Reaffirming Textualism and Rejecting Speculative Trading Profits in Firm Gas Balancing Contracts: Commentary on American Midstream (Alabama Intrastate), LLC v. Rainbow Energy Marketing Corp.

I. Introduction

The Supreme Court of Texas’s decision in American Midstream (Alabama Intrastate), LLC v. Rainbow Energy Marketing Corporation, No. 23‑0384 (Tex. May 23, 2025), is a significant reaffirmation of strict textualism in contract interpretation, particularly in the context of sophisticated energy-industry agreements. It also provides pointed guidance on three recurring themes in Texas commercial litigation:

Courts may not “blue-pencil” or rewrite contractual language to add qualifiers parties did not adopt, even to make technical sense of an industry-specific arrangement.
Accurate descriptions of contractual constraints do not constitute anticipatory repudiation or actionable misrepresentation.
Lost profits premised on a new, untested trading strategy in a volatile commodity market are too speculative to be recovered.

The dispute arises out of a so‑called “firm gas transportation” agreement—the MAG‑0005—between American Midstream (Alabama Intrastate), LLC (“AMID”), owner of the Magnolia pipeline, and Rainbow Energy Marketing Corporation (“Rainbow”), a gas marketer and trader. Though styled as a transportation contract, the MAG‑0005’s economic purpose was to provide Rainbow with powerful balancing rights that could be monetized through arbitrage. The case centers on the meaning of Section 9.1 of that agreement and on whether AMID’s operational limitations, triggered by upstream Operational Flow Orders (OFOs) from Transco, justified its refusal to provide balancing on certain days.

The Court reverses a multimillion-dollar judgment for Rainbow, renders judgment for AMID on all tort and repudiation claims, and remands for a new trial on the competing breach-of-contract claims under a corrected interpretation of Section 9.1. In doing so, the Court sends a clear message to Texas trial and appellate courts: they may not rescue a party from the consequences of a risky but sophisticated bargain by retrofitting the contract language to match that party’s litigation narrative.

II. Factual and Procedural Background

A. The Contracts and Pipeline Setting

The case arises in the highly technical world of interstate and intrastate natural gas transportation. Two pipelines are key:

Magnolia pipeline – owned by AMID, intrastate.
Transco pipeline – the interstate downstream (or upstream) pipeline interconnected with Magnolia.

In 2014, AMID and Rainbow signed MAG‑0001, a firm transportation agreement allowing Rainbow to ship up to 25,000 MMBtu per day on Magnolia. Under MAG‑0001:

Rainbow would electronically “nominate” equal quantities of gas to enter and exit Magnolia.
AMID would make corresponding nominations into Transco, allowing Rainbow to offload/sell downstream.
Rainbow had to maintain a daily balanced flow—deliver into Magnolia as much as was taken out.
The service was firm: AMID had to honor Rainbow’s nominations unless the agreement itself provided an exception.

By contrast, interruptible transportation allows the pipeline to decline a shipper’s nomination for essentially any reason.

B. Imbalances, Operational Balancing Agreement, and OFOs

The operational context is critical. At the Magnolia–Transco interconnect, AMID and Transco operated under an Operational Balancing Agreement (OBA). Under the OBA:

AMID could maintain a daily single‑point imbalance at the interconnect.
Any gas AMID scheduled to be delivered into Transco was deemed received, even if not physically delivered that day.
Transco could require AMID to limit its single‑point imbalance if it exceeded 5% of confirmed nominations and created operational concerns “in either party’s sole discretion.”

Practically, AMID sometimes ran single‑point imbalances as large as 40,000 MMBtu. Rainbow saw this “balancing flexibility” as an opportunity and approached AMID to structure a deal that would let Rainbow economically exploit that flexibility.

This led to the MAG‑0005 in February 2015—formally another “Firm Gas Transportation Agreement” for up to 20,000 MMBtu/day through Magnolia, with a demand charge payable regardless of actual use. But business reality diverged from the form: Rainbow did not use MAG‑0005 to move physical gas point‑to‑point in the usual way; it used it as a balancing tool and trading platform.

