Kerr-McGee Corp. v. Northern Utilities, Inc. (500 F. Supp. 624, 1980)

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BRIMMER, Chief Judge.

The above-entitled matter having been tried to the Court, on June 25, 26, and 27, 1980, Kerr-McGee Corporation appearing by and through William T. Schwartz, Esq., B. J. Zimmerman, Esq., and Peter J. Nickles, Esq., Northern Utilities, Inc. appearing by and through William H. Brown, Jr., Esq., Claude W. Martin, Esq., Edwin V. Magagna, Esq., and William Bryce Arendt, Esq., Amoco Production Company appearing by and through John S. Pfieffer, Esq., and R. H. Landt, Esq., Phillips Petroleum Company' appearing by and through Houston G. Williams, Esq., Thomas M. Blume, Esq., and Dale A. Mayer, Esq., and the State of Wyoming, appearing amicus curiae, by and through Steven R. Shanahan, Assistant Attorney General for the State of Wyoming, and the Court having heard the testimony submitted for and on behalf of the parties, and having reviewed the pleadings, the Agreed Statement of Facts, the evidence, the exhibits, and briefs filed for and on behalf of the parties, and being fully advised in the premises, makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. The jurisdiction of this Court is founded upon the diversity of citizenship of the parties and the requisite amount in controversy. 28 U.S.C. § 1332.

2. Northern Utilities, Inc. (“Northern”), is a corporation incorporated under the laws of the State of Wyoming, with its principal place of business in Wyoming. Northern Utilities, Inc. is the successor in interest of Northern Utilities Company.

3. Northern is an intrastate public utility, certificated by the Public Service Commission of the State of Wyoming. Northern’s rates, its service, and its earnings are regulated by the Public Service Commission of Wyoming. As a public utility, Northern is permitted to earn a fair, just and reasonable rate of return on its capital investment.

4. Kerr-McGee Corporation (“Kerr-McGee”), formerly Kerr-McGee Oil Industries, Inc., is a corporation incorporated under the laws of the State of Delaware, whose principal place of business is Oklahoma City, Oklahoma.

5. Amoco Production Company (“Amoco”), is a corporation incorporated under the laws of the State of Delaware, whose principal place of business is Chicago, Illinois, and who is duly authorized to transact business in the State of Wyoming. Amoco is the successor in interest of Pan American Petroleum Corporation, which was the successor in interest of Stanolind Oil and Gas Company.

6. Phillips Petroleum Company (“Phillips”), is a corporation incorporated under the laws of the State of Delaware, whose principal place of business is Bartlesville, Oklahoma, and who is duly authorized to transact business in the State of Wyoming.

7. This case involves the interpretation of intrastate Gas Sales Contracts between (1) Amoco and Northern Utilities, dated November 20, 1957, as amended by a Supplemental Agreement, dated October 1, 1970; (2) Kerr-McGee and Northern Utilities, dated October 14, 1958, as amended by a Supplemental Agreement, dated February 23, 1973; and (3) Phillips and Northern Utilities, dated May 20, 1958, as amended by a Supplemental Agreement dated May 4, 1973.

8. Amoco, Kerr-McGee, and Phillips each own working interests in oil and gas leases in the Beaver Creek unit, Fremont County, Wyoming. The ownership interests of the parties in the various formations in the Beaver Creek Field are as follows:

Frontier-Dakota Formation

Amoco 86.35979%

Kerr-McGee 5.93651%

Phillips 7.70370%

100.00000%

Madison Formation Amoco 100%

Phosphoria Formation Amoco 100%

Tensleep Formation Amoco 100%

Second Cody Formation Amoco 100%

First Cody Formation Amoco 100%

9. All of the natural gas involved in this case is produced from wells producing from the Frontier-Dakota participating area, and from wells producing from the Phosphoria formation. Such producing wells were commenced (spudded) on various dates between September 1, 1937 and October 31, 1969.

10. Northern’s principal service areas are Lander, Riverton, Casper and intermediate communities in Wyoming. Northern sells part of this gas to Northern Gas Company, an intrastate public gas utility which serves Rawlins, Laramie, and intermediate communities. All of the Beaver Creek gas is sold to Northern pursuant to contracts with Amoco, Kerr-McGee and Phillips.

