                    United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                  ___________

                                  No. 99-3122
                                  ___________

United States of America; United States *
of America, ex rel Robert J. Norbeck, *
                                        *
             Plaintiffs-Appellees,      *
                                        * Appeals from the United States
      v.                                * District Court for the
                                        * District of North Dakota.
Basin Electric Power Cooperative,       *
                                        *
             Defendant-Appellant.       *
                                   ___________

                                  No. 99-3216
                                  ___________

United States of America,              *
                                       *
             Plaintiff,                *
                                       *
United States of America, ex rel       *
Robert J. Norbeck,                     *
                                       *
             Plaintiff-Appellant,      *
                                       *
      v.                               *
                                       *
Basin Electric Power Cooperative,      *
                                       *
             Defendant-Appellant.      *
                                  ___________

                                      -1-
                                   No. 99-3450
                                   ___________


United States of America,              *
                                       *
             Plaintiff-Appellant,      *
                                       *
United States of America, ex rel       *
Robert J. Norbeck,                     *
                                       *
             Plaintiff,                *
                                       *
      v.                               *
                                       *
Basin Electric Power Cooperative,      *
                                       *
             Defendant-Appellant.      *
                                  ___________

                             Submitted: October 18, 2000

                                  Filed: April 30, 2001 (corrected 5-15-01)
                                   ___________

Before WOLLMAN, Chief Judge, LAY and BEAM, Circuit Judges.
                             ___________

LAY, Circuit Judge.

                            PART I. INTRODUCTION

      Basin Electric Power Cooperative (“Basin”), located in North Dakota, was
organized to build power plants and provide power for its members. In the late 1970s
and early 1980s, Basin constructed the Antelope Valley Station (“AVS facility”) in
North Dakota, which is the subject of this litigation. The AVS facility includes three

                                         -2-
separate parts: two power stations (“AVS I” and “AVS II”), and a set of common
facilities designed to provide service to both AVS I and AVS II.

       This litigation stems from a contract (the “Basin-WAPA contract”) between
Basin and Western Area Power Administration (“WAPA”)1. During the course of
building the AVS facility, Basin realized that the AVS facility would generate more
power than its members demanded, so Basin needed to sell this excess power to keep
the price of power from the AVS facility at a reasonable rate. At the same time,
WAPA needed extra power to meet the demands of its customers. In 1982, WAPA
contracted to buy 185 mega-watts (“MW”) of the 450 MW capacity of AVS II. When
the parties executed the contract, they could not accurately predict the price of power
for the life of the contract. Accordingly, they agreed that WAPA’s price would be
based on the cost of power production. The contract provided that WAPA would pay
185/450th, or forty-one percent, of the cost of producing power at AVS II.

        The methodology Basin used for determining the cost of AVS II power was set
out in Exhibit A of the contract. Exhibit A listed a series of fixed and variable or
energy related costs associated with producing power at the AVS facility, such as
interest on debt, operation costs, steam expenses, and maintenance costs. The Rural
Utilities Service (“RUS”) promulgated the Rural Utilities Service System of Accounts
(“RUS System”) upon which these cost categories were based.2 The RUS System
incorporates Generally Accepted Accounting Principles (“GAAP”), a series of general
principles followed by accountants. Included in GAAP are the Financial Accounting


      1
       WAPA is a unit of the Department of Energy, which generates and distributes
power to regional or local distribution utilities.
      2
        The Basin-WAPA contract actually lists “REA Accounts.” The REA, or Rural
Electrification Administration, was the predecessor to RUS. RUS, and the REA before
it, acted as the guarantor of Basin’s debt, and oversaw many aspects of Basin’s
administration. We will refer to both these entities as the “RUS.”
                                          -3-
Standards (“FAS”) published by the Financial Accounting Standards Board (“FASB”).

      However, before WAPA began purchasing power from AVS II, Basin sold
AVS II to a consortium of corporate investors for a total of $622,875,000, and leased
it back, paying a monthly lease cost instead of interest cost on AVS II debt.
Consequently, the Basin-WAPA contract was modified to reflect that WAPA’s cost of
power would include a pro rata share of lease costs, rather than interest costs, for
AVS II.

