 MCFD, the full capacity of SMEPA’s Paulding plant, SMEPA to have the right to very its purchases of gas from day to day from a minimum of zero MCF each day to a maximum of 6,500 MCF each day. In turn, Delhi agreed to take and pay for a contract quantity equal to 4000 MCFD. The price to be paid by SMEPA for all gas delivered to it or that SMEPA was obligated to pay for whether taken or not was 53V2$ per MMBTU. Delhi agreed to construct and maintain all facilities necessary to deliver the gas to SMEPA’s Paulding plant at a pressure of not less than 250 psig (pounds per square inch, gauge). Although not so identified in the contract, the parties do not dispute that the gas to be supplied to SME-PA by Delhi was being supplied by virtue of a “Residue Gas Purchase Agreement”, dated June 9,1972, between Delhi and Texas Pacific Oil Co., Inc., from the latter’s Lake Como Field, Jasper County, about eight miles southwest of SMEPA’s Paulding plant, this gas being designated herein as TP gas. The contract was for a period of eighteen months from the first delivery date. Texas Pacific made all its residue gas available with Delhi agreeing to take delivery at its Harmony plant of up to a maximum of 10,000 MCFD for 38$ per MMBTU. Both parties undertook performance of the contract.

It is undisputed that SMEPA was seeking the purchase of additional amounts of gas in sufficient quantities, at least 10,000 MCFD, over a period of time that would justify SMEPA’s construction of its own pipeline between its Paulding and Moselle generating plants, and that Delhi desired to be SMEPA’s supplier. These goals were established at a conference on March 29, 1973, in Jackson, Mississippi between Taylor and Lohman, also attended by Howard Berry, a pipeline contractor. In furtherance of same, Lohman, on behalf of Delhi, forwarded a proposed letter amendment, dated May 18,1973, to Taylor of SMEPA to implement a verbal agreement for Delhi to supply SMEPA with a new source of gas obtained by Delhi by virtue of a gas purchase agreement, dated April 6, 1973, between Delhi and Petro Grande, Inc., and others, this gas originating from the McNeil Field in Jasper County, about five miles from Paulding, and being referred to herein as Petro Grande gas. The Delhi-Petro Grande contract was for a ten year term, effective 30 days after receipt of the agreement by Delhi, and obligated Delhi to take up to a maximum of 5000 MCFD at initial delivery. It further provided for a price redetermination from the contract price of 47$ per MMBTU if deliveries reached a total of 2000 MCFD at the end of the first year, and, if not, a price redetermination at the end of two years. According to Lohman the total gas from both sources, Texas Pacific and Petro Grande, did not initially amount to 10,000 MCFD.

In Lohman’s proposed letter agreement of May 18, 1973, Delhi would have deleted Section 7.1 of Article VII pertaining to “Price and Billing”, and substituted the following:

“The price to be paid by Buyer to Seller for all gas delivered to Buyer hereunder, or that Buyer is obligated to pay for whether taken or not shall be fifty three and one-half cents (53%$) per MMBTU; provided, however, as to the first two thousand (2000) MCF per day or part thereof delivered to Buyer which is attributable to that certain Gas Purchase Agreement dated April 6, 1973, between Seller hereunder and Petro Grande Incorporated, et al the price shall be sixty-two and one-half cents (62%$) per MMBTU. Seller shall furnish Buyer with an allocation statement each month showing the volumes of gas delivered to Buyer attributable to said Petro Grande Gas Purchase Agreement.”

The succeeding paragraph in the proposal otherwise provided for the gas sales agreement of May 17, 1972 between Delhi and SMEPA to remain in full force and effect.

Taylor testified that this proposal was not acceptable to SMEPA as it did not obligate Delhi to make the Petro Grande gas available for the extended period.

On June 1, 1973, in a letter from R. Norman Bailey, SMEPA’s manager of production, to Lohman, Bailey noted that there appeared to be a misunderstanding as to SMEPA’s right to the Petro Grande gas for a ten year period. He requested two changes, (1) correction of SMEPA’s name from that which appeared in Lohman’s proposal, and (2), the following insertion as Item 2:

“All gas obtained by Delhi Gas Pipeline Corporation (the Seller) from Petro Grande, Inc., et al shall be made available to South Mississippi Electric Power Association (the Buyer) for the term of the existing sales contract, subject to price and terms agreeable to the Buyer, and for an additional term which when added to the remaining term of the existing contract will equal 10 years.”