C. How Rainbow Used MAG‑0005

The core of the MAG‑0005 was Rainbow’s contractual right under Section 9.1 (subject to its limits) to operate with imbalanced nominations, for example:

Nominate 0 MMBtu into Magnolia, and
Nominate 20,000 MMBtu out of Magnolia.

That pattern creates a point‑to‑point imbalance across Magnolia—Rainbow takes gas out without simultaneously putting gas in. Section 9.2 required Rainbow to true up and be in balance by month‑end. Economically, Rainbow saw this as an arbitrage opportunity:

Withdraw gas (via point‑to‑point imbalance) and sell when prices spike.
Later, when prices fall—before the end of the month—buy cheaper gas and resupply Magnolia.

Rainbow also hoped to use this “firm” balancing as a kind of insurance policy to support forward sales contracts: selling gas in advance at fixed prices while planning to obtain the actual physical supply later, either on the daily market or via MAG‑0005 balancing if prices spiked.

D. Section 9.1 of MAG‑0005

Section 9.1 is the pivotal clause. In substance (paraphrased and condensed), it provides:

Except as otherwise provided, Rainbow (the “Shipper”) is not obligated to balance receipts and deliveries daily unless AMID or Rainbow is requested or required by an upstream or downstream party (such as Transco) to balance receipts and deliveries attributable to Rainbow.
If AMID (the “Transporter”) is requested or required by an upstream or downstream party to balance receipts or deliveries of gas attributable to Rainbow, AMID may cease receiving or delivering gas for Rainbow until that request or requirement ceases.

The parties and the courts agreed that:

Sentence one governs point‑to‑point imbalances (imbalances between receipts and deliveries along the pipeline path).
Sentence two governs single‑point imbalances (imbalances at a specific interconnect point between scheduled and measured quantities).

It was undisputed that no OFO required AMID to limit single‑point imbalances under the OBA. Thus, the dispute at the Supreme Court focused solely on sentence one of Section 9.1.

E. Operational Flow Orders and the 2016–2017 Dispute

Transco occasionally issued OFOs indicating reduced flexibility to manage imbalances and recommending that shippers maintain concurrent balance of receipts and deliveries. In 2016 Transco became stricter in calling OFOs in the Magnolia region.

On several occasions in 2016, AMID advised Rainbow to limit its out‑of‑balance nominations; on at least one day it curtailed Rainbow’s nominations. Often, an OFO was in place on those days, though the OFO documents:

Left the “affected shippers” box blank,
Yet stated that if specific shippers were identified, only those would be subject to the OFO provisions.

The parties hotly disputes whether such OFOs applied to Rainbow at all. Complicating matters, AMID initially told Rainbow in January 2016 that an OFO limited its ability to provide the full 20,000 MMBtu of balancing services, but forty‑five minutes later walked that back, saying Transco had “not pulled in the OBA parties” yet.

F. The December 2016 Conference Call

By December 2016, Rainbow saw Transco’s frequent OFOs as eroding the value of its “firm” balancing bargain. In a conference call:

Rainbow’s trader, Tim Moreino, noted that historically OFOs were not called in the relevant region, but now were more frequent, and sought clarity on future flexibility under MAG‑0005.
AMID’s senior gas scheduler, Patricia De La Rosa, explained that:
- AMID wanted to keep its imbalance “under the radar with Transco.”
- Running a 20,000 MMBtu imbalance on consecutive days was not feasible; Transco would quickly demand it be eliminated.
- “We just want to make sure that you guys understand that [MAG‑0005] is interruptible, subject to the approval or being under [the] radar with Transco.”

The parties ended the call agreeing to “huddle up and try to figure it out.” Rainbow expressly stated it loved the MAG‑0005 flexibility but needed to understand changing conditions.

They continued operating under MAG‑0005 for more than a month. Only in February 2017 did Rainbow terminate the agreement and stop paying the demand charge.

G. Trial Court and Court of Appeals

Rainbow sued AMID for:

Breach of contract,
Repudiation,
Fraud,
Fraudulent inducement, and
Negligent misrepresentation.

AMID counterclaimed for breach of contract (for Rainbow’s termination and nonpayment).

