Background and Business Context

This dispute arose from the MAG-0005, a firm gas transportation agreement between American Midstream (Alabama Intrastate), LLC ("AMID"), owner of the Magnolia pipeline, and Rainbow Energy Marketing Corporation, a gas-trading company. The parties' relationship began with the MAG-0001 in 2014, which allowed Rainbow to transport up to 25,000 MMBtu of gas daily through the Magnolia pipeline with balanced receipts and deliveries. After Rainbow learned that AMID maintained daily single-point imbalances as large as 40,000 MMBtu under its Operational Balancing Agreement with the connected Transco pipeline, Rainbow approached AMID about executing a balancing agreement to leverage AMID's balancing flexibility at the interconnect.

In February 2015, the parties executed the MAG-0005, labeled a "Firm Gas Transportation Agreement," which allowed Rainbow to physically transport up to 20,000 MMBtu of gas daily. Rainbow paid a demand rate for this capacity regardless of daily usage. However, Rainbow never used the MAG-0005 to transport gas; instead, the parties designed it to provide balancing services, and Rainbow used it exclusively for that purpose. The agreement became contentious when Transco took a stricter stance on imbalances, leading to disputes over whether AMID's performance obligations were excused.

The Contract Interpretation Dispute

The central issue turned on the interpretation of Section 9.1 of the MAG-0005, which addressed when AMID's performance could be excused. The provision stated that Rainbow "shall not be obligated to balance receipts and deliveries of gas on a daily basis unless, on or for any Day, either Transporter or Shipper is requested or required by an upstream or downstream party to balance receipts and deliveries of gas attributable to Shipper." The next sentence provided that if AMID "is requested or required by an upstream or downstream party to balance receipts or deliveries of gas that are attributable to Shipper, Transporter may cease receiving gas from or delivering gas to or for Shipper."

The trial court found for Rainbow and entered judgment for $6,145,215.89 in actual damages, plus pre-judgment interest. The Houston Court of Appeals (First District) affirmed. Both lower courts interpreted the provision as excusing AMID's performance only in the event of an imbalance between scheduled receipts and scheduled deliveries on the connected line, effectively adding the terms "scheduled" and "physical" to the contract language.

The Supreme Court's Analysis

Justice Sullivan, writing for the Court, reversed on multiple grounds. First, the Court held that the lower courts impermissibly rewrote the contract by adding words the parties did not include. The Court emphasized its longstanding principle:

We have long held that courts will not rewrite agreements to insert provisions parties could have included or to imply restraints for which they have not bargained.

The Court found that the provision referred to point-to-point imbalances in the first sentence, while the next sentence concerning single-point imbalances was "interpreted as applicable to imbalance between scheduled quantities and physical deliveries, but adding terms 'scheduled' and 'physical' improperly conflated point-to-point imbalances and scheduled imbalances."

Second, the Court rejected Rainbow's repudiation claim, holding that AMID did not make a "distinct and unequivocal absolute refusal to perform without just excuse." AMID had described the agreement as "interruptible" in a conference call to discuss the contract's functioning under Transco's stricter imbalance stance, but the Court found AMID "expressed willingness to perform while taking position that mandate by owner of connected line would excuse performance under agreement."

Third, and critically for damages, the Court held that Rainbow could not recover lost profits because its use of the agreement was a "speculative, untested venture." The Court explained that Rainbow's strategy of using the MAG-0005 "to fulfill forward sales contract without a corresponding forward supply since agreement provided for balancing receipts and deliveries" was the "type of chancy business opportunity for which company could not recover lost profits." The Court emphasized that "lost profits cannot be awarded based on a speculative strategy" and that courts "may award lost-profits damages only if the claimant proves the fact and amount of damages with reasonable certainty."

Implications for Energy Practitioners

This decision carries significant implications for midstream contract drafting and litigation. The Court's strict adherence to the plain language of Section 9.1—refusing to add "scheduled" or "physical" qualifiers—underscores that Texas courts will not rescue parties from ambiguous or poorly drafted force majeure and excuse provisions. Energy companies negotiating firm transportation agreements with balancing components must explicitly define the types of imbalances (point-to-point versus single-point, scheduled versus physical) that trigger performance excuses.

The lost-profits holding is equally important. The Court's characterization of Rainbow's trading strategy as "speculative" and "untested" signals skepticism toward damages claims based on novel uses of transportation capacity, particularly strategies that exploit operational flexibility for financial arbitrage rather than physical gas movement. Trading companies and their counsel should note that even substantial damages awards ($6.1 million here) will not survive appellate review if the underlying business model is deemed too speculative, regardless of the sophistication of the parties or the deliberate nature of the contract design. The Court remanded for a new trial on both parties' breach-of-contract claims, leaving open the possibility of different damages theories on remand.