Case Title: WYOMING BOARD OF LAND COMMISSIONERS V. ANTELOPE COAL COMPANY, a Wyoming Corporation

Citation: 

Docket Number: S-07-0183

State: wyoming

Court: Wyoming Supreme Court

Date: 2008-06-03T00:00:00Z

Document:
WYOMING BOARD OF LAND COMMISSIONERS V. ANTELOPE COAL COMPANY, a Wyoming Corporation2008 WY 60185 P.3d 666Case Number: S-07-0183Decided: 06/03/2008
APRIL 
TERM, A.D. 2008

 
 

WYOMING BOARD OF LAND 
COMMISSIONERS,

 
 
Appellant

(Plaintiff),

 
 
v.

 
 
ANTELOPE COAL 
COMPANY, a Wyoming Corporation,

 
 
Appellee

(Defendant).

 
 
Appeal 
from the DistrictCourtofConverseCounty

The 
Honorable John C. Brooks, Judge

 
 
Representing 
Appellant:

Bruce A. Salzburg, Attorney General; 
Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior 
Assistant Attorney General; Susan Kay Stipe, Senior Assistant Attorney General; 
Brandi Lee Monger, Assistant Attorney General.  Argument by Ms. 
Monger.

 
 
Representing 
Appellee:

Patrick Reed Day, Holland & 
Hart, LLP, Cheyenne, Wyoming; Hadassah Marie Reimer, Holland & Hart, LLP, 
Jackson, Wyoming.  Argument by Mr. 
Day.

 
 
Before VOIGT, C.J., and GOLDEN, 
HILL, KITE, and BURKE, JJ.

 
 
BURKE, 
Justice.

 
 

[¶1]           
The 
Wyoming Board of Land Commissioners asserted that Antelope Coal Company 
underpaid the royalties it owed the State of Wyoming pursuant to two coal leases.  The Board filed suit against Antelope 
for breach of contract and declaratory judgment.  The district court granted summary 
judgment to Antelope, and the Board appealed.  We will affirm.

 
 
ISSUE

 
 

[¶2]           
The 
Board presents this issue for review:  
Did the district court properly interpret the provisions of the state 
coal leases between Antelope Coal Company and the Board of Land Commissioners as 
those provisions related to non-arms length sales?

 
 
FACTS

 
 

[¶3]           
Antelope 
is a coal producer in Wyoming's PowderRiver Basin.  Some of the coal it mines is owned by 
the State of Wyoming, and leased for mining by 
Antelope.  The two coal leases at 
issue in this case contain identical royalty provisions:

 
 
Royalty 
shall be payable on the gross value at the mine on all coal mined.  Gross value for the purpose of royalty 
calculation means the unit sale or contract price times the number of units 
sold.  In calculating gross value 
the sales price shall be prima facie evidence of such gross value.  No deduction shall be allowed for fees, 
taxes, assessments or similar levies imposed by the State of Wyoming, its 
political subdivisions, any other state or the federal government, nor for the 
expense of mining, processing and loading the coal in merchantable condition at 
the mine ready for shipment.  If the 
coal is not sold and valued at the mine, transportation from the mine to the 
point of sale or delivery may be deducted in determining value.  In the event there is no sale of the 
coal or the Board of Land 
Commissioners determines that the sales price does not truly reflect the value 
of the coal, it may make its own determination of value and require that 
royalties be paid on the basis of the value determined by the 
Board.

 
 

[¶4]           
Antelope 
sells most of its coal in arms length transactions with unaffiliated 
companies.  A small portion of its 
coal, however, is sold to an affiliated company, Venture Fuels,1 pursuant to a 1991 Coal Supply 
Agreement.  The Coal Supply 
Agreement between Antelope and Venture Fuels has been supplemented by agreements 
that, according to Antelope, adjusted the price to reflect current market prices 
in comparable arms length transactions. 

 
 

[¶5]           
In 2004, 
the Wyoming Department of Audit conducted an audit of Antelope's royalty 
payments for coal produced from May 1994 through December 2000.  The Department concluded that the sales 
of coal from Antelope to Venture Fuels were not arms length transactions because 
Antelope and Venture Fuels are affiliated companies.  Asserting that sales between affiliated 
companies are "inherently suspect," the Department concluded that the actual 
sales prices between Antelope and Venture Fuels "did not truly reflect the value 
of the State's coal."  Accordingly, 
the Department refused to accept the actual sales prices as the basis for 
calculating the royalties due under the leases.  

