Jonah Energy LLC v. Wyo. Dep't of Revenue

• Docket Number: S-22-0271
• Decision Date: 29 August 2023
• Citation: 2023 WY 87
• Parties: JONAH ENERGY LLC, a Delaware limited liability company, Appellant (Petitioner), v. WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).
• Court: Wyoming Supreme Court

1

2023 WY 87

JONAH ENERGY LLC, a Delaware limited liability company, Appellant (Petitioner),
v.
WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).

No. S-22-0271

Supreme Court of Wyoming

August 29, 2023

Appeal from the District Court of Sublette County The Honorable Marvin L. Tyler, Judge

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: ridget 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.

Before FOX, C.J., and KAUTZ, BOOMGAARDEN, FENN, JJ, and CAMPBELL, DJ.

2

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:

1. Did the Board misinterpret the NGL Purchase Agreement (Purchase Agreement) between Jonah and Enterprise Products?

2. 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 NGL^[1] 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

3

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 Wyo. Stat. Ann. § 39-14-203(b)(vi)(C) (LexisNexis 2023) ("The fair market value [of the gas] is the sales price minus expenses incurred by the producer for transporting produced minerals to the point of sale and third party processing fees."). In 2020, the Department of Audit reviewed Jonah's tax returns for 2014 through 2016 and determined the taxable value of the New Production was higher than reported because Jonah had incorrectly deducted the Shortfall Capacity Deficiency Fee in calculating the sales price. The DOR adopted the audit findings and issued final determinations to Jonah assessing additional severance taxes on its New Production for 2014 through 2016 and increasing the taxable value for ad valorem tax purposes. Jonah appealed the final determinations to the Board, claiming the DOR had improperly calculated the taxable value of its New Production.

[¶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 Wyoming Rule of Appellate Procedure (W.R.A.P.) 12.09(b) because it presented a question of state-wide impact and certification would serve the interests of judicial economy and reduce the parties' litigation expenses. See W.R.A.P. 12.09(b)(3), (6). The district court issued an order certifying the case and we accepted it. See W.R.A.P. 12.09(c)-(d).

STANDARD OF REVIEW

[¶6] "When an administrative agency case is certified to this Court under W.R.A.P. 12.09(b), we apply the standards for judicial review set forth in Wyo. Stat. Ann. § 16-3-114(c)." Wyodak Res. Dev. Corp. v. Dep't of Revenue, 2017 WY 6, ¶ 14, 387 P.3d 725, 729 (Wyo. 2017) (citing Wyodak Res. Dev. Corp. v. Dep't of Revenue, 2002 WY 181, ¶ 9, 60 P.3d 129, 134 (Wyo. 2002)). The agency's findings of fact after a contested case hearing are reviewed using the substantial evidence standard. Id. (citing § 16-3-114(c), and Dale v. S &S Builders, LLC, 2008 WY 84, ¶ 22, 188 P.3d 554, 561 (Wyo. 2008)). "'Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'" Genner v. State ex rel. Dep't of Workforce Servs., Workers' Comp. Div., 2022 WY 123, ¶ 13, 517 P.3d 1138, 1142 (Wyo. 2022) (quoting Guerrero v. State ex rel. Dep't of Workforce Servs., Workers' Comp. Div., 2015 WY 88, ¶ 12, 352 P.3d 262, 266 (Wyo. 2015)) (other citation and quotation marks omitted). "Findings of fact are

4

supported by substantial evidence when we can discern a rational premise for those findings from the evidence preserved in the record." Wyodak, ¶ 14, 387 P.3d at 729.

[¶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.

5

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. Wyo. Stat. Ann. §§ 39-14-203(a)(i), (b)(ii) (LexisNexis 2023) (severance tax), and 39-13-103(b)(iii)-(iv) (LexisNexis 2023) (ad valorem tax). The point of valuation for natural gas is at the end of the production process. Section 39-14-203(b)(ii). See also, Solvay Chems., Inc. v. Wyo. Dep't of Revenue, 2022 WY 122, ¶ 15, 517 P.3d 1123, 1129 (Wyo. 2022) ("the fair market value for natural gas is to be determined 'after the production process is completed'" (quoting § 39-14-203(b)(ii))). In circumstances such as this case when the natural gas is not "sold at or prior to the point of valuation," the legislature provides several options for determining the fair market value of the gas. Section 39-14-203(b)(vi)(A)-(E). Jonah chose the Netback valuation method found in § 39-14-203(b)(vi)(C). That provision states: "The fair market value [of the gas] is the sales price minus expenses incurred by the producer for transporting produced minerals to the point of sale and third party processing fees." Id.

[¶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...