Company Files Reply Brief in Tax Court on Treatment of Interest Paid on Loan

                           TABLE OF CONTENTS

Inaccurate, Misleading or Incomplete Citations to the Record. Many of the RFs are based on statements from documents or trial testimony included in the record. As noted in the specific objections, Petitioner does not disagree that the proposed finding may accurately reflect a statement in such document(s) or from trial testimony. Petitioner, however, may object to an RF on grounds that the proposed finding is inaccurate misleading, or incomplete. In some instances, the RF takes a particular statement completely out of context. In other instances, the RF conveniently ignores other credible evidence which either contradicts or provides further explanation of the fact at issue.

Irrelevant to the Ultimate Determination. Many of the RFs are irrelevant to the ultimate determination of whether the Loan Notes should be treated as debt for U.S. income tax purposes. Respondent does not explain in his legal argument how these proposed factual findings support an ultimate determination of this issue.

Inconsistent With the Parties' Stipulations of Facts. Many of the RFs cite to the parties' agreed-upon stipulations of fact (as amended), but, in several instances, Respondent attempts to add additional language to a stipulation. This additional language is not supported by the record, and Respondent did not otherwise reserve an objection with respect to the stipulation at issue. Thus, these RFs should not be accepted by the Court as a finding of fact.

RFs Regarding Interest Payments. Petitioner and Respondent agree on the amount of interest accrued and paid with respect to the Loan Notes. See RF ¶¶ 416-461 and ¶¶ 301-343. Indeed, the proposed findings largely represent the parties' stipulations of fact. See Stips. ¶¶ 183-245. Nevertheless, Respondent proposes additional RFs that are inconsistent with the parties' stipulations and needlessly confuse the record. See RF ¶¶ 462-505.

Respondent's Expert's Reliance on Morgan Stanley's and Ernst & Young's Advice. Petitioner objects to Mr. Mudge's (Respondent's expert) use of Ernst & Young's and Morgan Stanley's advice as his own. As explained in the specific objections below, in several instances, Mr. Mudge's purported expert opinion merely restates Ernst & Young's and Morgan Stanley's advice. This is not permissible. While an expert may consider remote statements that are not admitted and may be inadmissible (e.g., hearsay statements), he cannot act as a conduit to present an opinion that is not his own opinion but that of someone else. Further, he should not testify that others agree with him as a means of vouching for or reinforcing any opinion of his own that he presents, at least in relation to central or contested matters. See, e.g., Dura Automotive Systems of Indiana, Inc. v. CTS Corporation, 285 F.3d 609, 613-614 (7th Cir. 2002) (expert may base opinion in part on what another expert believes, but problem arises if soundness of underlying expert judgment is questioned; Daubert must be applied with "due regard" for specialization of modern science, but science is not allowed "to be the mouthpiece of a scientist in a different specialty").² The critical inquiry is whether there is enough of the expert's own independent appraisal in what he proposes to say to make his testimony useful and reliable by the force or weight of his own authority. Compare Pelster v. Ray, 987 F.2d 514, 524 (8th Cir. 1993) (investigator cannot testify that odometers had been rolled back since he relied on hearsay) with United States v. Affleck, 776 F.2d 1451, 1456-1458 (10th Cir. 1985) (accountant did not simply summarize statements, but presented his own conclusions based on financial records). As explained infra, Mr. Mudge often adopts another's analysis as his own, which suggests a lack of "objective, independent validation of the expert's methodology" required by law. Daubert v. Merrell Dow Pharms., Inc., 43 F.3d 1311, 1316 (9th Cir. 1995) (Daubert II), cert. denied, 516 U.S. 869 (1995). Mr. Mudge also fails to fully explain how his conclusions are derived and does not provide any true authority for such conclusions. Accordingly, Mr. Mudge's analysis and opinion should be afforded little to no weight.

Hearsay Objections as to Morgan Stanley's and Ernst & Young's Advice. During trial, Petitioner raised objections on hearsay grounds with respect to Morgan Stanley's and Ernst & Young's advice. See Tr. 1011:4-9 and Tr. 1017:1-4. Respondent relies on Morgan Stanley's and Ernst & Young's advice for certain RFs. Unless noted, Petitioner does not disagree that the RFs accurately reflect the views of Morgan Stanley and Ernst & Young as expressed in the relevant advice. As explained in the specific objections, however, Respondent fails to corroborate these statements with any trial testimony or other evidence. Moreover, Respondent takes many of the statements contained in the advice out of context or ignores other portions of the advice, which provide a more complete explanation of the issue. In many instances, there is other, more reliable evidence which establishes the fact at issue.

RF's Headings. The RF contains headings, which Petitioner assumes are for reference or indexing purposes only. To the extent that such headings were intended as findings of fact, Petitioner objects to each heading as constituting arguments and/or legal conclusions rather than proposed statements of fact as required by Tax Court Rule 151.

19. Object. RF is not supported by the referenced citations, is inaccurate, and is contrary to the testimony of both Mr. Merriman and Mr. Brown. Messrs. Merriman and Brown both testified that ScottishPower and its advisors considered various options for structuring the Acquisition. Tr. 151:22-25; Tr. 156:2-7 (Merriman); Tr. 246:2-10 (Brown). ScottishPower preferred an all stock transaction because it believed its stock was fully valued and PacifiCorp's stock was undervalued. Tr. 217:13-18 (Brown); Ex. 2-J at PHI-DOCS097138.

20-23. Object. Petitioner does not disagree that Exhibit 146-J is a memorandum for ScottishPower dated November 16, 1998, regarding structural considerations for the Acquisition; however, the views reflected in this draft memorandum, which was prepared more than a year prior to Closing, are obviously preliminary and speculative, were not corroborated by any trial testimony or other evidence, and are, at best, tangential to the relevant issues in this case. Therefore, neither the fact that these views were expressed nor the underlying views should be adopted as facts established at trial.

24. Object. RF is out of context and, at best, tangential to the relevant issues in this case. Mr. Brown testified in general terms concerning his understanding of the economic causes and effects of share flow back. Mr. Brown did not testify about "flowback" in the context of ScottishPower's acquisition of PacifiCorp. Tr. 243:

25-30. No objection.

31. Object. Mr. Brown qualified his speculative statement as follows: "I should perhaps qualify my responses to this by saying I'm commenting from not a terribly strong basis of expertise in these matters." Tr. 247:2-5 (Brown).

32-33. Object. See Response to RFs 20-23.

34. Object. See Response to RFs 20-23. In addition, RF is incomplete. According to Ex. 146-J at PHI-DOCS135025, the ratio levels were determined "(using conservative case projections for Sapphire)."

35-36. Object. See Response to RFs 20-23.

37-38. No objection.

39. Object. RF is incomplete. A more complete description of the terms of E&Y's advice is set forth in Stips. ¶¶ 75 through 77.

40. Object. RF is irrelevant to a determination of whether the Loan Notes are properly characterized as debt for tax purposes.

41. Object. RF is incomplete and irrelevant. Mr. Merriman testified that the form of this transaction was implemented "only this one time." Tr. 73:20-23 (Merriman).

42. Object. RF is incomplete. Exhibit 17-J is a draft memorandum prepared more than a year prior to Closing and the views expressed therein are obviously preliminary. The Step Plan outlined the basic legal steps for the proposed merger transaction. Tr. 61:1-62:18 (Merriman).

43-49. No objection.

50. Object. RF is incomplete. A full description of E&Y's advice is set forth in Stip. ¶ 64, in the trial transcript at Tr. 69:23-70:13 and Tr. 72:7-19 (Merriman) and in the complete E&Y Board Paper (Ex. 19-J) (as compared to Respondent's reference to a summary of the Board Paper).

51-53. No objection.

54. Object. E&Y did not "assume" that the Loan Note would be issued for up to 75 percent of the ScottishPower shares issued to the PacifiCorp shareholders to establish an initial debt-to-equity ratio of no more than 3:1. Rather, E&Y advised ScottishPower, consistent with its understanding of debt/equity case law, that an appropriate capitalization for PacifiCorp would be 3:1 (debt to equity). An accurate summary of E&Y's tax advice is set forth in Stips. ¶¶ 75 through 77; see also Ex. 19-J at PHI-DOCS083951-52.

55. Object. E&Y did not "estimate" that the amount of the Loan Notes would be $5.6 billion. The E&Y Board Paper included a threshold analysis of the amount of principal, payment terms and interest rate for NAGP's contemplated loan note to ScottishPower. Tr. 81:25-82:15 (Merriman). The purpose of the analysis was not to estimate an amount of the Intercompany Debt. The amount of the debt would be based on the final share price for PacifiCorp, which would be determined at Closing. Tr. 82:20-83:16 (Merriman). For purposes of this threshold analysis, the Board Paper computed $5.6 billion Intercompany Debt. Tr. 85:20-24 (Merriman). E&Y based the $5.6 billion loan amount on the value of consideration that was expected to be conveyed to the PacifiCorp shareholders as of December 1998. Tr. 82:20-83:2; Tr. 86:2-7 (Merriman).

56-58. Object. RF is offered out of context. At the time the E&Y Board Paper was issued, ScottishPower and its advisors were contemplating $5.6 billion in debt. Ex. 19-J at PHI-DOCS083943.

59. No objection.

60. Object. RF is incomplete. E&Y's opinions in the Board Paper were based on E&Y's own due diligence coupled with factual representations ScottishPower made to E&Y, including ScottishPower's audited financial statements. Tr. 161:16-20; Tr. 166:18-20 (Merriman).

61. Object. RF is an unfair and inaccurate characterization of Mr. Merriman's testimony with respect to E&Y's work. Respondent's Counsel's (Mr. Thurston) questions referred, strangely, to E&Y's verification of future events. Tr. 164:14-165:2. E&Y examined the financial analyses and projections that were developed by PacifiCorp, ScottishPower and Morgan Stanley, and concluded there would be sufficient cash flow to support $5.6 billion of debt. Tr. 89:6-89:11 (Merriman); Ex. 18-J; Ex. 210-J; Tr. 87:15-20 (Merriman). Moreover, the Board Paper was not intended to be E&Y's final analysis. Tr. 112:10-11 (Merriman). E&Y anticipated that the financial ratios would be refined, that numbers would change in terms of purchase price and other metrics, and that the projections would be updated closer to closing, which they were. Tr. 112:1-7; 93:9-16 (Merriman).

62. Object. RF is incomplete. The footnote to the cited portion of the E&Y Board Paper provides that "Interest on the Loan Note may also be funded by other means out of cash generated by the Pegasus US Group (e.g., such as intra group loans)." Ex. 19-J at PHI-DOCS083952 (Footnote 17). Item 10 in the Facts and Assumptions section goes on to provide: "To fund the principal repayment, GP [NAGP] may secure new financing from a source other than Sapphire or one of its UK subsidiaries." Ex. 19-J at PHI-DOCS083952.

63. Object. See Response to RF 60.

64. Object. RF mischaracterizes the record. Mr. Merriman testified that in addition to a section 482 transfer pricing analysis, E&Y was "determining an appropriate interest rate for the debt instruments that were issued by NAGP as part of the transaction." Tr. 168:7-9 (Merriman).

65. No objection,

66. Object. RF is irrelevant. The E&Y Board Paper provided, "External CUPs would provide interest rate data for companies with credit rating different than that of Pegasus and hence would be expected to be charged different rates of interest on loans from third parties. In conclusion, therefore, the lack of CUP data prompted us to apply the capital markets approach." Ex. 19-J at PHI-DOCS084022.

67-70. No objection.

71. Object. RF misstates the record. Mr. Merriman testified that the "Funds from Operations" line in Table 1 represents the net free cash flows projections PacifiCorp/NAGP would have available to "repay debt." Tr. 103:9-25 (Merriman). Further, RF is offered out of context. At the time the E&Y Board Paper was issued, ScottishPower and its advisors were contemplating $5.6 billion in debt. Ex. 19-J at PHI-DOCS083943.

72. Object. RF is misleading. Ernst & Young projected that NAGP would have the following excess cash flows after payment of interest on the new debt obligations, which at the time was assumed to be $5.6 billion:

73. Object. See Response to RF 71.

74-75. No objection.

76. Object. RF misstates the record. Table 3 of the E&Y Board Paper provided a summary of average financial ratios. Ex. 19-J at PHI-DOCS084023.

77. Object. RF is incomplete and offered out of context. The E&Y Board Paper further qualifies its estimate, noting that "As a reasonableness check, we noted that Pegasus [PacifiCorp] has a debt rating of A (from Standard & Poor's) prior to the contemplated transaction [and] The lower rating is inherently reasonable, given the increase in the debt level." Ex. 19-J at PHI-DOCS084023. Further, E&Y's BB credit rating estimate was based on $5.6 billion in debt. Ex. 19-J at PHI-DOCS083943.

78. No objection.

79-80. Object. RF is offered out of context. At the time the E&Y Board Paper was issued, ScottishPower and its advisors were contemplating an arm's length "threshold" interest rate of 7.67% on $5.6 billion in debt. Ex. 19-J at PHI-DOCS083943; Tr. 87:15-20; 110:6-10 (Merriman). The purpose of the analysis in the Board Paper was not to set a final amount of the Intercompany Debt or interest rate, because the amount of the anticipated loan note would be based on the final share price (i.e., the acquisition price) for PacifiCorp, which would be determined at closing. Tr. 82:20-83:16 (Merriman).

81. No objection.

82-86. Object. RF is offered out of context and is irrelevant. At the time the E&Y Board Paper was issued, ScottishPower and its advisors were contemplating $5.6 billion in debt. Ex. 19-J at PHI-DOCS083943.

87. Object. See Response to RF 83. In addition, this computation was based on data attributed to PacifiCorp's projections, not ScottishPower's projections. According to E&Y, the relevant ratio for tax purposes was NAGP's stand-alone debt-to-equity ratio. Ex. 19-J at PHI-DOCS0840253; Ex. 148-J at Ex. PHI-DOCS013577; Tr. 175:18-21 (Merriman).

88-90. No objection.

91. Object. RF is incomplete. The Workstream Report was a summary of ScottishPower's due diligence review of PacifiCorp, which also was utilized to validate certain assumptions in the Valuation Model. Tr. 326:20-22; Tr. 327:4-7 (MacRitchie); Ex. 5-J at PHI-DOCS097339.

92-96. No objection.

97. Object. Respondent's repeated use to the term "double-dip" is unnecessary, intended to be prejudicial and inappropriate. Respondent would have this Court believe that the title of the structure used by E&Y somehow establishes that the parties did not intend to create debt. To the contrary, even Respondent argues that the terminology used by the parties (i.e., the form) is not determinative of whether there was debt for U.S. tax purposes. See Respondent's Opening Brief at p. 204.

98. Object. Mr. Brown's understanding of the acquisition structure from a tax perspective is irrelevant. Mr. Brown testified that he had little involvement with development of the transaction structure. Tr. 242:2-5 (Brown).

99. No objection.

100. Object. The purpose of the Valuation Model was to provide a view on the value of PacifiCorp, such that ScottishPower management and the Board could reach a decision as to whether or not the company was a suitable acquisition target. Tr. 266:22-267:7 (Wilson).

101-104. No objection.

105-106. Object. Petitioner agrees that the model included a present value of the tax benefits arising from the Intercompany Debt in the amount of $283.5 million; however, this analysis was based on several assumptions including $5.6 billion of Intercompany Debt, rather than the actual amount at issue. Ex. 7-J at "MergedTotal" Tab; Ex. 8-J at PHI-DOCS154078. In addition, the accuracy of this analysis was not corroborated by any trial testimony or other evidence. Finally, the estimated present value of the tax benefits is tangential to the relevant issues in this case.

107-108. No objection.

109. Object. RF is incomplete. The Project Jet Paper further stated that PacifiCorp's "facilities are currently undrawn but support issues of commercial paper and pollution control revenue bonds . . . [and, specifically] the long term First Mortgage Debentures ($2.5bn) and other bonds and subordinated debentures should be unaffected." Ex. 2-J at PHI-DOCS097169.

110. No objection.

111-112. No objection, although this statement is only relevant to establish ScottishPower's expectation at the time the Board Paper was prepared.

113. No objection.

114. RF is incomplete. The likelihood of the occurrence of the projected variations was not analyzed and the variations were only "designed to educate our [ScottishPower] Board on the question of what will happen if we use different assumptions from . . . the ones that were in the base case, both negative and positive." Tr. 258:23-259:2 (Brown).

115. Object. RF mischaracterizes the record. The sensitivity scenarios in the Project Jet Board Paper did not analyze the likelihood that the projected variations would occur, but rather set forth the financial effects if the variations did in fact occur. Mr. Brown testified that the sensitivity scenarios were prepared to inform the Board of the financial range of possible outcomes. Tr. 233:1-12 (Brown).

116. Object. RF is misleading. ScottishPower management calculated that a 0.3% variation in electricity demand growth could result in either a positive or a negative change in value of $469 million. Tr. 258:15-19 (Brown); Ex. 2-J at PHI-DOCS097203.

117. Object. RF is misleading. ScottishPower management calculated that a 20% variation in U.S. non-fuel cost savings could result in either a positive or negative change in value of $418 million. Tr. 260:12-19 (Brown); Ex. 2-J at PHI-DOCS097203.

118-119. Object. RF mischaracterizes the record. The major downside scenario analysis did not analyze the likelihood that the projected variations would occur, but rather set forth the financial effects if the variations did in fact occur. Mr. Brown testified that the major downside scenario was prepared to inform the Board "how badly this could go . . . although it would not be life-threatening for the company." Tr. 233:1-12; Tr. 234:6-10 (Brown).

120-123. No objection.

124. Object. Exhibit 2-J at PHI-DOCS097152 refers to PacifiCorp's "core utility" as accounting for 83% of the total business value, not PacifiCorp's domestic electric operations. Ex. 6-J and Ex. 9-J do not support the RF. Mr. Wilson's testimony does not quantify the materiality of PacifiCorp's domestic electric operations. Tr. 275:23-25 (Wilson).

125. No objection.

126. Object. RF is incomplete. Mr. Wilson testified that different weighted average costs of capital were also applied to each business area in computing a consolidated business valuation for PacifiCorp. Tr. 275:10-22 (Wilson).

127. No objection.

128. Object. Petitioner does not dispute the forecast period, but would clarify that ScottishPower developed unique assumptions for each of the years in the forecasts. Tr. 275:23-277:7 (Wilson). The 10-year forecast period was typically the period ScottishPower used for its own forecasts. Tr. 274:24-275:9 (Wilson).

129. Object. ScottishPower continued to update its Projections as additional information became available, Tr. 270:21-271:20 (Wilson), and employed similar models in previous acquisitions, making the PacifiCorp valuation model a "fairly finely oiled machine." Tr. 223:1-3 (Brown).

130. Object. The proposed finding is incomplete. Julian Brown was ultimately responsible for determining what assumptions were incorporated into the Valuation Model, as well as ensuring that the model was reasonable and structurally correct and sound, although there were other checks and balances. Tr. 222:3-10 (Brown); Stip. ¶ 42. Jamie Wilson was responsible for developing ScottishPower's Valuation Model. Tr. 267:21-268:3 (Wilson); Stip. ¶ 43. This process involved marshalling the different assumptions that ScottishPower required to enable them to properly develop a view on the acquisition target. Id.

131. No objection.

132. Object. The shade that cells were highlighted in the Excel model is entirely irrelevant.

133. Object. RF is incomplete. Mr. Wilson worked with a number of individuals in connection with the development of the Valuation Model, including: his colleagues on the corporate strategy team; a separate team of business experts at ScottishPower, whose job it was to analyze their areas of expertise and determine appropriate assumptions; as well as a number of different professional advisors engaged by ScottishPower including, Morgan Stanley, E&Y and PwC. Tr. 268:4-24 (Wilson); Tr. 223:17-224:19 (Brown); Stip. ¶ 46.

134. Object. RF is incomplete. In addition to ScottishPower personnel, the numerous advisors also assisted in developing the Projections and verifying the assumptions, all within their respective areas of expertise. Tr. 268:15-24 (Wilson); Tr. 223:20-224:19 (Brown).

135. No objection.

136. Object. RF is incomplete. In addition to providing advice on U.S. regulatory issues, PwC also advised ScottishPower on issues of accounting treatment, finance, tax, pensions, employees, regulation, power marketing, mining and borrowing power limits. Stip. ¶ 29.

137. Object. RF is incomplete. E&Y provided both U.K. and U.S. tax advice with respect to the Acquisition. Stip. ¶ 29.

138. Object. RF is misleading. E&Y personnel continuously worked with ScottishPower and the other advisors to develop and test the Projections, culminating in the E&Y Board Paper and underlying analysis. Ex 19-J; Ex 8-J (Board Appendices) at PHI-DOCS154076; see also Petitioner's PFs 143-146.

139. Object. RF is incomplete. While PacifiCorp dividends were considered a primary source for interest payments on the Loan Notes, ScottishPower and NAGP also anticipated funding the interest payment with the proceeds from the sale of certain non-core assets, including PacifiCorp's Australian operations. Stip. ¶ 186; Tr. 756:16-19 (Martin); Tr. 922:16-21 (Self).

140-141. Object. Mr. Wilson testified that the $321 million dividend assumption was "not relevant for purposes of the model." Tr. 279:11-18 (Wilson). The dividend amount was a "plug to maintain some consistency in some of the balance sheets." Tr. 278:15-23 (Wilson). ScottishPower assumed $321 million in dividends because that was the approximate amount of annual dividends that PacifiCorp had traditionally paid prior to the proposed merger (1994-1998). The amount was calculated by multiplying the number of outstanding shares of PacifiCorp stock (297,343,000) times the historic annual dividend pay-out ($1.08). Stips. ¶¶ 14 and 186.

142. No objection.

143. Object. PacifiCorp's common shares were cancelled as a result of the Acquisition. Stip. ¶ 127.

144. Object. See Response to RF 140 and 141.

145-146. No objection.

147. Object. Mr. Wilson testified that in general terms, to be efficient from a corporate finance point of view and a U.S. regulatory point of view, a 50% debt and 50% equity capital structure would be typical.

148-150. No objection.

151-153. Object. Petitioner agrees that the models computed a present value of the tax benefits arising from the Intercompany Debt; however, this analysis was based on several assumptions including $5.6 billion of intercompany debt, rather than the actual amount at issue. Ex. 7-J at "MergedTotal" Tab; Ex. 8-J at PHI-DOCS154078. In addition, the estimated present value of the tax benefits is tangential to the relevant issues in this case.

154. Object. RF mischaracterizes the record. Mr. Wilson testified that the Projections included inputs from the E&Y Board Paper. Tr. 305:8-18 (Wilson).

155. Object. Following the announcement of the Merger in December 1998, Mr. Wilson received regular requests for updates from ScottishPower management and continued to maintain and update the Valuation Model to ensure that ScottishPower's view of PacifiCorp as an acquisition target had not changed. Tr. 287:8-288:24 (Wilson). Earlier assumptions were reviewed and reformulated as ScottishPower's due diligence teams continued their work in Portland and the developments occurred in the various state regulatory processes. Id.

156. No objection.

157. Object. Petitioner agrees that the 1998 and 1999 models (Ex. 6-J and Ex. 7-J) are fundamentally the same (and originate from the same model); however, the valuation models were continuously reviewed, reformulated, validated and updated. Stip. ¶ 41; Tr. 288:4-19 (Wilson).

158. Object. The 7.5% dividend increase assumption went into effect in 2000. Tr. 290:21-22 (Wilson).

159-161. Object. Dividend payments and capital structure assumptions were made solely for modeling purposes. Mr. Wilson testified that the Projections were prepared to value PacifiCorp and that because dividends and debt repayment were "arbitrary" "plug" numbers, the resulting capitalization structure was "just a calculation, and doesn't bear any [relevance]." Tr. 278:15-23; Tr. 281:22-24; Tr. 297:9-12 (Wilson).

162. Object. RF is inaccurate. In the 1998 Projections, ScottishPower defined the "U.S. Book Gearing" fields as debt divided by debt plus equity including preferred stock. Ex. 6-J at SUPP001000. In the 1999 Projections, ScottishPower computed the "U.S. Book Gearing" fields as net debt including preferred stock divided by debt including preferred stock plus equity. Ex. 9-J at SUPP001108.

163-167. Object. See Response to RF 159.

168. Object. See Response to RF 159. Further, Mr. Wilson was not asked any questions with respect to Exhibit 209-J.

169. Object. See Response to RF 159. Further, Mr. Wilson was not asked any questions with respect to Exhibit 209-J. In addition, during the due diligence period, PacifiCorp had a 12.10% allowed rate of return in Utah, which was only one of seven states in which PacifiCorp operated. Ex. 2-J at PHI-DOCS097177.

170. Object. Mr. Wilson was not asked any questions with respect to Exhibit 209-J. Further, RF does not accurately reflect the record. Exhibit 209-J provides that a 12.5% target rate of return could be achieved if one of two events were to occur. While the first event seemed "unlikely," Exhibit 209-J goes on to provide that the second option "would appear to be a reasonable assumption." PHI-DOCS098384.

171. No objection.

172. Object. Row 100 of the "SAloneTotal" tab of the 1999 Projections reported net debt increases and debt repayments. Ex. 9-J at SUPP001108.

173. No objection.

174-175. Object. RF is irrelevant. Dividend payments and capital structure assumptions were made solely for modeling purposes. Mr. Wilson testified that the Projections were prepared to value PacifiCorp and that because dividends and debt repayment were "arbitrary" "plug" numbers, the resulting capitalization structure was "just a calculation, and doesn't bear any [relevance]." Tr. 278:15-23; Tr. 281:22-24; Tr. 297:9-12 (Wilson).

176. Object. RF is irrelevant. See Response to RF 174. Mr. Wilson testified that the Projections were reviewed by regulatory advisors and "the process of managing the development of the model would have required them to inform me if there were changes that were required." Tr. 301:5-15 (Wilson). In any event, there were no meaningful regulatory restrictions on PacifiCorp's ability to pay out dividends to shareholders. Tr. 555:5-556:12 (Vander Weide) (regarding dividend limitations); Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon").

177. Object. See Response to RF 176. There is no evidence in the record that "payouts to PacifiCorp shareholders" would violate any credit covenants.

178. No objection, although this proposed finding is illogical.

179-180. No objection.

181. No objection, although this proposed finding is illogical.

182. No objection.

183. No objection, although this proposed finding is illogical.

184. No objection with respect to the first sentence. Object to the second sentence. RF is misleading. Mr. Wilson testified that the Projections were prepared to value PacifiCorp, and in turn, be used by the ScottishPower Board to determine whether acquisition of PacifiCorp was prudent. Tr. 235:15-19 (Brown); Tr. 277:24-278:1 (Wilson).

185. No objection.

186. Object. Nothing in the record supports this RF. Additionally, it is irrelevant.

187. No objection.

188-189. Object. The proposed finding is incomplete. Prior to the December 7, 1998 merger announcement, ScottishPower assembled a large team of employees to work on the due diligence. Tr. 219:19-25 (Brown). In November 1998, ScottishPower had 20 employees working in New York alongside numerous (20+) advisors. Tr. 219:19-220:4 (Brown). ScottishPower's due diligence team worked for about three weeks in New York reviewing data provided by PacifiCorp. Tr. 328:17-20; Tr. 356:3-12 (MacRitchie). Also in connection with its due diligence efforts, teams of ScottishPower employees and advisors interviewed senior PacifiCorp management and inspected certain PacifiCorp assets in the United States and Australia. Stip. ¶ 33; Tr. 328:20-329:6; Tr. 356:13-22 (MacRitchie). After the Acquisition was announced in December 1998, MacRitchie assembled a team of U.S. advisors and U.K. employees of ScottishPower in Portland to continue to work with PacifiCorp on further diligence and validation of ScottishPower's assumptions in terms of the business. Tr. 336:3-19 (MacRitchie).

190-202. No objection.

203. Object. RF is incomplete. PwC went on to qualify its vulnerabilities analysis: "These do not reflect our views of the likely outcome of the various matters concerned, but are included in order to enable the group's borrowing headroom and related covenants to be subject to appropriate testing." Ex. 147-J at PHI-DOCS083709.