        The contract was executed in 1982 and ran from 1985 to 1990 without any
apparent problems. In 1992, Robert Norbeck (“Norbeck”), who worked as Basin’s
chief auditor during the Basin-WAPA contract, faced the prospect of losing his job.
He sent a “whistle blower” letter to Basin’s management, threatening to reveal several
of Basin’s allegedly fraudulent transactions unless he kept his job. Undeterred by the
letter, Basin fired Norbeck,3 who responded by bringing a qui tam action under the
False Claims Act.4 See 31 U.S.C. §§ 3729-3733. The Government eventually
intervened, although it pursued only contract claims, as opposed to claims under the
False Claims Act, against Basin. Norbeck, as the Relator, then pursued the false claims
abandoned by the Government.

       Broadly stated, the parties bring four issues on appeal. First, Basin appeals the
district court’s finding that Basin violated the False Claims Act with regard to the

      3
        Norbeck’s discharge from Basin was the subject of a separate discrimination
suit in which a jury awarded no damages to Norbeck. Norbeck appealed his case to
this court, where the jury verdict was affirmed. See Norbeck v. Basin Elec. Power
Coop., 215 F.3d 848 (8th Cir. 2000).
      4
         The False Claims Act allows an individual (the Relator) to bring a qui tam claim
-- a claim “in the name of the Government.” 31 U.S.C. § 3730(b)(1). A Relator who
brings a false claim that is ultimately successful can recover a percentage of the
damages awarded. See id. at § 3730 (c)(1)-(2).
                                           -4-
manner in which it accounted and billed for the sale/leaseback of AVS II. Second,
Basin appeals the district court’s finding that Basin breached the Basin-WAPA contract
by choosing a ten-year amortization period for the common facilities. Next, on cross-
appeal, Norbeck claims the district court erred when it found that Basin did not breach
the Basin-WAPA contract by including post-construction imputed interest as a cost of
power charged to WAPA. Finally, the Government cross-appeals the district court’s
finding that Basin’s calculation and billing for coal costs did not constitute a breach of
contract. We discuss these issues seriatim.

     PART II. OVERCHARGE OF $15.5 MILLION VS. $2.4 MILLION

      A. Background

        Initially, Basin challenges the district court’s finding that Basin overcharged
WAPA due to Basin’s sale and leaseback of AVS II. Although Basin admits some
overcharge occurred and returned approximately $2.4 million to WAPA before trial,
the district court found that the total amount of Basin’s overcharge was approximately
$15.5 million. In accord with this decision, the district court awarded WAPA slightly
over $13 million ($15.5 million minus $2.4 million) in contract damages. The district
court further found that Basin submitted these overcharges to WAPA in violation of
the False Claims Act and multiplied the contract damages as provided for in the Act for
a total judgment of $35.95 million. On appeal, Basin asks that we reverse the district
court’s award, arguing that Norbeck5 introduced no evidence to support the district
court’s judgment. We agree, and we reverse the district court’s award of $13 million
in contract damages, as well as the award of multiplied damages under the False Claims
Act.

      Like most large power facilities, the AVS facility was financed on debt. Under

      5
          The Government has not pursued this claim.
                                           -5-
the original Basin-WAPA contract, WAPA’s costs included a share of interest
payments on AVS II. WAPA’s costs also included a share of the interest from the
common facilities. Since only a portion of the common facilities served AVS II, only
a portion of common facilities’ interest was allocated to AVS II, and only a pro rata
share of that was passed on to WAPA.

        After the formation of the original Basin-WAPA contract, Basin’s new general
manager discovered that it was in serious financial straits. To raise money to pay off
debt, Basin sold AVS II to an outside group of investors and then leased it back,
retaining full control over the operations of AVS II, but now paying a monthly lease.
Since the original agreement made WAPA responsible for a share of AVS II interest,
and the sale/leaseback of AVS II eliminated AVS II debt, Basin and WAPA altered
their original agreement. Under the new agreement, WAPA became responsible for a
share of AVS II lease payments in lieu of AVS II interest payments. The common
facilities were not a part of the sale/leaseback of AVS II, so this amendment to the
Basin-WAPA contract did not affect WAPA’s responsibility for its share of common
facilities’ interest.