After a bench trial, the trial court:

Construed Section 9.1 as if it excused AMID only when Transco requested balancing of:
- “Scheduled receipts and scheduled deliveries” on Transco (sentence one), or
- “Scheduled quantities with physical deliveries at the Magnolia‑Transco interconnect” (sentence two).
Found AMID in breach on seven specific days and on other unspecified occasions between May and August 2016, concluding no Transco request excused performance.
Found that De La Rosa’s conference‑call statements (calling the agreement “interruptible,” and limiting three consecutive days of full imbalance) constituted repudiation.
Found AMID had represented it could provide firm balancing subject only to the express limitations in MAG‑0005, and held that representation false and negligent, thereby supporting fraud, fraudulent inducement, and negligent misrepresentation claims.
Held AMID’s conduct destroyed Rainbow’s ability to safely enter forward sales, and awarded more than $6 million in lost profits under a model based on additional forward sales Rainbow claimed it would have made had service been “firm.”

A divided court of appeals affirmed. The majority endorsed the trial court’s distinction between:

Sentence one: point‑to‑point or “scheduling” imbalances, and
Sentence two: single‑point or “operational” imbalances.

As the majority saw it, AMID could curtail Rainbow only when an OFO or “critical alert” specifically implicated Rainbow’s scheduled point‑to‑point imbalance. It also upheld the repudiation and tort findings, and agreed that the lost‑profits model reasonably quantified the difference between “firm” service that would underwrite forward contracts and the “interruptible” service Rainbow actually received.

Justice Farris dissented, emphasizing that the trial court had impermissibly inserted the word “scheduled” into Section 9.1, effectively limiting AMID’s excuse to a scenario that never occurs, and that properly interpreted, Section 9.1 rendered AMID’s conduct non‑breaching on any OFO day. She would have left only a narrower factual dispute about which days had applicable OFOs and would have rejected the repudiation and tort theories entirely.

The Supreme Court granted review.

III. Summary of the Supreme Court’s Opinion

Justice Sullivan, writing for the Court (Justice Devine not participating), delivers a strongly textualist opinion that:

Rejects the trial court’s “blue‑penciled” construction of Section 9.1. The Court holds that:
- Courts may not insert qualifiers like “scheduled” or “physical” into the parties’ contract.
- Section 9.1 excuses AMID from providing balancing services on any day Transco requires either AMID or Rainbow to limit any imbalances—whether scheduled or physical—attributable to Rainbow.
Reverses and remands both parties’ breach‑of‑contract claims for a new trial under this corrected interpretation, so the trial court can determine:
- On what days, if any, AMID failed to provide balancing services, and
- On those days, whether Transco issued an OFO or other mandate that applied to Rainbow and thus excused AMID’s performance under Section 9.1.
Renders judgment for AMID on repudiation. De La Rosa’s description of the MAG‑0005 as “interruptible, subject to Transco,” given the contract’s express OFO‑based limitation, did not amount to a distinct and unequivocal refusal to perform; Rainbow also did not treat it as such.
Renders judgment for AMID on fraud, fraudulent inducement, and negligent misrepresentation.
- AMID’s representation that it could provide “firm” balancing, subject to Section 9.1, was true when the contract is properly interpreted.
- To the extent Rainbow claimed any extra‑contractual promise inconsistent with Section 9.1, reliance on such a promise would be unjustifiable as a matter of law.
Provides guidance on lost profits. If liability is found on remand, Rainbow cannot recover the previously awarded $6 million in lost profits because:
- They are based on a new, untried strategy—using daily markets and MAG‑0005 as an “insurance policy” for forward sales.
- That strategy depends on volatile and “chancy” market conditions and on the assumption that Transco would not exercise its contractual right to limit imbalances.
- Such speculative profits from a “new and unproven enterprise” are not recoverable under Texas law.