 
 

[¶6]           
The 
Board adopted the Department's conclusion, and recomputed the royalties based on 
a net-back methodology.  In 
simplified terms, this net-back methodology began with the sales price Venture 
Fuels received when it sold the coal to unrelated third parties in Michigan, and 
subtracted the costs Venture Fuels incurred to transport the coal from the mine 
to Michigan.  The result was used as 
the basis of calculating royalties.  
Using its net-back methodology, the Board concluded that Antelope had 
underpaid royalties by a significant amount, and demanded payment.  Antelope refused to pay the additional 
royalties, asserting that its sales to Venture Fuels did, in fact, reflect the 
fair market value of coal sold at the mine, and objecting to the Department's 
net-back methodology.  The State 
filed this lawsuit against Antelope, claiming breach of contract, and seeking a 
declaratory judgment interpreting the state leases.  On cross-motions for summary judgment, 
the district court ruled in favor of Antelope.  The Board has 
appealed.

 
 
STANDARD 
OF REVIEW

 
 

[¶7]           
We 
employ a familiar standard of review in considering the district court's grant 
of summary judgment against the Board and in favor of 
Antelope:

 

We 
examine de novo the record, in the 
light most favorable to the party opposing the motion, affording to that party 
the benefit of all favorable inferences that may be drawn from the record.  If upon review of the record, doubt 
exists about the presence of issues of material fact, that doubt must be 
resolved against the party seeking summary judgment.  We accord no deference to the district 
court's decisions on issues of law.

 
 

Linton 
v. E.C. Cates Agency, Inc., 2005 
WY 63, ¶ 7, 113 P.3d 26, 28 (Wyo. 2005) (internal citations 
omitted).

 
 
DISCUSSION

 
 

[¶8]           
It is 
well established that a mineral 
lease is a contract, and is interpreted and construed pursuant to the general 
principles of contract interpretation.  
Wolff v. Belco Dev. Corp., 736 P.2d 730, 732 (Wyo. 1987); State v. Moncrief, 720 P.2d 470, 473 
(Wyo. 
1986).  Employing settled rules of 
contract interpretation, we begin with the language of the 
contract.

 
 
[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).

 
 

Amoco 
Prod. Co. v. EM Nominee P'ship 
Co., 2 P.3d 534, 540 (Wyo. 2000).

 
 

[¶9]           
We focus 
on the language of the royalty provisions.  
For convenience, we repeat the relevant language 
here:

 
 
Royalty 
shall be payable on the gross value at the mine on all coal mined.  Gross value for the purpose of royalty 
calculation means the unit sale or contract price times the number of units 
sold.  In calculating gross value 
the sales price shall be prima facie evidence of such gross value. . . .  If the coal is not sold and valued at 
the mine, transportation from the mine to the point of sale or delivery may be 
deducted in determining value.  In 
the event there is no sale of the coal or 
the Board of Land Commissioners determines that the sales price does not 
truly reflect the value of the coal, it may make its own determination of value 
and require that royalties be paid on the basis of the value determined by the 
Board.  

 
 
As 
demonstrated in the following paragraphs, we agree with the parties that this 
language is clear and unambiguous.  
We therefore interpret the royalty provisions and apply them to the facts 
of this case.

 
 

[¶10]       
The 
first sentence establishes the basic requirement that the royalty shall be 
payable on the gross value at the mine.  
The term "gross value" is essentially equivalent to the more familiar 
term "fair market value."  See Wyodak Res. Dev. Corp. v. Wyoming Dept. of 
Revenue, 2002 WY 181, ¶ 33, 60 P.3d 129, 142 (Wyo. 2002).2  We will use the terms synonymously in 
this decision.  

 
 

[¶11]       
The 
second sentence provides that gross value is based on sales or contract 
prices.  In this case, the sales 
prices were the actual prices Antelope received for the coal it sold to Venture 
Fuels.  According to the Wyoming 
Uniform Commercial Code,3 a sale "consists in the passing of 
title from the seller to the buyer for a price."  
Wyo. Stat. Ann. § 34.1-2-106(a) (LexisNexis 
2007).  It is undisputed that title 
for the coal passed from Antelope to Venture Fuels, and that Venture Fuels paid 
Antelope a price.  The fact that 
Antelope and Venture Fuels are affiliated companies does not mean that there 
were no sales.  An interpretation 
limiting the term sales to arms length transactions between unaffiliated parties 
would be contrary to the plain and ordinary meaning of the word sale, and to the 
language of the coal leases.