       Basin, however, did not apply all of the money it received from the sale of
AVS II to AVS project debt. Approximately $99.5 million went to pay off higher
interest debt from other projects. WAPA’s agreement to pay a share of AVS II lease
costs as a substitute for AVS II interest costs meant that WAPA should not have been
responsible for any interest from the unretired $99.5 million. Both parties agree that
WAPA was charged for some of the interest from the $99.5 million. They disagree,
however, on the amount of the overcharge.

       To understand Basin’s explanation for the overcharge on interest from the $99.5
million in unretired debt, a brief examination of Basin’s accounting procedures is
necessary. Basin did not keep separate pools of debt for each of the AVS facilities.
Instead, all AVS debt was kept in a single pool. Since the cost of power from AVS I

                                         -6-
and AVS II included interest on debt from the facility providing the power, as well as
a portion of the interest from the common facilities, Basin needed to allocate the
interest from this pooled debt to each of the AVS facilities. The interest was allocated
based upon each facilities’ proportionate net investment value (cost).

       After the sale/leaseback transaction, WAPA was no longer responsible for any
interest charges from AVS II, including interest from the $99.5 million in unretired
AVS II debt. According to Basin, it eliminated AVS II interest as a cost category to
WAPA, but properly continued to charge WAPA for its share of the common facilities’
interest. The $99.5 million was still in the pooled AVS debt, however, and interest
from the $99.5 million still accrued. When Basin allocated the pooled interest to AVS I
and the common facilities (AVS II having been eliminated because of the
sale/leaseback), a part of the interest from the $99.5 million was allocated to the
common facilities. Then, once the common facilities’ interest was allocated to AVS I
and AVS II for the purposes of determining the cost of power, a portion of the interest
from the unretired $99.5 million was allocated to AVS II. Thus, when Basin billed
WAPA for common facilities’ interest, the bill included a small portion of the interest
from the unretired $99.5 million, for which Basin admits WAPA should not have been
responsible.

       Apparently no one complained about this overcharge during the contract period,
and it was only when Norbeck threatened to “blow the whistle” on several of Basin’s
transactions that Basin took action.6 After receiving Norbeck’s “whistle blower” letter,
Basin reviewed its bills to WAPA. Soon after, Basin informed WAPA that it had been

      6
        Based upon Norbeck’s whistle blower letter, the district court believed that
Norbeck was well aware of this overcharge. This is not the case. Norbeck’s letter did
refer to an audit done on a similar contract, but the letter does not indicate that Norbeck
was aware of any overcharge. Indeed, Norbeck’s brief admits that he was unaware of
the outcome of the previous audit and that his letter merely questioned the conclusions
of that audit.
                                            -7-
overcharged an amount in excess of $1 million, and that Basin would shortly refund the
money to WAPA.7 Basin eventually sent WAPA approximately $2.4 million as
payment for the overcharge (including interest), which WAPA accepted without
complaint.

        Several years after the $2.4 million refund, Norbeck was fired and proceeded
with this False Claims Act complaint. The Government considered intervening and
hired the accounting firm of KPMG to do an audit of the Basin-WAPA relationship.
KPMG initially determined that Basin owed WAPA $13 million more than the $2.4
million Basin had already returned. KPMG arrived at this number by assuming that
Basin kept separate pools of debt for AVS I, AVS II, and the common facilities. With
that in mind, KPMG then assumed that the $99.5 million in unretired debt stayed in the
AVS II account and that Basin continued to charge WAPA for its share of this
remaining AVS II interest, in addition to the lease payments. Based upon these
assumptions, KPMG determined that Basin overcharged WAPA in excess of $15
million, rather than the $2.4 million that Basin had already returned.

