Co-author Gunner West
In American Midstream (Alabama Intrastate), LLC v. Rainbow Energy Marketing Corporation, the Texas Supreme Court held that the trial court improperly inserted the words “scheduled” and “physical” into a contract. By blue‐penciling these terms, the trial court improperly altered the plain text of the contract. This opinion was issued on the same day as Cromwell v. Anadarko, leaving no doubt about the Court’s approach to contract interpretation.
The contract
AMID owns the Magnolia pipeline, linked to the Transco pipeline. Producer Rainbow contracted under “MAG‑0001”, a “firm” transportation agreement requiring AMID to accept Rainbow’s gas nominations (unlike “interruptible”, where the pipeline may refuse nominations). When Rainbow nominated equal volumes in and out of Magnolia, AMID scheduled the same amount into Transco, which Rainbow then withdrew to sell to a downstream customer.
A “single‐point imbalance” occurs if scheduled volumes into Transco don’t match physical flow at the interconnect. Under an Operational Balancing Agreement, AMID could carry daily imbalances (treated as received) that do not exceed 5 percent of nominations or cause operational concerns, at which point Transco could issue an Operational Flow Order (OFO) forcing AMID to limit the imbalance.
Balancing Arbitrage in MAG‑0005
Seeking to leverage AMID’s balancing flexibility, Rainbow negotiated MAG‑0005, a 20,000 MMBtu/day “Firm Gas Transportation Agreement” whose practical purpose was for AMID to provide Rainbow with balancing services.
Section 9.1 states: “[Rainbow] shall not be obligated to balance receipts and deliveries of gas on a daily basis unless, on or for any Day, either [AMID] or [Rainbow] is requested or required by an upstream or downstream party [e.g., Transco] to balance receipts and deliveries of gas attributable to [Rainbow].
Thus, Rainbow could create “point‐to‐point imbalances” with monthly settlement. Rainbow viewed this agreement as an insurance policy for forward‐sales contracts: By paying a daily demand rate it could withdraw gas during price spikes and replace gas later when prices fell.
Trial Court
AMID limited Rainbow’s imbalanced nominations on specific days, citing Transco OFOs and operational concerns. Rainbow sued for breach, repudiation, and tort claims, seeking lost profits for disrupted trading.
The trial court read “scheduled” into Section 9.1, excusing AMID from providing balancing services only if Transco instructed to balance “scheduled” quantities with “physical” deliveries. This excluded physical‐only imbalances. The court found that AMID breached MAG-0005 on seven identified days (and on several unspecified occasions) and repudiated the “firm” nature of the contract by describing it as “interruptible” on a conference call between the parties. The trial court awarded Rainbow $6.1 million; the court of appeals affirmed.
Supreme Court
The Court focused on one textual question: Did Section 9.1 excuse AMID’s balancing obligation on any day Transco issued an OFO, regardless of naming or imbalance type?
Under MAG-0005 there could be point-to-point imbalances of two types: either “scheduled” or “physical”. But 9.1 makes no such distinction. Nowhere in the text of 9.1 do those words appear. By improperly inserting two words the trial court narrowed AMID’s excuse for nonperformance to only scheduled point-to-point imbalances.
Properly read, 9.1 allows AMID to refuse balancing whenever Transco requires either party to limit any Rainbow imbalance—scheduled or physical. As all but one contested day coincided with an OFO, the $6.1 million judgment could not stand. The Court remanded to decide liability and damages for the single non‐OFO day.
Reversing contract interpretation also wiped out Rainbow’s ancillary claims. Because 9.1 permitted refusals during an OFO, AMID’s remark that MAG‑0005 was “interruptible” simply asserted a contractual right, not repudiation. The repudiation claim failed. For the same reason Rainbow’s fraud‑based tort claims collapsed.
Lastly, the Court offered guidance on the proper measure of lost-profits damages: Speculative futures‐trading profits are not recoverable without a concrete usage history and reliable market data.
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