IV. Detailed Analysis

A. Contract Interpretation and the Ban on Judicial “Blue-Penciling”

1. The Court’s Textualist Framework

The Court grounds its interpretive approach in a line of modern Texas contract cases:

Barrow‑Shaver Resources Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019) – Parties’ intent is determined from the contract’s language. Courts “give effect to the parties’ intentions, as expressed in their agreement,” and give contractual language its “plain, grammatical meaning.” Courts should not alter the agreed risk allocation.
Tenneco Inc. v. Enterprise Products Co., 925 S.W.2d 640 (Tex. 1996) – Courts will not “rewrite agreements to insert provisions parties could have included or to imply restraints for which they have not bargained.” This is the centerpiece quote the Court reprises to criticize the lower courts.
Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) – Interpretation is controlled by the text agreed upon, not by one side’s post hoc assertions about what it “intended” but did not write.
Great American Insurance Co. v. Primo, 512 S.W.3d 890 (Tex. 2017) – Courts should avoid constructions that render portions of a contract meaningless.

Applying these principles, the Court emphasizes that it is not free to prefer an interpretation that “makes more sense” to one side or seems to better align with the parties’ supposed intent if the words chosen do not support that interpretation.

2. What Section 9.1 Actually Says—And Does Not Say

Section 9.1, in essence, provides two triggers excusing AMID’s obligation to provide balancing:

When either AMID or Rainbow is requested or required by an upstream/downstream party (Transco) to balance receipts and deliveries of gas attributable to Rainbow (sentence one — point‑to‑point imbalances).
When AMID is requested or required by an upstream/downstream party to balance receipts or deliveries of gas attributable to Rainbow (sentence two — single‑point imbalances).

There is no qualifying language distinguishing:

Scheduled vs. physical imbalances, or
Imbalances at one point vs. another (except through the and/or distinction and the parties’ understanding of point‑to‑point vs. single‑point).

Yet the trial court’s findings treated Section 9.1 as if it stated:

Sentence one: AMID is excused only if Transco requests balancing of Rainbow’s scheduled receipts and scheduled deliveries on Transco where MAG‑0005 would create scheduled imbalances.
Sentence two: AMID is excused only if Transco requests balancing between scheduled quantities and physical deliveries at the interconnect where MAG‑0005 creates such an imbalance.

Those interpolated words—“scheduled” and “physical”—never appear in Section 9.1. The Supreme Court aptly calls this “blue‑penciling” language into the agreement and holds it improper.

3. Why the Trial Court’s Reading Failed

The majority below tried to justify the insertion by insisting that sentence one “necessarily implicates a point‑to‑point imbalance or scheduling imbalance,” and that sentence two addresses physical operational imbalances. The Supreme Court dissects the error:

Point‑to‑point vs. single‑point is not the same as scheduled vs. physical. A point‑to‑point imbalance (between receipts and deliveries) can be either:
- a scheduled imbalance (mismatched nominations), or
- a physical imbalance (mismatched actual flows).
Nothing in the text draws a line between those two subtypes.
Contract does not distinguish between subtypes of imbalance. Section 9.1 simply refers to “receipts and deliveries” (or “receipts or deliveries”) without further qualifiers. Courts cannot add qualifiers under the guise of clarifying technical usage.
The trial court’s reading nullified sentence one in practice. It was undisputed that Rainbow never had an imbalance between its scheduled receipts and scheduled deliveries. By limiting the sentence‑one excuse to that non‑existent scenario, the trial court rendered sentence one effectively meaningless—an interpretive result Texas law counsels against.

By contrast, the Supreme Court’s reading preserves both the point‑to‑point vs. single‑point division (via “and” vs. “or”) and leaves in place all types of imbalances within those categories, whether scheduled or physical.

4. The Correct Rule Announced

The Court states its holding clearly:

“The plain language of Section 9.1 excused AMID from providing balancing services any time Transco required AMID or Rainbow to limit scheduled or physical imbalances attributable to Rainbow.”

The new or clarified principle is not revolutionary but is important in the energy‑contract context: When sophisticated parties do not differentiate between types of operational imbalances in their written contract, courts cannot retroactively graft such a distinction onto the text, even if one party later insists that is what it “really meant.”

The Court also ties this interpretation to risk allocation: by agreeing that Transco’s requests to limit imbalances (of any type) could excuse AMID’s performance, Rainbow assumed the risk that Transco would change its operational tolerance. Judicially narrowing that excuse to “scheduled” imbalances only would “disturb the risk allocation to which the parties agreed,” contrary to Barrow‑Shaver.

