MORGANTOWN — Three related federal court cases involving EQT and West Virginia natural gas royalty owners are nearing resolution — in favor of the royalty owners.
The cases are referred to as Leggett, Kay and Caperton. All three have been stayed pending final approval of a settlement deal in Kay.
Kay is a class action suit that began in 2013. It is in the U.S. District Court for the Northern District of West Virginia, before Judge John P. Bailey.
The plaintiffs — the Kay Co. and individual royalty owners H. Dotson Cather and James E. Hamric III, on behalf of a class of royalty owners — allege that EQT and its midstream and downstream chain of subsidiaries wrongly take deduct post-production expenses and severance taxes from their royalty checks, and do not report the sale of natural gas liquids.
In a series of November rulings, Bailey dealt EQT a series of setbacks. Among them, he ruled that evidence provided by the plaintiffs shows EQT “decided that it was taking whatever it wanted to take and was not going to provides its lessors with enough information that they could tell what they were taking, and then, refused to provide sufficient information that anyone could ever determine what all they were taking. The conduct was intentional.”
In Kay, Bailey also made a ruling that affected Leggett and Kay regarding SB 360, passed in 2018.
SB 360 was a response to the state Supreme Court’s about-face in Leggett. In answering a question from a federal court, the Supreme Court in 2016 determined in “Leggett 1” that EQT could not deduct post-production expenses from royalties on leases converted from flat rate to 12.5 percent. Then in 2017, in “Leggett 2,” with a new justice on board, in changed its answer and said that’s OK. (Leggett 1 and 2 are the same case but identify the different Supreme Court opinions.)
SB 360 resulted, prohibiting those deductions.
In Kay, EQT wanted to rely on Leggett 2 for the trial but Bailey said that SB 360 served as an amendment to existing law and was therefore retroactive, effectively nullifying Leggett 2.
Settlement talks in Kay began in November and concluded in January. A hearing on final settlement approval is set for July 11.
Leggett, which also began in 2013, was transferred to Bailey’s court in February. In their joint motion to stay the case, the parties note that the plaintiffs consider themselves part of the plaintiff class in Kay, and the settlement there will determine the outcome of disputes in Leggett.
EQT filed the Caperton suit in April 2018, naming Department of Environmental Protection Secretary Austin Caperton as defendant. It is before Judge Thomas S. Kleeth.
In it, EQT sought to have SB 360 and the entire law prohibiting new permits based on old flat rate leases declared unconstitutional so that Leggett 2 would govern how expenses are deducted from royalty checks.
In its motion to stay the case, EQT said that the Kay settlement may resolve the payment terms under most of its flat rate leases and may lead to voluntary dismissal of this case. Kleeth ordered EQT to file a status report no later than July 19.
While EQT’s arguments didn’t convince the court, it is interesting to see its reasoning, and note its attempt at persuasion in order to win its way.
EQT, in an amended complaint filed in January, said that SB 360 and the flat rate law supplant its privately negotiated contracts, replacing the agreements with a formula lacking any public purpose.
“As natural gas production gradually increased over the years as a result of EQT’s substantial investment, West Virginia lessors who had entered into flat-rate leases became dissatisfied with the bargains they had struck — under which they had been paid for decades. Rather than negotiate amendments to their leases, those lessors prevailed on the West Virginia Legislature to modify the parties’ rights under those leases.”
Prohibiting EQT from deducting post-production expenses to gather, compress, transport, and market the gas, it said, forces it to pay royalties on a sale price to an unaffiliated third party ”substantially higher than the at-the-wellhead price, because it reflects the significant expenses that EQT or its affiliate incurs after extraction. … It awards the lessors a greater share of EQT’s revenues than under the original regime.”
EQT argues, “The Legislature has thus twice substantially impaired EQT’s contract rights by retroactively awarding the lessors more compensation than they bargained for in the leases, based on some ill-defined notion of “fairness” in the distribution of the ‘natural wealth of the state’ as between private parties.”
EQT suggested it would pull business out of the state if it lost the Caperton case.
“EQT’s business development and expansion in the State are inhibited when it cannot rely on the terms of the many contracts it has executed with West Virginian lessors.” For 2018, despite similar acreage holdings, it had only 28 wells planned for West Virginia, compared to 122 in Pennsylvania. “West Virginia’s attempts to alter economics of EQT’s flat rate leases have increased costs and forced EQT to look elsewhere for development opportunities.”
The Dominion Post asked EQT if it would be able to offer any perspectives on the cases and their effects. A spokeswoman replied, “We’re unable to comment or provide additional detail on pending litigation.”
Representatives of the West Virginia Royalty Owners Association could not be reached for comment. The executive director of the West Virginia Land & Mineral Owners Association sent questions to association counsel, who could not respond in time for this report.
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Email dbeard@dominionpost.com