       Once the KPMG audit was complete, Basin challenged KPMG’s assumption that
it maintained separate pools of debt for the AVS facility. KPMG investigated whether
its assumption was correct, and the guarantor’s of Basin’s debt confirmed to KPMG
that Basin kept all AVS debt in a single pool. Once KPMG learned this, it withdrew
its conclusion that Basin owed WAPA in excess of $15 million.

        Norbeck pursued the sale/leaseback issue, however, and the district court held
in his favor. The district court’s opinion relied exclusively upon the testimony of Lester

      7
       The parties agree on the sequence of events, but disagree about the motivation.
Basin claims it honestly undertook an audit of its transactions once it received the
Norbeck letter and determined the amount of the overcharge in good faith. Norbeck
claims that Basin fraudulently determined the amount of the overcharge, sending
WAPA a lesser amount in the hopes that WAPA would not notice the real overcharge.
                                           -8-
Heitger, an accounting professor who testified as an expert for Norbeck. Norbeck
relies upon three arguments to support the district court’s verdict.

       First, Norbeck relies on the evidence admitted at trial showing Basin
intentionally used $99.5 million of the proceeds from the sale of AVS II to pay off non-
AVS debt. Norbeck consistently characterizes this as a misappropriation of funds, and
believes the intentional use of this money to pay off non-AVS debt supports the district
court’s judgment.

       Norbeck next relies on Heitger’s review of the KPMG audit. Heitger testified
that he reviewed the KPMG audit, and he believed that the KPMG audit correctly
determined that Basin overcharged WAPA by $15.5 million. Heitger’s review of the
audit was limited, however, to checking KPMG’s work; he did not conduct a new
audit.

       Norbeck’s third argument relies on Heitger’s “parallel construct,” which Heitger
referred to several times. (Trial Tr. of Lester Heitger at 136-37). Norbeck begins by
pointing out that Basin received approximately $623 million from the sale of AVS II.
Of that $623 million, Basin used $99.5 million to pay off non-AVS debt. Thus,
approximately sixteen percent of the AVS II proceeds was, to use Norbeck’s
characterization, misappropriated. Norbeck then points out that WAPA paid $87.2
million in lease costs for AVS II during the contract period. Norbeck concludes that,
had Basin not misappropriated the $99.5 million, WAPA’s lease costs would have gone
down by sixteen percent. Thus, sixteen percent of $87.2 million is a little over $13
million. When multiplied by a cost of money factor, this sum becomes close to the
amount the district court found Basin overcharged WAPA.

      On appeal, Basin argues that neither the district court nor Norbeck point to any
competent evidence supporting the judgment. Further, Basin points out that it
introduced its actual billing statements to WAPA, and Norbeck did not use those billing

                                          -9-
statements to prove his case.8 Finally, although Norbeck has the burden of proof on his
contract claims, Basin points out that it did introduce evidence, through the testimony
of Ms. Shawn Deisz, an executive in Basin’s accounting department, that supports
Basin’s description of how the overcharge took place. Basin argues Deisz’s testimony
is the only direct evidence of the amount of the overcharge.

      B. Amount of Overcharge

       We believe the district court committed clear error in holding that Basin
overcharged WAPA $15.5 million. Although the district court relied upon Heitger’s
expert testimony, which Norbeck contends should be sufficient to support the
judgment, a close examination of Heitger’s testimony reveals that neither of his
arguments withstand scrutiny. Also, Norbeck’s attempts to characterize Basin’s use
of the $99.5 million as “misappropriation” misses the mark, and cannot support the
judgment.

        Norbeck’s brief consistently attempts to characterize Basin’s use of $99.5
million of AVS II proceeds on non-AVS debt as a misappropriation, suggesting that
this misappropriation supports the judgment. We find several flaws with this position.
First, it appears to us that Basin’s use of the $99.5 million was not inappropriate. Basin
was free to do what ever it wanted with the proceeds from AVS II, including spending
that money on non-AVS debt. Admittedly, Basin had an obligation to deal with the
consequences of such a transaction correctly, and in this situation, it meant ensuring
that WAPA would not be charged for interest from the unretired $99.5 million. Basin
admits as much. This leads, however, to the second problem with Norbeck’s argument.
Simply saying that the $99.5 million was “misappropriated” does not provide any
evidence of how much WAPA was overcharged. Even if the $99.5 million was


