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Citgo Petroleum Corporation and Pdv Midwest Refining, LLC v. Integrys Energy Services

June 1, 2012

CITGO PETROLEUM CORPORATION AND PDV MIDWEST REFINING, LLC, PLAINTIFFS,
v.
INTEGRYS ENERGY SERVICES, INC. , DEFENDANT.



The opinion of the court was delivered by: Hon. Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

In 2008, Plaintiffs PDV Midwest Refining, LLC ("PDVMR") and CITGO Petroleum Corporation ("CITGO," and collectively with PDVMR, "Plaintiffs") entered into an agreement with Defendant Integrys Energy Services, Inc. ("Integrys" or "Defendant"), in which Integrys agreed to provide electricity to Plaintiffs' petroleum refinery in Lemont, Illinois.*fn1 The following year, as the parties approached the end of the initial twelve-month contract period, a dispute arose over whether Plaintiffs would be obliged to reimburse Defendant for certain charges instituted by the state legislature should Plaintiffs exercise their option to renew for a second year. As a result, Defendant sent Plaintiffs notice of its decision to terminate the contract at the end of the initial term.

In this lawsuit, brought under the court's diversity jurisdiction, Plaintiffs claim that Integrys's termination notice breached the contract, in violation of Plaintiffs' right to renew the contract for another twelve-month period. Defendant claims that it properly exercised its unilateral right to terminate the contract. In the alternative, Defendant also raises several affirmative defenses, including anticipatory repudiation and unclean hands, stemming from Plaintiffs' alleged refusal to pay the new charges.

The parties have filed cross-motions for summary judgment. For the reasons below, the motions are granted in part and denied in part.

BACKGROUND

I. The Parties

Plaintiff PDVMR is a Delaware limited liability company composed of one member: VPHI Midwest, Inc., a Delaware corporation with its principal place of business in Houston, Texas. (Pls.' 56.1 ¶ 1.) PDVMR is a wholly owned subsidiary of Plaintiff CITGO, a Delaware corporation with its principal place of business in Houston, Texas. (Id. ¶ 2.) Defendant Integrys, a retail supplier of electric power, is a Wisconsin corporation with its principal place of business in De Pere, Wisconsin. (Id. ¶ 3.) This court has diversity jurisdiction over the contract dispute between these parties, in which more than $75,000 is a stake, and the parties agree that venue is proper because Plaintiffs' refinery, which Defendant contracted to furnish with electric power, is located in this district. (Id. ¶ 5.)

II. The Contract

The lawsuit has its origins in the "Power Sale Agreement" and "Confirmation" executed by PDVMR on August 20, 2008 and by Integrys on September 9, 2008. (Power Sale Agreement, Ex. 1 to Am. Compl.; Confirmation, Ex. 2 to Am. Compl.) On August 21, 2008, Plaintiff CITGO executed a Guaranty of PDVMR's obligations (collectively, with the Power Sale Agreement and the Confirmation, the "contract"). (Guaranty, Ex. 3 to Am. Compl.) Under the terms reflected in those documents, Integrys agreed to provide electric power to a refinery owned by PDVMR and operated by CITGO in Lemont, Illinois. It is undisputed that for several weeks before executing the contract, the parties engaged in negotiations and, with the assistance of their attorneys, exchanged multiple drafts. Integrys prepared a draft Confirmation and Supplemental Confirmation on July 23, 2008. (Def.'s 56.1 ¶ 10.) Plaintiffs contend the negotiations began two months earlier, in May 2008, when Integrys responded to CITGO's request for proposal ("RFP") for the supply of electricity to the Lemont Refinery. (Pls.' 56.1 Resp. ¶ 10; Pls.' 56.1 ¶¶ 6-8.) In addition to the relevant provisions discussed below, the contract included an integration clause. (Def.'s 56.1 ¶ 23.)

A. Renewal Provision

This case hinges, in part, on the meaning of the contract renewal provision in the Confirmation. The Confirmation defines a one-year "initial Delivery Period," from September 2008 through the latest meter read date in September 2009. (Pls.' 56.1 ¶ 18.) Thereafter, Integrys would continue to provide electricity on the same terms, unless one of certain events occurred. Specifically, the Confirmation contains a section entitled "Renewal" (the "Renewal provision"), which provided:

After the initial Delivery Period, service shall continue on a billing cycle-to-billing cycle basis at the same terms and conditions unless (i) terminated by either Party giving 30 days written notice prior to the end of the initial Delivery Period noted above, or (ii) PDVMR exercises it's [sic] option to renew the contract for a second year, pursuant to the Special Conditions below, as evidenced by a fully executed Confirmation for the second year.. Subject to PDVMR renewing for a second year, after the second year, service shall continue on a billing cycle-to-billing cycle basis at the same terms and conditions unless terminated by either Party giving 30 days written notice. (Confirmation at 3 (extra punctuation in original).) Critical to this dispute, the contract does not explicitly provide for which of the two alternatives has priority should Integrys wish to terminate the contract at the end of the initial Delivery Period, but PDVMR wish to exercise its option to renew the contract for a second year.