204. No objection.

205. Object. RF is incomplete. Alternatively, PwC advised that ScottishPower could reduce debt by "around £160 million." Ex. 147-J at PHI-DOCS083711.

206-212. No objection.

213-214. Object. RF is incomplete and requires further context. This limitation had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Tr. 555:5-556:3 (Vander Weide). The term "common equity capital" in the above-referenced phrase "refers to the common equity capital in domestic utility operations; that is the Oregon Commission would regulate PacifiCorp's Oregon operations based on the regulated capital structure of PacifiCorp's domestic utility operations." Tr. 552:6-17 (Vander Wiede). Respondent's expert testified during cross-examination that these restrictions only applied to regulated assets. Tr. 1062:20-24 (Mudge). Petitioner's regulatory expert clarified that the restrictions only applied to regulated assets in Oregon. Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon"). Moreover, these percentages are not computed using GAAP accounting rules; they are instead based on regulatory accounting standards that are set forth in the Uniform System of Accounts, put out by the Federal Energy Regulatory Commission. As a result, compliance with this requirement cannot be determined by examining PacifiCorp's SEC filings, as Respondent's expert attempts to do. Tr. 553:21-11 (Vander Weide); Tr. 1064:1-14 (Mudge).

215. No objection.

216. No objection, although Respondent's witness Douglas Larson testified that UPUC administered its summary cash flow filing requirement in a "perfunctory manner," never "even asking any questions regarding any of those filings" in his 28-year career with PacifiCorp. Tr. 975:16-976:14 (Larson). Petitioner's regulatory expert similarly testified "since the company has every desire to provide service or certainly had and does, that didn't appear to me to be a meaningful restriction." Tr. 556:6-12 (Vander Weide).

217. Object. The UPSC Report and Order relates exclusively to PacifiCorp's regulated assets and liabilities allocable to PacifiCorp's regulated operations in Utah. Tr. 548:16-549:1; Tr. 554:14-25 (Vander Weide). Further, Dr. Vander Weide opined that he did not view any of the UPSC requirements to be meaningful for purposes of limiting PacifiCorp's ability to pay dividends to NAGP. Tr. 556:6-12 (Vander Weide); Ex. 249-P (Vander Weide Report) at p. 23.

218-222. No objection.

223. Object. Ms. Self testified that it was her "understanding" that when PacifiCorp suspended its dividend payments in 2001 it "continued to declare dividends because it desired to maintain a consistent dividend declaration pattern, so that if [PacifiCorp] subsequently wanted to have a new rate case, the regulators wouldn't impose a lower dividend requirement." Tr. 905:20-906:4 (Self).

224. Object. RF mischaracterizes Ms. Self's testimony. Ms. Self did not testify that the purpose of the discussions would be "to avoid" adverse regulatory implications. Rather, she testified that if PacifiCorp wanted to vary the amount of the dividend, "then we would need to have detailed discussions with our regulatory colleagues to make sure there weren't any adverse regulatory implications of doing anything else." Tr. 921:20-24 (Self) (emphasis added). Ms. Self also qualified her testimony with respect to regulatory issues by stating that she "had some understanding at that time, but it wasn't clear to me." Tr. 921:16-17. Ms. Self testified further that "there were certain non-core activities that it was anticipated would be sold and so those funds, because they were not regulated activities, the proceeds could also be used to flow up to NAGP to fund the interest." Tr. 922:16-21 (Self). In fact, the only regulatory limitation (which applied only to regulated assets in Oregon), had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Tr. 555:5-556:12 (Vander Weide) (regarding dividend limitations); Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon").

225-227. No objection.

228-229. Object. Mr. Larson speculated on a hypothetical "$2 billion" dividend for illustrative purposes, qualifying his statement with, "but that wasn't the case, that didn't happen, and so there wasn't a problem." Tr. 979:1-5 (Larson).

230-234. No objection.

235-236. No objection, although Petitioner notes that the PUHCA Order exempted all existing financing arrangements from the Order's coverage. Ex. 76-J at SUPP000945.

237. Object. Petitioner's regulatory expert, Professor James Vander Weide, testified that ScottishPower, not PacifiCorp, was subject to PUHCA. Tr. 572:10-24 (Vander Weide).

238-239. No objection.

240-241. Object. Neither the author of this letter (Randall Wilson of E&Y) nor the advisors referenced therein were called to testify at trial. Therefore this statement in the letter should be afforded little, if any, weight and the assertions therein should not be adopted as fact. Moreover, the views expressed in the RFs were provided at a nascent stage in drafting the Loan Notes, with several modifications to come from the advisors' collaborative review. Ultimately, the advisors were happy with the terms of the Loan Notes as executed. Tr. 89:6-11; Tr. 137:15-17; Tr. 90:12-15; Tr. 92:4-6 (Merriman).

242. No objection.

243-244. Object. RF is irrelevant. This analysis was based on several assumptions, including $5.6 billion of intercompany debt rather than the actual amount at issue. Ex. 210-J at PHI-DOCS098612.

245. No objection.

246. Object. RF is incomplete. The E&Y Board Paper provided that "Interest on the Loan Note may also be funded by other means out of cash generated by the Pegasus US Group (e.g., such as intra group loans)" and "to fund the principal repayment, GP [NAGP] may secure new financing from a source other than Sapphire or one of its UK subsidiaries." Ex. 19-J at PHI-DOCS083952.

247. Object. RF misstates the record. The relevant portion of Exhibit 148-J refers more broadly to "certain 'mezzanine' items on the balance sheet," not just PacifiCorp preferred stock. Ex. 148-J at PHI-DOCS013577.

248-256. No objection.

257. No objection, although Petitioner notes that the Loan Notes were subsequently revised to a point where E&Y was "happy" with the terms of the Loan Notes. Tr. 137:14-24 (Merriman).

258-259. Object. Mr. Merriman testified that the passage referred to "all the things you might want to have in a loan note . . . some may be necessary [and] some may not be necessary . . . [and] some loan notes have these; some don't." Tr. 184:25-185:6 (Merriman) (emphasis added).

260. Object. See Response to RF 258.

261. No objection.

262. Object. Mr. Evans commented that the instrument Freshfields drafted was much more closely analogous with a loan note issued in connection with an acquisition than a revolving credit facility. Ex. 154-J at PHI-DOCS088147.

263. Object. Mr. Merriman testified that he would have to review the Loan Notes with respect to whether the Notes included a provision for interest cover specifically. Tr. 184:11-15 (Merriman). Mr. Merriman did not provide testimony with respect to any other "standard warranties and representations."

264. Object. RF is inaccurate. E&Y commented on the Loan Notes in a facsimile dated November 25, 1999, in which E&Y advised Freshfields that it had "reviewed the amendments made and are comfortable that they are consistent with those discussed." Ex. 156-J at PHI-DOCS089492; Tr. 137:11-24 (Merriman).

265-270. Object. RF is irrelevant. Moreover, the views expressed in the RF were provided at a nascent stage in drafting the Loan Notes, with several modifications to come from the advisors' collaborative review. Ultimately, the advisors were happy with the terms of the Loan Notes as executed. Tr. 89:6-11; Tr. 137:15-17; Tr. 90:12-15; Tr. 92:4-6 (Merriman).

271-277. No objection.

278. Object. RF is vague.

279. Object. PacifiCorp's revolving credit facility is completely unrelated to the relevant issues in this case.

280-282. Object. See Response to RF 279.

283. Object. PacifiCorp's 1989 mortgages are completely unrelated to the relevant issues in this case.

284. Object. RF is irrelevant and misleading. Bruce Williams, Vice President and Treasurer of PacifiCorp, testified that PacifiCorp's loan agreements would have had no impact on any debt incurred at the NAGP level. Ex. 264-R, Tr. 22:7-12 (Williams). Additionally, RF is misleading because it fails to differentiate between PacifiCorp's regulated and nonregulated assets. Ex. 264-R at Tr. 14:14-15:3 (Williams).

285. Object. See Responses to RF 283 and RF 284.

286-290. No objection.

291. Object. Mr. Williams also testified that PacifiCorp's credit agreements would have had no impact on any debt incurred at the NAGP level. "The debt-to-capitalization test . . . look[s] solely at PacifiCorp's debt [and] it would not be impacted by any debt upstream . . . at NAGP or ScottishPower." Ex. 264-R at Tr. 22:7-13 (Williams).

292. Object. This general statement, which is overly simplistic, is ambiguous and inappropriate for a factual finding.

293. Object. Mr. Williams testified that PacifiCorp managed its credit rating by attempting to meet various financial ratio and credit measure targets that credit rating agencies published. Ex. 264-R at Tr. 11:16-25 (Williams).

294-301. No objection.

302. Object. This general statement, which is overly simplistic, is ambiguous and inappropriate for a factual finding.

303-304. Object. See Response to RF 302. Bruce Williams testified that dividend payments out of current earnings do not reduce equity. Rather, only distributions out of retained earnings or capital will reduce equity. Tr. 21:10-21; Tr. 23:7-12 (Williams).

305-306. Object. See Response to RF 302.

307-312. No objection.

313. Object. RF mischaracterizes the record. The PacifiCorp 10-K for the fiscal year ended March 31, 2001 only provides that debt was paid down with proceeds from "asset sales." Ex. 84-J at IRS-NAGP0027104.

314-327. No objection.

328. Object. While listed under the "Pre-Closing" section, the Closing Memorandum provides that the form of the Partnership Loan Note was finalized on November 29, 1999, the date of the Closing. Ex. 30-J at PHI-DOCS104303.

329-330. No objection, although Mr. Merriman testified it was his recollection that the Pledge Agreement was executed at the Closing on November 29, 1999. Tr. 140:7-8; Tr. 142:1-5 (Merriman); Stip. ¶ 166.

331-333. No objection.

334. Object. Warburg Dillon Read transmitted two letters via facsimile dated November 25, 1999 to ScottishPower attaching the details of the investment bank's interest rate calculations on the Fixed and Floating Rate Notes. Stip. ¶ 162; Ex. 58-J.

335. No objection.

336-337. Object. RF is incorrect and incomplete. The referenced attachment to Exhibit 58-J at PHIDOCS-011262 bears a different date (November 30, 1999) than the facsimile letter (November 25, 1999). However, Exhibit 218-J, dated November 25, 1999, is a spreadsheet bearing the same date as the letter, is more detailed than the referenced attachment, and was described by Mr. Merriman as the "summary calculation of [Warburg's] analysis of the interest rate and credit rating for PacifiCorp's debt." Ex. 58-J; Tr. 115:5-14 (Merriman). Mr. Merriman testified that the interest rate analysis in Exhibit 218-J corresponds to the calculations reflected PHIDOCS-011262 (dated November 30, 1999). Ex. 58-J; Ex. 218-J; Tr. 116:11-24 (Merriman). Mr. Merriman further testified that Warburg, an independent investment bank, did their analysis to determine a market rate of interest for the Loan Notes, including selecting a credit rating from market indices provided by Bloomberg and comparing them to PacifiCorp's. Tr. 115:13-23 (Merriman); Tr. 117:17-25 (Merriman).

338. Object. RF is incomplete. In addition, in March 2002 PGHC paid a dividend to PHI of $300 million, the source of which was the proceeds from the sale of Powercor. Stip. ¶ 220. On March 19, 2002, PHI used the funds as part of a return of capital distribution to NAGP. Stip. ¶ 221. On the same date, NAGP used the PHI distribution proceeds to retire its indebtedness to RBS. Stip. ¶ 222.

339. Object. RF is incorrect. The Fixed Rate Loan Instrument expressly provides that the Loan Notes are being issued to ScottishPower. Ex. 45-J at PHI-DOCS103346. The Notes were issued by NAGP. Id.

340-346. No objection.

347. Object. RF is incorrect. The Floating Rate Loan Instrument expressly provides that the Loan Notes are being issued to ScottishPower. Ex. 55-J at PHI-DOCS103362. The Notes were issued by NAGP. Id.

348-361. No objection.

362. Object to second sentence. RF is incorrect. There is no evidence that the Pledge Agreement was not executed at Closing. The face of the signed Pledge Agreement provides that it was "made this 29th day of November, 1999." Ex. 59-J at PHI-DOCS136937. Exhibit 59-J also includes a facsimile header and footer dated December 3, 1999 (five days after the Closing). Further, Mr. Merriman testified it was his recollection that the Pledge Agreement was executed at the Closing on November 29, 1999. Tr. 140:7-8; Tr. 142:1-5 (Merriman); Stip. ¶ 166. In addition, on November 23, 1999, Freshfields noted that "E&Y's tax opinion contemplates a pledge of the shares of PacifiCorp in favour of ScottishPower" and requested that John O'Connor (Milbank) arrange for a simple pledge agreement to be drafted as soon as possible. Ex. 155-J at PHI-DOCS135544; Ex. 158-J at PHI-DOCS089506; Tr. 137:3-9 (Merriman). Finally, the corporate minutes for both NA1 and NA2 dated November 26, 1999 expressly authorized the execution at Closing of "such other documents (including, without limitation, a proposed pledge agreement to be entered into between NA General Partnership and Scottish Power plc relating to a pledge in favour of Scottish Power plc of NA General Partnership's interest in PacifiCorp.") Ex. 194-J at PHI-DOCS103460 and PHI-DOCS103468.

363-378. Object. Generalized references to unrelated transactions, proposed financing activities of other companies, and the capital structures of other companies without any indication as to their relevancy to the transaction at issue in this case are irrelevant and inappropriate for findings of fact.

379. No objection, although the Southern Water transaction is only relevant because when ScottishPower acquired Southern Water, it prepared cost savings projections that were largely, if not entirely, achieved. Tr. 210:13-19 (Brown). In addition, Mr. Brown previously performed the analytical work in connection with ScottishPower's acquisition of Southern Water and also led the transition team that integrated ScottishPower and Southern Water. Tr. 207:25-208:6 (Brown).

380-385. Object. See Responses to RFs 363-370.

386. No objection.

387. No objection, although ScottishPower initially valued Powercor at $1.9 billion, excluding approximately $860 million of debt. Stip. ¶ 66. Taking into account the Powercor debt, the net equity value of Powercor would have been $1.04 billion ($1.9 billion - $860 million). Id. In November of 1999, ScottishPower valued Powercor at approximately $1.6 billion before taking into account Powercor debt. Id. Taking into account the approximately $860 million of Powercor debt, the net equity value of Powercor would have been approximately $858 million. Id.

388. Object. RF is incomplete. In addition, in March 2002 PGHC paid a dividend to PHI of $300 million, the source of which was the proceeds from the sale of Powercor. Stip. ¶ 220. On March 19, 2002, PHI used the funds as part of a return of capital distribution to NAGP. Stip. ¶ 221. On the same date, NAGP used the PHI distribution proceeds to retire its indebtedness to RBS. Stip. ¶ 222.

389. Object. Mr. Wright testified that prior to the Acquisition, ScottishPower, NA1 and NA2 planned to manage foreign exchange exposure between the U.S. and the U.K. with respect to prospective interest payments on the Loan Notes through use of cross-currency interest swaps for foreign currency. On November 29, 1999, in anticipation of receiving its February 2000 interest payment from NAGP, ScottishPower entered into a cross-currency swap with NA1 and NA2 in order to eliminate its foreign exchange exposure with respect to NAGP's payment of interest in dollars on both the Fixed Rate Notes and Floating Rate Notes with respect to the first interest payment date of February 11, 2000. Ex. 198-J; Tr. 843:18-844:15; 846:6-10 (Wright). NA1 and NA2, in turn, sold the dollars-based interest payment to third party banks in order to eliminate their foreign exchange exposure. Ex. 204-J; Tr. 847:25-848:20; 850:8-851:1; Tr. 889:11-890:5 (Wright).

390. Object. RF is incomplete. ScottishPower, NA1 and NA2 managed foreign exchange exposure with respect to prospective interest payments on the Loan Notes through cross-currency interest swaps, forward contracts, currency sales with third-party banks, and with hedging contracts. Ex. 198-J through Ex. 207-J; Tr. 843:3-12; Tr. 848:16-20; Tr. 849:8-11 (Wright).

391-392. Object. RFs are incomplete. The Transition Plan was a document that was intended to be ScottishPower's road map and plan for detail of how it would achieve anticipated performance improvements. Tr. 337:7-338:2 (MacRitchie). The Transition Plan was also a public document that ScottishPower had committed to share with its new U.S. regulators within six months of Closing. Tr. 337:11-338:2 (MacRitchie). The Transition Plan detailed ScottishPower's and PacifiCorp's plan to achieve cost savings as well as improve operating performance (i.e., customer service improvements) over a five-year period. Tr. 337:11-20 (MacRitchie); Ex. 60-J at PHI-DOCS065792.

393. No objection.

394. Object. RF is incomplete. The Transition Plan included a "Base Case," an "Optimistic Case," and a "Highly Optimistic Case" annual cost savings figures. Ex. 60-J at PHI-DOCS065776. ScottishPower and PacifiCorp intended to "over-deliver" on the cost savings figures characterized as "Highly Optimistic." Tr. 380:22-381:12 (MacRitchie).

395-396. No objection.

397. Object. RF is incomplete. The cost savings in the "Highly Optimistic Case," which were made publicly available, were also the same figures that were presented to ScottishPower's Board of Directors in the Project Jet Board Paper and also incorporated into the 1998 Model. Tr. 341:24-342:5; Tr. 343:12-18 (MacRitchie). The "Highly Optimistic Case" cost savings were also entirely consistent with the cost savings projections ScottishPower communicated to the investor community when the proposed Merger was announced in December 1998. Tr. 343:12-18 (MacRitchie).

398-401. No objection.

402. No objection. The "Highly Optimistic Case" cost savings were also entirely consistent with the cost savings projections ScottishPower communicated to the investor community when the proposed Merger was announced in December 1998. Tr. 343:12-18 (MacRitchie).

403. Object. RF is incomplete. Mr. MacRitchie testified that three projected cost savings categories were included in the Transition Plan in anticipation of future rate cases. Tr. 341:19-23 (MacRitchie). While there was only one actual cost savings plan, the Transition Plan included three sets of projections, which were intended to make state regulators aware of potential risks inherent in achieving cost savings. Tr. 380:1-23 (MacRitchie).

404. Object. RF is incomplete. ScottishPower and PacifiCorp intended to "over-deliver" on the cost savings figures characterized as "Highly Optimistic." Tr. 380:22-381:12 (MacRitchie). In fact, for fiscal year ending March 31, 2001, ScottishPower projected cost savings of $48 million. Tr. 346:8-10 (MacRitchie); Ex. 5-J at PHI-DOCS097339. Mr. MacRitchie's team delivered first-year cost savings of $85 million, a significant increase above what ScottishPower originally planned. Tr. 346:5-19 (MacRitchie); Ex. 91-J at SUPP001564. These cost savings were achieved through a number of different initiatives in different business units. Tr. 346:20-347:11 (MacRitchie). Continued cost savings occurred in the fiscal years ending March 31, 2002 and March 31, 2003, with the continued plan of reaching annual savings of $300 million by 2004-2005. Ex. 92-J at SUPP001696; Ex. 93-J at SUPP001823. Through the fiscal year ending March 31, 2003, Mr. MacRitchie was confident that he delivered the cost savings that were projected in the Transition Plan. Tr. 354:16-21 (MacRitchie).

405. Object. RF mischaracterizes the record. See Response to RF 394. Mr. MacRitchie testified that his "confidence" that the "highly optimistic" projections were "realistic goals" that could be delivered was shared throughout ScottishPower. Tr. 341:21-23; Tr. 379:18-25; Tr. 381:11-12 (MacRitchie).

406. No objection.

407. Object. RF is incomplete. The "Highly Optimistic Case" cost savings were entirely consistent with the cost savings projections ScottishPower communicated to the investor community when the proposed Merger was announced in December 1998. Tr. 343:12-18 (MacRitchie).

408-419. No objection.

420. Object to citation to Exhibit 66-J, which was ScottishPower's calculation of interest due from NAGP. NAGP's calculations of interest owed to ScottishPower were slightly different due to differences in accounting methods.

421-422. No objection.

423. Objection to the Exhibit 65-J citation. Exhibit 65-J, the PwC file memorandum dated May 23, 2002, may not be cited as a source to prove whether and when certain interest payments were made. Further, the schedule on PHI-EDOCS008664 does not reflect ScottishPower's and NAGP's decision to allocate interest payments exclusively to the Fixed Rate Notes. For example, Respondent later relies on this chart to show that NAGP was in arrears on interest payments on the Loan Notes in the amount of $133,476,157 as of March 31, 2002 (RF 534), but that is inconsistent with Stipulations, testimony and other exhibits to the effect that as of March 31, 2002 ScottishPower and NAGP treated $1,483,068 as accrued but unpaid interest on the Fixed Rate Notes. Stips. ¶¶ 230-232; Ex. 238-J; Tr. 871:10-874:14; Tr. 838:3-16 (Wright); Tr. 768:13-25 (Martin); Tr. 915:17-916:20; 917:12-16 (Self). In addition, PacifiCorp did not declare a dividend on its common stock in the tax year ending March 31, 2000. Stip. ¶ 191. As a result, NAGP delayed its first interest payment due on February 11th until the late dividend was paid in June 2000. Stips. ¶¶ 192 and 198; Tr. 852:9-21 (Wright); Tr. 751:3-4 (Martin).

424-427. No objection.

428. Object. RF misstates the record. Stipulation ¶ 196 specifies that the table was based on an assumption, for the sake of simplicity, that interest due dates for Loan Notes are February 11, May 11, August 11 and November 11, while the Loan Note Instruments (as amended on November 6, 2000) provide that the due date is to be the following business day in the event that the 11th falls on other than a business day. The actual due dates and amounts due are set out in Exhibit 66-J as follows:

     Period                    7.3% Fixed          Total Floating

462. Object. RF is duplicative of RF 419 and RF 423.

463. Object. RF is duplicative of RFs 419 and 423 and inappropriately manipulates the parties' Stipulations. The reference to an amount "in excess of $72,292,293.28 is incorrect. The parties merely stipulated that interest of $72,292,293.28 was not paid when due on February 11, 2000, and that the next payment date was May 11, 2000. Stips. ¶¶ 187, 192 and 196. Moreover, in light of Larry Martin's testimony that the interest paid in the tax year ended March 31, 2001 was allocable exclusively to the Fixed Rate Notes, Petitioner does not agree with Respondent's attempts to calculate "arrears" on both the Fixed Rate Notes and Floating Rate Notes other than as stipulated. Stips. ¶¶ 202 and 232. There are no calculations of interest "in arrears" in the Stipulations with respect to particular interest periods other than year-end, nor was there any testimony to that effect.

464. Object. RF is duplicative of RFs 423, 428 and 433.

465. Object. RF is duplicative of RFs 428 and 433 and inappropriately manipulates the parties' Stipulations. See Response to RF 463.

466. Object. RF is duplicative of RFs 428 and 433. Petitioner objects to the addition of "on the Loan Notes," which goes beyond Stip. ¶ 210. Petitioner's position is that payments were made only on the Fixed Rate Loan Notes.

467-468. Object. See Responses to RFs 463, 465 and 466. Moreover, Respondent fails to treat interest payments made on August 15, August 17 and August 18 as allocable to the August 11, 2000 interest payment date, despite the Fixed Rate Loan Instrument providing a 30-day grace period. Ex. 45-J at PHI-DOCS103356; Stip ¶ 338.

469. Object. See Responses to RFs 463 and 465. Moreover, Respondent incorrectly allocates payments on August 15, August 17 and August 18 to the interest period ending November 13, 2000, and fails to treat payments made on November 15 and December 1 as allocable to the November 11, 2000 interest payment date, despite the Fixed Rate Loan Instrument providing a 30-day grace period. Ex. 45-J at PHI-DOCS103356; Stip ¶ 338.

470. Object. See Response to RF 466.

471. Object. RF is duplicative of RFs 428 and 433 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 463 and 465. Moreover, Respondent incorrectly allocates payments on November 15 and December 1 to the interest period ending February 12, 2001, and fails to treat the payment made on February 12, 2001 as allocable to the February 12, 2001 interest payment date.

472. Object. RF is duplicative of RFs 433 and 442 and inappropriately manipulates the parties' Stipulations. See Response to RF 466. Also, Respondent's inclusion of $101,848,787.68 and $84,432,840.60 as interest payments on the Loan Notes on April 12, 2001 and May 11, 2001 is inaccurate and confuses journal entries with actual cash payments. Respondent incorrectly refers to Mr. Wright's testimony at Tr. 880:4-17 as supporting Respondent's position that Petitioner intended for the $101,848,787.68 and $84,432,840.60 amounts to represent actual payments of interest on the Loan Notes. The parties stipulated and Mr. Wright testified that these figures comprise "book entries, accounting entries" representing interest accruals on NAGP's books for accounting purposes, not actual cash payments for tax purposes. Stip. ¶ 229; Tr. 862:10-863:20; 864:25-865:11; 866:7-12; 867:18-23; Tr. 882:21; Tr. 883:15-16 (Wright); Tr. 757:12-21; Tr. 781:20-782:12; 784:3-6 (Martin). Payment of these accrued but unpaid amounts did not occur until September 27, 2001, when NAGP paid ScottishPower $273,373,300 with funds borrowed from RBS. Stip. ¶ 227; Ex. 132-J; Tr. 859:4-9; Tr. 860:20-21 (Wright). Both Mr. Martin and Mr. Wright testified that the interest payments deducted by NAGP during the tax year ended March 31, 2002 were made by NAGP on September 27, 2001 and November 13, 2001 by immediately transferring the borrowed cash proceeds to ScottishPower (totaling the claimed deduction amount of $357,489,615). Tr. 859:4-861:10 (Wright); Tr. 796:21-797:9 (Martin). NAGP's $273,373,300 interest payment on September 27, 2001 was attributed to outstanding accrued interest through the payment date (or the latest interest period, August 11, 2001) ($101,848,787.68, plus $84,432,840.60, plus $87,075,265.75). Tr. 859:4-9 (Wright).

473. Object. RF is duplicative of RFs 433 and RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RF 463, RF 466 and RF 472. Respondent's chart, which was not introduced at trial, is riddled with mistakes and should be ignored by the Court. The $22,500,000 payment should be allocated to the prior interest period. See Response to RF 471. The first row states that interest due as of February 11, 2001 is $84,613,047.37, which contradicts RF 470 (amount due stated as $91,544,541.50). The second row refers to prior periods, but if that really means prior to November 12, 2000, the amount would contradict RF 469 (amount due stated as $112,523,350.70). The third row then purports to add amounts due in February 2001 with amounts due prior to November 12, 2000 and states that this amount reflects interest due as of November 11, 2000 (which is obviously prior to February 11, 2001). The interest period runs from November 13, 2000, not November 12, 2000. Ex. 66-J. Respondent's chart also mistakenly confuses journal entries in the amounts of $101,848,787.68 on April 12, 2001 and $84,432,840.60 on May 11, 2001 as payments. These amounts were not payments. See Response to RF 472. Petitioner also objects to Respondent's attempts to calculate "underpayments" or "overpayments" on both the Fixed Rate Loan Notes and the Floating Rate Loan Notes for particular interest periods during the tax year ended March 31, 2002. The parties stipulated and the record overwhelmingly reflects that as of March 31, 2002, NAGP had accrued a total of $692,144,443 on the Fixed Rate Loan Notes from inception on November 29, 1999, and paid a total of $690,661,364 in interest for an underpayment of $1,483,068. Stips. ¶¶ (230, 232; Ex. 238-J; Tr. 838:3-16; Tr. 839:10-15; Tr. 871:18-874:19 (Wright). The "interest overpaid from previous periods" of ($630,880) is incorrect because it reflects entries for accruals of $101,848,787.68 and $84,432,841, which were viewed as mere book entries and were not intended to reflect an actual payment of interest. See Response to RF 472.

474. Object. RF is duplicative of RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 466 and 472. Respondent is incorrect in stating that no interest payments were made between May 12, 2001 and October 24, 2001. See Response to RF 472.