      8
         We note that Norbeck admitted at oral argument that an examination of Basin’s
bills to WAPA would not reveal an overcharge.
                                           -10-
“misappropriated,” that is not evidence of the actual amount of the overcharge to
WAPA. Norbeck does not cite to any evidence, other than the abandoned KPMG
audit, suggesting interest from the $99.5 million was directly allocated to AVS II (as
the KPMG audit incorrectly assumed). Thus, this argument fails to support the amount
of the judgment.

       With respect to Heitger’s analysis, he first testified that the amount of the
judgment was supported by the KPMG initial audit.9 This overlooks, however, the fact
that the KPMG audit was based upon the faulty assumption that Basin separated each
of the AVS facilities’ debt. As the unrebutted testimony of Arvle Hix, an accountant
with KPMG who worked on the Basin audit, shows, KPMG determined this
assumption was incorrect, and later abandoned the conclusion in the initial draft that
Basin overcharged WAPA $15.5 million.10


      9
       Although Heitger relied upon the KPMG audit, he did not independently
recalculate this audit. Rather, he testified that he “redid that [KPMG] calculation” and
“concluded that it was an appropriate calculation.” (Trial Tr. of Lester Heitger at 130).

      10
           Q. Okay. I neglected to ask you something I wanted to address. When you
              went back . . . and found out that the debt for AVS was pooled, were any
              of the claims or any of the issues in your audit report abandoned as a
              result of those consultations?

      A.       Yes.

      Q.       What issue or claim was abandoned as a result of that
               investigation?

      A.       That first issue on the leveraged lease transaction.

      Q.       Okay. And just so the record is clear on that, was that the issue
               about whether or not the refund that was ultimately made to
               WAPA should have been 2.4 million dollars or 13 million dollars?
                                           -11-
       Although Heitger checked KPMG’s calculations to make sure they were correct,
his testimony does not support the faulty assumption of separate debt upon which the
entire KPMG audit was based. In fact, he specifically acknowledged that Basin pooled
all of its debt. (Trial Tr. of Lester Heitger at 132-33). Since neither Heitger nor
Norbeck have presented any evidence that suggests KPMG’s initial (and later
abandoned) assumption was correct, Heitger’s support for the KPMG audit proves
nothing. All Professor Heitger could correctly testify to was that if KPMG’s
assumptions were correct, then the KPMG figures were correct. However, he failed
to provide any evidence that KPMG’s assumption was, in fact, correct.11 We believe,
therefore, that Heitger’s approval of the KPMG audit, when KPMG backed away from
its own conclusions, cannot support the district court’s judgment.

       Professor Heitger’s “parallel construct” argument fails for several reasons. First,
the argument is based upon the assumption that Basin misappropriated the $99.5
million it spent on non-AVS debt. As we discussed earlier, Norbeck gives us no reason
to believe the $99.5 million was misappropriated. Further, even if the money was
misappropriated, Norbeck cannot show any connection between the misappropriation
and WAPA’s lease cost.12 Basin and the outside investors negotiated the price of


      A.     Yes, I think so.

(Trial Tr. of Arvle Hix at 74).
      11
         We further note that the district court specifically found that Basin’s debt was
in a single pool.
      12
         Heitger even testified (seemingly contrary to his own “parallel construct”) that
the lease costs would not have been altered by the “correct” application of the $99.5
million:

Q:    (THE COURT) That cuts to the question: Would a lease amount have
      been lower in the cost factor to WAPA if the 99.5 million had been
      applied properly, under your terms? Would the lease payment have been
                                           -12-
AVS II before it made any use, appropriate or inappropriate, of the funds. What Basin
would do with the funds from the sale of AVS II did not affect the negotiations for the
lease price of AVS II, which, of course, determined WAPA’s lease costs. Therefore,
the parallel construct argument fails since Norbeck can show no connection between
Basin’s use of the $99.5 million and WAPA’s lease costs.