B. Application to Pipeline Balancing Arrangements

Although the opinion is doctrinally framed in general contract‑law terms, it has immediate industry‑specific implications.

1. Firm vs. Interruptible in a World of OFOs

“Firm” transportation generally means the pipeline must accept the shipper’s nominations except as provided in the contract (often for force majeure or system‑integrity reasons). “Interruptible” service gives the pipeline broad discretion to decline nominations, usually subordinate to firm shippers.

Here, MAG‑0005 was labeled firm, but Section 9.1 carved out a specific exception tied to third‑party OFOs/OBA requests. As Transco’s practices changed, AMID increasingly invoked this contractual carve‑out. Rainbow and the lower courts effectively argued that such frequent invocations transformed a firm contract into an interruptible one, thus destroying the benefit of the bargain.

The Supreme Court’s response is twofold:

Labels yield to operative text. The contract can be “firm” yet still include a narrow but meaningful exception for third‑party operational constraints. Describing such a contract as “firm subject to OFOs” is not inconsistent.
Operational realities were anticipated in the contract. Section 9.1 inherently recognizes that “firm” balancing was always conditional on Transco not exercising its rights to limit imbalances. Rainbow thus bet—unsuccessfully—that Transco would remain lenient.

2. Interplay with OBAs and OFOs

The decision also underscores how contractual risk is allocated when a party’s performance depends on a third‑party pipeline:

AMID’s OBA with Transco permitted daily single‑point imbalances, limited only if they exceeded 5% of nominations and caused operational concerns.
Rainbow knew AMID had been running very large imbalances under the OBA (up to 40,000 MMBtu) and sought to tap that flexibility.
Section 9.1 built that OBA‑based risk into the bilateral contract by tying AMID’s obligations to Transco’s directives not only to AMID but also directly to Rainbow as shipper.

The unresolved factual question, left for remand, is whether particular OFOs that left the “affected shippers” box blank nonetheless “requested or required” Rainbow to limit imbalances. The Court notably does not decide whether a blank “affected shippers” field:

Means “all shippers are affected,” or
Means “no shipper is specifically identified, so none are formally affected.”

That question remains one of fact (and potentially of industry usage) for the trial court to resolve, now under the correct legal standard.

C. Repudiation: Asserting Contractual Limits Is Not an Anticipatory Breach

1. Legal Standard

On repudiation (anticipatory breach), the Court looks back to classic Texas precedent:

Kilgore v. North West Texas Baptist Education Society, 37 S.W. 598 (Tex. 1896) – Repudiation requires “a distinct and unequivocal absolute refusal to perform” without just excuse, and the other party must treat and act on that refusal as unconditional.
Davis v. Canyon Creek Estates Homeowners Ass’n, 350 S.W.3d 301 (Tex. App.—San Antonio 2011, pet. denied) – Mere assertions that a party will be unable or will refuse to perform are insufficient; the refusal must be clear and absolute.

2. The December 2016 Call in Context

Rainbow’s repudiation theory rests almost entirely on De La Rosa’s statement that MAG‑0005 “is interruptible, subject to the approval or being under [the] radar with Transco.”

Viewed in isolation, calling a supposed “firm” contract “interruptible” might sound like a denial of the agreed performance. But the Court insists on reading this remark in context:

The call’s purpose was to discuss how Transco’s increased OFO usage would affect the parties’ “flexibility” under the existing MAG‑0005 framework.
Rainbow initiated the call, acknowledged conditions had changed, and asked how that would affect future operations.
De La Rosa:
- Explained that running a full 20,000 MMBtu imbalance for several consecutive days would quickly trigger Transco attention.
- Stated AMID wanted to stay “under the radar” to avoid OFOs.
- Did not say AMID would refuse all future balancing; rather, she warned about operational constraints and the need to adjust usage.
Rainbow did not treat the comment as a final refusal; instead, both parties agreed to “figure it out” and continued to perform for more than a month.

The Court concludes:

No distinct and unequivocal refusal. AMID was explaining its understanding of Section 9.1 and Transco’s operational behavior, not renouncing performance. At most, AMID said it could not provide 20,000 MMBtu of continuous imbalance under new OFO patterns, which Section 9.1 already contemplated.
No treatment as unconditional repudiation. Rainbow’s continued performance post‑call is incompatible with its later litigation position that the December call terminated the contract by repudiation.