475. Object. RF is duplicative of RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 473 and 474. In RF 473, Respondent inaccurately asserts that NAGP had made more interest payments than the amount owed on the Loan Notes as of May 12, 2001, in the amount of $630,880.00. In this proposed finding, Respondent simply builds on this error. The reference to August 11,2000 is also incorrect.

476. Object. RF is duplicative of RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 466 and RF 474. Respondent incorrectly relies on the journal entries in Stipulation ¶ 229 for its position that a $87,091,671.32 payment of interest was made on October 24, 2001. NAGP paid ScottishPower total interest of $357,489,615 during the tax year ending March 31, 2002. Stip. 1224. On September 27, 2001, NAGP received $274 million, paid RBS a fee of $720,000 and transferred $273 million to ScottishPower to pay the interest due and previously unpaid. Tr. 859:4-861:10 (Wright); Ex. 132-J. On November 13, 2001, NAGP similarly received $84.1 million and on the same day transferred the funds to ScottishPower as a payment of interest. Tr. 859:4-861:10 (Wright).

477. Object. RF is duplicative of RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 475 and RF 476.

478. Object. RF is duplicative of RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 466 and 472. Further, Respondent incorrectly relies on the journal entries in Stipulation ¶ 229 for its position that a $84,116,315.50 payment of interest was made on March 8, 2002. NAGP paid ScottishPower $84,116,315.50 on November 13, 2001 following receipt of the funds from RBS, not March 8, 2002. Stip. ¶ 228; Tr. 859:4-861:10 (Wright); Ex. 132-J.

479. Object. RF is duplicative of RF 442 and inappropriately manipulates the parties' Stipulations. See Responses to RFs 473, 477 and RF 478.

480. Object. RF is duplicative of RFs 419 and 423.

481-482. Object. RF is duplicative of RFs 419, 423 and 428.

483-484. Object. RF is duplicative of RFs 428 and 433.

485. Object. RF is duplicative of RF 428 and RF 433. In addition, the accrual period ends on November 13, 2000, not November 11, 2000, and the amount of interest accrued on the Fixed Rate Notes for that period is $76,244,444.44, not $74,622,222.21. Ex. 66-J; Ex. 238-J.

486. Object. RF is duplicative of RF 428 and RF 433. In addition, the accrual period ends on November 13, 2000, not November 11, 2000, and the cumulative amount of interest accrued on the Fixed Rate Notes for that period is $283,888,888.88, not $282,266,666.64. Ex. 66-J; Ex. 238-J.

487. Object. RF is duplicative of RF 428 and RF 433. In addition, the accrual period ends on February 12, 2001, not February 11, 2001, and the amount of interest accrued on the Fixed Rate Notes for that period is $73,811,111.11, not $74,622,222.21. Ex. 66-J; Ex. 238-J.

488. Object. RF is duplicative of RF 428 and RF 433. In addition, the accrual period ends on February 12, 2001, not February 11, 2001, and the cumulative amount of interest accrued on the Fixed Rate Notes for that period is $357,699,999.99, not $356,888,888.85. Ex. 66-J; Ex. 238-J.

489. Object. RF is both duplicative of RF 433 and RF 442and incorrect. The correct amount of accrued interest on the Fixed Rate Notes for the period ending May 11, 2001 was $71,377,777.78, not $72,188,888.88. Ex. 66-J; Ex. 238-J. Respondent's inclusion of $101,848,787.68 on April 12, 2001 and $84,432,840.60 on May 11, 2001 as interest payments is incorrect. These amounts reflect interest accruals, not actual cash payments. See Response to RF 472.

490. Object. RF is both duplicative of RF 433 and RF 442. Respondent's inclusion of $101,848,787.68 on April 12, 2001 and $84,432,840.60 on May 11, 2001 as interest payments is incorrect. These amounts reflect interest accruals, not actual cash payments. See Response to RF 472.

491. Object. Respondent's inclusion of $101,848,787.68 on April 12, 2001 and $84,432,840.60 on May 11, 2001 as interest payments is incorrect. These amounts reflect interest accruals, not actual cash payments. See Response to RF 472.

492. Object. RF is both duplicative of RF 442 and incorrect. The accrual period ended on August 13, 2001, not August 11, 2001. Ex. 66-J. NAGP paid $273,373,300 in interest to ScottishPower on the Fixed Rate Notes on September 27, 2001. See Response to RF 476.

493. Object. RF is incorrect. The accrual period ended on August 13, 2001, not August 11, 2001. Ex. 66-J. Respondent's inclusion of $101,848,787.68 on April 12, 2001 and $84,432,840.60 on May 11, 2001 as interest payments is also incorrect. These amounts reflect interest accruals, not actual cash payments. See Response to RF 472.

494. Object. RF is incorrect. See Responses to RF 492 and RF 493.

495. Object. RF is both duplicative of RF 442 and incorrect. Respondent incorrectly treats $87,091,671.32 as a payment on October 24, 2001. See Response to RF 476.

496. Object. RF is incorrect. The accrual period ended on November 13, 2001, not November 11, 2001. Ex. 66-J. Respondent's inclusion of $101,848,787.68 on April 12, 2001, $84,432,840.60 on May 11, 2001 and $87,091,671.32 on October 24, 2001 is incorrect. See Responses to RF 472 and RF 476.

497. Object. RF inappropriately manipulates the parties' Stipulations. In addition to confusing journal entry posting dates with payment dates, RF attempts to calculate underpayments or overpayments for particular interest periods during the fiscal year ended March 31, 2002. The parties stipulated and the record overwhelmingly reflects that as of March 31, 2002 (fiscal year end), NAGP had accrued a total of $692,144,443 on the Fixed Rate Loan Notes from inception on November 29, 1999, and paid a total of $690,661,364 in interest, a difference of $1,483,068. Stips. ¶¶ 230 and 232; Ex. 238-J; Tr. 838:3-16; Tr. 839:10-15; Tr. 871:18-874:19 (Wright). Stated another way, by the fiscal year end, NAGP had not overpaid interest and was only underpaid by $1,483,068.

498. Object. RF is both duplicative of RF 442 and incorrect. NAGP paid ScottishPower $84,116,315.50 on November 13, 2001 following receipt of the funds from RBS, not March 8, 2002. Stip. ¶ 228. Donald Wright testified that the $84,116,315.50 interest payment was made by NAGP on November 13, 2001 by immediately transferring the borrowed cash proceeds to ScottishPower. Tr. 859:11-15; Tr. 860:22-861:10 (Wright).

499. Objection to Respondent's citation of Stips. ¶¶ 225, 226 and 229 as authority for calculation. See Responses to RFs 472, 476, and 478.

500. Objection to Respondent's citation of Stips. ¶¶ 225, 226 and 229 as authority for calculation. See Responses to RFs 472, 476, and 478.

501. No objection.

502. Object. Petitioner disagrees with the calculation of an excess interest amount of $5,942,760, as it depends on treating $101,848,788 as an amount paid on May 11, 2001. There is substantial evidence in the record confirming that the $101,848,788 was not actually paid in cash by NAGP to ScottishPower until September 27, 2001. See Response to RF 472.

503. Object. Petitioner disagrees with the calculation of a cumulative excess interest amount of $49,575,601, as it depends on treating both $101,848,788 and $84,432,841 as amounts paid on May 11, 2001 and June 30, 2001, respectively. There is substantial evidence in the record confirming that the $101,848,788 and $84,432,841 amounts were not actually paid in cash by NAGP to ScottishPower until September 27, 2001. See Response to RF 472.

504. Object. Petitioner disagrees with the calculation of a cumulative excess interest amount of $101,222,828, as it depends on treating the $101,848,788, $84,432,841 and $87,091,671 amounts as paid on May 11, 2001, June 30, 2001 and August 13, 2001, respectively. There is substantial evidence in the record confirming that the $101,848,788, $84,432,841 and $87,091,671 amounts were not actually paid in cash by NAGP to ScottishPower until September 27, 2001. See Response to RF 472.

505-523. No objection.

524. Object. The citation does not support the RF. But see Tr. 785:15-21 (Martin).

525-529. No objection.

530. Object. RF misstates the record. While Mr. Martin testified that he "provided" his spreadsheet to PwC. PwC was not called to testify at trial regarding which documents it relied on for purposes of its analysis.

531. No objection.

532. Object. The chart shows PwC's understanding of NAGP's interest payments and arrearages on the Loan Notes. The chart does not accurately reflect the correct dates and amounts of the interest accruals and payments. See Response to RF 534.

533. No objection.

534. Object. See Response to RF 532. Moreover, the schedule on PHI-EDOCS008664 does not reflect ScottishPower's and NAGP's decision to allocate interest payments exclusively to the Fixed Rate Notes and, therefore, is not consistent with both the Stipulations and testimony. RF is inconsistent with the record in that as of March 31, 2002, ScottishPower and NAGP treated $1,483,068 as accrued but unpaid interest on the Fixed Rate Notes. Stips. ¶¶ 218, 224 and 230-232; Ex. 238-J; Tr. 871:10-874:1-14; Tr. 838:3-16 (Wright); Tr. 768:13-25 (Martin); Tr. 915:17-916:1-20; Tr. 917:12-16 (Self).

535. Object. PwC's memorandum simply reflects PwC's understanding at the time. To the extent Respondent is attempting to support the assertion that NAGP's interest payment shortfall was primarily due to regulatory restrictions on PacifiCorp's ability to pay dividends (see RF 838), PwC's chart is contradicted by substantial testimony at trial. The regulatory restrictions on PacifiCorp's ability to pay dividends to NAGP had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Ex. 249-P (Vander Weide Expert Report) at p. 2. There were no meaningful regulatory restrictions on PacifiCorp's ability to pay dividends. Id. The only regulatory limitation (which applied only to regulated assets in Oregon) had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Tr. 555:5-556:12 (Vander Weide) (regarding dividend limitations); Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon"). Mr. Larson testified that regulators watched dividend payouts in only a "very perfunctory manner," and simply asked that a notice be filed each quarter with the regulatory commission once the board of the utility had declared the dividend; he did not recall a commission "ever even asking any questions regarding any of those filings." R. Tr. 975:16; 976:4-14 (Larson). The reason given by Mr. Larson was that the regulators viewed the earnings of the utility as "shareholder money," and that "[t]heir view was that the board could determine what to do with the earnings of the utility." R. Tr. 975:19-976:1; 978:19-22 (Larson) (". . . if the board wanted to pay 100 percent of it out in dividends, they could pay it out").

536. No objection.

537. Object. RF is misleading. PwC concluded that under its model, which differed from the ScottishPower Projections, NAGP would have sufficient net cash flows to repay "approximately $3,544 billion" of the Fixed Rate Loan Notes and "approximately $846 million" of the Floating Rate Loan Notes upon maturity. Ex. 65-J at PHI-DOCS008662. PwC did not perform an analysis of the effects that refinancing would have on repayment.

538. Object. The RF is incomplete. The PwC memorandum further provided, and Mr. Martin corroborated, that if the Floating Rate Loan Notes were capitalized, then NAGP would more likely than not be able to sustain interest deductions on $4.0 billion in Intercompany Debt. Ex. 65-J at PHI-DOCS008653; Tr. 790:1-9 (Martin).

539. No objection.

540. Object. RF is not complete. By December 2001, PwC gave PacifiCorp its preliminary indication that it would be able to support the $4 billion of Fixed Rate Debt and, before the end of the tax year ended March 31, 2002, PwC informed PacifiCorp that it could reach a more likely than not opinion on repayment of $4 billion of the Intercompany Debt. Tr. 762:13-18; Tr. 766:3-5 (Martin).

541. No objection, although Petitioner notes that the timing of the capitalization of the Floating Rate Notes was in part so that NAGP's tax return for the tax year ended March 31, 2002 would accurately report interest deductions consistent with PwC's analysis. Tr. 766:22-767:1 (Martin); Tr. 917:19-918:3 (Self).

542. No objection.

543. Object. RF misstates the record. ScottishPower made contributions to NA1 and NA2. NA1 and NA2 made contributions to NAGP. NAGP used the contributions to fully retire the $896,279,844 in Floating Rate Debt. NAGP recorded the elimination of the Floating Rate Debt on its books as additional paid-in capital of NA1 and NA2. Stip. ¶ 180; Tr. 766:14-19 (Martin); Tr. 869:21-25 (Wright); Tr. 918:6-13 (Self).

544-548. No objection.

549. Object. RF is duplicative of RF 548.

550-551. No objection.

552. Object. RF is inaccurate. NAGP claimed an interest deduction in the amount of $333,171,736, equal to the amount of interest actually paid to ScottishPower on the Fixed Rate Notes. Stips. ¶¶ 201, 207; Ex. 67-J. Mr. Martin testified that the interest paid during the tax year ended March 31, 2001 was allocable exclusively to the Fixed Rate Loan Notes. Tr. 762:13-763:15; Tr. 763:25-764:4; Tr. 793:21-794:2; Tr. 799:10-800:14 (Martin). Heather Self corroborated Mr. Martin's testimony. Tr. 919:12-15 (Self).

553. Object. See Response to RF 552.

554. Object. See Response to RF 552. Further, Respondent's reliance on Mr. Martin's deposition transcript is misplaced. Respondent attempted to impeach Mr. Martin during cross-examination with an alleged "inconsistent statement," but failed to do so. During both his deposition and direct and cross examinations, Mr. Martin consistently testified that the interest deduction claimed on the tax return for the tax year ended March 31, 2001 was attributable exclusively to the Fixed Rate Loan Notes. Tr. 762:13-763:1; Tr. 793:21-794:2; Tr. 799:10-800:14 (Martin).

555. No objection.

556. Object. RF mischaracterizes the record. NAGP borrowed funds from RBS in order to fund its interest obligations to ScottishPower on the Loan Notes in light of the suspension of PacifiCorp dividends. Stip. ¶ 218; Tr. 908:11-24 (Self).

557. Object. See Response to RF 556. Further, Donald Wright testified that in addition to PacifiCorp dividends, NAGP earned "interest on the investments [NAGP] had and some U.S. Treasuries." Tr. 889:1-2 (Wright).

558. Object. RF is misleading. Mr. Wright testified repeatedly, including on cross-examination, that the journal entries for the $101,848,787.68 and $84,432,841 designated as "Accrual - Interest" in Stip. ¶ 229 were "book entries" or "accounting entries" on NAGP's books and did not represent cash payments of interest on the Loan Notes with monies borrowed from ScottishPower. Tr. 862:10-863:20; Tr. 864:25-865:11; 866:7-12; 867:18-23; Tr. 882:21-883:5; 883:15-16 (Wright).

559. Object. RF is misleading. See Response to RF 558. The parties have stipulated, and Mr. Wright corroborated, that May 11, 2001 was the journal entry posting date, not the payment date. Id.; Stip. ¶ 229.

560. Object. RF is misleading. See Response to RF 558. The parties have stipulated, and Mr. Wright corroborated, that June 30, 2001 was the journal entry posting date, not the payment date. Id. Stip. ¶ 229.

561. Object. ScottishPower recorded a total of $186,281,629. Ex. 66-J at SUPP000080. Further, Mr. Wright was not definitive as to what the referenced amount constituted. Tr. 881:10-13 (Wright). RF is not supported by cited testimony.

562. Object. NAGP recorded a credit entry "Intercomp A/P -- ScottishPower" dated August 22, 2001 in the amount of $101,848,787.68 and debited accrued interest. Stip. ¶ 229. This journal entry was not recorded as a "payment" or treated as a payment for tax purposes. Mr. Wright was not definitive as to what the referenced amounts constituted. RF is not supported by cited testimony.

563. Object. NAGP recorded a credit entry "Intercomp A/P -- ScottishPower" dated August 22, 2001 in the amount of $84,432,841 and debited accrued interest. Stip. ¶ 229. This journal entry was not recorded as a "payment" or treated as a payment for tax purposes. Mr. Wright was not definitive as to what the referenced amounts constituted. RF is not supported by cited testimony.

564. Object. Petitioner agrees that ScottishPower was advised that for tax deductibility purposes, an external third-party should provide NAGP with funds to pay interest. There is no evidence in the record that August 21, 2001 was the first time such advice was provided to ScottishPower.

565-570. No objection.

571. Object. The RF is inaccurate. NAGP paid ScottishPower total interest of $357,489,615 during the tax year ending March 31, 2002. Stip. ¶ 224. On September 27, 2001, NAGP received $274 million, paid RBS a fee of $720,000 and transferred $273 million to ScottishPower to pay the interest due and previously unpaid. Stip. ¶ 227; Tr. 859:4-9; Tr. 859:16-860:20-21; Tr. 861:18-21 (Wright); Ex. 132-J. On November 13, 2001, NAGP similarly received $84.1 million and on the same day transferred the funds to ScottishPower as a payment of interest. Tr. 859:4-861:10 (Wright); Tr. 796:21-797:9 (Martin). Mr. Wright's in Tr. 886:2-15 does not support this RF. Respondent began the questioning by referring to the alleged $101.8 million and $84 million payments, but then asked whether the entire $273 million borrowing was used to pay back the intercompany loan. This was confusing, as Respondent never attempted to establish that the third interest payment of $87 million was set up as an intercompany loan (and which, when added to the $101.8 million and $84 million alleged amounts, comprised the $273 million amount). Mr. Wright's response of "They go to investments, yeah" was not clarified by Respondent, and does not say what Respondent asserts.

572-574. No objection.

575. Object. The cited testimony does not support the finding that the waiver occurred after March 27, 2002. Numerous documents and testimony support a factual finding that the waiver of interest on the Floating Rate Notes and decision to allocate interest payments to the Fixed Rate Notes was made before March 2002. Tr. 874:11-14; 892:7-11 (Wright); Tr. 762:13-763:1-12; 766:8-10 (Martin); Tr. 920:14-18 (Self).

576-585. No objection.

586. Object. Ms. Self testified that it was her "understanding" that when PacifiCorp suspended its dividend payments in 2001 it continued to declare dividends because it desired to maintain a consistent dividend declaration pattern, so that if [PacifiCorp] subsequently wanted to have a new rate case, the regulators wouldn't impose a lower dividend requirement." Tr. 905:20-906:4 (Self).

587-591. No objection.

592. Object. The parties stipulated that NAGP deposited approximately $238 million with SPUK for later use on interest payments to ScottishPower. Stip. ¶ 223.

593-595. No objection.

596. Object to the reference to "Loan Note indebtedness." The testimony of Ms. Self and page 5 of Exhibit 65-J, PHI-EDOCS008656, relate to a recommendation of PwC for NAGP to consider restructuring the Fixed Rate Notes going forward. It did not relate to all of the Loan Notes, as PwC had already recommended that the Floating Rate Notes be capitalized.

597. Object. Ms. Self testified that Exhibit 233-J was presented to the ScottishPower Board on October 25, 2002. Tr. 928:24-25 (Self). The detailed planning that resulted in Exhibit 233-J started during the summer of 2002. Tr. 924:22-25 (Self).

598-599. No objection.

600. Object. Exhibit 233-J provides that a deferred subscription agreement would seek to preserve the existing double dip benefits "in a different way." Ex. 233-J at PHI-EDOCS006451.

601-602. No objection.

603. Object. RF mischaracterizes the record. Ms. Self testified that Project Venus was a "refinancing" of the Loan Notes. Tr. 927:17-22 (Self).

604-607. No objection.

608. Object. RF mischaracterizes the record. The cited portion of Exhibit 233-J goes on to provide that the DSA "has been extensively reviewed . . . PwC's detailed knowledge of our group structure and ability to amend the detail of the structure to fit our circumstances makes it appropriate to continue to use them for implementation [and] the structure has also been independently reviewed by Tax Counsel." Ex. 233-J at PHI-EDOCS006451.

609-621. No objection.

622. Objection to RF's reference to Exhibit 259-R, which is a set of slides prepared by Respondent for purposes of trial, in effect attempting to re-state information already depicted by Ms. Self in a report prepared contemporaneously with the underlying transactions, Exhibit 233-J. Ms. Self noted several presentation errors in Exhibit 259-R. Tr. 248:6-248:18 (Self); Tr. 250:18-22 (Self); Tr. 954:19-21 (Self). In addition, Ms. Self testified that the purpose of the borrowing "was simply to evidence an audit trail, to show that we did actually do what we said we were doing that day." Tr. 939:23-940:1 (Self).

623. Object. See Response to RF 622. In addition, Ms. Self clarified that the transfer of funds from ScottishPower to SPF2 was "not a contribution" but a receipt of cash by SPF2 in exchange for an issue of shares and debt. "It's a flow of money." Tr. 951:24-952:7 (Self).

624. Object. See Response to RF 622.

625. Object. See Response to RF 622. PHI used the funds from SPF2 to repay share capital to NAGP. Ex. 233-J at PHI-EDOCS006459.

626. Object. See Response to RF 622. RF also mischaracterizes the nature of the transaction between ScottishPower and NAGP. Ms. Self testified that "NAGP gave the cash back to ScottishPower as a repayment of some of the original debt," not an elimination of the debt. Tr. 941:2-8 (Self).

627. Object. See Response to RF 622. At the end of the day, instead of having debt due from NAGP to ScottishPower, there was debt due from PHI to ScottishPower. Tr. 941:6-8 (Self).

628. Object. See Response to RF 622. Ms. Self testified that ScottishPower made a contribution of capital to NAGP and that NAGP used that contribution to retire the remainder of the fixed rate notes. Tr. 941:17-23 (Self).

629-632. No objection.

633. Object. RF is misleading and inconsistent with the record. Mr. Mudge did not "prepare an expert report opining on the questions of (i) whether the Loan Notes were in a form reasonably acceptable to unrelated third party creditors; and (ii) whether there was a reasonable expectation at the time the Loan Notes were issued that NAGP could service interest on the Loan Notes and repay the principal when due." Mr. Mudge's report states the two questions on which Mr. Mudge opined, neither of which is relevant: "(1) Whether the Loan Notes, pursuant to their stipulated pricing and terms, a) took a form that could reasonably be expected to be acceptable to unrelated third party creditors, and b) would otherwise have been practicable for NAGP to issue to third party creditors; and (2) Whether there was a reasonable expectation at the time the Loan Notes were established that, per their terms (i.e., reliant upon dividends paid by PacifiCorp), NAGP could service the interest on the debt and repay the principal when due had they in fact been obligations to third parties." Ex. 260-R (Mudge Report) at p. 2. Mr. Mudge did not consider whether the Loan Notes were in a form reasonably acceptable to unrelated third party creditors. Ex. 260-R (Mudge Report) at p. 2. Mr. Mudge confirmed on cross-examination that the question he considered was whether the precise terms, or the exact terms, would have been acceptable to unrelated third party creditors. Tr. 1034:16-1035:6 (Mudge). Mr. Mudge also did not opine on whether there was a reasonable expectation at the time the Loan Notes were issued that NAGP could service interest on the Loan Notes and repay ScottishPower the principal when due. Instead, Mr. Mudge considered whether NAGP could have repaid principal had they in fact been obligations to third parties (with a different interest rate and reliant solely on his projection of PacifiCorp's dividends). Ex. 260-R (Mudge Report) at p. 2; Tr. 470:3-11 (Shaked). Mr. Mudge testified that he did not perform any analysis with respect to whether ScottishPower could reasonably expect to be repaid. Tr. 1041:7-13 (Mudge).

634. Object. Petitioner does not dispute that RF accurately states Mr. Mudge's conclusions; however, Petitioner objects to Mr. Mudge's conclusions as proposed findings of fact because they are not supported by the record or reliable analysis. Petitioner's expert, Mr. Chigas, concluded that the Loan Notes' interest rates were reasonable in light of the prevailing interest rates in the financial community at that time. Ex. 253-P (Chigas Report) at pp. 26-27. The interest rate on the Fixed Rate Notes was 7.3%. An indicative credit spread range for a hypothetical debt capital markets transaction would have been the 10-yr Treasury yield of 6.20%, plus 200 basis points (bps) plus or minus 12.5 bps. Id. Consequently, the initial spread in a debt capital markets transaction for the Loan Notes indicates an initial yield range of 8.075% - 8.325%. Ex. 253-P (Chigas Report) at pp. 26-27. In rendering his opinion, Mr. Chigas analyzed interest rates of comparable market transactions and specific deal terms and determined that third-party investors in the debt capital market would have purchased bonds on substantially similar terms as the Loan Notes. Ex. 253-P (Chigas Report) at pp. 23-27; Tr. 687:15-688:23 (Chigas). In contrast, Mr. Mudge's report is devoid of any citations or meaningful analysis with respect to this issue. Mr. Mudge's observation that the Loan Notes lacked provisions normally required in commercial debt transactions was based on anecdotes, lacks any analysis or citations, and is similarly not supported by the record. Ex. 253-P (Chigas Expert Report) at p. 5. Moreover, Mr. Mudge's opinion is limited to whether the exact terms of the Intercompany Debt would have been acceptable to third party lenders. Tr. 1034:16-20 (Mudge). In contrast, Mr. Chigas identified specific examples of debt capital market transactions that were comparable to the hypothetical NAGP transaction which did not require the covenants relied upon by Mr. Mudge. Ex. 254-P (Chigas Rebuttal Report) at pp. 3-6. Following a comprehensive analysis, Mr. Chigas concluded that the terms of the Loan Notes were substantially similar to standard investment grade bond terms at the time. Ex. 253-P (Chigas Expert Report) at p. 5. Mr. Chigas also opined that the other material terms of the Loan Notes cannot be characterized as a "patent distortion of what would normally have been available" to NAGP. Ex. 253-P (Chigas Expert Report) at pp. 18-19; Tr. 684:7-20; Tr. 690:16-19 (Chigas).

635. Object. Petitioner does not dispute that RF accurately states Mr. Mudge's conclusions; however, Petitioner objects to Mr. Mudge's conclusions as proposed findings of fact because they are not supported by the record or reliable analysis. Mr. Mudge's entire approach to analyzing whether a third-party lender could reasonably project that NAGP could repay interest and principal on the Loan Notes is not only an irrelevant inquiry but is also flawed because he erroneously relies on a forecasted "dividend" in the 1999 Projections rather than available cash flow. Tr. 470:3-11 (Shaked). Mr. Mudge did not rely on the contemporaneous management projections, but instead devised his own scenarios without basis in theory or the record, to wit:

• Mr. Mudge did not provide quantitative analysis or citations to support the modifications he made to the 1999 projections. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 3.

• Mr. Mudge arbitrarily discounted the projected savings in operating expenses by 40%. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 19.

• Mr. Mudge discounted 100% of the capital expenditure cost savings without any basis. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 20.

• Mr. Mudge's second sensitivity case reduced expected operating savings by an additional 26%, also without support. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 22.

• Mr. Mudge lowered growth considerations without lowering certain corresponding expense considerations. This was an analytical inconsistency. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 20.

• Mr. Mudge's sensitivity cases reduced fuel savings and increased purchased power costs without analytical support. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 23.

• Mr. Mudge's second sensitivity case reduced expected operating savings by an additional 26%, also without support. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 23.

• Mr. Mudge assumes that the interest rate on the Floating Rates Notes is 7.3%, with no factual or analytical basis. At the time of the transaction, the appropriate rate was 6.675%. This error led Mr. Mudge to underestimate PacifiCorp's cash flows by $56 million. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 9; Tr. 471:22-472:10 (Shaked).

• Mr. Mudge's exclusion of the Powercor proceeds is a "billion and half dollar mistake." Tr. 467:19-469:16 (Shaked); Tr. 474:24-475:3 (Shaked) (Dr. Shaked testified: "So this Australia is the beginning of the end of his report, in my opinion. There are many other things, but no doubt this is a big-time mistake"). Certain PacifiCorp assets, including Powercor, were anticipated to be available for debt repayment at the time of the Acquisition. The sale of the Australian operations was expected to generate $885 million in cash. Ex. 247-P (Shaked Expert Rebuttal Report) at pp. 10-14. Mr. Mudge's model shows NAGP was anticipated to be $900 million short in its ability to repay the Loan Notes. Rather than using the anticipated proceeds from the sale of Powercor and Hazelwood to pay the Loan Notes, Mr. Mudge inexplicably assumed that PacifiCorp would transfer the proceeds directly to ScottishPower, as a dividend, rather than a payment to NAGP's debt holders. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 10.