 
 

[¶12]       
The next 
sentence provides that the sales price is prima facie evidence of gross value. 
 Prima facie means "[s]uch evidence as . 
. . is sufficient to establish a given fact, or the group or chain of facts . . 
. and which if not rebutted or contradicted, will remain sufficient."  Kruzich v. Martin-Harris Gallery, 
2006 WY 7, ¶ 16, 126 P.3d 867, 874 (Wyo. 2006) (emphasis omitted).  There were sales between Antelope and 
Venture Fuels.  Those sales prices 
provide prima facie evidence of gross 
value, and unless rebutted or contradicted, that is sufficient to establish 
gross value and to calculate royalties.

 
 

[¶13]       
The next 
sentence indicates that, if the coal is not sold at the mine, then 
transportation from the mine to the point of sale or delivery may be deducted in 
determining value.  The Board 
deducted transportation costs from the point of sale in Michigan in applying its 
net-back methodology to calculate the royalty.  Under this lease provision, however, 
transportation costs are deducted only if the coal is not sold at the mine.  Antelope sold the coal to Venture Fuels 
at the mine.  The Board's use of a 
net-back methodology to calculate royalties was not authorized under this 
particular sentence. 

 
 

[¶14]       
The 
final sentence indicates two circumstances in which the Board may make its own 
determination of value.  The first 
is when there is no sale of the coal.  
That is inapplicable here, because there were sales from Antelope to 
Venture Fuels.  The second 
circumstance is when the Board "determines that the sales price does not truly 
reflect the value of the coal."  The 
Board argues strenuously that this language gives it sole discretion to 
determine that the actual sales price did not reflect fair market value.  Given the language of the lease, we do 
not disagree.  When exercising that 
discretion, however, the Board still must abide by the terms of the leases.  The leases provide that the actual sales 
prices are prima facie evidence of 
fair market value.  Unless that 
evidence is rebutted or contradicted, there is simply no basis other than actual 
sales prices for determining fair market value and calculating 
royalties.

 
 

[¶15]       
The 
Board asserted in the district court that, to determine that sales prices 
between Antelope and Venture Fuels did not truly reflect the value of the coal, 
it did not need to compare those sales prices with prices of comparable sales 
Antelope made to other non-related parties, with prices of comparable sales from 
other mines, or with any other measurement of the coal market.  Instead, as the district court wrote in 
its decision letter, "counsel for the Board stipulated that the Board assumed that the sale to Venture [Fuels] 
did not reflect fair market value since the sale was to a related entity."  (Emphasis in original.)  Because it was relying on this legal 
argument, the Board chose not to present the district court with evidence of any 
kind demonstrating that the sales prices between Antelope and Venture Fuels did, 
in fact, differ from the fair market value of the coal.

 
 

[¶16]       
In oral 
argument before this Court, the Board suggested that its net-back methodology 
provided evidence that Antelope's sales to Venture Fuels did not truly reflect 
the value of the coal.  This 
evidence, the Board asserted, effectively rebutted or contradicted the prima facie evidence of the actual sales 
prices, and further, raised a genuine issue of material fact that precluded 
summary judgment in Antelope's favor.  
It is true that the net-back methodology is a recognized appraisal 
technique that, under proper circumstances, may yield evidence of fair market 
value.  See Thunder Basin Coal Co. v. WyomingState 
Board of Equalization, 896 P.2d 1336, 1338-39 (Wyo. 1995).  But the record contains no indication 
that the Board asked the district court to consider this argument, and we have 
repeatedly stated that we will not consider issues that are raised for the first 
time on appeal.  E.g., Yates v. Yates, 2003 WY 161, ¶ 13, 81 P.3d 184, 188 (Wyo. 2003).

 
 

[¶17]       
Even if 
we were to consider the Board's new argument, we would conclude that the Board's 
net-back methodology did not provide sufficient evidence to raise a genuine 
issue of material fact.  The 
net-back methodology used by the Board was based on the sales prices obtained by 
Venture Fuels in its sales to third parties in Michigan, with deductions for the costs of transporting 
the coal from the mine to Michigan.  But Venture Fuels did more than just 
transport Antelope coal from the mine to the point of sale in Michigan.  For example, Venture Fuels blended 
Antelope coal with coal from other mines.  
The resulting blended coal had characteristics, chiefly energy value and 
sulfur content, that made it different from, and different in value from, the 
coal from either mine alone.  It is 
undisputed that the net-back methodology used by the Board did not take into 
account the value added by Venture Fuels when it blended the coal.  Thus, while the net-back methodology 
used by the Board could reflect the fair market value of the blended coal, it 
did not reflect the fair market value of Antelope coal.  The Board's net-back methodology, as 
used in this case, did not provide evidence that the sales prices between 
Antelope and Venture Fuels did not truly reflect the value of the 
coal.