11. Amoco is the unit operator of the Beaver Creek Unit Area (Beaver Creek Field) under a Cooperative Development Contract and Unit Plan dated March 29, 1932, and amendments thereto. As such operator Amoco collects and receives payments from Northern for all of the gas produced and sold from the Beaver Creek Field and distributes to Phillips and Kerr-McGee their respective shares thereof. Amoco also pays all severance taxes, production taxes, ad valorem taxes and all royalties for its account and for the account of Phillips and Kerr-McGee. Northern obtains approximately 85% of its total supply of gas from the Beaver Creek Field under the above-mentioned Gas Sales Contracts. Northern sells to the Standard Refinery in Casper (an affiliate of Amoco) and to Amoco at Salt Creek and Winkleman Dome gas volumes approximating 40% of the total annual volume purchased from Beaver Creek. Northern receives for gas delivered to said points a price per Mcf equal to the price it pays for Beaver Creek gas at the Beaver Creek Field plus a fee of 5 cents per Mcf for gas delivered to the Casper refinery, 6 cents per Mcf for gas delivered to Salt Creek and 9 cents per Mcf for gas delivered to Winkleman Dome. The obligation of Northern to sell and deliver such quantities extends to the expiration of the Supplement, December 31, 1990.

12. Northern and Amoco entered into a twenty-year Gas Sales Contract dated November 20, 1957 (herein referred to as the “1957 Amoco Contract”), in which Amoco agreed to sell and Northern agreed to buy all of Amoco’s Beaver Creek gas, up to maximum quantities specified therein. Northern and Kerr-McGee entered into a Gas Sales Contract dated October 14, 1958, (the “1958 Kerr-McGee Contract”), in which Kerr-McGee agreed to sell and Northern agreed to buy all of Kerr-McGee’s gas, up to the maximum quantities specified therein, allocated to or owned by Kerr-McGee from certain lands and formations in the Beaver Creek Field. Northern and Phillips entered into a Gas Sales Contract dated May 20,1958 (the “1958 Phillips Contract”) wherein Phillips agreed to sell and Northern agreed to buy all of Phillips’ gas, up to the maximum quantities specified therein, allocated to or owned by Phillips from certain lands and formations in the Beaver Creek Field, at the same price and in accordance with the other relevant terms of the 1957 Amoco Contract. All of the terms of the 1958 Kerr-McGee Contract and the 1958 Phillips Contract relevant to this lawsuit are identical to those in the 1957 Amoco Contract. Both Phillips and Kerr-McGee ratified the 1957 Amoco Contract without negotiations with Northern.

13. The 1957 Amoco Contract was amended four times prior to 1970, but these amendments did not make changes in the contract price. The first and third amendments incorporated into the contract deliveries of Sherwood Unit Gas produced in Natrona and Converse Counties, Wyoming. These amendments are no longer of concern, the Sherwood Unit Gas having been exhausted. The second amendment changed the point of delivery to the Beaver Creek Gas. The fourth amendment concerned the sale by Amoco to Northern of its wholly-owned gas from the Phosphoria formation in the Beaver Creek Field.

14. In April, 1970, pursuant to Amoco’s letter, Northern and Amoco entered into negotiations which were carried on in Amoco’s Denver office and which culminated in the Supplemental Agreement dated October 1, 1970 amending the 1957 Amoco Contract (herein referred to as the “Amoco Supplement” or the “Supplement”) and a number of related or collateral agreements referred to elsewhere herein. On February 23,1973, Northern and Kerr-McGee entered into a Supplemental Agreement (the “Kerr-McGee Supplement”) wherein all relevant terms were identical with those in the supplement negotiated by Amoco and Northern. On May 4,1973, Phillips and Northern entered into a Supplemental Agreement (the “Phillips Supplement”) amending said 1958 Phillips Contract wherein all relevant terms were identical with those in the Supplement negotiated by Amoco and Northern.

15. Paragraph 4 in each of said supplements provides as follows:

“4. The paragraph comprising present Article 6, Favored Nations Clause, is designated (a), and the following new paragraph (b) is added to said Article 6:

“(b) From and after January 1, 1976, when the price to be paid by Northern to Pan American pursuant to the other provisions hereof is less than the sum of the price received for gas being sold in interstate commerce, by any producer within the State of Wyoming, except in the counties of Uinta and Lincoln, plus three cents per one thousand cubic feet (3$Mcf), then Northern shall increase the price to be paid Pan American hereunder to a price equal to the price being received by such producer plus three cents per Mcf.” (Said new paragraph (b) will be referred to herein as “Article 6(b)”).