• Mr. Mudge's analysis failed to incorporate the effect of the existing cash on the balance sheet. Ex. 247-P (Shaked Expert Rebuttal Report) at p. 14.

• Mr. Mudge underestimated the return that NAGP could have expected to receive on surplus cash. Ex. 247-P (Shaked Expert Rebuttal Report) at pp. 14-15; Tr. 471:7-21 (Shaked) (Shaked testified: "his [Mr. Mudge's] assumption is grossly unreasonable").

637. Object. Mr. Mudge constructed a "consolidated balance sheet" showing a $4.9 billion liability to a third party without a corresponding $4.9 billion asset. Tr. 651:18-652:13 (Chambers). That is, under Mr. Mudge's scenario, NAGP "borrows" $4.9 billion, but does not receive the proceeds of the borrowing. Mr. Mudge simply removes $4.9 billion from the consolidated group's balance sheet.

638. Object. Mr. Mudge determined that, based on his own unsupported assumptions, PacifiCorp and NAGP would have a debt-to-capitalization ratio of 85.6% and a debt-to-equity ratio of 5.9:1 in November 1999. Mr. Mudge included preferred stock as debt in his debt-to-capitalization ratio calculations. By comparison, Dr. Chambers treated preferred stock as equity in his ratio, which is consistent with established credit rating agency criteria. Ex. 252-P (Chambers Rebuttal Report) at pp. 3-4. Mr. Mudge also determined that NAGP on a stand-alone basis would have a debt-to-capitalization ratio of 75% or 3:1. Ex. 260-R, Table 1, Column E, p. 7 (Mudge Report).

639. Object. See Response to RF 637. ScottishPower's consolidated debt-to-capitalization ratio is irrelevant.

640. Object. The assumptions underlying Mr. Mudge's analysis are flawed. See Responses to RF 637 and RF 638.

641. Object. Mr. Mudge assumed Morgan Stanley's draft comment (in November 1998) regarding ScottishPower's financial capacity was accurate and adopted the comment, without further analysis, as his own opinion. Mr. Mudge did not perform any independent analysis of whether an additional £1.8 billion of debt would be "beyond the constraints of prudent financial capacity" for ScottishPower. While an expert may consider remote statements that are not admitted and may be inadmissible (e.g., documents that are hearsay), he cannot properly act as a conduit by presenting an opinion that is not his own opinion but that of someone else, and should not testify that others agree with him as a means of vouching for or reinforcing any opinion of his own that he presents, at least in relation to central or contested matters. See, e.g., Dura Automotive Systems of Indiana, Inc. v. CTS Corporation, 285 F.3d 609, 613-614 (7th Cir. 2002) (expert may base opinion in part on what another expert believes, but problem arises if soundness of underlying expert judgment is questioned; Daubert (see Footnote 2, above) must be applied with "due regard" for specialization of modern science, but science is not allowed "to be the mouthpiece of a scientist in a different specialty").

642. Object. Mr. Mudge "noted that at the time of the pricing of the loan notes. . . . ScottishPower's advisor, Warburg, arrived at the conclusion that a BBB+ rating would have been appropriate for NAGP/PacifiCorp at that time." Tr. 1020:7-13 (Mudge).

643. Object. Mr. Mudge did not "find" anything. He merely testified as to the contents of the E&Y Board Paper and a fax from Warburg Dillon. For example, Mr. Mudge testified "Ernst & Young went to some lengths to estimate the appropriate credit ratings for the combined NAGP/PacifiCorp entity. . . ." Tr. 1014:23-25 (Mudge). Those documents speak for themselves.

644. Object. Mr. Mudge did not perform an independent analysis of the credit rating that would have applied had NAGP issued the $4.9 billion in Loan Notes. Mr. Mudge testified about how ScottishPower and its advisors determined a hypothetical credit rating for NAGP (Tr. 1014:16-18) and he attempted to calculate three ratios (long term debt-to-capitalization; pre-tax interest coverage, and FFO-to-total debt) and compared them to ratios that E&Y referenced in its Board Paper. Ex. 260-R at pp. 22-23. Mr. Mudge admitted that a credit agency would not just look at these three ratios. Tr. 1043:17-20 (Mudge). The approach Mr. Mudge followed with respect to the assignment of a hypothetical credit rating was very narrow, and a very limited slice of the overall process that a credit agency would follow in terms of assigning a rating. Tr. 621:15-24 (Chambers). In contrast, Dr. Chambers, whose expertise is in credit ratings, performed a complete analysis of the credit rating that would have applied to NAGP's issuance of the $4.9 billion in Loan Notes. Ex. 251-P (Chambers Expert Report).

645. Object. See Response to RF 644. In addition, Mr. Mudge did not apply standard financial ratios used by creditors and Standard & Poor's. Ex. 251-P (Chambers Expert Rebuttal Report) at p. 1; Tr. 621:15-24 (Chambers). Mr. Mudge purported to calculate three ratios and compared only those three ratios to data in the E&Y Board Paper that E&Y attributed to Standard & Poor's. Tr. 1053:2-4 (Mudge). Mr. Mudge did not consider other factors or credit metrics and admitted that he "would have to rely on Dr. Chambers' analysis, which took into account, for example, business profile score . . ." Tr. 1054:22-1055:7 (Mudge).

646. Object. See Response to RF 644. In addition, Mr. Mudge made other unsupported adjustments and assumptions in order to compute his three ratios including:

• Powercor is assumed to be sold in 2000, with net proceeds paid to ScottishPower in dividends;

• Deferred credits and current liabilities were excluded from the calculation of capitalization;

• Preferred stock was aggregated with long term debt; and

• A premium to book equity. Ex. 260-R at pp. 40-41; Tr. 1048:20-1050:14 (Mudge).

650. Object. See Responses to RF 644 and RF 645.

651. Object. See Responses to RF 644 and RF 645. In addition, Mr. Mudge concluded that the three "November 1999 Model credit metrics [that he computed] would imply a decidedly sub-investment grade credit rating" under the credit metrics that E&Y attributed to Standard & Poor's in the E&Y Board Paper. Ex. 260-R (Mudge Report) at p. 23. Conversely, Professor Chambers concluded that if NAGP had issued $4 billion of debt to third parties under similar terms as the Fixed Rate Notes, NAGP would have been assigned a stand-alone credit rating of at least "BBB-" (investment grade) on the S&P rating scale or equivalent from other independent credit rating agencies such as Moody's. Ex. 251-P (Chambers Expert Report) at p. 4. Professor Chambers further opined that there is the possibility that a slightly higher "BBB" rating could have been assigned to NAGP at that time. Ex. 251-P (Chambers Expert Report) at p. 4.

652-653. Object. Mr. Mudge adjusted the interest rate on the Fixed Rate notes to 8.8% because, according to him, his "analysis indicated that it could be as much as 1.5%" above the 7.3% stated rate. Tr. 1081:10-11 (Mudge). It appears that the bases for Mr. Mudge's opinion are the interest rates stated in the E&Y Board Paper and E&Y's threshold estimate of a BB credit rating (on $5.6 billion debt), rather than any independent analysis by Mr. Mudge. Tr. 1022:6-1023:6 (Mudge). In contrast, Mr. Chigas independently analyzed a substantial volume of market data and concluded that an indicative credit spread range for a hypothetical debt capital markets transaction would have been the 10-yr Treasury yield of 6.20%, plus 200 bps plus or minus 12.5 bps. Mr. Chigas opined that the initial spread in a debt capital markets transaction for the Loan Notes indicates an initial yield range of 8.075% - 8.325%. Ex. 253-P (Chigas Expert Report) at pp. 26-27. Mr. Chigas testified further that this would be the initial price indication and that the investment bank would be motivated to lower it further. That is, the ultimate market rate would be below the initial yield range of 8.075% - 8.325%. Tr. 689:1-22 (Chigas).

654. Object. Mr. Mudge did not independently research or offer any analysis regarding "standard creditor protections." Mr. Mudge merely testified about a comment in an E&Y facsimile. Specifically, Mr. Mudge's report states "per the observation of Ernst & Young in their memorandum in October 1999, the lack of Loan Notes [sic] would have exposed creditors to the following. . . ." Ex. 26-R (Mudge Report) at pp. 26-27. In contrast, Mr. Chigas identified specific examples of debt capital market transactions that were comparable to the hypothetical NAGP transaction which did not require the covenants referenced by Mr. Mudge. Ex. 254-P (Chigas Rebuttal Report) at pp. 3-6. Further, Mr. Mudge admitted that he was not asked to opine on how covenant standards apply in an intercompany debt context. Tr. 1056:18-25 (Mudge). In addition, the Loan Notes were adapted from loan notes issued by ScottishPower in relation to the Southern Water bond offering, which was a debt capital market transaction. Ex. 152-J; Tr. 123:17-22; Tr. 124:3-8; Tr. 177:7-10; Tr. 177:16-25 (Merriman). Finally, Mr. Mudge limited his analysis to the terms of the Loan Notes and intentionally ignored the existence of the Pledge Agreement. Ex. 260-R at Footnote 4 (Mudge Report).

655. Object. There is no authority for Mr. Mudge's opinion. Mr. Mudge stated that "it would have been an uncertain prospect for NAGP to issue the Loan Notes to third party creditors as it would have breached capitalization guidelines established by the [SEC] in its administration of [PUHCA]" Ex. 260-R at p. 3. However, Mr. Mudge did not provide any reference or citation to an SEC "guideline" in his report. On cross examination, Mr. Mudge first stated that the authority for his position was an SEC Order. Tr. 1057:1-1058:11 (Mudge). When Petitioner's counsel pointed out that the referenced SEC Order was issued on December 6, 2000, a year after Closing, Mr. Mudge pivoted and referred instead to "a practice of the SEC that was commonly understood." Tr. 1058:2-10 (Mudge). In contrast, Professor Vander Weide testified that regulatory restrictions had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Ex. 249-P (Vander Weide Report) p. 24.

656. Object. RF is repetitive and unsupported. With regard to Mr. Mudge's opinion that the Loan Notes were mispriced, Mr. Mudge's opinion is based exclusively on E&Y's estimated BB credit rating and interest rates stated in the E&Y Board Paper rather than any independent analysis. See Response to RF 652. With regard to Mr. Mudge's opinion that the Loan Notes lacked customary creditor protections, Mr. Mudge merely testified about a comment in an E&Y facsimile. See Response to RF 654. As to his opinion that "there were likely regulatory constraints on their issuance," Mr. Mudge's vague assertions are not supported by either the facts or any legal authorities. See Response to RF 655.

657. Object. Mr. Mudge testified that he did not perform any analysis with respect to whether ScottishPower could reasonably expect NAGP to service and repay the $4.9 billion in Loan Notes. Tr. 1041:7-13 (Mudge). Instead, Mr. Mudge considered whether NAGP could have repaid principal had they in fact been obligations to third parties (with a different interest rate and reliant solely on his projection of PacifiCorp's dividends). Ex. 260-R (Mudge Report) at p. 2; Tr. 470:3-11 (Shaked).

658. Object. RF is inaccurate. Mr. Mudge's entire approach to analyzing whether a third-party lender could reasonably project that NAGP could repay interest and principal on the Loan Notes is incorrect because he relies on a forecasted "dividend" in the 1999 Projections rather than available cash flow. Tr. 470:3-11 (Shaked). In the 1999 Projections, the dividend was projected to grow at 7.5% annually. Tr. 290:24-291:1 (Wilson). This growth rate was not intended to reflect ScottishPower's management's view of the anticipated growth of PacifiCorp's dividend. Tr. 291:14-17 (Wilson). Rather, the purpose of the 7.5% dividend growth rate assumption was to illustrate financial projections with a debt-equity ratio that was more typical of a U.S. utility, which was 50% debt, 50% equity. Tr. 291:18-23 (Wilson). In order to calculate the amount of cash that ScottishPower anticipated would be available to NAGP, various cash flow lines in the 1999 Projections would need to be added together. Tr. 292:2-9 (Wilson).

659. Object. RF is inaccurate. Mr. Mudge did not compare dividends projected in the 1999 Projections to debt service (principal and interest) required under the terms of the Loan Notes. Instead, Mr. Mudge considered whether NAGP could have repaid principal had the Loan Notes in fact been obligations to third parties (with a different interest rate and reliant solely on his projection of PacifiCorp's dividends). Ex. 260-R (Mudge Report) at p. 2; Tr. 470:3-11 (Shaked). Mr. Mudge testified that he did not perform any analysis with respect to whether ScottishPower could reasonably expect to be repaid. Tr. 1041:7-13 (Mudge). Mr. Mudge adjusted the terms of the Loan Notes. For example, Mr. Mudge assumed a 7.3% interest rate for the Floating Rate Notes (according to him for simplicity). Tr. 1070:16-1071:12 (Mudge). In addition, Mr. Mudge adjusted the interest rate on the notes to 8.8% because his "analysis indicated that it could be as much as 1.5%" above the 7.3% stated rate. Tr. 1081:10-11 (Mudge). Mr. Mudge also made numerous unsupported assumptions and adjustments to the dividend projections, which are set forth in Ex. 260-R at pp. 31-35.

660. Object. RF is incomplete. Mr. Mudge created three scenarios that he labeled as: (a) ScottishPower Base Case ("Base Case"); (b) Creditor Base Case; and (c) Creditor Sensitivity Analysis. Ex. 260-R (Mudge Report) at 28.

661. Object. RF is incomplete. See Responses to RFs 658 and 659.

662. Object. Mr. Mudge's "Base Case" shows that when the interest rate on the Loan Notes is increased and various other (negative) assumptions are made with respect to cash flow (including the removal of the Powercor sales proceeds), the 1999 Projections indicate that NAGP would receive sufficient dividends to service the interest on $4.9 billion of debt and to repay approximately $4.0 billion of principal by 2009. Ex. 260-R at p. 29. If the anticipated Powercor proceeds were factored in ($885 million), Mr. Mudge's "base case" would show sufficient cash to service interest and repay the entire principal prior to maturity. Ex. 247-P (Shaked Rebuttal Report) at p. 13, 16 and Ex. 3B.

663. Object. The RF accurately characterizes Mr. Mudge's Creditor Case. Mr. Mudge's Creditor Case, however, is pure fiction and should be afforded no weight. Mr. Mudge does not provide any basis for his opinion that a third-party creditor would have a more conservative view than ScottishPower. Nor does Mr. Mudge provide any explanations for his arbitrary adjustments to ScottishPower's projections. Mr. Mudge offered no references or analyses to show why ScottishPower's Valuation Model was either reasonable or unreasonable. Tr. 460:20-462:6 (Shaked) (Dr. Shaked testified: "Mr. Mudge has none, and when I say none, I mean zero, references to show that the projections are reasonable or unreasonable . . . I mean, I just couldn't -- frankly, I was shocked not to see it"); Tr. 464:9-465:15 (Dr. Shaked further testified: "he decides that they are aggressive because that's what he decided. I know that it sounds unreal . . . it's not an expert report in my opinion").

664. Object. The RF accurately characterizes Mr. Mudge's opinion; however, Mr. Mudge's opinion is unsupported and incorrect. Mr. Chigas opined that hypothetical investors would invest in the Intercompany Debt because of prospects for credit improvement and capital appreciation. Ex. 253-P (Chigas Expert Report) at pp. 15-16; Tr. 681:16-683:3 (Chigas).

665. Object. The RF accurately characterizes Mr. Mudge's illogical assumption. With regard to the appropriateness of this assumption, see Response to RF 652.

666. Object. The RF accurately describes Mr. Mudge's results-driven assumption that NAGP could not use the anticipated proceeds from the sale of Powercor ($885 million) to service interest or repay principal. Mr. Mudge's error/assumption results in an understatement of cash flows by $885 million at the time of the expected sale, or by $1.799 billion if the proceeds are compounded. Ex. 247-P (Shaked Rebuttal Report) at p. 16. There is no support in the cited documents for Mr. Mudge's result-driven assumption that NAGP would distribute the anticipated proceeds from the sale of Powercor to ScottishPower as a dividend rather than service the Intercompany Debt or repay principal. Tr. 1083:21-1084:6 (Mudge).

667-669. Object. The RF accurately describes Mr. Mudge's assumption; however, Mr. Mudge's report does not offer any support for his assumptions.

670. Object. The term "common equity capital" in the Oregon Order "refers to the common equity capital in domestic utility operations; that is, the Oregon Commission would regulate PacifiCorp's Oregon operations based on the regulated capital structure of PacifiCorp's domestic utility operations." Tr. 552:6-17 (Vander Weide). Mr. Mudge admitted during cross-examination that these restrictions only applied to regulated assets. Tr. 1062:20-24 (Mudge). Petitioner's regulatory expert clarified that the restrictions only applied to regulated assets in Oregon. Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon"). Moreover, these percentages are not computed using GAAP accounting rules, as Mr. Mudge has done; they are instead based on regulatory accounting standards that are put forth in the Uniform System of Accounts, put out by the Federal Energy Regulatory Commission. As a result, compliance with this requirement cannot be determined by examining PacifiCorp's SEC filings, as Respondent's expert attempts to do. Tr. 553:21-554:10 (Vander Weide); Tr. 1064:1-14 (Mudge).

671. Object. The RF accurately describes Mr. Mudge's calculation; however, Mr. Mudge's report does not offer any support for the assumptions in his calculation.

672. Object. The RF accurately describes Mr. Mudge's calculation. With respect to Mr. Mudge's use of an 8.8% interest rate, see Response to RF 652.

673-674. Object. Mr. Mudge devised a so-called "Creditor Sensitivity Analysis." Mr. Mudge did not offer any support for the assumptions in this analysis.

675-676. Object. With respect to alleged OPUC restrictions, see Response to RF 670. Taking the tax shield into account (and disregarding the Australian assets), each of Mr. Mudge's fictional scenarios project that NAGP will have adequate cash flow to service interest and repay at least some principal. Ex. 260-R (Mudge Report) at p. 29, Table 7; Tr. 1092:2-8 (Mudge).

677. Object. Dr. Shaked performed several analyses, including an analysis of whether at the time the Loan Notes were issued, ScottishPower reasonably anticipated that NAGP could service the interest and ultimately repay the principal. See PF 212 through PF 228; Ex. 245-P (Shaked Expert Report) at pp. 28-29.

678. Object. RF mischaracterizes the record. Prior to relying on the projection, Dr. Shaked tested the 1998 and 1999 Projections for reasonableness against a variety of metrics and concluded the Projections could be relied upon. After verifying their reliability, he incorporated the Projections into his analysis. Ex. 245-P (Shaked Expert Report) at Sections V(A)-(B); Tr. 416:3-417:19 (Shaked).

679. No objection.

680. Object. RF is inaccurate. Dr. Shaked added or subtracted changes to working capital. Dr. Shaked also adjusted for positive or negative "Other" cash flows to arrive at debt-free cash flow (DFCF). Ex. 245-P (Shaked Expert Report) at Ex. 16B.

681. No objection.

682. Object. RF is incomplete. Dr. Shaked separately calculated PacifiCorp's DFCF using the 1998 (Ex. 15A-B) and 1999 (Ex. 16A-B) Projections, and $4.0 billion (Ex. 15A & 16A) and $4.9 billion (Ex. 15B & 16B) in Intercompany Debt. Ex. 245-P (Shaked Expert Report).

683. Object. RF is incomplete. Dr. Shaked separately calculated PacifiCorp's cash available for Intercompany Debt using the 1998 (Ex. 15A-B) and 1999 (Ex. 16A-B) Projections, and $4.0 billion (Ex. 15A & 16A) and $4.9 billion (Ex. 15B & 16B) in Intercompany Debt. Ex. 245-P (Shaked Expert Report). RF refers only to Dr. Shaked's analysis with respect to the $4.9 billion scenario and the 1999 Projections. Ex. 245-P (Shaked Expert Report) at Ex. 16A-B. Dr. Shaked also performed the same analysis with respect to the 1998 ScottishPower Projections. Ex. 245-P (Shaked Expert Report) at Ex. 15A-B. In each of his analyses, Dr. Shaked assumed $583.1 million as the 1999 beginning cash balance. PacifiCorp reported $583.1 million as the cash balance on hand as of December 31, 1998 in its 1998 10-K. Ex. 82-J at IRS-NAGP0026060.

684. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue, see Response to RF 683. Petitioner agrees that Professor Shaked calculated an "ending cash balance (Pro Forma)" in 1999 of $819.8 million. Petitioner notes that the $155 million in merger closing costs was calculated on an after-tax basis. Ex. 245-P (Shaked Expert Report) at p. 24 and Footnote 5 to Ex. 15A-B & 16A-B.

685. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue, see Response to RF 683. Petitioner agrees that Professor Shaked computed a pro forma ending cash balance in 1999 in the amount of $819.8 million.

686. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue, see Response to RF 683. Petitioner agrees that for purposes of this pro forma analysis, Dr. Shaked assumed that interest on the Loan Notes began accruing on January 1, 2000.

687. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue, see Response to RF 683. Petitioner agrees that in Professor Shaked's analysis based on ScottishPower's 1999 projections (and assuming $4.9 billion of debt) Dr. Shaked added the "beginning cash balance" of $819.8 million to DFCF of $1,491.7 million to arrive at "total cash available for debt and interest" of $2,311.5 million. Ex. 245-P (Shaked Expert Report) at Ex. 16B.

688. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue. See Response to RF 683. In Professor Shaked's analysis based on ScottishPower's 1999 projections (and assuming $4.9 billion of debt) for the year 2000, Dr. Shaked subtracted interest due on PacifiCorp's existing debt and payment of preferred dividends from his computation "total cash available for debt and interest" to arrive at "cash available for intercompany debt" of $2,047.9 million (emphasis added). Ex. 245-P (Shaked Expert Report) at Ex. 16B.

689. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue, see Response to RF 683. In Professor Shaked's analysis based on ScottishPower's 1999 Projections (and assuming $4.9 billion of debt) for the year 2000, Dr. Shaked subtracted $196.9 million of after-tax interest expense on the $4.9 billion in Loan Notes from his $2,047.9 million of "cash available for intercompany debt in 2000" and applied $1,826 million of the remaining cash to principal prepayment of the Loan Notes, leaving $25 million as an ending cash balance. Ex. 245-P (Shaked Expert Report) at Ex. 16B.

690. Object. Petitioner agrees that Dr. Shaked was aware that at the end of PacifiCorp's third quarter in September 1999, PacifiCorp reported a cash balance of $275 million; however, Respondent is inappropriately implying that Dr. Shaked ignored PacifiCorp's historical data. Dr. Shaked performed several alternative analyses. Dr. Shaked testified that PacifiCorp's $275 million cash balance in the third quarter of 1999 was not relevant to his pro forma analysis of ScottishPower's 1999 projections (e.g., Ex. 246-J, Slide 20). Tr. 435:15 (Shaked). Dr. Shaked testified that for purposes of his pro forma analysis using ScottishPower's 1999 projections, he started with 1998 historical data, including the historical cash balance as of the end of 1998, and applied the 1999 Projection beginning on January 1, 1999. Tr. 434:15-436:1 (Shaked). Consequently, PacifiCorp's historical 1999 information was not relevant to the approach referenced by Respondent. Dr. Shaked further testified that in his rebuttal report, he performed an alternative analysis, using the "extremely more conservative" methodology applied by Mr. Mudge's, and, in fact, utilized PacifiCorp's historical third quarter 1999 cash balance of $275 million. Tr. 436:2-437:1; 513:20-514:5 (Shaked); Ex. 247-P (Shaked Rebuttal) at p. 14. Under that "extremely more conservative" methodology that Mr. Mudge applied, Dr. Shaked noted that Mr. Mudge's model disregarded $250 million in excess cash available to be paid as dividends to NAGP in that year (emphasis added). Tr. 513:4-514:5 (Shaked). Professor Shaked stated in his rebuttal report that after taking the effect of interest into account (at an 8.2% return), Mr. Mudge's model mistakenly omitted $550 million of cash that would have been available for debt repayment in 2009. Ex. 247-P at p. 14.

691. Object. See Response to RF 690. The $275 million cash balance shown on the PacifiCorp 10-Q for the period ending September 30, 1999 was irrelevant to this approach.

692. Object. RF is incomplete. Dr. Shaked did not use a beginning cash balance of $250 million for the 2000 year in his rebuttal report. Dr. Shaked used a beginning cash balance of $25 million. The Rebuttal Report states that at the time of the Merger, PacifiCorp held millions of dollars of cash obtained through its sale of Pacific Telecom, of which it required relatively small amounts (approximately $25 million) to meet the day-to-day operating needs of its business. Mr. Mudge assumed a $275 million beginning cash balance for the year 2000. Dr. Shaked corrected this error. Dr. Shaked wrote: This simplest way to correct this error in Mr. Mudge's model is to include PacifiCorp's excess cash as of September 30, 1999. At September 30, 1999 PacifiCorp had approximately $275 million in cash, of which approximately $25 million was required for operation of its business, leaving $250 million in excess cash available to be paid as dividends to NAGP. Ex. 247-P at p. 14; Exhibit 3E "PacifiCorp Existing Cash (1/1/2000)," p. 36 (Shaked Rebuttal).

693-695. Object. See Response to RF 690.

696. Object. See Response to RF 690. In response to Respondent's counsel's assertion to the contrary, Dr. Shaked clearly and repeatedly testified that his pro forma analysis of ScottishPower's 1999 projections did, in fact, consider repayment of existing PacifiCorp debt. Tr. 503:1-503:9 (Shaked).

697. Object. RF is incomplete. With regard to the complete analysis performed by Professor Shaked with respect to this issue, see Response to RF 683. Petitioner agrees that in Professor Shaked's pro forma analysis of ScottishPower's 1999 projections for the year 2000, Professor Shaked included proceeds from the sale of Powercor in the amount of $885.2 million.

698. Object. The 1999 Projections are a sophisticated, dynamic Excel model that was constructed to allow the user to either include or exclude the Powercor (Polaris) proceeds through a "toggle switch." Ex. 9-J; Ex. 10-J; Tr. 307:6-23 (Wilson) (describing the working toggle feature of the Excel model). Petitioner agrees that when the Excel "toggle switch" is set to assume Powercor is retained, the discounted cash flow value of PacifiCorp includes the value of operating revenue from PacifiCorp's Australian Operations (including Powercor). Mr. Mudge testified he was aware of the working toggle switch in the 1999 Projections for Australian Operations, but selectively chose to "define the model as received literally, and the model as received literally treats the Australian assets as if they are not sold." Tr. 1071:16-20 (Mudge).

699. Object. See Response to RF 698. The 1998 Projections are also a sophisticated, dynamic Excel model that was constructed to allow the user to either include or exclude the Powercor (Polaris) proceeds through a "toggle switch." Ex. 7-J; Tr. 307:6-23 (Wilson) (describing the toggle feature of the model). The discounted cash flow value of PacifiCorp is the exactly the same regardless of whether the "toggle switch" is set to assume the sale or retention of PacifiCorp because Powercor was valued on a discounted cash flow basis. Ex. 2-J at PHI-DOCS097153. Petitioner agrees that when the "toggle switch" is set to assume Powercor is retained, the proceeds from the anticipated sale of Powercor are not included in PacifiCorp's cash flow. Instead, the operating revenue from Powercor is included in PacifiCorp's cash flow. When the "toggle switch" is set to assume Powercor is sold, the revenue from the sale is included and the operating revenue is excluded. Ex. 7-J. The Project Board Paper, which summarizes the 1998 Projections, states: "The base case is to sell Polaris. We have valued Polaris on a discounted cash flow valuation basis from the viewpoint of a potential purchaser . . . Our valuation of $1.9 bn or $6.46 per share represents 14% of the total business value." Ex. 2-J at PHI-DOCS097153.

700. Object. RF is misleading. The 1999 Projections provide that "Dividends Paid: These are removed on consolidation, as Sapphire [ScottishPower] will be the only shareholder post-merger." Ex. 10-J at Tab "SAloneTotal" Summary Box. The projected dividends paid amounts ranged from $320 million in 1999 to $570.7 million in 2007. With a sole shareholder, PacifiCorp common stock dividend payments are eliminated, which increases the amount of post-dividend cash available by an equal amount.