 
 

[¶18]       
Antelope, 
in contrast, provided the district court with substantial evidence supporting 
its position that the sales between Antelope and Venture Fuels did reflect fair 
market value.  This evidence 
included information about the prices Antelope received for sales of coal to 
unrelated third parties, and expert opinion that the sales from Antelope to 
Venture Fuels were at fair market value.  
To counter this evidence, the Board offered the district court only its 
assumption that non-arms length sales between affiliated companies cannot 
reflect fair market value.

 
 

[¶19]       
The 
Board's assumption is contrary to Wyoming law.  In Wyodak, ¶ 34, 60 P.3d  at 142, we 
recognized the possibility that sales between affiliated companies might not be 
at fair market value:

 
 
When 
coal sales are not arms length transactions . . . the potential exists that the 
sales price may not reflect the fair market value.  Typically, one would presume the nonarms 
length sale price would tend to be lower and thereby more favorable to the 
preferred customer, such as a parent company, than the actual fair market 
value.

 
 
But 
while that possibility exists, we concluded in Wyodak that the sales prices between the 
affiliated companies did provide the proper basis of valuation.  ¶ 43, 60 P.3d  at 144.  This makes it plain that prices between 
affiliated companies can, indeed, reflect fair market value.  Even more to the point, in Department of Revenue v. Amoco Production 
Co., 7 P.3d 35, 39 (Wyo. 2000), we ruled that the Department was not 
entitled to "rely on an assumption that the price paid pursuant to a transaction 
between related parties cannot be considered the fair market 
value of the product."  (Emphasis in 
original.)  The Department was 
required to determine fair market value based on actual evidence of fair market 
value, not on the presumption that sales between affiliate companies did not 
reflect fair market value.

 
 

[¶20]       
Given 
this precedent, the Board was justified in questioning whether non-arms length 
sales between affiliated companies reflected fair market value.  It was not justified in assuming that 
such sales could never reflect fair market value.  The parties agreed in the coal leases 
that the sales price between Antelope and Venture Fuels was prima facie evidence of gross 
value.  The Board could not rebut or 
contradict that prima facie evidence 
with an unsupported assumption that sales between affiliates do not reflect fair 
market value.  It had to base its 
assumption, and it had to rebut or contradict the prima facie evidence, with some actual 
evidence that the sales prices did not truly reflect the value of the coal.  Absent rebuttal or contradiction, that 
prima facie evidence was sufficient 
for determining gross value and calculating royalties.

 
 

[¶21]       
The 
information before the district court, as it considered the parties' cross 
motions for summary judgment, can be divided into three categories.  First, the district court had the actual 
sales prices between Antelope and Venture Fuels, which under the terms of the 
coal leases, was prima facie evidence 
of gross value.  Second, it had 
evidence from Antelope supporting its position that the sales prices between 
Antelope and Venture Fuels reflected fair market value.  Third, it had the Board's unsupported 
assumption that sales between Antelope and Venture Fuels did not truly reflect 
the value of the coal because they were not arms length transactions between 
unrelated parties.  Given this 
information, the district court correctly ruled that there were no genuine 
issues of material fact, and that Antelope was entitled to judgment as a matter 
of law.  We 
affirm.

 
 
FOOTNOTES

 
 

1Antelope 
is a wholly owned subsidiary of NERCO Coal Corporation.  Venture Fuels is a partnership between 
NERCO Coal Sales Company and Midwest Energy Resources Company.  

2We 
recognize that Wyodak involved 
valuation for purposes of calculating ad valorem and severance taxes, not 
royalties.  However, any differences 
in the valuation of minerals for purposes of assessing taxes or for purposes of 
calculating royalties are not at issue in this case.  We are satisfied that the terms "gross 
value" and "fair market value" are equivalent for the purposes of this 
case.

3The 
Wyoming 
Uniform Commercial Code applies to "transactions in goods."  Wyo. Stat. Ann. § 34.1-2-102.  After it is severed from the mineral 
estate, extracted coal is a "good" within the meaning of the Wyoming Uniform 
Commercial Code.  See Wyo. Stat. Ann. 
§ 34.1-2-105(a); Central Illinois 
Light Co. v. Consolidation Coal Co., 235 F. Supp. 2d 916, 918 (C.D. Ill. 2002) 
(applying Illinois Uniform Commercial Code); United States v. Rapoca Energy Co., 751 F. Supp. 565, 568 (W.D. Va. 1990) (applying Virginia Uniform Commercial 
Code).  The Uniform Commercial Code 
definition of "sale" therefore applies here.