The holding establishes that a contracting party does not repudiate merely by:

Communicating its good‑faith, textually supportable reading of its contractual obligations, and
Explaining operational caveats that are expressly embedded in the contract’s risk allocation.

D. Tort Claims Based on Contractual Promises

1. Fraud, Fraudulent Inducement, and Negligent Misrepresentation Elements

Rainbow’s tort theories hinge on alleged misrepresentations that AMID could provide “firm” balancing services up to 20,000 MMBtu per day, limited only by MAG‑0005’s express terms. Texas law requires, among other things:

For fraud and fraudulent inducement: a material false representation made with the requisite scienter, on which the plaintiff justifiably relied, causing injury. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011).
For negligent misrepresentation (Restatement (Second) of Torts § 552): a misrepresentation of existing fact made in the course of business, supplied for guidance, justifiably relied upon, and resulting in pecuniary loss.

2. No Falsity in AMID’s “Firm Service” Representation

Rainbow argued that because the OBA allowed Transco to require AMID to eliminate imbalances that exceeded 5% of nominations (roughly 6,000 MMBtu when volumes were high), AMID’s claim it could provide 20,000 MMBtu of firm balancing was false.

The Court rejects this for two reasons:

The OBA allowed larger imbalances absent operational concerns. The 5% threshold was not an absolute cap; it was a trigger for Transco to request or require corrective action if operational concerns arose. Before MAG‑0005, AMID had in fact operated with imbalances up to 40,000 MMBtu.
Section 9.1 directly tracks the OBA‑based risk. Properly interpreted, Section 9.1 incorporates Transco’s ability to require limitation of any imbalances “that create operational concerns.” AMID’s representation—that it could provide up to 20,000 MMBtu of firm balancing, subject to the express limitations in MAG‑0005—fits squarely within this arrangement.

Thus, there is no evidence AMID’s statement about its capabilities under the contract was false. At most, AMID’s ability to perform was conditional on factors all parties knew about and expressly codified in the contract.

3. Justifiable Reliance and Conflicts with Written Contracts

The Court further addresses negligent misrepresentation, noting that to the extent Rainbow alleged some separate oral assurance that AMID would always provide a firm 20,000 MMBtu/day regardless of OFOs, such a statement would conflict with Section 9.1’s explicit carve‑out. On that premise, reliance would not be justifiable.

This reasoning draws from JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648 (Tex. 2018), where the Court held that a party cannot justifiably rely on oral representations that directly contradict a written contract or that reasonable businesspeople in the relevant industry would recognize as inconsistent with the written deal.

Applied here:

Rainbow is a sophisticated energy trader.
MAG‑0005 is a detailed contract incorporating known industry mechanisms (OBAs, OFOs).
Any alleged “absolute” promise of firm service unqualified by Section 9.1 would openly contradict the written risk allocation.

The Court therefore forecloses the tort claims both because there was no falsity and, even if there had been an extra‑contractual statement, there would have been no justifiable reliance.

This reinforces a growing line of Texas decisions limiting the use of fraud and negligent misrepresentation claims to re‑trade or re‑allocate risks embedded in a written contract.

E. Lost-Profits Guidance: New Ventures and Chancy Trading Strategies

1. The Governing Standard

Lost profits are recoverable only when the plaintiff proves both the fact and amount of the loss with “reasonable certainty.” The Court reiterates key principles:

Horizon Health Corp. v. Acadia Healthcare Co., 520 S.W.3d 848 (Tex. 2017) – Proof must be based on objective facts, figures, or data, not conjecture.
Texas Instruments, Inc. v. Teletron Energy Management, Inc., 877 S.W.2d 276 (Tex. 1994) – Profits from an “untested venture,” speculative opportunities, or enterprises dependent on uncertain/changing market conditions are not recoverable.
Phillips v. Carlton Energy Group, LLC, 475 S.W.3d 265 (Tex. 2015) – Emphasizes the bar on lost profits for “new and unproven enterprises.” The Court here even reprises its “ifs and buts” Christmas quip from Phillips to underscore the point.