701. Object. RF mischaracterizes the record. Jamie Wilson testified that in the Projections, the dividends paid cells and the PacifiCorp debt repayment cells were linked. Tr. 280:17-23 (Wilson). Both projections were "plug" numbers not set up to express an actual repayment plan, but rather to "maintain some consistency" in PacifiCorp's projected balance sheets by applying generated cash to dividends or debt reduction. Tr. 278:15-279:18 (Wilson).

702. Object. RF is inaccurate. See Response to RF 690. In response to Respondent's counsel's assertion to the contrary, Professor Shaked clearly and repeatedly testified that his pro forma analysis of ScottishPower's 1999 projections did, in fact, consider repayment of existing PacifiCorp debt. Tr. 503:1-9 (Shaked).

703. Object. RF appears to be intentionally misleading. Over the same period, PacifiCorp issued new long-term debt almost equal to the amount of long-term debt it repaid ($4.1238 billion and $4.2837 billion, respectively), resulting in PacifiCorp's long-term debt remaining stable. Ex. 33-J; Ex. 84-J; Ex. 85-J; Ex. 86-J; Ex. 87-J; Ex. 245-P (Shaked Expert Report) at p. 25.

704. Object. RF is inaccurate. Dr. Shaked demonstrates that, over the long term, PacifiCorp's debt was reasonably expected to remain at its December 31,1998 level, resulting in repayments balancing out with new debt issuances. Ex. 245-P (Shaked Expert Report) at pp. 24-25.

705. Object. RF misstates the record. At the time of the Merger, PacifiCorp's stated goal was to maintain total debt at 48% to 54% of capitalization. Ex. 82-J at IRS-NAGP0026052.

706. Object. See Response to RF 703.

707. No objection. Petitioner notes that the interest rate on the Fixed Rate Notes was 7.3%.

708. No objection.

709. Object. RF mischaracterizes Dr. Shaked's testimony. Dr. Shaked's report states "The ratio analysis performed by Professor William Chambers, Petitioner's credit rating expert, is also a component of a market driven analysis of adequate capitalization, specifically as it pertains to rating agencies' and other market participants' perceptions of credit-worthiness." Dr. Shaked summarized the basis for his opinions regarding adequate capitalization as follows:

710. Object. See Response to RF 709. In addition, RF mischaracterizes Professor Chambers' analysis. Professor Chambers testified that if, rather than issuing $4 billion of public debt, the Floating Rate Notes had also been issued as external senior debt (i.e., pari passu with the Fixed Rate Notes), the financial position of NAGP would have been only slightly weaker. Ex. 251-P (Chambers Expert Report) at p. 56. Dr. Chambers further testified that while there is still a possibility that an investment grade rating of "BBB-" would have been assigned to NAGP, it is more likely that a lower credit rating of "BB+" would have been assigned to NAGP in 1999, the highest possible rating in the speculative grade. Id.

711. Object. Dr. Shaked testified that he was aware of Dr. Chambers' opinions with respect to NAGP's hypothetical credit rating. Dr. Shaked further testified his analysis of NAGP's ability to repay the Loan Notes and his valuation analysis were not dependent on NAGP's hypothetical credit rating (nor does Dr. Shaked's cash flow analyses reflect the price of tea in China, or, as the Scots say -- the price of fish). Tr. 494:14-20 (Shaked).

712-713. Object. See Response to RF 709 and 711.

714. Object. RF mischaracterizes the record in several respects. First, RF misstates Mr. Chigas' opinion. Mr. Chigas' report does not state that the NAGP $4 billion bonds would bear an interest rate in the range of 8.075 percent to 8.325 percent. Mr. Chigas opined that 8.075% to 8.325% would be the "initial yield range," i.e., "the starting point of price discussions with investors, which the investment bank would seek to reduce over the marketing period." Ex. 253-P (Chigas Report) at p. 27; Tr. 679:13-16 (Chigas). Further, Dr. Shaked's analysis is focused on whether at the time the Loan Notes were issued ScottishPower reasonably anticipated that NAGP could service the interest and ultimately repay the principal on the Loan Notes. Therefore, Professor Shaked's cash flow analysis reflects the actual interest rates of the Loan Notes rather than a hypothetical interest rate. Ex. 245-P, Exhibit 16A and Exhibit 16B, "Interest Rate" (Shaked Report). In contrast, Mr. Mudge considered whether NAGP could have repaid principal had the Loan Notes in fact been obligations to third parties (with a different interest rate and reliant solely on his projection of PacifiCorp's dividends). Ex. 260-R (Mudge Report) at p. 2; Tr. 470:3-11 (Shaked).

715. Object. See Response to RF 714. Mr. Chigas' interest rate analysis is irrelevant to Dr. Shaked's report.

716. No objection.

717. Object. Dr. Shaked computed total debt/total capitalization ratios for NAGP/PacifiCorp (as of November 29, 1999) using twelve different scenarios and assumptions. Ex. 245-P, Exhibit 20. Respondent has cherry-picked the highest figure and disregarded all the other figures, which is inappropriate. Id. Exhibit 20 provides total debt/total capitalization ratios for NAGP/PacifiCorp ranging from 73% to 84%. Also, under the scenario specifically referenced by Respondent, NAGP's stand-alone debt-to-equity ratio was 72%. Petitioner notes that E&Y opined that a stand-alone debt-equity ratio for NAGP of 3:1 was both an appropriate analysis and a safe harbor based on case law. Stips. ¶¶ 80 and 89; Ex. 151-J; Tr. 107:3-9; Tr. 120:2-7 (Merriman). Finally, Dr. Shaked does not mention the 84% figure during the substantive discussion of his mergers and acquisitions analysis on page 31 of his report, which is cited by Respondent in the prior RF.

718-719. No objection.

720. Object. RF is inaccurate. Dr. Shaked obtained total transaction values from CapitalIQ. Ex. 245-P (Shaked Expert Report) at p. 32.

721. Object. RF fails to set forth the proper source. Dr. Shaked included $4,624 billion of existing PacifiCorp debt at the time of the Merger because that was the amount PacifiCorp reported in its September 30, 1999 10-Q quarterly report. Ex. 245-P (Shaked Expert Report) at Ex. 23B. Dr. Shaked calculates the shareholder consideration by multiplying the number of ScottishPower shares (or ADRs) transferred to PacifiCorp shareholders times the ScottishPower share price and foreign exchange rate at Closing. Ex. 245-P (Shaked Expert Report) at p. 36.

722. Object. Dr. Shaked computed total debt/total capitalization ratios for NAGP/PacifiCorp (as of November 29, 1999) using twelve different scenarios and assumptions. Ex. 245-P, Exhibit 20; Ex. 246-P, Slide 37 (Shaked Slides) shows the highest scenario -- 84%. Once again, Respondent has cherry-picked the highest figure and disregarded all the other figures, which is inappropriate. Id. Exhibit 20 provides total debt/total capitalization ratios for NAGP/PacifiCorp ranging from 73% to 84%. Also, under the scenario specifically referenced by Respondent, NAGP's stand-alone debt-to-equity ratio was 72%.

723. Object. RF is incomplete. Dr. Shaked also provides an analysis that applies 7.3% and 5.5% rates of return. Ex. 247-P (Shaked Rebuttal Report) at p. 36 (Ex. 3E).

724. No objection.

725-726. Object. RF is inaccurate. The 8.2% used by Professor Shaked was PacifiCorp's weighted average cost of capital ("WACC"). This figure was not intended to illustrate a "long-term investment rate of return." Dr. Shaked rejected Respondent's counsel's assertion that his 8.2% return was a long term investment rate of return. Tr. 508:9-509:10 (Shaked). Moreover, the premise of Respondent's counsel's question was flawed. Id. Dr. Shaked testified that "it makes sense, as I explained earlier, that the companies that invest money for nine years would invest it at least at the cost of capital. Otherwise it will be a disservice to the shareholders. You are not going to take people, money from people at eight percent and invest it at four. They would not be too happy with you." Tr. 509:4-10 (Shaked).

727. Object. RF is ambiguous. Dr. Shaked also applies 7.3% and 5.5% rates of return to critique Mr. Mudge's analyses. Ex. 247-P (Shaked Rebuttal Report) at p. 36 (Ex. 3E).

728. Object. RF mischaracterizes the record. Dr. Shaked testified that he applies a 7.3% rate of return in his rebuttal analysis to illustrate an error in Mr. Mudge's analysis. Tr. 512:2-4 (Shaked).

729. No objection.

730-738. Object. RF misinterprets the 1999 Projections. The 1998 balance sheet figures for PacifiCorp consolidated does not "begin with" total assets of $12,942,300,000. This figure is the year-end balance.

739-744. Object. RF incorrectly attributes the source of this data to Professor Shaked. This is not an opinion. The source of this data is the 1999 Projections. Ex. 9-J. The 1999 Projections reflect EBITDA of $1,311,800,000. Ex. 9-J; Ex. 245-P, Exhibit 5. Professor Shaked did not independently determine PacifiCorp's EBITDA, depreciation, or amortization. See Ex. 9-J at SUPP001107.

745. Object. RF incorrectly attributes the source of this data to Professor Shaked. This is not an opinion. The source of this data is PacifiCorp 1998 10-K, p. 56.

746-747. Object. See Response to RF 739-744.

748. No objection.

749. Object. RF mischaracterizes the record. Mr. Chigas opined that a hypothetical NAGP $4 billion fixed rate investment-grade rated debt capital market bond transaction offered on November 29, 1999 would have been purchased by third-party income investors on similar terms as the Loan Notes. Ex. 253-P (Chigas Expert Report) at p. 5; Tr. 658:7-19 (Chigas).

750-751. Object. RF mischaracterizes the record. Mr. Chigas opined that 8.075% to 8.325% would be the "initial yield range," i.e., "the starting point of price discussions with investors, which the investment bank would seek to reduce over the marketing period." Ex. 253-P (Chigas Report) at p. 27; Tr. 679:13-16 (Chigas).

752. Object. Mr. Chigas concluded the Loan Notes' interest rates were reasonable in light of the prevailing interest rates in the financial community at that time. Ex. 253-P (Chigas Expert Report) at pp. 26-27.

753. Object. RF is incorrect. Mr. Chigas' expert report did not address interest rates in a scenario under which NAGP was not an investment grade issuer. In response to a hypothetical question from Respondent's counsel during cross-examination, the premise of which is completely inconsistent with Mr. Chigas' expert report, Mr. Chigas "guessed" that "conservatively" he might add an additional 20 basis points to the "starting point that we would use with investors and seek to drive the pricing down lower." Tr. 693:4-694:9 (Chigas).

754. Object. RF is incorrect. On the same page that Respondent cites in support of this RF, Mr. Chigas dedicates an entire section of his report to "The Floating Rate Notes." Ex. 253-P (Chigas Report) at p. 27. Mr. Chigas goes on to conclude in his Opinion Summary and Conclusion, "The $897 million of floating rate notes would not have materially affected the issuance of the NAGP DCM Transaction." Ex. 253-P (Chigas Report) at pp. 5 and 28.

755. Object. RF is incorrect. Mr. Chigas concluded that a hypothetical NAGP $4 billion fixed rate investment-grade rated debt capital market bond transaction offered on November 29, 1999 would have been purchased by third-party income investors on similar terms as the Loan Notes. Ex. 253-P (Chigas Expert Report) at p. 5; Tr. 658:7-19 (Chigas). With respect to the question of whether the debt could have been issued with a 7.3% coupon, Mr. Chigas testified at trial: "I do believe they would be able to issue that debt. I've offered a slightly different coupon. Or there could have been other structural enhancements that could have been added to that debt, if a coupon of 7.3 percent coupon [sic] was an objective to be obtained, such as a parent guarantee or something." Tr. 716:14-20 (Chigas).

756. Object. Mr. Chigas' statement is out of context. Mr. Chigas testified that security is not a standard term in investment grade bond offerings. In the sentence preceding the above-referenced statement, Mr. Chigas wrote "In 1999, 92% of the investment grade utility debt issued was unsecured, which is the standard for the debt capital markets." Ex. 253-P (Chigas Report) at p. 40.

757. Object. Mr. Chigas' Expert Report, which Respondent cites as authority for the above-referenced assertion, does not include any discussion about whether a security interest would be visible on the face of an instrument. At trial, Mr. Chigas stated that "as a first mortgage bond, the top of the prospectus would say first mortgage bond secured." Tr. 709:8-18 (Chigas). However, the Loan Notes are not structured as "first mortgage bonds." Mr. Chigas also agreed that "it would be a good idea" to state that there was security on the instrument if an issuer were trying to gain a pricing advantage on an offering. Tr. 709:19-22 (Chigas).

758. Object. RF is incomplete. In addition to providing expert testimony on regulatory issues generally, Dr. Vander Weide testified about the electric industry economic environment from 1992 to the early 2000s and changes in this environment from the late 1990s to the early 2000s. Dr. Vander Weide also opined about the reasonableness of the growth rate and cost savings assumptions in ScottishPower's financial models, as well as the lack of any meaningful regulatory restrictions on PacifiCorp's dividend payments to NAGP. Ex. 249-P (Vander Weide Report) at pp. 1-2; Tr. 529:14-530:4 (Vander Weide).

759. No objection.

760-762. Object. Both the referenced Exhibit and Dr. Vander Weide's testimony make clear that Dr. Vander Weide is referring exclusively to PacifiCorp's domestic operations balance sheet (i.e., PacifiCorp's regulated assets), not PacifiCorp's balance sheet (and Respondent is well aware of the difference). Dr. Vander Weide testified that based on ScottishPower's 1999 Projections, PacifiCorp could have paid dividends of up to $501 million in 2000 from Domestic Operations without its Domestic Operations common equity-to-total capital ratio dropping below 40%. Ex. 249-P (Vander Weide Report) at Ex. 25; Tr. 555:5-556:3; Tr. 574:4-18 (Vander Weide). In fact, the only regulatory limitation (which applied only to regulated assets in Oregon) had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Tr. 555:5-556:12 (Vander Weide) (regarding dividend limitations); Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon").

763. No objection.

764. Object. RF is inaccurate. Regulated utilities do not "allow" capital structures; rather, state utility regulators have the authority to regulate a utility's capital structure (but only the regulated operations located in that particular state). Tr. 558:13-23 (Vander Weide); Ex. 249-P (Vander Weide Report) at Ex. 9a and 9b. Also, RF mischaracterizes Dr. Vander Weide's testimony. Dr. Vander Weide testified that regulators generally achieve financial stability by allowing equity ratios for regulated utility operations in the 40% to 50% range. Tr. 576:11-15 (Vander Weide).

765. Object. RF mischaracterizes Dr. Vander Weide's testimony. Dr. Vander Weide testified that PacifiCorp financial models projected capital structures for its regulated operations in the 43% to 45% range. Tr. 559:2-4 (Vander Weide). Further, the cited exhibit (Ex. 249-P at Ex. 9a) depicts "average" allowed equity ratios for U.S. electric utilities, not "target" equity ratios. Ex. 249-P (Vander Weide Report) at Ex. 9a and 9b.

766-767. No objection.

768. Object. RF mischaracterizes Dr. Vander Weide's testimony. Dr. Vander Weide testified that from 1992 through 2002, the average allowed rate of return on equity (ROE) for regulated electric utilities ranged from 10.72% to 12.09%. Ex. 249-P (Vander Weide Report) at p. 9. Dr. Vander Weide also testified that it was becoming increasingly common for utilities to be regulated with incentive mechanisms, which allowed the utility to earn a varying range of returns, the upper end of the range being significantly higher than 11%. Tr. 562:10-15 (Vander Weide). For example, Dr. Vander Weide testified that PacifiCorp's regulated utility operations in Oregon were allowed to earn up to 12.5% without any rate reductions, and up to 13.5% with a rate reduction that allowed the company to earn 13.25%. Tr. 562:19-24 (Vander Weide).

769. No objection.

770. Object. Professor Vander Weide agreed with Respondent's counsel's assertion that "PacifiCorp had a couple of bad years there in 1997 and 1998" with respect to return on revenues, return on assets and return on equity. Tr. 566:12-14 (Vander Weide). Professor Vander Weide attributed PacifiCorp's underperformance in 1997 and 1998 to its "lost focus on its regulated utility operations in the U.S." Tr. 546:22-547:15 (Vander Weide).

771. Object. Professor Vander Weide did not testify that "an outside lender would have recognized that ScottishPower might make bad decisions going forward or do better than forecast." With regard to the reasonableness of ScottishPower's anticipated cost savings, Professor Vander Weide testified that "if [a lender] thought that ScottishPower had previous experience in being able to implement cost savings and actually achieve them, [a lender] would have expected ScottishPower to do it in this situation as well." Tr. 566:25-567:4 (Vander Weide). Professor Vander Weide agreed with Respondent's counsel's assertion that a lender "would have recognized that there's still risk that ScottishPower might make bad decisions going forward," but added "and they would also recognize that there's an opportunity for ScottishPower to maybe do better than . . . the forecast, so they would have looked at reasonable -- reasonable with up and down from the best estimate of what the cost savings were." Tr. 567:5-14 (Vander Weide).

772. Object. See Response to RF 771. Dr. Vander Weide further testified that in comparison to other U.S. electric utilities, ScottishPower's cost savings projections for PacifiCorp "might even be conservative." Tr. 571:5-9 (Vander Weide).

773. No objection.

774. Object. Professor Vander Weide did not refer to PacifiCorp in the cited testimony.

775. Object. RF is incomplete. Professor Vander Weide testified that the Western Power Crisis initially had little impact on PacifiCorp because PacifiCorp is a winter-peaking utility, and the Western Power Crisis began in the summer of 2000. Dr. Vander Weide further testified that the Western Power Crisis had a significant negative impact on PacifiCorp's Domestic Utility Operations in the winter of 2000 and the first part of 2001 because PacifiCorp was forced to buy power at higher costs during its winter peak due to low output from its hydroelectric plants and the out-of-service condition of its Hunter plant. Tr. 568:5-569:6 (Vander Weide); Ex. 249-P (Vander Weide Report) at pp. 15-16.

776. Object. RF is inaccurate and irrelevant. Professor Vander Weide stated that following the Acquisition, ScottishPower was subject to PUHCA. Tr. 572:10-24 (Vander Weide). PacifiCorp was not subject to PUHCA. Id.

777. No objection.

778. Object. Dr. Chambers testified that, in his opinion, the $4 billion Fixed Rate Loan Notes and $.9 billion Floating Rate Loan Notes were ranked pari passu. Tr. 625:7-21 (Chambers).

779. Object. Professor Chambers testified that if, rather than issuing $4 billion of public debt, the Floating Rate Notes had also been issued as external senior debt (i.e., pari passu with the Fixed Rate Loan Notes), the financial position of NAGP would have been only slightly weaker. Ex. 251-P (Chambers Expert Report) at p. 56. Dr. Chambers further testified that, under this scenario, while there is still a possibility that an investment grade rating of "BBB-" would have been assigned to NAGP, it is more likely that a lower credit rating of "BB+" would have been assigned to NAGP in 1999, the highest possible rating in the speculative grade. Id.

780. Object. RF is inaccurate. Dr. Chambers conducted identical analyses for both the $4.0 billion and the $4,897 billion of debt. Tr. 616:10-617:6 (Chambers).

781. No objection, although Dr. Chambers was speaking in general terms in the context of a hypothetical third-party lender.

782. No objection.

783. Object. RF is incomplete. Dr. Chambers testified that NAGP's debts were effectively structurally subordinated to PacifiCorp's debts. Dr. Chambers testified further that structural subordination becomes much more of an issue where there are other liabilities at the holding company level. Dr. Chambers explained that "in this case, where essentially NAGP is PacifiCorp, that issue becomes much less important or much less relevant to the analysis." Tr. 628:8-16 (Chambers).

784. Object. Dr. Chambers testified that in situations where the holding company (NAGP) and the operating company (PacifiCorp) are essentially the same entity, new debt at the operating company level is not an important issue because the holding company (NAGP) "controls that strategic decision." Tr. 628:11-23 (Chambers). Moreover, any effect that this issue does have on debt holders would first be "recognized in the [credit] ratings." Tr. 629:5-10 (Chambers).

785. Object. Dr. Chambers testified that while credit rating agencies review both historical and projected information, the relative weights placed on historical versus projected information is based on many factors and will vary from case to case. Ex. 251-P (Chambers Expert Report) at p. 23.

786. Object. Dr. Chambers examined and incorporated PacifiCorp historical operational information in his analysis. Ex. 251-P (Chambers Expert Report) at pp. 18-22. Dr. Chambers examined but did not rely on PacifiCorp financial information for the years immediately preceding the Acquisition because, in his opinion, that historical financial information was clouded by ancillary activities (most notably, the change in strategic focus, such as energy trading, which had been divested or was in the process of being divested by PacifiCorp), which would have no bearing on future operations of the company. Ex. 251-P (Chambers Expert Report) at pp. 23-24; Tr. 631:2-632:12 (Chambers). Petitioner notes that Mr. Mudge did not consider PacifiCorp's historical information in his "credit rating."

787. Object. Dr. Chambers' analysis included assumptions that were consistent with the ScottishPower Projections, in the same manner that a credit rating agency would consider any reputable company's financial assumptions. Tr. 632:13-633:9 (Chambers).

788. Object. RF is incomplete. Dr. Chambers understood that management intended to sell the Australian businesses, including Powercor. However, consistent with the credit rating agencies' perspective, Dr. Chambers excluded Powercor sales proceeds from his analysis until "there is a firm agreement to sell that asset." Tr. 613:8-19 (Chambers). Instead, the Australian assets (and cash flow from Australia) are included in Dr. Chambers' analysis. Tr. 613:20-614:13 (Chambers); Ex. 251-P at p. 23 (Chambers Report).

789. Object. RF is offered out of context. Dr. Chambers opined that debt issuances with a long-term maturity date provide the issuer with sufficient flexibility and time to plan for repayment and/or refinancing. Prepayment also creates flexibility. Tr. 635:15-19 (Chambers). Specifically, Dr. Chambers opined that the four Loan Notes' single 10-year maturity structure would not be an issue with respect to the flexibility of the Intercompany Debt. Tr. 635:20-23 (Chambers).

790. No objection.

791. Object. See Response to RF 789. Dr. Chambers opined that the Loan Notes' 10-year maturity structure provided NAGP sufficient flexibility and time to plan for repayment and/or refinancing. Tr. 634:18-636:6 (Chambers).

792. No objection, although Petitioner notes that the parties stipulated to the call and put features of the Loan Notes. See Ex. 45-J; Stip. ¶ 163(f)-(g).

793. Object. RF mischaracterizes testimony. Dr. Chambers testified in general terms about the impact of put and call features, as well as other kinds of conditions. He testified that "we see those kinds of conditions in many instances of debt that are issued. Obviously we see different covenants, and different conditions attached to pieces of debt, and that are attractive to issuers, and that are attractive to investors in various ways. So those all get factored into the actual terms that would be assigned to the obligation." Tr. 636:15-22 (Chambers).

794. Object. RF is misleading. Dr. Chambers stated "I didn't see any evidence that there was a likelihood that a put would be exercised, and no, I do not see a specific plan for attending to that." Tr. 637:14-16 (Chambers).

795. Object. RF is misleading. Dr. Chambers testified that additional financial covenants analysis would not be necessary for the Loan Notes because the Loan Notes retained an investment grade credit rating. Tr. 639:2-5 (Chambers). Additionally, Dr. Chambers testified that credit ratings agencies always pay attention to financial covenants. It is not an "on and off switch" depending on a company's investment/sub-investment grade credit rating. Tr. 639:17-640:2 (Chambers).

796. Object. RF's limited time frame does not present Dr. Chambers' complete analysis and therefore is misleading. A complete presentation of Dr. Chambers' analysis shows the projected total debt to total debt plus equity ratio on the $4.897 billion of Debt declining to 63.5% by 2007. Ex. 251-P (Chambers Expert Report) at p. 56. The projected total debt to total debt plus equity ratio declines 54.1% when computed on only the $4.0 billion in Fixed Rate Loan Notes. Ex. 251-P (Chambers Expert Report) at p. 33.

797. Object. RF is incomplete. Petitioner notes that Dr. Chambers' inclusion of preferred stock as equity in his debt-to-equity ratio calculations is consistent with established credit rating agency criterion. Tr. 623:5-8 (Chambers). Conversely, Mr. Mudge included preferred stock as debt in his debt-to-equity ratio calculations, then purported to apply these calculations to the rating agency standard even though his methodology differed from those of the rating agencies. Ex. 252-P (Chambers Rebuttal Report) at pp. 3-4. Dr. Chambers noted that Mr. Mudge was "comparing apples and oranges." Tr. 623:9-15 (Chambers).

798. Object. Professor Chambers did not testify that preferred stock creates an "equity cushion" -- that is Respondent's counsel's term. In addition, Professor Chambers testified that S&P treats preferred stock as equity for purposes of computing debt-to-equity ratios. Tr. 644:9-14 (Chambers).

799. Object. RF mischaracterizes Dr. Chambers' testimony. Dr. Chambers testified that while the debt-to-equity ratio was above the benchmark range included in the chart at issuance, it drops rapidly. Tr. 645:9-11 (Chambers). Dr. Chambers further opined that a single ratio at a point in time has to be balanced against other factors in terms of a complete analysis. Tr. 645:15-19 (Chambers). Also, the reference to "off the chart" was Respondent's counsel's term, not Dr. Chambers', and was referring specifically to Dr. Chambers' chart.

800. Object. RF mischaracterizes Dr. Chambers' testimony. Dr. Chambers also determined that this debt-to-capitalization ratio would decrease to 63.5% by 2007. Ex. 251-P at pp. 55-56 (Chambers Report). Furthermore, Dr. Chambers acknowledged other situations in which a ratio is "off the chart," but the ultimate credit rating was not affected. Tr. 645:20-646:3 (Chambers).

801. Object. RF is axiomatic and inappropriate for a factual finding.

802. No objection.

803. Object. RF is incorrect. Dr. Chambers testified that he was not making any specific assumption in that respect. See Tr. 651:5-17 (Chambers). Dr. Chambers' rebuttal analysis reflects a complete picture of the balance sheet effects of a hypothetical $4.9 billion loan from third parties. Dr. Chambers concluded that if NAGP had borrowed $4.9 billion from public markets, the consolidated entity would have had an additional $4.9 billion in assets with which to pay down other debt or for income-producing purposes. By contrast, Mr. Mudge's balance sheet omits the corresponding $4.9 billion asset (the proceeds from the borrowing) and only includes the debt. Tr. 650:4-651:25 (Chambers); Ex. 252-P (Chambers Rebuttal Report) at p. 4.

804. No objection as to the fact that Mr. Mudge prepared a rebuttal report. Petitioner objects to the "analyses" contained therein on the grounds that it is inaccurate and unsupported.

805. Object. The RF accurately characterizes Mr. Mudge's characterization of Dr. Shaked's report; however, Mr. Mudge's characterization is incorrect. Dr. Shaked performed identical analyses for both the Fixed and Floating Rate Notes.

806. Object. Mr. Mudge's "determination" is neither correct nor is it a "determination" -- it is his erroneous perception. Both Dr. Chambers and Mr. Chigas considered scenarios where the Floating Rate Notes were pari passu with the Fixed Rate Notes. Professor Chambers concluded in his report that if, rather than issuing $4 billion of public debt, the Floating Rate Notes had also been issued as external senior debt (i.e., pari passu with the Fixed Rate Notes), the financial position of NAGP would have been only slightly weaker than if the notes were issued as subordinated debt. Ex. 251-P (Chambers Expert Report) at p. 56. Mr. Chigas stated in his report that "the inclusion of an additional approximately $897 million of debt would not alter my conclusions. If the inclusion of $897 million incremental debt resulted in a downgrade of the $4 billion of debt to non-investment grade, then in my experience, I would have recommended the following structuring strategy, which I have utilized in transactions: divide the total debt offering amount into senior and subordinated tranches. I would maximize the amount of senior debt that could be investment grade and the remaining amount as non-investment grade." Ex. 253-P (Chigas Expert Report) at p. 27.