Clause 6(b) is not a standard clause of common use in the industry, but is a unique provision. Arles H. Barrett, of Amoco, testified that he knows of no other contract containing this clause.

16. All relevant terms and provisions in the separate contracts referred in this case between Phillips and Kerr-McGeé with Northern are identical with the contracts between Amoco and Northern from which they were copied or adopted by reference. For brevity references made in these findings to the Supplement will also apply to the Phillips Supplement and the Kerr-McGee Supplement unless otherwise noted.

17. The 1957 Amoco contract is a 41 page document plus an Exhibit A, setting forth the acreage dedicated to the contract, an Exhibit B setting forth the quantities of gas to be delivered, received and paid for, and an Exhibit C, setting forth a map of the pipeline to be built by Northern from Beaver Creek to Casper. The quantity which Northern is obligated to take or pay for in any year (“take or pay” obligation) is set forth in Exhibit B and is conditioned upon the producers’ ability to deliver the specified maximum quantities (“peak deliverability”).

18. Article 5 of the 1957 Amoco contract sets forth a base price per Mcf of the gas to be delivered in each of the 20 years during the contract term. The price for year 1959 is 10.17 cents Mcf and each succeeding year’s price is incrementally higher; the base price for year 1978 is 20.18 cents.

19. Article 7 of the 1957 Amoco Contract is entitled “Inflation-Deflation Adjustment”. It provides for adjustments each year of the Article 5 base price for inflation or deflation determined by references to the Wholesale Price Index. Article 16 of the 1957 Amoco Contract provides by a reference to Article 10 of Chapter 32, WCS 1945, that ad valorem taxes will be borne by the parties against whom the tax is levied and other taxes therein specified assessed against the producers would be reimbursed by Northern to the extent of three-fourths thereof. The Supplement makes no change in Article 16 with respect to ad valorem taxes but increased from seventy-five percent to one hundred percent the amount of reimbursement for other taxes to be paid by Northern.

20. The Supplement amends the 1957 and 1958 contracts in the following respects:

(1) extends the term 12 years and two months to December 31, 1990;

(2) increases the base prices set forth in Article 5 for the period of the next ended term (the base prices for the extended term are set forth for each year providing for a base price of 21.81$ for year 1979, incrementally higher prices for each year thereafter with a base price of 29.84$ for year 1990) all subject to adjustment of inflation or deflation;

(3) increases the annual take or pay obligation of Northern relative to the peak deliverability obligation of producers from a ratio of 59%. to a ratio of 92.7% beginning in 1970 through 1990 by incorporation of a revised Exhibit B;

(4) redesignates Article 6 of the 1957 contract as Article 6(a) and adds a new Article 6(b) which new article is at the center of the principal controversy herein;

(5) increases the minimum daily quantity that Northern is obligated to receive from 11 thousand Mcf plus deliveries at Salt Creek, to 15 thousand Mcf plus deliveries at Salt Creek and Winkle-man Dome;

(6) decreases the delivery pressure obligation of Amoco from 600 psia to 580 psia;

(7) provides that if Amoco is unable to deliver Phosphoria formation gas, Northern nevertheless shall be obligated to purchase an additional quantity from other Beaver Creek formations as will make up the deficiency of Phosphoria formation gas; and

(8) increases the obligation of Northern to reimburse severance and conservation taxes from 75% to 100% but does not change Article 16 as to ad valorem taxes; and

(9) continues the provisions of the 1957 contract authorizing the producers to suspend deliveries and terminate the contracts in the event of a default by Northern.

21. The Supplement was negotiated by Amoco on the premise that there were a number of advantages to be derived from selling the excess gas to Northern. The memorandum from K. W. Beaver to Mr. Hegglund (Exhibit 1-7) shows that the price from Northern would be better than in an interstate sale, the sale could be started as soon as an agreement was made with Northern, whereas an interstate sale would have required about two years of FPC negotiations. Amoco calculated that Amoco could sell over $15,000,000 of additional gas to Northern during the next eleven years if the reservoir is capable of producing the rates necessary to do this. That number would convert to 25