Under a cover letter of June 11, 1973, Delhi forwarded a letter agreement, dated June 7, 1973, to Bailey containing the substituted Section 7.1 under Article VII, Price and Billing, with SMEPA’s corrected name, adding Item 2 as proposed by Bailey, except for providing “subject to price and terms mutually agreeable to the Seller and the Buyer”, and again providing that, except as herein amended, said Gas Sales Contract dated May 17, 1972, would remain in full force and effect. (Underscoring added). This letter agreement was accepted by SMEPA on June 20, 1973. In the cover letter to Bailey, Lohman said: “In paragraph 2 I have indicated our willingness to negotiate with you for the extension of the term during- which this gas would be available to you. It is, of course, subject to our mutually agreeing upon the price and terms to be included in the contract.”

Delhi promptly initiated negotiations with Texas Pacific to secure an extension of Delhi’s eighteen month gas purchase agreement with Texas Pacific and was successful on August 24,1973. By a letter agreement of that date, the term of the initial agreement was extended to September 1, 1983, and month to month thereafter until either party terminated by giving the other party ninety days prior written notice. In order to get the extension, Delhi agreed to an increase in price from 38$ per MMBTU to 56V2$ per MMBTU, effective September 1, 1973, with a 1$ annual increase per MMBTU each September 1, thereafter; also, effective September 1, 1974 and each September 1, thereafter, the contract provided for a redetermination of price based on the highest price then being paid for gas of like quantity and quality in Jasper, Wayne and Clarke Counties.

On August 29, 1973, Lohman met with Taylor and Bailey in Hattiesburg for the purpose of SMEPA’s acquiring from Delhi the TP gas on a long term basis and to resolve the “price and terms” left open by the June 7, 1973 letter amendment. In a letter of the same date from Lohman to B.ailey, Lohman felt it desirable to summarize the morning decision. In this letter he stated that it would be necessary to pass on to SMEPA the 18V2$ per MMBTU increase that Texas Pacific required of Delhi for a price of 72$ per MMBTU, effective September 1,1973, with the same annual escalation of 1$ per MMBTU each September 1, thereafter, and for a price redetermination each year based on the highest price paid for gas of like quantity and quality in Jasper, Wayne and Clarke Counties. He said an agreement would be necessary for Delhi to purchase gas for SMEPA in Jasper, Clarke and Wayne Counties for sale to SMEPA at Delhi’s residue gas cost plus 15.5$ per MMBTU, saying this would give Delhi an area of interest near the end of SMEPA’s proposed pipeline from its Moselle plant to its Paulding plant, encompassing the area in which Delhi’s gathering system is located. He mentioned the possibility of SME-PA’s exchanging fuel oil in lieu of paying for the gas. He indicated the desirability of changing the delivery point from SME-PA’s Paulding generating station to Delhi’s Harmony gas processing plant. In order to do this, Lohman suggested that Delhi construct a 6" gas pipeline between the two points, for an approximate cost of $500,-000.00, to sell to SMEPA at cost, with Delhi retaining the right to use some of the capacity of the pipeline to provide fuel for Delhi’s facilities along the route of the pipeline in conjunction with which Delhi would provide operating personnel and maintenance for the pipeline and reduce the price of gas to SMEPA in the area of 2V2 to 4$ per MCF. Lohman also noted that if the pipeline was built from Paulding to Delhi’s Harmony plant, Delhi would also be in a position to dedicate to SMEPA other gas purchase contracts, which were currently undedicated, as well as sell SMEPA an ethane product that could be produced at the Harmony plant and sold as a commingled product with gas. Based on current gas rates, Lohman said this would mean approximately 10,000 MCFD would be available to SMEPA, adding that it would be Delhi’s obligation to deliver whatever quantity was available.

As both the plaintiff and the Court note, nowhere in Lohman’s letter of August 29, 1973, does Lohman comment on Delhi’s obligation to deliver Petro Grande gas for the contemplated extended period. Taylor, on behalf of SMEPA stated that the quantity of the Petro Grande gas was never at issue inasmuch as the June 7, 1973 letter amendment committed Delhi to the sale of all the Petro Grande gas for the extended period. On the other hand, Lohman, on behalf of Delhi, testified that the “price and terms” of the Petro Grande gas had not, at this point in time, been negotiated. Be that as it may, Taylor, on September 4, 1973, responded to Lohman’s letter of August 29, 1973, noting that, after a telephone conversation between Lohman and Bailey on August 31, 1973, in which Lohman had agreed that the new price of 72$ per MMBTU for TP gas would become effective on January 1, 1974, instead of September 1, 1973, Taylor said that with this understanding SME-PA would commit itself to buy the TP gas for the extended period, with a price redetermination each year based on highest selling price in the area for comparable sales, and, in the event the selling price, as redetermined, “becomes so high that South Mississippi (SMEPA) cannot economically continue to purchase it, South Mississippi (SMEPA) would then have the right to cancel the contract.” (Parenthesis added). Lohman testified that the quoted language was objectionable in that conceivably Delhi, under the price redetermination terms of its contract with Texas Pacific, would have to pay more to Texas Pacific than a price considered by SMEPA to be uneconomical. Taylor closed with the following:

“We would appreciate your proceeding with the conclusion of your arrangements with Texas Pacific, and we would then like to get with you at the earliest possible time to work out the details of a contract to include this commitment and purchase.”

Continuing with their negotiations, Delhi submitted to SMEPA a proposed letter agreement of September 11, 1973, amending the terms of their May 17, 1972 contract, basically as follows:

1. The TP gas would be dedicated to SMEPA for a ten year period ending September 1, 1983.

2. SMEPA would agree to pay Delhi 72$ per MMBTU for all TP gas, with a 1$ annual increase, together with price redeterminations as provided in the Delhi-Texas Pacific gas purchase agreement plus 15x/2$ per MMBTU.

3. Delhi would be authorized to purchase additional gas for SMEPA in the Jasper-Clarke-Wayne County area at Delhi’s cost plus 15!/2$ per MMBTU.

4. The delivery point would be changed from SMEPA’s Paulding plant to Delhi’s Harmony plant, Delhi to construct a pipeline for this purpose with SMEPA paying approximately $500,000.00, and Delhi agreeing to reduce the price of gas by 2x/2$ per MCF until a total of $500,000.00 had been recovered by SMEPA.

5. Delhi would dedicate additional residue gas to SMEPA available from Tonkawa Gas Processing Co., the price to be the same as the Texas Pacific gas.

6. The letter agreement of June 7, 1973 would be terminated and Delhi would dedicate to SMEPA all gas available under Delhi’s contract with Petro Grande at 62%$ per MMBTU, with a 1$ increase on May 1, 1974, and each May 1 thereafter and the amount of any price redeterminations under Delhi’s contract with Petro Grande.

7. SMEPA would be obligated to purchase 80% of all gas purchased by Delhi under the gas purchase agreements referred to.

8. The term of the original gas purchase contract of May 17,1972, would be amended to terminate on September 1, 1983, and except for the amendments contained therein, the gas sales contract of May 17, 1972 would continue in effect.

Taylor testified that the above proposals were not acceptable to SMEPA, and he sent Bailey to see Lohman in Dallas on September 12, 1973 to see what terms and prices could be agreed upon, particularly with reference to the quantity of gas to be taken by SMEPA and limitations on the prices. No agreement was reached as a result of that conference. As to the proposed letter agreement of September 11, 1973, Lohman testified that these proposals were in the interest of helping SMEPA to acquire a long term source of gas of at least 10,000 MCFD to justify the construction by SME-PA of a pipeline connecting its two plants at Paulding and Moselle, and that Delhi would be the best vehicle to furnish this supply through its gas gathering system in the area. Lohman testified that he suggested a change in the delivery point from SMEPA’s Paulding plant to Delhi’s Harmony processing plant because it was the central point of Delhi’s gas gathering system; it could meet the requirements of the Environmental Protection Act which required a sulfur treatment, and because the Harmony plant had the capacity to treat from 15,000 to 20,000 MCF per day whereas SMEPA’s Paulding plant could handle only 6,500 MCF per day. Lohman and Bailey discussed the quantities of gas available from the various sources, and Lohman admitted that Bailey did not object to the prices for the TP and Petro Grande gas, but that Bailey did object to a change in the delivery point, wanted a delay in the dedication of gas from the Tonkawa Processing Plant to which Lohman agreed, and wanted a different method of providing repayment to SMEPA for the cost of the pipeline, if the delivery point was to be changed, his suggestion being to substitute the actual cost plus 12% interest in lieu of $500,000.00. Lohman felt the two parties were close to an agreement following the conference of September 12, 1973 and that Bailey would return to Dallas where the various items could be reduced to contract form.

Instead, on September, 24, 1973, Taylor forwarded to Lohman copies of a proposed “Amendment No. 2” which had been executed on behalf of SMEPA for acceptance by Delhi. SMEPA proposed that Delhi dedicate the TP gas acquired by it from Texas Pacific for the extended term at 72