807. Object. Mr. Mudge's opinion with respect to this legal issue is irrelevant.

808. Object. Mr. Mudge's perception of Dr. Chambers' and Dr. Shaked's analysis is flawed. Professor Chambers and Professor Shaked analyzed two different issues, which required the application of different methodologies. Professor Shaked analyzed whether, at the time the Loan Notes were issued, ScottishPower could reasonably project that interest and principal payments on the Loan Notes could be made out of NAGP's assets and reasonably anticipated cash flow. Professor Shaked's analysis was necessarily focused on ScottishPower's reasonable expectation at the time the Loan Notes were issued. On the other hand, Dr. Chambers' analysis answers a hypothetical question focused on how a credit rating agency would assign a credit rating to NAGP in connection with a hypothetical debt offering.

809. Object. Mr. Mudge's view that Powercor should be omitted from PacifiCorp's assets is illogical.

810. Object. Dr. Chambers' expert report does not corroborate Mr. Mudge's opinions. Dr. Chambers concludes that if, hypothetically, NAGP had issued $4.9 billion of debt to third parties under similar terms as the Fixed Rate and Floating Rate Notes, there is still a possibility that an investment grade rating of "BBB-" would have been assigned to the company, although it is more likely that a lower credit rating of "BB+" would have been assigned to NAGP in 1999, the highest possible rating in the speculative grade. Ex. 251-P (Chambers Expert Report) at p. 56. Mr. Mudge concludes, without any serious analysis, that the credit rating would be "closer to single B than BB." Further, Dr. Chambers concludes that in the likely event that the Floating Rate Loan Notes would have been subordinated, the Fixed Rate Loan Notes would have carried an investment grade credit rating. Ex. 251-P (Chambers Expert Report) at p. 56; Ex. 260-R (Mudge Report) at pp. 21, 23; Tr. 618:18-619:6 (Chambers). An expert should not testify that others agree with him as a means of vouching for or reinforcing any opinion of his own that he presents, at least in relation to central or contested matters. See, e.g., Dura Automotive Systems of Indiana, Inc. v. CTS Corporation, 285 F.3d 609, 613-614 (7th Cir. 2002).

811. Object. Mr. Mudge's opinions with respect to these issues are unsupported and not credible. Dr. Chambers explained his rationale for including operating revenue from Powercor in his model. Tr. 633:10-634:11 (Chambers). With regard to Mr. Mudge's criticism that Dr. Chambers did not adjust the interest rate of the Loan Notes to reflect a non-investment grade credit rating (when determining NAGP's hypothetical credit rating), Mr. Mudge's reasoning is obviously circular, flawed and contrary to Dr. Chambers' opinion with respect to NAGP's credit rating.

812. Object. Mr. Mudge's perception is wrong. Dr. Shaked testified that he was aware of Mr. Chambers' opinions with respect to NAGP's hypothetical credit rating, but that NAGP's hypothetical credit rating was not relevant to his analysis, which principally focused on ScottishPower's expectation of repayment. Tr. 494:8-495:1 (Shaked). Mr. Chigas specifically addressed the possibility that the issuance would be non-investment grade. Mr. Chigas wrote in his report that "if the inclusion of $897 million incremental debt resulted in a downgrade of the $4 billion of debt to non-investment grade, then in my experience, I would have recommended the following structuring strategy, which I have utilized in transactions: divide the total debt offering amount into senior and subordinated tranches. I would maximize the amount of senior debt that could be investment grade and the remaining amount as non-investment grade." Ex. 253-P (Chigas Expert Report) at p. 27. NAGP's hypothetical credit rating was not in any way relevant to the Professor Vander Weide opined on.

813. Object. Mr. Chigas' opinions did not corroborate Mr. Mudge's views. Mr. Chigas concluded that a hypothetical NAGP $4 billion fixed rate investment-grade rated debt capital market bond transaction offered on November 29, 1999 would have been purchased by third-party income investors on similar terms as the Loan Notes. Ex. 253-P (Chigas Expert Report) at p. 5; Tr. 658:7-19 (Chigas). With respect to the question of whether the debt could have been issued with a 7.3% coupon, Mr. Chigas testified at trial "I do believe they would be able to issue that debt. I've offered a slightly different coupon. Or there could have been other structural enhancements that could have been added to that debt, if a coupon of 7.3 percent coupon [sic] was an objective to be obtained, such as a parent guarantee or something." Tr. 716:14-20 (Chigas). An expert should not testify that others agree with him as a means of vouching for or reinforcing any opinion of his own that he presents, at least in relation to central or contested matters. See, e.g., Dura Automotive Systems of Indiana, Inc. v. CTS Corporation, 285 F.3d 609, 613-614 (7th Cir. 2002).

814. Object. RF mischaracterizes Mr. Chigas' report. Mr. Chigas opined that 8.075% to 8.325% would be the "initial yield range," i.e., "the starting point of price discussions with investors, which the investment bank would seek to reduce over the marketing period." Ex. 253-P (Chigas Report) at p. 27; Tr. 679:13-16 (Chigas).

815. Object. RF mischaracterizes the record. Mr. Chigas quoted a Credit Suisse research report, which provided that yields in the range of 250-350 bps would dis-incentivize bond issuances. Mr. Chigas, in turn, interpreted the Credit Suisse observation to set a pricing ceiling above what could be expected in the bond market. Tr. 690:20-692:18 (Chigas); Ex. 253-P (Chigas Expert Report) at p. 27.

816. Object. RF fails to consider the entire record. Mr. Chigas testified that he footnoted the Empire District Electric Company transaction simply because it was the closest utility industry transaction in time to the November 1999 NAGP transaction. Tr. 713:13-19 (Chigas).

817. Object. Mr. Chigas noted that unlike the Loan Notes, the TNP Enterprises transaction is junior subordinated debt at the holding company level. Tr. 714:18-21 (Chigas).

818. Object. In stark contrast to Mr. Mudge's report, the bases for every assumption in Dr. Shaked's report are thoroughly explained and substantiated.

819-820. Object. Mr. Mudge's "finding" is neither correct nor a "finding" -- it is an argument. Professor Shaked did not ignore historical facts. He fully explained his computation of the 1999 ending cash balance on cross examination at Tr. 500:21-504:17 (Shaked) and in his expert report.

821. Object. Mr. Mudge's view that neither the Powercor asset nor the Powercor sales proceeds should be included in PacifiCorp's assets is illogical and was addressed at length by Dr. Shaked. See, e.g., Tr. 489:5-490:19 (Shaked).

822. Object. RF misstates Mr. Chigas' opinion. See Responses to RF 750 and RF 755. Moreover, Professor Shaked's analysis was focused on whether, at the time the Loan Notes were issued, ScottishPower could reasonably project that interest and principal payments on the Loan Notes could be made out of NAGP's assets and reasonably anticipated cash flow. Professor Shaked performed a sensitivity analysis on the ScottishPower Projections by determining the break-even interest rate on NAGP's Intercompany Debt. "The break-even interest rate is the highest rate at which NAGP could make interest payments on its Intercompany Debt over the course of the projection period, while making no principal payments and having PacifiCorp maintain a minimum cash balance of $25 million. For the 1998 Projections, the break-even interest rate on the fixed rate notes was 23.8%, more than three times higher than the actual interest rate on the fixed rate notes (see Exhibit 17A). For the 1999 Projections, the break-even interest rate was 23.1%, again more than three times higher than the actual interest rate on the fixed rate notes (see Exhibit 18A)." Ex. 245-P (Shaked Expert Report) at pp. 26-27.

824. Object. RF is inaccurate and unsupported by the record. The Acquisition was not structured as a stock-for-stock deal "because a cash transaction was beyond ScottishPower's financial capacity." As set forth in the Project Jet Board Paper, ScottishPower management recognized that PacifiCorp's stock price had declined sharply, from a high of more than $27 in December 1997 to around $19 per share in December 1998. "In contrast, UK utility prices, including [ScottishPower's] had held up well." The Project Jet Board Paper states "this contrast in performance obviously helps any transaction financed with stock, as does the continuing strength of the sterling." Ex. 2-J at PHI-DOCS097148. This rationale for a stock-for-stock transaction was confirmed by Mr. Brown. "We intended to do this deal as an all stock transaction, and we felt that our stock was fairly fully valued, I think, and that theirs was probably undervalued by the market at that point, and our calculations bore that out." Tr. 217:13-17 (Brown).

825. Objection. RF is incomplete. The Loan Notes were issued by NAGP to compensate ScottishPower for shares it issued to PacifiCorp's shareholders in connection with ScottishPower's acquisition of PacifiCorp.

826. Object. RF is misleading and unsupported by the record. E&Y, ScottishPower's advisor, thoroughly analyzed NAGP's ability to pay interest and repay the principal on both $5.6 billion and $4.9 billion of Intercompany Debt. Table 1 of the E&Y Board Paper (Ex. 19-J at PHI-DOCS084025-27) sets forth contemporaneous cash flow projections which support PacifiCorp's ability to pay interest and repay $4.9 billion of Loan Notes by the 2009 maturity date. In total, Ernst & Young projected that, after payment of the interest expense, through 2007 (at least 2 years prior to maturity), NAGP would have $5,457 billion in excess cash flows to fully pay off principal on the Loan Notes. Ex. 19-J at PHI-DOCS084026; Tr. 195:6-17 (Merriman). In addition, Mr. Merriman testified that "we [E&Y] looked at the numbers on this level of debt, the numbers that we received from the financial projections. Transfer pricing people looked at the numbers at the time on this sort of threshold amount here. And that we felt they could support it." Tr. 87:15-20. Mr. Merriman testified further "we felt that through our analysis and projections that were developed by PacifiCorp, ScottishPower, Morgan Stanley, that there was sufficient cash to support [the debt]." Tr. 89:8-11. Mr. Merriman also confirmed that immediately prior to Closing, E&Y reviewed the latest financial projections and confirmed that they comported with their prior financial analysis. Ex. 148-J; Tr. 92:15-93:16.

827. Object. RF is inaccurate and unsupported by the record. The parties had numerous advisors poring over the details of the Intercompany Debt in advance of the Merger -- including discussing and approving the commerciality of the terms -- all with the objective of both creating true debt and substantiating the intention to do so. Stip. ¶¶ 29-30; Ex. 41-J; Ex. 152-J; Ex. 154-J; Ex. 155-J; Ex. 156-J; Tr. 79:2-5; Tr. 137:11-24 (Merriman); Tr. 220:9-13 (Brown). The drafting and implementation of the Loan Notes was focused on ensuring that the Loan Notes reflected commercial terms and conditions that would be respected by third parties, including U.S. and U.K. tax authorities. Ex. 40-J; Tr. 186:23-187:3 (Merriman). E&Y commented that the Loan Notes "as drafted does accurately reflect an offering of debt to a wide range of unrelated investors, possible for the purpose of the issuer making an acquisition." Ex. 41-J. E&Y concluded that, from their perspective as U.S. and U.K. tax advisors "the Loan Note is nonetheless representative of a debt instrument for US tax purposes and, as such, if all other parties are otherwise satisfied with its contents, then it should be satisfactory for the intended purposes if the features required can be accommodated." Ex. 41-J at PHI-DOCS089400; Tr. 132:14-24 (Merriman) (emphasis added). In addition, the fact that the instruments were drafted by Freshfields, ScottishPower's U.K. legal counsel, rather than E&Y, ScottishPower's tax advisors, lends further support to the parties' intent. Tr. 122:13-16 (Merriman); Stip. ¶ 145.

828. Object. RF is contrary to the parties' Stipulations. Stips. ¶¶ 153 through 161.

829. Object. RF is incorrect and contradicted by Mr. Chigas. Mr. Chigas analyzed interest rates of comparable market transactions and specific deal terms and determined that third-party investors in the debt capital market would have purchased bonds on substantially similar terms as the Loan Notes. Ex. 253-P (Chigas Report) at pp. 23-27; Tr. 687:15-688:23. In addition, the Loan Notes were adapted from loan notes issued in connection with the Southern Water bond offering, which was a debt capital market transaction. Ex. 152-J; Tr. 123:17-22; Tr. 124:3-8; Tr. 177:7-10; Tr. 177:16-25 (Merriman). RF apparently relies on Mr. Mudge's report, which is devoid of any citations or meaningful analysis, to support this assertion. Mr. Mudge's observation that the Loan Notes lacked provisions normally required in commercial debt transactions was based on anecdotes, lacks any analysis or citations, and is not supported by the record. Ex. 253-P (Chigas Report) at p. 5. Mr. Mudge did not independently research or offer any analysis regarding "standard creditor protections." Mr. Mudge merely testified about a comment in an E&Y facsimile. Ex. 260-R at 26. Specifically, Mr. Mudge's report states "per the observation of Ernst & Young in their memorandum in October 1999, the lack of Loan Notes [sic] would have exposed creditors to the following. . . ." Id. In contrast, Mr. Chigas identified specific examples of debt capital market transactions that were comparable to the hypothetical NAGP transaction which did not require the covenants referenced by Mr. Mudge. Ex. 254-P (Chigas Rebuttal) at pp. 3-6. Further, Mr. Mudge admitted that he was not asked to opine on how covenant standards apply in an intercompany debt context. Tr. 1056:18-25. Mr. Mudge limited his analysis to the Loan Note Instruments and intentionally ignored the existence of the Pledge Agreement. Ex. 260-R (Mudge Report) at fn. 4. Moreover, Mr. Mudge's opinion is limited to whether the exact terms of the Intercompany Debt would have been acceptable to third-party lenders. Tr. 1034:16-20.

830. Object. There is no evidence in the record to support the assertion that the Loan Notes were structured to facilitate their conversion to equity. Following a comprehensive analysis, Mr. Chigas concluded that the terms of the Loan Notes were substantially similar to standard investment grade bond terms at the time. Ex. 253-P (Chigas Report) at p. 5.

831. Object. RF is irrelevant. Dr. Chambers testified that while the Loan Notes were effectively structurally subordinated to the debts of PacifiCorp, structural subordination becomes much more of an issue where there are other liabilities at the holding company level. Dr. Chambers explained that "in this case, where essentially NAGP is PacifiCorp, that issue becomes much less important or much less relevant to the analysis." Tr. 628:8-16.

832. Object. RF is unsupported by the record and irrelevant. Mr. Chigas analyzed interest rates of comparable market transactions and specific deal terms and determined that third-party investors in the debt capital market would have purchased bonds on substantially similar terms as the Loan Notes. Ex. 253-P (Chigas Report) at pp. 23-27; Tr. 687:15-688:23. Mr. Chigas further testified that "The $897 million of floating rate notes would not have materially affected the issuance of the NAGP DCM Transaction." Ex. 253-P (Chigas Report) at pp. 5 and 28.

833. Object. RF is incorrect and irrelevant. Mr. Chigas concluded that a hypothetical NAGP $4 billion fixed rate investment grade rated debt capital market bond transaction offered on November 29,1999 would have been purchased by third-party income investors on similar terms as the Loan Notes. Ex. 253-P (Chigas Report) at p. 5; Tr. 658:7-19. With respect to the question of whether the debt could have been issued with a 7.3% coupon rate, Mr. Chigas testified at trial "I do believe they would be able to issue that debt. I've offered a slightly different coupon. Or there could have been other structural enhancements that could have been added to that debt, if a coupon of 7.3 percent coupon [sic] was an objective to be obtained, such as a parent guarantee or something." Tr. 716:14-20.

834. Object. RF is incorrect and unsupported by the record. Respondent has not identified any "financial constraints" that would have prevented NAGP from obtaining 4.9 billion of debt. Nor do any of Respondent's RFs refer to "financial constraints."

835. Object. RF is incorrect and unsupported by the record. The only basis for this RF is Mr. Mudge's opinion that "it would have been an uncertain prospect for NAGP to issue the Loan Notes to third-party creditors, as it would have breached capitalization guidelines established by the SEC. . . ." and another statement that "it appears that NAGP could have faced practical impediments to issuance." Ex. 260-R at pp. 3, 13 ,27. Likewise, at trial Mr. Mudge testified that in his opinion "there would have been significant uncertainty that would have had to be addressed." Tr. 1060:19-1061:4. None of these statements is definitive. During cross examination, Mr. Mudge would not address whether the alleged requirement applied to third-party debt hypothetically incurred by Petitioner in connection with the Merger on the grounds that he was not a PUHCA expert. Tr. 1060:13-1061:5. In addition, Mr. Mudge did not provide any reference or citation to an SEC "guideline" in his report. On cross examination, Mr. Mudge first stated that the authority for his position was an SEC Order. Tr. 1057:1-1058:11. When Petitioner's counsel pointed out that the referenced SEC Order was issued on December 6, 2000, a year after Closing, Mr. Mudge pivoted and referred instead to "a practice of the SEC that was commonly understood." Tr. 1058:2-10. In contrast, Professor Vander Weide testified that regulatory restrictions had little or no impact on PacifiCorp's ability to pay dividends to NAGP. Ex. 249-P (Vander Weide Report) p. 24. The SEC Order itself answers the question; Section III of the Order exempts all existing financing arrangements from the Order's reach. Ex. 76-J at SUPP000945. As a result, there is absolutely nothing in the record supporting Mr. Mudge's vague statements, which he admitted he is not qualified to make. Mr. Brown, on the other hand, testified that ScottishPower's regulatory lawyers advised that PUHCA was a non-issue and that PUHCA was likely to be significantly modified or repealed. Tr. 258:4-9. The advice was correct, as PUHCA was later repealed in the Energy Policy Act of 2005. Stip. ¶ 258.

836. Object. RF is incorrect. Dr. Shaked testified that:

• Utilizing the 1998 Projections, NAGP was reasonably expected to make regular interest payments and fully repay the Fixed Rate Notes by year end-2007, approximately two years prior to the maturity date of the Fixed Rate Notes. Ex. 245-P (Shaked Expert Report) at p. 26.

• Utilizing the 1998 Projections, NAGP was reasonably expected to make regular interest and principal payments and likely could repay both the Fixed Rate Notes and Floating Rate Notes on or before their maturities in 2009 and 2014, respectively. Ex. 245-P (Shaked Expert Report) at pp. 26-27.

• Utilizing the 1999 Projections, NAGP was reasonably expected to make regular interest payments and fully repay the Fixed Rate Notes by year-end 2007, approximately two years prior to the maturity date of the Fixed Rate Notes. Ex. 245-P (Shaked Expert Report) at p. 27; Tr. 438:7-16 (Shaked).

• Utilizing the 1999 Projections, NAGP was reasonably expected to make regular interest and principal payments and likely could repay both the Fixed Rate Notes and Floating Rate Notes on or before their maturities in 2009 and 2014, respectively. Ex. 245-P (Shaked Expert Report) at p. 27.

837. Object. RF is incorrect because it disregards the possibility of third-party borrowing or refinancing. Mr. Mudge acknowledged that refinancing of existing debt is an "industry practice," however, his analysis does not consider that possibility because "it wasn't a question I was asked to address." Tr. 1070:4-11.

838. Object. RF is incorrect. Dr. Vander Weide testified that there were no meaningful regulatory restrictions on PacifiCorp's ability to pay out dividends to shareholders. Tr. 555:5-556:13 (regarding dividend limitations); Tr. 549:7-550:19. Respondent's expert admitted during cross-examination that any regulatory restrictions would only applied to regulated assets. Tr. 1062:20-24. Petitioner's regulatory expert clarified that the only regulatory restriction applied to regulated assets in Oregon. Tr. 549:7-550:19 (Vander Weide) (Oregon regulators "would look at the assets that resided within the State of Oregon to provide electric service in Oregon"). In addition, Mr. Larson testified that regulators watched dividend payouts in only a "very perfunctory manner," and simply asked that a notice be filed each quarter with the regulatory commission once the board of the utility had declared the dividend; he did not recall a commission "ever even asking any questions regarding any of those filings." R. Tr. 975:16; 976:4-14 (Larson). The reason given by Mr. Larson was that the regulators viewed the earnings of the utility as "shareholder money," and that "[t]heir view was that the board could determine what to do with the earnings of the utility." R. Tr. 975:19-976:1; 978:19-22 (Larson) (". . . if the board wanted to pay 100 percent of it out in dividends, they could pay it out").

839. Object. RF is incorrect and is unsupported by the record. The 1999 Projections amply demonstrate that there would be sufficient cash flows such that NAGP would be able to repay interest and principal on the Intercompany Debt. See Ex. 245-P at pp. 27-28 (Shaked Report). Contrary to Respondent's assertion (see RF 633), Mr. Mudge did not analyze whether, based on this model, ScottishPower could reasonably expect at the time the Loan Notes were issued that NAGP could service interest on the Loan Notes and repay the principal when due. Instead, Mr. Mudge adapted this model and considered whether NAGP could have repaid principal had the debt been issued to third parties (with a different interest rate as determined by Mr. Mudge, different assumptions Mr. Mudge speculates a lender might apply, and reliant solely on projection of PacifiCorp's dividends). Ex. 260-R (Mudge Report) at p. 2; Tr. 470:3-11 (Shaked). Under each "sensitivity" scenario devised by Mr. Mudge (each of which excluded both operating revenue and the anticipated proceeds from the sale of Powercor), Mr. Mudge's analysis confirms that NAGP was anticipated to have sufficient funds to fully service interest on $4.9 billion of debt and repay substantial principal by 2009 (in excess of $1 billion under his worst case scenario). Tr. 1092:2-8 (Mudge). While acknowledging that refinancing of existing debt is an "industry practice," Mr. Mudge's analysis does not consider that possibility because "it wasn't a question I was asked to address." Tr. 1070:4-11 (Mudge). Moreover, Mr. Mudge's entire approach to computing the funds available to NAGP to pay interest and service the debt is flawed because he erroneously relied on a forecasted "dividend" number in the 1999 Projections rather than NAGP's available cash flow. Tr. 470:3-11 (Shaked). In the 1999 Projections, the dividend was projected to grow at 7.5% annually. Tr. 290:24-291:1 (Wilson). This growth rate was not intended to reflect ScottishPower's management's view of the anticipated PacifiCorp's dividend. Tr. 291:14-17 (Wilson). Rather, the purpose of the 7.5% dividend growth rate assumption was to illustrate financial projections with a debt-equity ratio that was more typical of a U.S. utility (50% debt, 50% equity). Tr. 291:18-23 (Wilson). In order to calculate the amount of cash that ScottishPower anticipated would be generated by PacifiCorp, various cash flow lines in the 1999 Projections would need to be added together. Tr. 292:2-9 (Wilson).

In addition, Mr. Mudge's sensitivity analysis contains numerous unsubstantiated adjustments. Mr. Mudge arbitrarily discounted the projected savings in operating expenses by 40%; arbitrarily discounted 100% of the capital expenditure cost savings without any basis; reduced expected operating savings by an additional 26%, also without support in his second sensitivity; lowered growth considerations without lowering certain corresponding expense considerations; reduced fuel savings and increased purchased power costs without analytical support; and reduced expected operating savings by an additional 26% in his second sensitivity, also without support. Ex. 247-P (Shaked Rebuttal) at pp. 19-23.

Mr. Mudge also makes several analytical errors. Professor Shaked testified that the effect of correcting these errors would create $2.764 billion in additional available cash in 2009. With these corrections, NAGP would have had a cash surplus in his base case analysis and sensitivity scenarios. Ex. 247-P (Shaked Rebuttal) at p. 16. Mr. Mudge's analytical errors include the following:

(1) Mr. Mudge assumes that the interest rate on the Floating Rates Notes is 7.3%, with no factual or analytical basis. At the time of the transaction, the appropriate rate was 6.675%. This error led Mr. Mudge to underestimate PacifiCorp's cash flows by $56 million. Ex. 247-P (Shaked Rebuttal) at p. 9; Tr. 471:22-472:10 (Shaked).

(2) Mr. Mudge's exclusion of the Powercor proceeds is a "billion and half dollar mistake." Tr. 467:19-469:16 (Shaked); Tr. 474:24-475:3 (Shaked) (Dr. Shaked testified: "There are many other things, but no doubt this is a big-time mistake"). Certain PacifiCorp assets, including Powercor, were anticipated to be available for debt repayment at the time of the Acquisition. The sale of the Australian operations was expected to generate $885 million in cash. Ex. 247-P (Shaked Rebuttal) at pp. 10-14. Mr. Mudge's "base case" shows NAGP was anticipated to be $900 million short in its ability to repay the Loan Notes. Rather than using the anticipated proceeds from the sale of Powercor and Hazelwood to pay the Loan Notes, Mr. Mudge inexplicably assumed that PacifiCorp would transfer the proceeds directly to ScottishPower, as a dividend, rather than a payment to NAGP's debt holders. Ex. 247-P (Shaked Rebuttal) at p. 10. Thus, under Mr. Mudge's base case, once the proceeds from the anticipated sale of Australia are properly factored in, under Mr. Mudge's approach of using PacifiCorp dividends rather than available cash flow, NAGP was projected to have sufficient funds to service interest and fully retire $4.9 billion prior to maturity 2009.

(3) Mr. Mudge's analysis failed to incorporate the effect of the existing cash on the balance sheet. Ex. 247-P (Shaked Rebuttal) at p. 14.

(4) Mr. Mudge underestimated the return that NAGP could have expected to receive on surplus cash. Ex. 247-P (Shaked Rebuttal) at pp. 14-15; Tr. 471:7-21 (Shaked) ("his [Mr. Mudge's] assumption is grossly unreasonable").

In sharp contrast, Dr. Shaked concluded that, based on the information known at the time of the Merger, NAGP was projected to be able to pay interest and principal on the Loan Notes as it became due, that the value of NAGP's assets at the time of the Acquisition exceeded its debt obligations to ScottishPower and that NAGP was adequately capitalized. Ex. 245-P at p. 8. In order to reach this conclusion, Dr. Shaked tested the reasonableness of ScottishPower's projections, performed a cash flow analysis and several sensitivity analyses that confirm NAGP's ability to repay, and also performed two valuation analyses of NAGP concluding that NAGP's assets exceeded its debt to ScottishPower and that NAGP was adequately capitalized. Id.

840. Object. Petitioner is uncertain which conduct Respondent specifically relies on to establish this fact. In general terms, NAGP and ScottishPower's conduct following the Merger remained consistent with the economic reality of a debtor-creditor relationship, including ultimate payment of all interest accrued on the Fixed Rate Notes up until the time those notes were restructured in December 2002. All interest payments made and deducted for U.S. tax purposes were sourced from PacifiCorp dividends and the proceeds of sale of Australian assets, as contemplated at the time of the Merger. PacifiCorp's expected financial performance post-Merger was significantly negatively affected beginning in mid-2000 by two unanticipated events: the Western Power Crisis and the simultaneous catastrophic failure of the Hunter Power Station. Stip. ¶ 170. This ultimately led to a re-assessment, based on changed economic conditions and new external analyses of debt capacity, which supported capitalization of the Floating Rate Notes in March 2002, and the later capitalization of a portion of the Fixed Rate Notes in December 2002.

841. Object. RF is inaccurate. This issue is addressed in the argument section of Petitioner's Reply Brief at Section X-A.

842. Object. RF is inaccurate. This issue is addressed in the argument section of Petitioner's Reply Brief at Section X-B.

843. Object. RF is irrelevant.

844. Object. RF is inaccurate. NAGP claimed an interest deduction in the amount of $333,171,736, equal to the amount of interest actually paid to ScottishPower on the Fixed Rate Notes. Stip. ¶¶ 201 and 207; Ex. 67-J. Mr. Martin testified that the interest paid during the tax year ended March 31, 2001 was allocable exclusively to the Fixed Rate Loan Notes. Tr. 762:13-763:1; Tr. 793:21-794:2; Tr. 799:10-800:14. Ms. Self corroborated Mr. Martin's testimony. Tr. 919:12-15. During both his deposition and direct and cross examinations, Mr. Martin consistently testified that the interest deduction claimed on the tax return for the tax year ended March 31, 2001 was attributable exclusively to the Fixed Rate Loan Notes. Tr. 762:13-763:1; Tr. 793:21-794:2; Tr. 799:10-800:14.