2. Rainbow’s Damages Theory

Rainbow’s expert modeled over $6 million in lost profits, claiming that:

Had AMID reliably provided firm balancing, Rainbow would have entered additional forward sales contracts at profitable terms.
Rainbow would have fulfilled those forward contracts by:
- Buying gas on the daily market when prices were favorable; and
- Using MAG‑0005 as an “insurance policy” during price spikes or supply constraints.

Critically, Rainbow:

Had never used MAG‑0005 (or any daily market strategy) to fulfill forward sales contracts before the alleged breach.
Historically used MAG‑0005 solely for daily in‑and‑out trading (spot arbitrage), not for hedging forward obligations.

3. Why the Lost Profits Were Too Speculative

The Court holds that such lost profits are nonrecoverable for multiple interrelated reasons:

New and unproven enterprise. Rainbow’s proposed strategy—linking forward contracts with reliance on daily markets plus MAG‑0005 balancing—was a business model it had never implemented in its 25‑year existence. This is precisely the kind of “new and unproven” venture Texas law treats as too speculative.
Dependence on volatile market conditions. Gas prices during the MAG‑0005 period fluctuated wildly (from a few dollars to over $100 per MMBtu). Profits premised on successfully timing such a market—where one hopes to buy low and sell high using a daily spot strategy—fall into Teletron’s category of “chancy business opportunities” driven by “uncertain or changing market conditions.”
Dependence on non‑occurrence of contractually recognized risks. Rainbow’s use of MAG‑0005 as an “insurance policy” assumed:
- Transco would either not issue OFOs or would not apply them in a way that curtailed Rainbow’s ability to run imbalances when most needed, even though Section 9.1 expressly allocated the opposite risk.
- AMID would always have the right (under the OBA) to maintain very large imbalances without restriction, despite the OBA’s 5%/operational‑concern constraints.
Texas law does not allow parties to claim lost profits based on a hypothetical world that ignores expressly acknowledged contractual risks.
“Gamble” characterization. Echoing Phillips and Teletron, the Court suggests Rainbow effectively “gambled” that Transco’s enforcement stance would remain lenient. The contract did not guarantee that; it merely allowed Rainbow to benefit from leniency when it existed.

Thus, if Rainbow proves a breach on remand, it will need a fundamentally different damages model, anchored in:

Established business practices, not hypothetical strategies; and
Objective, historically grounded data, not speculative future trading wins based on assumed market behavior.

V. Complex Concepts Simplified

For ease of reference, here are short explanations of several technical concepts central to the opinion:

Firm transportation – A pipeline service level under which the pipeline is generally obligated to accept the shipper’s nominated volumes except under limited contractual exceptions (e.g., force majeure, safety, regulatory limits). “Firm” conveys priority and reliability.
Interruptible transportation – A lower‑priority service where the pipeline may decline or curtail nominations for almost any reason. It is typically cheaper but less reliable.
Point‑to‑point imbalance – A situation where the amount of gas a shipper brings onto a pipeline (receipts) does not match what it removes (deliveries). This can be:
- Scheduled imbalance: The nominations themselves are mismatched (e.g., nominate 0 in, 20,000 out).
- Physical imbalance: Actual flows differ from the nominations or from counterpart flows (e.g., physically taking gas without putting corresponding gas in).
Single‑point imbalance – A mismatch at a specific physical point such as a pipeline interconnect (e.g., the OBA point). It compares the gas scheduled to move through that point with the gas actually measured there.
Operational Balancing Agreement (OBA) – A contract between interconnected pipelines that governs how imbalances at their interconnect are tracked, allocated, and corrected. It typically permits some level of imbalance before requiring corrective action.
Operational Flow Order (OFO) – A directive issued by a pipeline, often in response to operational stress or constraints, requiring shippers (and sometimes OBA parties) to maintain tighter balancing and potentially limiting or prohibiting certain imbalances.
Blue‑penciling – Judicial editing of a contract’s text by deleting, modifying, or adding words or phrases. In Texas, courts may sometimes strike illegal or unenforceable provisions in limited contexts (e.g., non‑competes) but generally may not add limitations or qualifiers that parties did not include.
Anticipatory repudiation – When, before the time of performance, a party clearly and unequivocally declares it will not perform its contractual duties without legal excuse, and the non‑breaching party elects to treat that declaration as a breach.
Lost profits from a new enterprise – Profits a business claims it would have made from a new product line, new market, or new strategy it has never successfully implemented before. Texas law views such profits as generally too speculative to recover.