Under the "Special Conditions" referenced in the Renewal provision, the Confirmation provides that "PDVMR shall have the right to renew the Confirmation for an additional twelve (12) month Delivery Period," subject to rate adjustments should certain components of the ancillary rate deviate more than 10% from the previous year. (Confirmation at 4.)*fn2 The Special Conditions also set a timetable for renewal: Integrys was required to notify PDVMR of any change in the rates by June 15, 2009; PDVMR then had until July 30 to decide whether to exercise its option to renew. (Id.)*fn3 Should PDVMR choose to renew for another year, the contract provides, "the Confirmation will renew with the same terms and conditions as the initial Delivery Period," subject to any of the specified rate adjustments. (Id. at 5.)

Defendant notes that subsection (i) of the Renewal provision, which allows for unilateral termination of the contract past the initial Delivery Period by either party, remained unchanged throughout the negotiations process, and was a standard term in Integrys's customer contracts. (Def.'s 56.1 ¶¶ 18-19.) With respect to subsection (ii), Defendant argues that despite the language in the Confirmation identifying the "option" or "right to renew" as PDVMR's, the renewal right was not unilateral. Defendant maintains that the contract provided merely for an option to renew provided that both parties agreed. In support, Defendant emphasizes the unilateral termination provision of subsection (i) and the language in subsection (ii) requiring that PDVMR's election to renew be "evidenced by a fully executed Confirmation for the second year."

The termination provision may have been a standard feature of Integrys agreements, but it appears that the renewal clause was not. The option to renew in subsection (ii) had its origins in negotiations over a pricing error in Integrys's response to CITGO's RFP. (Pls.' 56.1 ¶¶ 10-11.)

When Integrys realized that the price quoted in its initial response was lower than it intended, it offered CITGO two options: (1) the lower price ($1.135 per megawatt hour) for a one-year term, or (2) a higher price ($1.355 per megawatt hour) for a one-year term with an option to renew. (Id.; Def.'s 56.1 Resp. ¶ 11.) Integrys's representatives referred to the second option as an attempt to "share half the pain" with Plaintiffs by raising the rate initially offered in Integrys's response to the RFP, but giving Plaintiffs the option to renew those still-favorable terms for a second year. (Fahey Dep., Ex. I to Pls.' 56.1, at 214-217; E-mail Message from Fahey to Fillar of 7/16/2008, Ex. J to Pls.' 56.1; E-mail Messages between Fahey and Zimonick of 7/11/2008, Ex. K to Pls.' 56.1.) The court infers from the terms of the Confirmation that the parties settled on the second option.

According to Plaintiffs, the contract language established their unilateral right to renew. They point, in addition, to circumstances surrounding the contract's negotiation. First, Plaintiffs note that CITGO's RFP requested bids for a "12-month contract with CITGO's option to extend for an additional 12-month period at same terms and conditions under initial 12-month contract." (Pls.' 56.1 ¶ 7.) Plaintiffs also point to Integrys documents and Integrys employees' internal and external communications, both before and after execution of the contract, which do appear to recognize the option to renew as Plaintiffs' to exercise. In particular, communications from James Fahey, one of Integrys employees principally responsible for negotiations with Plaintiffs, made repeated reference to the renewal option as a right Plaintiffs enjoyed under the contract's terms. (Pls.' 56.1 ¶¶ 14-16.)*fn4

B. "Pass Through" Provision

Another contract provision relevant to this dispute is what the parties refer to as the "Pass Through" provision. The Power Sale Agreement addressed changes in tariffs or law that affect Integrys's cost of providing the electricity and shifted certain costs and benefits of those laws to Plaintiffs, providing in relevant part:

Seller may pass through to Buyer (i) any increase or decrease in such tariff charges or (ii) other increase or decrease in Seller's cost to provide electric power that result from a change in or change in interpretation or administration of current tariffs, laws, regulations or other requirements . . . . Any such ...


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