845-846. Object. RF is inconsistent with the parties' Stipulations. The parties stipulated that on December 9, 2002, the Fixed Rate Notes were replaced pursuant to Project Venus with a deferred subscription obligation between PHI and PacifiCorp UK Limited ("PUKL"), a ScottishPower affiliate, that has been treated by Petitioner as debt for federal income tax purposes. Stip. ¶ 247. The resulting aggregate principal amount of debt claimed by Petitioner after December 9, 2002 was $2.375 billion, comprised of six separate notes (the "Project Venus Debt"). Stip. ¶ 247.

847. Object. RF is not supported by the record.

Respondent's proposed findings in numerous respects bear little resemblance to the record established at trial. Curiously (and perhaps strategically, to avoid testing the credulity of its assertions), Respondent called no witness and/or sought no testimony at trial concerning approximately 60% of the exhibits relied upon in its opening brief. As detailed in the objections, in many instances, Respondent then overreaches in asserting conclusions based on selected statements in those documents, specifically where such conclusions are entirely uncorroborated or more often expressly contradicted by other evidence in the record, which Respondent ignores.

Thus, Respondent asserts that alleged pre-merger financial considerations discussed at ScottishPower, as well as certain state-specific regulatory merger conditions, a post-merger SEC Order and PacifiCorp's revolving credit facilities, would have restricted NAGP's ability to incur similar indebtedness in the hypothetical third-party context. This type of tangential and speculative analysis strains the boundaries of the applicable legal test of whether a third-party creditor would lend on terms reasonably comparable to the Loan Notes. More significantly, Respondent put on no evidence whatsoever to support these various conclusions and fails to acknowledge that the alleged relevance and effect of the purported constraints and restrictions were repeatedly contradicted by the testimony of numerous witnesses and the documentary evidence itself.

Respondent also backtracks on the Stipulations. For example, having stipulated that the executed Pledge Agreement bears the date of Closing, Respondent now insinuates that the agreement was not executed at Closing -- an assertion belied by the exhibit, by evidence that E&Y, Freshfields and Milbank each contemplated execution of the agreement at Closing, by corporate minutes of NA1 and NA2, by Mr. Merriman's testimony and by reasonably contemporaneous facsimile markings. Further, although the parties painstakingly stipulated the detailed factual record concerning the timing and amount of all relevant interest accruals and payments, Respondent's attempts to layer on a new alternative presentation of those facts that is confusing, inaccurate and inconsistent with the Stipulations.

Respondent's presentation concerning the substance of the testimony of Petitioner's financial, credit rating, debt capital markets and regulatory experts is misleadingly selective and intentionally over-simplified, ignoring large segments, as well as the relevant context, of the experts' analysis and alleging purported inconsistencies where there are none. Respondent also attempts to rehabilitate the largely unsupported and misdirected testimony of its expert Mr. Mudge. Respondent thus disingenuously attempts to restate the questions on which Mr. Mudge opined in an effort to fit them more squarely into the legal standards applicable to a debt-equity case. Compounding Mr. Mudge's error, Respondent contrives to assert that opinions expressed by Morgan Stanley and E&Y are Mr. Mudge's expert opinions arising from his independent analysis. Respondent also asks the Court to adopt as fact numerous conclusions drawn by Mr. Mudge without explanation, authority, or reasoned analysis of any kind. The Court should be wary of Respondent's broad-brush approach.

Respondent's description of the Ninth Circuit's legal standard in debt-equity cases would be more complete if it described the Ninth Circuit's acceptance of related party debt as debt for tax purposes, and its leniency and flexibility toward taxpayers when applying debt-equity factors in the related party context. Hardman v. United States, 827 F.2d 1409 (9th Cir. 1987).

B. The Tax Court Standard.

After citing Litton Business Systems, Inc. v. Comm'r, 61 T.C. 367 (1973) as the Tax Court standard, Respondent then purports to analyze the debt-equity issue "by the application of the Ninth Circuit factors." What follows is a confusing sequence of headings and discussions that fail to match either the Litton standard or the Ninth Circuit factors. Petitioner urges this Court to adopt the more sensible, and more targeted, form of legal analysis used in Litton and Nestle Holdings, Inc. v. Comm'r, 70 T.C.M. (CCH) 682 (1995), precisely to avoid the kind of disjointed and awkward analysis presented by Respondent. Because Litton expressly applied Ninth Circuit law, Petitioner believes that Litton's more streamlined, three-factor approach reflects the principles of the Ninth Circuit and should be used in this case.

Respondent's summary of why there was no genuine debtor-creditor relationship is improperly based on incorrect factual conclusions and invalid legal principles. Respondent claims the debt was "contrived to obtain tax benefits." The law is clear that tax motivation does not affect a debt-equity analysis in the corporate intercompany debt context. Respondent's view that the parties "gave no serious consideration" to repayment of the debt is contrary to the substantial work done by ScottishPower to prepare financial projections and the analysis done by E&Y in its Board Paper. Respondent's view that the debt "lacked the basic formalities of debt" is puzzling, given that Respondent stipulated that both the terms of both the Fixed and Floating Rate Notes included fixed maturity dates, stated interest rates and payment dates, and rights of enforcement in the event of default. In light of dramatically changing financial conditions, the parties took responsible steps to bring intereset payments current and to adjust the principal of the debt going forward. The conduct of the parties was not the kind of conduct that leads courts to invalidate related party debt.

Respondent states that "NAGP never paid overdue interest on the Floating Rate Notes," implying a failure to pay interest on the Floating Rate Notes affects the debt-equity determination of the Fixed Rate Notes. While Petitioner believes the Floating Rate Notes constituted debt when issued on November 29, 1999, Petitioner proved that it never claimed interest deductions attributable to the floating rate debt. It is not necessary for Petitioner to prove the debt status of the Floating Rate Notes in order to sustain the interest deductions claimed on the Fixed Rate Notes. Respondent's implication that the decision to capitalize the Floating Rate Notes affects the debt-equity determination of the Fixed Rate Notes is similarly erroneous.

Respondent's assertion that the Fixed Rate Notes were "eliminated . . . through a circular movement of cash" contradicts its Stipulation that the Fixed Rate Notes were replaced in large part by an instrument that was treated as debt by the parties. The debt or equity status of the instrument known as a deferred subscription agreement was not at issue in this case, no proof in that regard was presented, and Respondent is not now entitled to make such assertion.

Respondent cites select statements in Morgan Stanley's November 16, 1998 "draft memo" and from Julian Brown's testimony, but fails to draw a factual or legal conclusion of any relevance. This issue is discussed infra in Section V.B.

B. Tax Motivation is Not Inconsistent with an Intent to Create a Debtor-Creditor Relationship.

Respondent repeatedly asserts that Petitioner's tax motivation is inherently inconsistent with NAGP's and ScottishPower's intent to create debt. As explained in Petitioner's opening brief, tax motivation does not cause debt to be recharacterized as equity. Moreover, an intent to achieve interest deductions is consistent with an intent to have a debtor-creditor relationship. It is irreconcilable for Respondent to claim that Petitioner only cared about interest deductions, and as a result did not have the requisite intent to create indebtedness. The Second Circuit, in Kraft Food Company v. Comm'r, 232 F.2d 118, 122 (2d Cir. 1954), recognized this point over 50 years ago (". . . taxpayer intended to become indebted because the desired deductions could be secured only if it created genuine indebtedness").

Petitioner's tax motivation was focused primarily on the ability of ScottishPower to claim U.K. tax on the dividends received by NA1 and NA2. Tr. 73:11-19 (Merriman). The E&Y Board Paper (p. 87) shows that the U.S. tax benefit of interest deductions on the Loan Notes over the first three years would be $457,343,000 (with a present value of $412,689,000), but also shows that the U.K. tax credits on the related dividend income over the same three years would be $443,756,000. Thus, apart from the U.K. tax credit on the dividend income, the net US/UK tax benefit of the interest payments to ScottishPower would be negligible. Respondent inappropriately attempts to suggest that the parties were driven by the $412,689,000 in present value tax benefits associated with U.S. interest deductions.

C. Respondent's Objection is to U.K. Tax Savings.

Respondent states that the "1998 Projections included $283.5 million in expected tax benefits from the double-dip tax structure over a three-year period, which were computed by E&Y." RF 105. This $283.5 million benefit is derived primarily from projected U.K. tax credits. Ironically, Respondent is claiming that Petitioner did not intend to create a valid debtor-creditor relationship with ScottishPower because of a U.K. tax planning strategy.

D. Substantial Analysis Supported the Expectation that NAGP Could Pay Interest and Principal on the Loan Notes.

Respondent insinuates that, "[a]s the "originator of the double dip scheme, Mr. Merriman has an interest in its successful sustention." Mr. Merriman left E&Y in May 2001 to join KPMG, and for the last five years has run an independent international tax consulting practice in London. Respondent elicited no proof concerning any interest Mr. Merriman may have in ensuring a successful resolution for Petitioner.

Mr. Merriman's testimony at Tr. 99:11-21 does not "contradict" the November 16, 1998 letter, as Respondent claims. In the E&Y Board Paper, E&Y opined that the Loan Note should qualify as debt for U.S. federal income tax purposes because, among other reasons, PacifiCorp's "reasonably anticipated cash flow will be sufficient to fund GP's interest payments and principal repayment on the Loan Note." (emphasis added). Ex. 19-J at PHI-DOCS083965. The fact that the November 16, 1998 letter did not further state that cash flows would support payment of principal is hardly a "contradiction" of either the E&Y Board Paper or Mr. Merriman's testimony.

Respondent points to a standard qualification in the E&Y Board Paper as proof that E&Y did no analysis of NAGP's ability to pay interest and principal on the Loan Notes. Ex. 19-J at PHI-DOCS083946. Mr. Merriman testified that, in connection with the Board Paper, E&Y reviewed and evaluated projections that were developed by PacifiCorp, ScottishPower and Morgan Stanley. Tr. 89:8-11; Tr. 93:9-16; Tr. 99:15-21; Tr. 100:22-101:1-17. Asked by Respondent whether E&Y "independently verified" that PacifiCorp's cash flows supported the payments of interest and principal, Mr. Merriman explained that PacifiCorp's financial statements had already been audited, and it was reasonable for E&Y to have relied upon those projections in conducting its debt capacity analysis without independently verifying the numbers. Tr. 161:16-20; Tr. 166:5-24. The fact that E&Y relied upon PacifiCorp's financial projections without independent verification in no way means that E&Y did not conduct a debt repayment analysis.

Respondent then attempts to discredit E&Y's financial analysis in Table 1 of the E&Y Board Paper (Ex. 19-J at PHI-DOCS084025-27) by claiming it "was not prepared for debt repayment purposes" and "did not show the application of cash flow to the intercompany Loan Note." RFs 71-72. Table 1 set forth financial projections of PacifiCorp for 1999 through 2007 and various financial ratios that were used by E&Y to derive an appropriate credit rating, on a pro forma basis, for PacifiCorp. Mr. Merriman testified how Table 1 set forth projected cash flows that were not only specifically applied to interest on the Loan Note for years 1999 through 2007, but also were available to repay principal. Tr. 103:1-25. Respondent incorrectly claims that Mr. Merriman "admitted" on cross-examination that Table 1 did not show the application of cash flow to the Intercompany Debt. Respondent conveniently ignores Mr. Merriman's clarification that Table 1 nevertheless showed projected cash flows that were available "after payment of all other cash items." Tr. 194:14-195:17. Respondent has not questioned the validity of the Table 1 financial projections.

Respondent's primary objection to the use of this evidence is that it was not created specifically for debt repayment analysis. Yet Respondent cites no authority for the premise that contemporaneous cash flow projections must be done expressly for debt repayment analysis purposes to be given evidentiary weight. Petitioner urges the Court to give weight to Table 1 as a contemporaneous cash flow projections which supports NAGP's ability to repay $4.9 billion of Loan Notes by the 2009 maturity date. Clearly, the available free cash flows for 1999 through 2007 add up to $5.457 billion, more than enough to repay $4.9 billion of debt. It is logical that Table 1 did not explicitly apply those cash flows to the repayment of then-anticipated $5.6 billion debt because the projections given to E&Y only ran through 2007, while principal was not due until November 2009.

Respondent's final attempt to discredit Mr. Merriman is based on an E&Y communication from that refers to "strong concerns" of PacifiCorp's tax advisors "about the proposed amount of the loan note (i.e., 75% of the value of Pegasus)." Ex. 210-J. Mr. Merriman explained that, notwithstanding these concerns from other advisors, E&Y believed there was sufficient cash flow to support the Intercompany Debt based on its "analysis and projections that were developed by PacifiCorp, ScottishPower and Morgan Stanley." Tr. 89:6-11. Mr. Merriman also explained that E&Y was comfortable that a 3:1 debt to equity ratio, together with other well-established debt-equity factors, supported the treatment of the Loan Notes as debt for tax purposes, based on many years of U.S. case law. Tr. 85:1-19. The Court should reject Respondent's attempt to undermine evidence of E&Y's, ScottishPower's and Morgan Stanley's professional determinations with a single-page fax (Ex. 210-J) written early in the process (Dec. 2, 1998), especially when neither the author nor recipient was called as a witness.

E. Structuring Debt to Be Respected for Tax Purposes Cannot Reasonably Be Held Against Related Party Taxpayers.

Focusing again on tax motivation, Respondent suggests that the Loan Notes are not debt because the terms were driven by the parties' desire to create debt which would be respected for tax purposes, rather than by arm's length negotiations between NAGP and ScottishPower. If Respondent's view were correct, it would no longer be possible for a corporate group to have intercompany debt that is motivated by tax considerations or, for that matter, to engage in any kind of tax planning among its affiliated members. Obviously, the Loan Notes were not negotiated at arm's length because NAGP was 100% owned and controlled by ScottishPower. Like any related party transaction that is structured to be respected for tax purposes, the Loan Notes included terms resembling agreements negotiated at arm's length between unrelated third parties. Tax advice is part and parcel of any such exercise. Kraft, 232 F.2d at 122; Tr. 77:7-11.

F. The Execution of the Loan Note Documentation Was Consistent with an Intent to Create Valid Debt

Respondent incredulously claims that NAGP did not maintain a Register and, as a result, "would have no way of knowing what Loan Notes were outstanding or be able to prove the identity of legitimate creditors in the case of a dispute." There were, of course, a host of ways in which NAGP knew exactly who held the Loan Notes and the amounts outstanding, including: the publicly available Merger Agreement; the Loan Note Instruments and Loan Note Certificates; the requirement in Loan Note Instruments that a new certificate must be issued to any transferee; the joint accounting efforts of, and communications between, NAGP and ScottishPower; and the actual payments of interest from NAGP to ScottishPower. Accordingly, a Register was not necessary in this context.

Respondent's claim that no arm's length creditor would have accepted undated certificates without a stated loan amount is misdirected. The relevant issue under Litton and in the Ninth Circuit is whether NAGP and ScottishPower intended to create a debtor-creditor relationship, not whether NAGP and some hypothetical third party intended to create such a relationship. Litton, 61 T.C. at 373; Nestle, 70 T.C.M. at 701. Litton and Nestle respected intercompany debt between a parent and subsidiary on far less documentation than what exists in this case (i.e., in the absence of formal debt instruments, the Tax Court looked at a board resolution, recording of debt on the books, and correspondence between employees).

Respondent claims that NAGP and ScottishPower demonstrated a "careless disregard for the amount of the Loan Notes outstanding on the $4 billion fixed rate notes" by causing an additional $8 billion of Fixed Rate Note Certificates to be issued after Closing. With different sets of legal advisors for PacifiCorp and ScottishPower in both the U.S. and U.K., possibly duplications of effort given the complexity of the Acquisition caused additional copies to be prepared. However, the Fixed Rate Loan Note Instrument prescribes that only $4 billion of Fixed Rate Note Certificates could be issued; accordingly, any additional certificates would either be considered void or replacements for earlier certificates. It was not possible, as Respondent seems to contend, for an additional $8 billion of indebtedness to be considered outstanding.

Respondent's assertion that the interest rates were not "arm's length" conflicts with Respondent's own regulations, which provide that interest charged by related corporate parties is considered at arm's length if the rate is not less than 100% of the applicable federal rate (AFR) and not more than 130% of the AFR. Treas. Reg. § 1.482-2(a)(2)(iii). At Closing, the 100-130% AFR safe harbor ranged from 6.24% to 8.1%, comfortably falling around the fixed and floating stated interest rates. Ex. 220-J; Tr. 112:16-114:3 (Merriman).

Respondent misrepresents the 30-day put and call provisions in the Fixed Rate Loan Note Instrument by failing to mention the "market rate" requirement. ScottishPower could, upon 30 days notice, require repayment (or "put") of some or all of the Fixed Rate Notes "at a market rate agreed in writing" between ScottishPower and NAGP, or at an average of the rates of two leading investment banks if the parties failed to agree, plus accrued interest up to the date of repayment. Ex. 45-J at PHI-DOCS103354; Stip. ¶ 163. The Floating Rate Notes had a similar (but not identical) provision. NAGP could, upon 30 days notice, redeem (or "call") the Fixed Rate Notes "at a market rate." Stip. ¶ 164. Mr. Chigas described how the "market rate" requirement, from the standpoint of NAGP exercising its call right, would require NAGP to pay a premium if the call were exercised when interest rates had decreased relative to the interest rate on the Fixed Rate Notes; that is, it could be "expensive" for NAGP. Tr. 720:3-721:1-25. Conversely, if ScottishPower were exercising its put right at a time when interest rates had increased relative to the interest rates on the Fixed Rate Notes, NAGP's payment of the Fixed Rate Notes would be made at a discount; thus, exercising a put could be "expensive" for ScottishPower. Id.

Dr. Chambers did not testify that a rating agency would be "concerned" about a company's financial flexibility if it were likely to be exercised. Rather, he said that "we see those kinds of conditions in many instances of debt that are issued." Tr. 636:12-16. When asked about what terms to expect on "a 30 day demand note," Dr. Chambers replied that the demand feature could affect the pricing but not the rating. Tr. 636:25-636:6. There is uncontroverted testimony from Mr. Chigas that these put/call provisions in the Fixed Rate Loan Instrument are a "market acceptable variation" on the standard terms of an investment grade bond. Ex. 253-P (Chigas Report) at pp. 18-19.

Respondent's conclusion that ScottishPower had "complete discretion to capitalize the Loan Notes when convenient" is contradicted by the fact that the Fixed Rate Loan Note Instrument merely provided that NAGP and ScottishPower may agree in writing, if they so choose, to modify, abrogate or compromise the Fixed Rate Notes. Ex. 45-J at PHI-DOCS103357; Stip. ¶ 163.

B. ScottishPower's Subordination to RBS Was Not Inconsistent with Analogous Third-Party Debt Arrangements.

Respondent apparently claims that the Loan Notes resemble equity more than debt because they did not restrict NAGP from taking on more senior debt, as an "unrelated creditor would not ordinarily subordinate its right to repayment of a loan." Mr. Chigas, however, provided several examples of utility holding companies that issued investment grade bonds in the debt capital markets without any restriction against the issuance of additional debt. Ex. 254-P (Chigas Rebuttal) at pp. 3-5. Respondent attempted, unsuccessfully, to question those examples on the grounds that the comparable group had less leverage than the NAGP/ScottishPower group. Tr. 698:9-2; 713:22-714:21. Mr. Chigas also explained that the debt capital markets effectively self-regulate issuers who want to be free of negative covenants but then engage in "non-bond friendly activities," by possibly requiring a higher coupon or certain types of covenants in the next issuance. Tr. 710:16-711:5.

NAGP's decision to incur RBS debt was actually made for the benefit of the pari passu debtholder, ScottishPower. As Respondent concedes, the debt was incurred in order to fund NAGP's interest obligations to ScottishPower on the Loan Notes. Stip. ¶ 218. The RBS debt was short-term, with a maturity date six months later on March 31, 2002. Stip. ¶ 216; Ex. 68-J. Principal repayment was not compromised by this borrowing, as the Fixed Rate Notes were not due until 2009, and the Floating Rate Notes were not due until 2014. Moreover, notwithstanding Respondent's assertion that NAGP could have issued additional senior debt without ScottishPower's consent, ScottishPower actually consented to subordination of the Loan Notes to the short-term RBS debt. Stip. ¶ 217.

C. Structural Subordination and Holding Companies; the Pledge Agreement Evidences the Parties' Intent to Create Valid Debt.

If Respondent's claim that "structural subordination" causes debt to be treated as equity for tax purposes is upheld, then no holding company could safely issue debt. Dr. Chambers testified that structural subordination could affect a bond rating where there are other liabilities, other obligations, at the holding company level, but it is "less important" and "less relevant" where the holding company does nothing other than hold stock of the operating company. Tr. 628:11-16. NAGP was a pure holding company that "was essentially indistinguishable from that of PacifiCorp from an analytical standpoint." Ex. 251-P (Chambers Report) at p. 5.

Mr. Chigas provided several examples of utility holding companies that issued investment grade debt in the debt capital markets, often without negative covenants. Ex. 253-P (Chigas Report) at pp. 51-53; Ex. 254-P (Chigas Rebuttal) at pp. 3-6; Tr. 667:4-6 ("holding companies are a very common financing structure used in the electric utility industry"); Tr. 699:15-700:15; 702:12-15; 704:11-22; 713:22-714:6. Mr. Chigas also described how a distinction is drawn between an operating company and a holding company when pricing the interest rate, as an adjustment to the basis points. Ex. 253-P (Chigas Report) at Table 6, p. 25; Tr. 677:3-5. Thus, NAGP's status as a holding company does not in any way suggest that the Loan Notes more closely resemble equity than debt. At best, NAGP's holding company status could affect the pricing of its hypothetical issuance of bonds in the debt capital markets.

Respondent asserts that no weight should be given to the Pledge Agreement. Petitioner submits that the Pledge Agreement provides additional evidence of the parties' intent to create debt. Obviously, in light of the fact that ScottishPower owned and controlled 100% of NAGP's stock, the Pledge Agreement did not, as a purely practical matter, give ScottishPower rights that it could not have otherwise exercised as the 100% shareholder of NAGP. This simple truth was recognized by the Tax Court in Litton when, in response to the government's argument that the intercompany debt should have been secured, the Court stated that the 100% parent-subsidiary relationship "serves to justify the apparent lack of a security arrangement backing up the advance account" and "adequately substitutes for an independent security interest, or at least minimizes the importance thereof." Litton, 61 T.C. at 381.

Respondent's allegation that the Pledge Agreement was "mere window dressing" is inconsistent with the importance it places on negative covenants which, in the context of 100%-owned related parties, as Nestle held, do not have much importance.

The reference to the Loan Notes in the Loan Note Instruments as "an unsecured debt obligation" of NAGP does not "contradict" the use of a Pledge Agreement. Clearly, the Loan Notes were not secured by the underlying assets of PacifiCorp. The Pledge Agreement would have simply given ScottishPower, upon default, an interest in 100% of the NAGP equity, which, through NA1 and NA2, was already owned by ScottishPower. It would not have given ScottishPower any priority over the existing creditors of PacifiCorp. Mr. Chigas testified that the Loan Notes are "appropriately described as unsecured since there was no lien on the assets." Ex. 253-P (Chigas Report) at fn. 36, p. 19.

The fact that a stock pledge would have been visible on the face of a debt instrument issued to a third-party bondholder is irrelevant for purposes of assessing NAGP's and ScottishPower's intent to create debt. The only relevant parties for purposes of the intent requirement -- NAGP and ScottishPower -- knew about the Pledge Agreement. While the Pledge Agreement may not have been mentioned in the Merger Agreement or the Closing checklist, it was mentioned in the E&Y Board Paper as a term of the Loan Notes. Also, Freshfields and Millbank took careful steps to ensure that the Pledge Agreement would be executed at Closing.

A pledge of the PacifiCorp stock by NAGP to a third-party creditor would not have violated Section 6.18(c) of the Merger Agreement. This provision relates to a requirement in the "B" reorganization rules that NAGP acquire "control" of PacifiCorp. This boilerplate provision helped ensure that NAGP would not, pursuant to a prearranged plan, lose "control" of PacifiCorp and put the tax-free acquisition of PacifiCorp at risk. A transfer of PacifiCorp stock to a third-party creditor upon a default in the next three years would not violate this provision, since such a transfer clearly would not be part of a prearranged plan to lose control for tax-free reorganization purposes. Regardless, this provision is not relevant to the question of whether NAGP and ScottishPower intended to create debt.

Respondent elicited no proof at trial on whether ScottishPower regarded the Pledge Agreement as a "nullity" when it signed the Subordination Agreement with RBS. Accordingly, Respondent's assertion to that effect is pure conjecture.

A. The Terms Would Remain Reasonably Comparable Even If a Higher Interest Rate Were Required.

Citing the investment bank's letters, including summary spreadsheets showing the basis of the calculation, Respondent criticizes Warburg Dillon Reed's interest rate analysis, yet offers no substantive reasons why it should be discredited other than to compare it to the estimated credit rating analysis done by E&Y a year earlier based on $5.6 billion of debt. Ex. 252-P (Chambers Rebuttal) at p. 3. Mr. Merriman admitted that E&Y did not have credit rating expertise and did not follow the steps that a credit agency would take. R. Tr. 83:23-84:10.

The Warburg analysis proves that ScottishPower took responsible steps to determine appropriate interest rates for the Loan Notes by seeking advice from an investment bank. The Warburg advice buttressed E&Y's advice that the interest rates would be considered "arm's length" under the Treasury's section 482 regulations. Petitioner is not relying on the Warburg analysis to prove that a 7.3% interest rate on the Fixed Rate Notes was reasonable -- its experts address that. Respondent's focus on the Warburg analysis is misdirected. Instead, the focus should be on the experts' analyses.

Respondent misstates Mr. Chigas' opinion. He opined that the Fixed Rate Notes, without any enhancements, would have been purchased by third-party investors in the debt capital markets at an initially proposed yield of 8.075% to 8.325%, but that the investment bank would be motivated to negotiate for a lower yield. Ex. 253-P (Chigas Report) at p. 27; Tr. 689:6-20. Mr. Chigas testified that the Fixed Rate Notes could have been issued in the debt capital markets at a 7.3% interest rate if there were structural enhancements such as a guarantee by ScottishPower. Tr. 716:14-20. He did not testify that $4 billion of Fixed Rate Notes would be rated "BBB-." Rather, he specifically made clear that while his opinion assumes the issuance of investment grade debt, it was "not conditioned on an investment grade credit rating." Tr. 662:23-663:7 (Chigas). Mr. Chigas testified he was "very comfortable and confident" that even if the Fixed Rate Notes had been rated non-investment grade such as "BB+," they would have been sold into the investment grade marketplace through the "crossover market." Tr. 664:1-8; Tr. 665:14-18: Tr. 692:4-7. Mr. Chigas testified that he did not analyze how the Fixed Rate Notes would be priced if they were non-investment grade, but "guessed" that a "conservative" adjustment would be 25 basis points (the 8.335% to 8.57% range). He also guessed that the adjustment could be as low as 12.5 basis points. Tr. 693:4-24.

In Nestle, the Tax Court held that the intercompany debt rate of LIBOR-plus 3/8% was not a "patent distortion" of the LIBOR-plus 1 to 1.25% that would be charged by third-party lenders. Nestle, 70 T.C.M. (CCH) at 702. Petitioner submits that the spread of 100 bps or less between the 7.3% intercompany rate and the third-party investor rate is similarly not a "patent distortion."

B. Respondent's Theory That Financial Constraints Would Have Prevented a Hypothetical Third-Party Borrowing is Untested Conjecture.

Respondent is relying on statements made by Morgan Stanley and Julian Brown about ScottishPower's desire to maintain an "A" credit rating, in order to claim that a hypothetical borrowing by NAGP from third parties would have eliminated ScottishPower's "A" credit rating. Respondent offered no corroborating witness. It is pure conjecture on Respondent's part. Moreover, even assuming arguendo that Respondent's assertion was proven, its legal relevance is unclear. It would appear that Respondent believes that if there are business reasons why ScottishPower would not have caused NAGP to borrow from third parties, then NAGP is not permitted to prove that it could have borrowed from third parties under terms that are similar to the terms of the Intercompany Debt. Respondent has cited no legal authority for its position.