VI. Likely Impact and Broader Significance

A. For Energy and Commodity-Contract Drafting

This decision sends clear signals to drafters of energy and commodity contracts:

Be explicit about operational limits. If parties intend to distinguish among different types of imbalances (e.g., scheduled vs. physical), they must do so expressly. Courts will not read such distinctions into a technically dense provision after the fact.
Integration of third‑party constraints must be candid. When upstream or downstream pipelines’ OFOs or OBAs will condition performance, that risk must be allocated in the text. Once allocated, courts will enforce that allocation, even if it later turns out to be economically disadvantageous for one side.
“Firm” labels are not talismans. Calling a contract “firm” does not override specific carve‑outs that tie performance to operational or regulatory conditions. Parties should not rely on labels over substance.

B. For Litigation Strategy in Commercial Cases

On the litigation side, the opinion has multiple consequences:

Contract vs. tort boundaries. Attempts to repackage a contract dispute as fraud, fraudulent inducement, or negligent misrepresentation will face heightened scrutiny where:
- The alleged misrepresentation is essentially a restatement of the contract’s performance obligations, and
- The written contract addresses the very risk the plaintiff claims to have been misled about.
Repudiation claims are disfavored when based on interpretive disputes. A party that articulates its reading of the contract and notes operational constraints does not necessarily repudiate. The complaining party must show a clear, unconditional refusal and must respond by treating the contract as terminated, not by continued performance.
Lost profits must track the actual business model. Damage models premised on a hypothetical strategy that the plaintiff never actually adopted or tested—especially in volatile commodity markets—will be vulnerable to attack as speculative.

C. For Texas Contract Doctrine More Generally

More broadly, American Midstream links and reinforces several strands in modern Texas contract jurisprudence:

It deepens textualism from cases like Barrow‑Shaver and Gilbert, particularly in the commercial/energy space, warning courts away from context‑driven rewrites.
It continues the contraction of tort remedies where sophisticated parties enter detailed written agreements allocating known risks (Italian Cowboy, JPMorgan).
It sharpens the line on speculative lost profits in light of Teletron, Phillips, and Horizon Health—especially pertinent to financial and commodity‑trading disputes involving complex hedging strategies.

VII. Conclusion

American Midstream v. Rainbow Energy is best understood as an emphatic re‑assertion of three core principles in Texas commercial law:

Courts must enforce the contract the parties wrote, not the contract one party wishes it had written. Section 9.1 said nothing about scheduled vs. physical imbalances; therefore, AMID’s excuse extends to all imbalances that Transco required AMID or Rainbow to limit.
Describing contractual limits and operational realities does not constitute repudiation or fraud. AMID’s statements about the MAG‑0005 being effectively “interruptible” in light of OFOs aligned with Section 9.1 and did not amount to a distinct and unequivocal refusal to perform, nor to a misrepresentation.
Lost profits based on untested, market‑dependent strategies are unrecoverable. Rainbow’s proposed forward‑trading model, backed by daily spot purchases and MAG‑0005 as an insurance policy, was a speculative venture from which Texas law will not award lost profits.

The Court’s decision reverses Rainbow’s sweeping trial victory, eliminates its tort and repudiation theories, and sends the breach‑of‑contract issues back for retrial under a properly textual reading of Section 9.1. For practitioners and contracting parties—particularly in the energy and commodities sectors—the opinion is a reminder that sophisticated bargains will be enforced as written, that risk allocations tied to third‑party operational discretion will hold, and that courts will be reluctant to underwrite ambitious but untried trading strategies with multimillion‑dollar damage awards.

Reaffirming Textualism and Rejecting Speculative Trading Profits in Firm Gas Balancing Contracts: Commentary on American Midstream v. Rainbow Energy