Opinion ID: 2586675
Heading Depth: 1
Heading Rank: 14

Heading: Did the district court err by refusing to exclude certain expenses from the net profits calculation?

Text: [¶ 129] The district court made the following findings regarding calculation of the NPI due to plaintiffs: 27. The Net Profits Contract sets forth the terms to be applied and honored in order to perform proper computation of any payable net profits. The accounting requirements are set forth in the body of the Net Profits Contract, in Exhibit A listing the permitted royalty and overriding royalty burdens on the leases, and in Exhibit C-1, which is an Accounting Procedure. 28. The Net Profits Contract Accounting Procedure may not be amended without the consent or approval of Novi or its successors in interest, including plaintiffs or their successors in interest. The Net Profits Accounting Procedure has never been amended. 29. The Net Profits Contract and the Net Profits Accounting Procedure establish principles to be followed in performing a proper accounting of the NPI as follows: (a) Plaintiffs' net profits equals 4.98% of cumulative gross revenue less cumulative expenses on a consolidated basis associated with the operation of NPI leases and wells on those leases; (b) The NPI is to be calculated each month and the incremental net profits for that month, if positive, is to be paid as soon as practicable after the end of any month in which net profits have been realized; (c) Gross revenue is based on proceeds from wellhead gas and oil sales and on fair market value for other sales and for unsold production; (d) Deductible expenses are all those that are reasonable and customary in connection with the operation and development of oil and gas properties. These expenses are properly chargeable against the NPI leases and are limited by amounts specified in the Accounting Procedure unless and until that procedure is amended as provided herein; (e) Expenses that are not reasonable and customary and not properly chargeable in connection with the operation and development of NPI lease and therefore, not deductible, include, among others, federal income tax, interest on capital and other expenses, depreciation, acquisition costs, accrual accounts, and future asset retirement accounts; (f) The Accounting Procedure limits the amount of deductible labor expense (including employee benefits), Pinedale district office expense, well overhead rates, and legal expenses; and (g) Deductible expenditures that benefit both NPI and non-NPI wells are allocated based on the ratio of the operators' end-of-year NPI well count to total well count. 1. Gas used on lease [¶ 130] In determining the amount of net profits due to the plaintiffs, the district court ruled that the value of gas produced but used in lease operations rather than sold was properly included on the revenue side of the calculation under the terms of the Unit NPI Contract. The defendants argue that the district court improperly interpreted the Unit NPI Contract in arriving at that decision. Section 2 of the contract pertains to computation of the net profits. That provision states in relevant part: In computing gross revenue, there shall be taken into account the proceeds of production sold for delivery at the wellhead. As to production not so sold, the fair market value of such production at the wellhead shall be taken into account. [¶ 131] The plaintiffs argue that the production not so sold language of Section 2 applies to all gas produced and not sold at the wellhead, including gas used on the lease. The defendants maintain that the provision only speaks to gas not sold at the wellhead but sold downstream and does not require considering the value of gas used on the lease. We do not take contract language out of context. Instead, [w]e interpret contracts as a whole, reading each provision in light of all the others to find the plain and ordinary meaning of the words. State ex rel. Arnold v. Ommen, 2009 WY 24, ¶ 40, 201 P.3d 1127, 1138 (Wyo.2009). See also, Squillace v. Wyoming State Employees' and Officials' Group Ins. Bd. of Admin., 933 P.2d 488, 491 (Wyo.1997). Consistent with our rules of contract interpretation, we must interpret the disputed phrase in the context of the entire provision pertaining to calculation of the NPI. [¶ 132] The computation provision of the Unit NPI Contract states that deductible expenses include those associated with drilling, completion and producing wells. Without question, if the producers purchased gas to use in lease operations, that expense would be deductible. In order to read the provisions of the Unit NPI Contract consistently, the revenue from gas used on the lease must either be removed from the revenue calculation or deducted because it would be an allowable expense in computing net profits. We conclude, therefore, the disputed language, production not so sold speaks only to production that is not sold in accordance with the previous provision, i.e., at the wellhead. The language simply provides a means of calculating the value of gas sold downstream from the wellhead. It does not pertain to gas used on the lease. The district court erred by including that revenue in the net profits calculation and we remand for proceedings consistent with this decision. [20] 2. Fixed expenses/overhead [¶ 133] The defendants claim that the district court erred by ruling that the allowable overhead expenses set out in a 1954 accounting procedure applied to their operations in the twenty-first century. As the district court recognized, the Unit NPI Contract expressly incorporated the accounting procedures contained in the standard 1953 PASO form, which was attached to the Unit NPI Contract as Exhibit C-1. The accounting procedures contained certain allowable expense amounts and included limitations on deductions for employee benefit costs, administrative overhead for drilling and producing wells and expenses associated with district and camp offices. [¶ 134] The accounting procedure stated that employee benefit labor expenses were deductible, but that the total of such charges shall not exceed [ten percent crossed out and 10½ percent added in] of Operator's labor costs. ... The accounting procedure also stated that administrative overhead for wells was a deductible expense, up to $375 per month for drilling wells and $75 per month for producing wells, although the above specific overhead rates may be amended from time to time by agreement between operator and non-operator if, in practice they are found to be insufficient or excessive. The amounts were not standard, but were typed in by the First Parties and Novi. Section II.11 of the accounting procedures limited deductible expenses for the operator's district and camp offices. [¶ 135] The plaintiffs' expert accounting witness used the limitations included in the accounting procedures to exclude some of defendants' expenses, while defendants' expert accountant included all of their expenses as deductions in the NPI calculation. The defendants' expert stated that the overhead expenses were not restricted by the amounts in the accounting procedure because the Unit NPI Contract specifically allowed the deduction of all expenses and charges that are reasonable and customary. [¶ 136] We conclude the district court properly interpreted the overhead expense provisions of the First Parties' and Novi's agreement. While the Unit NPI Contract allows for the deduction of any reasonable and customary expenses, that provision does not govern the overhead amount. The specific provisions in the accounting procedure for overhead would not have been necessary if the parties intended that the reasonable and customary provision would control. The fact that they crossed out 10 percent and inserted 10½ percent for the employee benefits deduction, typed in specific overhead amounts for drilling and producing wells, and specifically designated certain district and camp office expenses as deductible, indicates that they clearly gave specific thought to those expenses. [¶ 137] We do not dispute the defendants' contention that the amounts may no longer be reasonable. However, it is not our role to construe a contract to reach a different result than that clearly stated in the contract language. In other words, no matter how unwise the parties' agreement, our task is to interpret their intent as expressed in the contract's plain language. Collins v. Finnell, 2001 WY 74, ¶ 21, 29 P.3d 93, 101 (Wyo.2001). The parties recognized that the amounts may not continue to be feasible over time and specifically allowed for amendment of the agreement to reflect a change of conditions in Section II.12. The district court ruled that no such amendment had been made and the defendants do not direct us to any evidence showing an express amendment to the contract provisions which define allowable expenses. [21] If the proper parties agree to such an amendment in the future, different overhead amounts may be applied to future NPI calculations.