Similarly, Petitioner objects to Respondent's assertion that ScottishPower's revolving credit facility would have prevented NAGP from borrowing from third parties. There was no testimony from any witness to support Respondent's theory. While Respondent questioned Julian Brown about the revolving credit facility (Tr. 252:16-253:16), the PwC Working Capital Review was never brought up by Respondent during the trial.

C. There is No Evidence that PUHCA Would Have Restricted the ScottishPower Group's Ability to Incur Third-Party Debt.

Respondent failed to prove that PUHCA would have had any effect whatsoever on a hypothetical issuance of debt by NAGP to third parties. As Petitioner explained in its opening brief at p. 131, there is absolutely nothing in the record supporting Respondent's position.

D. Mr. Mudge's Unrelated Creditor Analysis Does Not Assist the Court in this Case.

As discussed in Petitioner's opening brief, Mr. Mudge testified that he was asked whether the "precise" or "exact" pricing and terms of the Loan Notes could reasonably be expected to be acceptable to unrelated third-party creditors. Ex. 260-R at p. 2; Tr. 1034:10-20 (Mudge). Thus, Mr. Mudge in effect applied a "mechanical test of absolute identity" between the actual terms of the Loan Notes and what a third-party lender would accept. This test does not reflect the governing law, so Mr. Mudge's opinion on this question simply should be disregarded.

Moreover, Mr. Mudge's "third-party creditor" analysis is fundamentally flawed and unsupported. Mr. Mudge's analysis is based on his opinions with respect to: (1) NAGP's hypothetical credit rating; (2) the reasonableness of the interest rate; (3) the loan terms; and (4) "likely" regulatory constraints. Petitioner previously addressed each of these issues in detail in its opening brief. In sum, Mr. Mudge's analysis is not credible because:

(1) The approach Mr. Mudge followed with respect to his determination of a hypothetical credit rating was a very narrow, limited slice of the overall process that a credit agency would follow in terms of assigning a rating. Tr. 621:15-24 (Chambers). In fact, when asked to describe credit ratings agencies' general methodologies, Mr. Mudge deferred to Dr. Chambers. Tr. 1042:11-1043:7. Rather than following the approach that credit agencies utilize, Mr. Mudge simply computed three financial ratios and compared those three ratios to metrics that E&Y attributed to S&P in its Board Paper. Mr. Mudge didn't confirm whether the metrics he applied were accurate. Tr. 1046:9-25. Mr. Mudge admitted that a credit agency would not just look at these three ratios or metrics. Tr. 1043:17-20. He also admitted that there are other fundamental criteria that S&P or Moody's would apply that he did not consider (e.g., for example, PacifiCorp's business profile score, which he acknowledged is a core element of a utility's credit rating, or ratios for any year other than 1999). Dr. Chambers testified that a single ratio at a point in time has to be balanced against other factors. Tr. 645:15-19. In contrast, Dr. Chambers, a credit ratings expert, followed the same approach utilized by credit rating agencies and considered each relevant factor in detail.

In addition to methodological errors, Mr. Mudge incorrectly computed the ratios he applied. For example, Mr. Mudge included preferred stock as debt in his debt-to-equity ratio calculations, then purported to apply these calculations to S&P metrics, even though his methodology for computing the ratio differed from those applied by S&P. Ex. 252-P (Chambers Rebuttal) at pp. 3-4. Dr. Chambers noted that Mr. Mudge was "comparing apples and oranges." Tr. 623:9-15.

(2) Mr. Mudge adjusted the interest rate on the Fixed Rate notes to 8.8% because his "analysis indicated that it could be as much as 1.5%" above the 7.3% stated rate. Tr. 1081:10-11. Mr. Mudge's report does not include any independent analysis with respect to prevailing interest rates during the relevant period. Id. Instead, Mr. Mudge's opinions rely on the interest rates stated in the E&Y Board Paper and Warburg Dillon facsimile. See Ex. 260-R at pp. 25-26. In addition, Mr. Mudge opines without analysis that NAGP should be assigned a "BB" credit rating. In contrast, Mr. Chigas independently analyzed volumes of market data to conclude that an indicative credit spread for a hypothetical debt capital markets transaction would have been the 10-yr Treasury yield of 6.20%, plus 200 basis points, plus or minus 12.5 bps. Id. Mr. Chigas testified that the initial spread in a debt capital markets transaction for the Loan Notes indicates an initial yield range of 8.075% - 8.325%. Ex. 253-P (Chigas Report) at pp. 26-27. Mr. Chigas testified further that this would be the initial price indication and that an investment bank would be motivated to lower it further. That is, the ultimate market rate would be below the initial yield range of 8.075% - 8.325%. Tr. 689:1-22.

(3) Mr. Mudge did not consider whether the Loan Notes were in a form reasonably acceptable to unrelated third-party creditors but only whether the exact terms would have been acceptable to unrelated third-party creditors. Tr. 1034:16-1035:6. Mr. Mudge also did not independently analyze "standard creditor protections." Mr. Mudge merely testified about a comment in an E&Y facsimile. Specifically, Mr. Mudge's report states "per the observation of Ernst & Young in their memorandum in October 1999, the lack of Loan Notes [sic] would have exposed creditors to the following. . . ." Ex. 260-R at pp. 26-27. In contrast, Mr. Chigas identified specific examples of debt capital market transactions that were comparable to the hypothetical NAGP transaction which did not require the covenants referenced by Mr. Mudge. Ex. 254-P (Chigas Rebuttal) at pp. 3-6. Mr. Mudge also limited his analysis to the terms of the Loan Notes and intentionally ignored the existence of the Pledge Agreement, which Mr. Chigas testified "would have been a tremendous collateral improvement" had the debt been issued to third parties. Ex. 260-R, fn. 4; Tr. 685:4-25.

(4) The issue of "likely" regulatory constraints is addressed in the section below.

Respondent continues to make the same bold assertions on the basis of testimony of certain witnesses that either went nowhere or was clarified by other, more qualified witnesses whom Respondent neglects to mention. As Petitioner explained in its opening brief at pp. 132-33, the record does not support Respondent's declaration that PacifiCorp's financial restrictions limited the amount of dividends that PacifiCorp could pay to NAGP. Respondent asserts that PacifiCorp paid attention to its dividends for capital structure and regulatory reasons, but then fails to establish the fact or draw a relevant conclusion.

Next, as explained in Petitioner's opening brief at p. 132, Mr. Mudge's conclusion that PacifiCorp's anticipated dividend growth of 7.5% would have caused PacifiCorp to violate the 40% threshold imposed by Oregon was discredited at trial. Mr. Mudge testified that his calculation was derived from the consolidated financial statements of PacifiCorp, and was applied to the entirety of PacifiCorp's regulated and nonregulated operations, both in and outside of Oregon. That is, Mr. Mudge's analysis assumes that Oregon can regulate utility and non-utility operations in other states. Tr. 1062:19-1063:20. This testimony is in direct contradiction to the testimony of Professor Vander Weide, a regulatory expert who confirmed that Oregon's equity capitalization requirement applies only to PacifiCorp's regulated operations in Oregon, and that it would be impossible to determine whether such requirement was breached by examining the consolidated financial statements of PacifiCorp. Tr. 548:7-22; 553:21-554:10. Dr. Vander Weide, on the other hand, provided a thorough analysis of why the Oregon restriction would not have come into play. Ex. 249-P (Vander Weide Report) at pp. 22-23; Tr. 555:12-556:3; Tr. 555:11-556:2. Dr. Vander Weide also concluded that the Utah requirement was not a meaningful restriction. Ex. 249-P (Vander Weide Report) pp. 22-23; Tr. 556:6-12 (Vander Weide). Respondent also mischaracterizes testimony of Ms. Self in an attempt to prove that there were regulatory reasons for limiting PacifiCorp's dividends to about $80 million per quarter. See Petitioner's Response to RFs 223-224.

Respondent fails to refer to the testimony of Doug Larson, Respondent's sole fact witness, who had 28 years of utility regulation experience and was in charge of regulatory issues for Utah, Idaho and Wyoming at the time of the merger and, beginning in 2001, for all of PacifiCorp's regulatory affairs. Mr. Larson was aware that PacifiCorp paid $80 million a quarter in dividends, or $320 million a year prior to the Merger, but also believed that the total earnings "were probably north of $400 million per year." Tr. 978:14-19; 979:14-22 (Larson). Mr. Larson testified that regulators watched dividend payouts in only a "very perfunctory manner," and simply asked that a notice be filed each quarter with the commission once PacifiCorp declared the dividend; he did not recall a commission "ever even asking any questions regarding any of those filings." Tr. 975:16; Tr. 976:4-14. Mr. Larson testified that the regulators viewed the earnings of the utility as "shareholder money," and that "[t]heir view was that the board could determine what to do with the earnings of the utility." Tr. 975:19 - 976:1; Tr. 978:19-22 (". . . if the board wanted to pay 100 percent of it out in dividends, they could pay it out").

Respondent also cites Mr. Martin to support the regulatory restrictions of dividends theory. Mr. Martin testified that it was his "understanding that there were some merger amendments that restricted the ability to pay dividends." Tr. 791:4-6. These "merger amendments" are likely the same merger commitments in Oregon and Utah which are the subject of Dr. Vander Weide's opinion. Respondent finally states that PwC "concluded the same in its Analysis of NAGP Indebtedness." Ex. 65-J. No one from PwC testified at trial, and, thus, Respondent's assertion is not corroborated by any other evidence.

B. Mr. Mudge's Views Do Not Inform The Analysis of ScottishPower's Reasonable Expectation That NAGP Could Pay Interest and Repay the Loan Notes.

The detailed valuation models, developed by ScottishPower's Strategy Group and relied on by ScottishPower in purchasing PacifiCorp, amply demonstrate that there would be sufficient cash flows such that NAGP would be able to repay interest and principal on the Intercompany Debt. Ex. 245-P (Shaked Expert Report). Contrary to Respondent's assertion (RF 633), Mr. Mudge did not analyze whether, based on these models, ScottishPower could reasonably expect at the time the Loan Notes were issued that NAGP could service interest on the Loan Notes and repay the principal when due. Instead, Mr. Mudge considered whether NAGP could have repaid principal had the debt been issued to third parties (with a different interest rate as determined by Mr. Mudge, different assumptions Mr. Mudge speculates a lender might apply, and reliant solely on projected PacifiCorp's dividends). Ex. 260-R (Mudge Report) at p. 2; Tr. 470:3-11 (Shaked). As discussed in Petitioner's opening brief, that factor -- the reasonable expectation of repayment of a hypothetical third-party creditor -- exists nowhere in the law, and Mr. Mudge's opinions on the issue are not relevant for the Court's analysis. In fact, Mr. Mudge testified that he did not perform any analysis with respect to the correct legal test -- whether ScottishPower could reasonably expect to be repaid. Tr. 1041:7-13. Had he done so, his analysis would have supported fully Petitioner's contention that ScottishPower could reasonably expect at the time the Loan Notes were issued that NAGP could service interest on the Loan Notes and repay the principal when due.

Under each "sensitivity" scenario devised by Mr. Mudge (each of which excluded both operating revenue and the anticipated proceeds from the sale of Powercor), Mr. Mudge confirms that NAGP was anticipated to have sufficient funds to fully service interest on $4.9 billion of debt and repay substantial principal by 2009 (in excess of $1 billion under his worst scenario). Tr. 1092:2-8. While acknowledging that refinancing of existing debt is an "industry practice," Mr. Mudge does not consider that possibility because "it wasn't a question I was asked to address." Tr. 1070:4-11.

Moreover, Mr. Mudge's entire approach to computing the funds available to NAGP to pay interest and service the debt is flawed because he erroneously relied on a forecasted "dividend" number in the 1999 Projections rather than NAGP's available cash flow. Tr. 470:3-11 (Shaked). In the 1999 Projections, the dividend was projected to grow at 7.5% annually. Tr. 290:24-291:1 (Wilson). This growth rate was not intended to reflect ScottishPower's management's view of the anticipated growth of PacifiCorp's dividend. Tr. 291:14-17 (Wilson). Rather, the purpose of the 7.5% dividend growth rate assumption was to illustrate financial projections with a debt-equity ratio that was more typical of a U.S. utility (50% debt, 50% equity). Tr. 291:18-23 (Wilson). In order to calculate the amount of cash that ScottishPower anticipated would be generated by PacifiCorp, various cash flow lines in the 1999 Projections would need to be added together. Tr. 292:2-9 (Wilson).

In addition, Mr. Mudge's sensitivity analysis contains numerous unsubstantiated adjustments. Mr. Mudge arbitrarily discounted the projected savings in operating expenses by 40%; arbitrarily discounted 100% of the capital expenditure cost savings without any basis; reduced expected operating savings by an additional 26%, also without support in his second sensitivity; lowered growth considerations without lowering certain corresponding expense considerations; reduced fuel savings and increased purchased power costs without analytical support; and reduced expected operating savings by an additional 26% in his second sensitivity, also without support. Ex. 247-P (Shaked Rebuttal) at pp. 19-23.

Mr. Mudge also makes several analytical errors. Professor Shaked testified that the effect of correcting these errors would create $2.764 billion in additional available cash in 2009. With these corrections, NAGP would have had a cash surplus under Mr. Mudge's base case analysis and sensitivity scenarios. Ex. 247-P (Shaked Rebuttal) at p. 16. Mr. Mudge's analytical errors include the following:

(1) Mr. Mudge assumes that the interest rate on the Floating Rates Notes is 7.3%, with no factual or analytical basis. At the time of the transaction, the appropriate rate was 6.675%. This error led Mr. Mudge to underestimate PacifiCorp's cash flows by $56 million. Ex. 247-P (Shaked Rebuttal) at p. 9; Tr. 471:22-472:10 (Shaked).

(2) Mr. Mudge's exclusion of the Powercor proceeds is a "billion and half dollar mistake." Tr. 467:19-469:16 (Shaked); Tr. 474:24-475:3 (Dr. Shaked testified: "There are many other things, but no doubt this is a big-time mistake"). Certain PacifiCorp assets, including Powercor, were anticipated to be available for debt repayment at the time of the Acquisition. The sale of the Australian operations was expected to generate $885 million in cash. Ex. 247-P (Shaked Rebuttal) at pp. 10-14. Mr. Mudge's "base case" shows NAGP was anticipated to be $900 million short in its ability to repay the Loan Notes. Rather than using the anticipated proceeds from the sale of Powercor and Hazelwood to pay the Loan Notes, Mr. Mudge inexplicably assumed that PacifiCorp would transfer the proceeds directly to ScottishPower, as a dividend, rather than a payment to NAGP's debt holders. Ex. 247-P (Shaked Rebuttal) at p. 10. Thus, once the proceeds from the anticipated sale of Australia are properly factored in, under Mr. Mudge's approach of using PacifiCorp dividends rather than available cash flow, NAGP was projected to have sufficient funds to service interest and fully retire $4.9 billion prior to maturity in 2009.

(3) Mr. Mudge's analysis failed to incorporate the effect of the existing cash on the balance sheet. Ex. 247-P (Shaked Rebuttal) at p. 14.

(4) Mr. Mudge underestimated the return that NAGP could have expected to receive on surplus cash. Ex. 247-P (Shaked Rebuttal) at pp. 14-15; Tr. 471:7-21 (Shaked) ("his [Mr. Mudge's] assumption is grossly unreasonable").

In sharp contrast to Mr. Mudge's report, Dr. Shaked's report is balanced, thorough and authoritative. Dr. Shaked concluded that, based on the information known at the time of the Merger, NAGP was projected to be able to pay interest and principal on the Loan Notes as it became due, that the value of NAGP's assets at the time of the Acquisition exceeded its debt obligations to ScottishPower and that NAGP was adequately capitalized. Ex. 245-P at p. 8. Dr. Shaked tested the reasonableness of ScottishPower's projections, performed a cash flow analysis and several sensitivity analyses that confirm NAGP's ability to repay, and also performed two valuation analyses of NAGP concluding that NAGP's assets exceeded its debt to ScottishPower and that NAGP was adequately capitalized. Id.

At the time the debt was put in place, E&Y advised ScottishPower, consistent with its understanding of debt/equity case law, that an appropriate capitalization for PacifiCorp would be 3:1 (debt to equity). Tr. 91:1-92:6 (Merriman). In order to compute this debt-to-equity ratio, E&Y considered the capitalization of both NAGP on a stand-alone basis and the capitalization of the consolidated group, which would include PacifiCorp's debt. Tr. 91:14-22; Tr. 175:18-21 (Merriman).

Second, the worst energy crisis in U.S. history began in earnest just six months after the Merger in the summer of 2000, which soon forced PacifiCorp to purchase power on the open market at exorbitantly high prices. Stip. ¶ 172; Tr. 347:24-348:10 (MacRitchie). The unanticipated, concurrent catastrophic failure of PacifiCorp's Hunter Power Station at the height of the crisis created the perfect storm, costing PacifiCorp around $1 billion to cover its power commitments. Tr. 352:13-19 (MacRitchie); Tr. 569:7-20 (Vander Weide). These events help explain the late and/or suspended interest payments and the decisions to capitalize the Floating Rate Notes and, later, a portion of the Fixed Rate Notes. Respondent describes these post-issuance actions as if they were part of a grand design by NAGP to disrespect the Intercompany Debt, without any mention of the horrific (and unanticipated) circumstances under which these events must be evaluated. Tr. 557:17-22 (Vander Weide); Ex. 249-P at p. 2; Ex. 245-P at p. 49. Respondent gives Petitioner no credit for taking responsible steps in the wake of these events to bring the interest payments current by March 31, 2002, and adjust the principal of the debt in light of changed economic conditions going forward, but rather seeks to use these decisions as fuel for its position.

Third, the Fixed Rate Notes, as restructured to $2.375 billion in December 2002, were fully paid off in July 2006 following the sale of PacifiCorp, which was more than three years prior to the originally scheduled maturity date. This was hardly a situation where all of NAGP's assets were sold to pay the debt. To the contrary, PHI (NAGP's successor) had developed a successful wind energy business in addition to its ownership of PacifiCorp; PHI was later acquired by Iberdrola. Despite stipulating to the contrary, Respondent now claims that the entire $4 billion of Fixed Rate Notes were eliminated in a circular cash transaction and converted into equity. Stips. ¶¶ 247, 249, 251. Respondent's allegations of circular cash flow obfuscate the stipulated facts.

A. Respondent's Purported "Arrearages" Assertions Do Not Inform the Court's Analysis.

As explained in Petitioner's Responses to RFs 462-479, Respondent has manipulated the Stipulation to calculate alleged interest arrearages that are unsupported by the evidence and riddled with mistakes. Neither the detailed Stipulation accounting for all accruals and payments nor any testimony in the record describes interest arrearages on the basis proposed by Respondent. Petitioner submits that the Court should ignore Respondent's attempts to confuse and misconstrue the record.

B. NAGP Did Not Deduct Book Entry Borrowings or Interest Attributable to the Fixed Rate Notes; the Intercompany Debt was Appropriately Restructured in 2002 Under Changed Conditions.

NAGP is effectively put on a cash basis by Code sections 267(a)(2) and (3), which prohibit a U.S. taxpayer from claiming a deduction for an amount owed to a foreign person until such amount is paid under the cash method of accounting. Treas. Reg. § 1.267(a)-3; Cleveland Trencher Comp. v. Comm'r, 166 F. 2d 1213 (6th Cir. 1998). The courts and the IRS uniformly regard the purported payment of interest by a cash basis taxpayer through a second loan from the same lender as not a payment at all. Rather, it is viewed merely as a promise to make a payment in the future, that is, as "nothing more than a postponement of the taxpayer's interest obligation to the lender" on the first loan. See, e.g., Wilkerson v. Commissioner, 655 F. 2d 980 (9th Cir. 1981); accord, IRS News Release 83-93 (7/6/83). Thus, Respondent has no legal basis for claiming that NAGP "paid" $186 million of interest on the Loan Notes through the second Intercompany Debt, and then paid down the second Intercompany Debt with the RBS proceeds.

Respondent's comparison of this case to Laidlaw is irresponsible. In Laidlaw more than 90% of the taxpayer's purported interest payments to its foreign parent were borrowed through a second loan from the parent. There was no evidence that the taxpayer ever paid the second loan, and clearly no principal was ever paid on the first loan. The taxpayer did not dispute Respondent's contention that there was a circular flow of funds. In this case, the $186 million alleged to have been borrowed by NAGP in April and May of 2001 was paid in full by NAGP on September 27, 2001 with RBS loan proceeds. Stip. ¶ 227; Ex. 132-J; Tr. 859:4-9; Tr. 860:20-21 (Wright). Then the RBS loan was repaid in full on March 19, 2002 with PacifiCorp's cash flows and Powercor sales proceeds. Stips. ¶¶ 218, 220-222. This case is not even close to Laidlaw.

Respondent cites to Mr. Martin's "International Restructuring Memo" (Ex. 171-J), a various email (Ex. 70-J), and Mr. Wright's testimony as conclusive evidence that NAGP intended to pay interest on the Loan Notes with a second loan from ScottishPower, and that such intent was inconsistent with a debtor-creditor relationship. Respondent, however, is ignoring substantial evidence that the alleged second loan and associated journal entries were merely done as a temporary measure to record the interest payment on the books pending the PHI restructuring and NAGP's receipt of cash in amounts sufficient to pay interest on the Loan Notes.

Mr. Martin testified that such a borrowing "wouldn't qualify as an interest deduction." Tr. 781:1-20. Respondent attempted to elicit an admission from Mr. Martin that NAGP's payment of interest through a second loan was a payment, and Mr. Martin replied: "Not for tax purposes." Tr. 781:24. Mr. Martin testified he did not recall an email from Bruce Williams referencing a borrowing by NAGP from ScottishPower to pay interest, stating: "I see it, but it doesn't help me recall anything, and that doesn't surprise me, just because I would not have been concerned with it from a tax standpoint." Tr. 784:3-6.

As explained in Petitioner's Response to RF 472, Mr. Wright testified repeatedly, including on cross-examination, that the journal entries for the $101,848,787.68 and $84,432,841 designated as "Accrual -- Interest" in Stip. ¶ 229 were "book entries" or "accounting entries" on NAGP's books and did not represent cash payments of interest on the Loan Notes. Tr. 862:10-863:20; Tr. 864:25-865:11; Tr. 866:7-12; Tr. 867:18-23; Tr. 882:21-883:5; Tr, 883:15-16. Mr. Wright testified that the amounts in the journal entries were paid by NAGP in cash as interest on the Loan Notes on September 27, 2001, when NAGP paid ScottishPower $273,373,300 with funds borrowed from RBS. Tr. 859:4-9; Tr. 859:16-860:20-21; Tr. 861:18-21. Stip. ¶ 227; Ex. 132-J. He further testified that the remaining $84,116,315.50 in 2002 interest payments were paid in cash by NAGP on November 13, 2001 from the second RBS borrowing. Tr. 859:10-15; Tr. 860:25-861:10; Tr. 861:18-23; Tr. 796:21-797:9 (Martin). NAGP's interest payment of September 27, 2001 was attributed to outstanding accrued interest through the payment date (or the latest interest period, August 11, 2001) ($101,848,787.68, plus $84,432,840.60, plus $87,075,265.75). Tr. 859:4-9 (Wright).

Respondent flatly contradicts the Stipulations (Stip. ¶ 218) by stating that "NAGP borrowed from RBS in order to pay back the $186 million loan to ScottishPower and to pay additional interest to ScottishPower on the Loan Notes."

Respondent apparently agrees with Petitioner that there is no legal requirement to allocate interest payments on a pro rata basis to the Floating Rate Notes. Rather, the allocation of payments exclusively to the Fixed Rate Notes will be respected if it is supported by NAGP's or ScottishPower's intent. Second, Respondent is not challenging Petitioner's application of the $357,489,615 in 2002 interest payments exclusively to the Fixed Rate Notes but only the application of payments in 2001.

Respondent describes how NAGP's records did not allocate the payments between the Fixed Rate Notes and the Floating Rate Notes. That was true in both 2001 and 2002. Stips. ¶¶ 202, 230, 232, 233. However, Respondent has not used NAGP's failure to allocate interest payments as a reason for challenging the 2002 interest payments. Thus, this particular evidence is simply not conclusive of what was intended and, therefore, additional evidence must be examined.

Respondent implies that Mr. Martin's signing of the 2001 tax return in December 2001 supports its position, because the return discloses total debt of $4,896,279,844 on Schedule L and Form 5472. However, the fact that both the Fixed Rate Notes and Floating Rate Notes were outstanding at the end of the 2001 tax year says absolutely nothing about NAGP's intent to allocate the interest payments exclusively to the Fixed Rate Notes.

Respondent puts a great deal of evidentiary weight on Mr. Martin's testimony as to whether the 2001 interest payments were attributable to both the Fixed Rate Notes and the Floating Rate Notes. However, Respondent's attempt at trial to impeach Mr. Martin's testimony with his deposition transcript was unsuccessful. During both his deposition and at trial, Mr. Martin consistently testified that the interest deduction claimed on the tax return for the tax year ended March 31, 2001 was attributable exclusively to the Fixed Rate Loan Notes. Tr. 762:13-763:1; Tr. 793:21-794:2; Tr. 799:10-800:14. Ms. Self corroborated Mr. Martin's testimony. Tr. 919:12-15 (Self).

Respondent claims that Mr. Martin's testimony is not credible because it is a belated characterization of what happened. His testimony is entirely credible, however, because Mr. Martin put his views in context. He testified that when he decided to hire PwC, he was concerned that interest payments did not fully cover the Fixed Rate Notes and weren't covering anything on the Floating Rate Notes. Tr. 763:25-764:1-4. This indicates that Mr. Martin held an independent view before the 2001 tax return was filed that the interest payments would first be applied to the Fixed Rate Notes before being applied to the Floating Rate Notes. He further testified that when he signed and filed the 2001 return in December 2001, he had been given a preliminary indication from PwC (with which he agreed) that they would support only the $4 billion of Fixed Rate Debt for tax purposes. Tr. 762:13-763:15 (Martin). Because the interest deducted for 2001 was less than the accrued interest on the Fixed Rate Notes, Mr. Martin was sufficiently comfortable claiming the deduction. Id.

Respondent constructs a schedule to show that even if the payments were allocated exclusively to the Fixed Rate Notes, beginning in May 2001 the payments would have exceeded the interest accruals on the Fixed Rate Notes and, therefore, such excess payments must be allocated to the Floating Rate Notes. Apart from numerous errors in Respondent's calculations, described in Petitioner's Responses to RFs 480-500, Respondent's legal premise is incorrect. Section 461(g) of the Code permits cash basis taxpayers to deduct prepaid interest paid at any time during the tax year so long as the prepayment relates to interest that has accrued by the end of the tax year. See also Dana Corp. v. United States, 174 F. 3d 1344 (Fed. Cir. 1999). There is no requirement to compare payments against accruals at various times during the year; it is only necessary to compare payments to accruals at year end. As Mr. Martin testified, at the end of 2001 the payments made were less than the accruals on the Fixed Rate Notes.

Respondent's final point about an arm's length creditor has no place in a discussion of the parties' post-issuance conduct.

C. In December 2002, Pursuant to a Contemporaneous Analysis, ScottishPower Restructured the Fixed Rate Notes into a New Form of Debt.

As explained above, Respondent's attempt to cast the December 2002 restructuring of the Fixed Rates Notes as a $4 billion equity conversion contradicts the Stipulations and improperly raises an issue regarding the status of the restructured indebtedness that is not part of this case.

DATED: August 24, 2011

² Under the Federal Rules of Evidence, expert testimony is admissible only if it "will assist the trier of fact to understand the evidence or to determine a fact in issue." Fed. R. Evid. 702. A witness qualified as an expert by knowledge, skill, experience, training or education may testify in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case. See Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589-90 (1993). It is not enough for an expert to state an opinion and refer vaguely to his or her "experience" to support that opinion; rather, some "objective, independent validation of the expert's methodology" is required. Daubert v. Merrell Dow Pharms., Inc., 43 F.3d 1311, 1316 (9th Cir. 1995) (emphasis added), cert. denied, 516 U.S. 869 (1995).