      We find no evidence to support the district court’s award of damages past the
$2.4 million Basin already returned to WAPA. Norbeck has thus failed to meet his
burden of proving Basin overcharged WAPA in excess of the $2.4 million, and
accordingly, we reverse the district court’s award of $13.05 million in contract
damages.

      C. Multiplied Damages Under the False Claims Act

       The district court found that Basin’s overcharge of the interest from the $99.5
million was done with the level of intentionality required for multiplied damages under
the False Claims Act. See 31 U.S.C. § 3729(a). Although we have reversed the
district court’s award over the $2.4 million Basin already returned to WAPA, we still
must determine whether Basin overcharged the Government this $2.4 million with the
level of intentionality required for the False Claims Act’s multiplied damages



      lower?

      ****

A:    Well, answering the first question, is that the lease payment, itself, would
      probably not have been lower because they would have then all been
      properly applied.

(Trial Tr. of Lester Heitger at 137-38).


                                           -13-
provisions.13

        In order for Basin to be liable under the False Claims Act, it must have submitted
the false claims with the requisite mental state.14 The lowest level of intentionality that
satisfies the False Claims Act is “act[ing] in reckless disregard of the truth or falsity of
the information.” See 31 U.S.C. § 3729(b)(3). “The improper interpretation . . . of a
contract,” however, “does not constitute a false claim for payment.” United States ex
rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321, 329 (9th Cir. 1995). Rather,
something beyond mere negligence, but falling short of specific intent, must be shown
for liability to attach. See United States v. Cooperative Grain & Supply Co., 476 F.2d
47, 60 (8th Cir. 1973) (holding False Claim Act intent standard was satisfied when
defendant submitted his false claim in an “extremely careless and foolish” manner);
JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS § 2.04(c)(1) (2nd ed.
2000) (“To avoid summary judgment for the defendant [under the False Claims Act],
admissible, credible evidence of a knowing false statement is required.”).

    The district court gave three reasons for its finding that Basin overcharged
WAPA with the required intent. First, the district court held that Basin “knew that

       13
        The district court did not subject the $2.4 million Basin returned to WAPA
before trial to the False Claims Act’s multiplied damages provisions, apparently
reasoning that since Basin voluntarily returned the money, it should not be subject to
these provisions. Norbeck and the Government appeal this decision. If the district
court was correct, then we would not have to decide whether the $2.4 million
overcharge was submitted in violation of the False Claims Act, since the amount would
not be subject to the False Claims Act’s multiplied damages provisions. Since we find
no evidence to support the district court’s finding of fraud in the first place, we need
not reach this issue.
       14
       The False Claims Act, including the intent standard, was significantly modified
in 1986. As this circuit recently indicated, the 1986 False Claims Act intent
modification did not alter the law in the Eighth Circuit. See Miller v. Federal
Emergency Management Agency, 57 F.3d 687, 690 (8th Cir. 1995).
                                            -14-
interest on the remaining debt of the AVS [project] was being allocated in part as an
expense item, in addition to the lease payments, in computing [WAPA’s cost].”
Despite this knowledge, “Basin Electric made a deliberate decision to retire other debt”
with AVS II proceeds, which led to “a continuing overcharge” to WAPA. United
States v. Basin Elec. Power Coop., No. A1-95-003 slip op. at 22 (D.N.D. Mar. 26,
1999). Second, the district court noted that once Norbeck sent his letter, the audit team
investigating the overcharge “deliberately selected an assumption that the $99,500,000
payment did not have to be applied to that portion of the remaining debt being charged
to WAPA, (AVS Unit II and 50% of the common area).” Id. at 23. Finally, the district
court held that both these factors, “when linked to the myriad of small edges taken by
Basin Electric” in determining costs under the contract “satisf[ies] the fraud
requirement under the False Claims Act.” Id. at 23. We believe each of these reasons
lack merit.

        First, Basin no doubt knew that interest on the remaining pooled AVS debt was
being allocated, in part, to WAPA. This was entirely appropriate, since even after the
sale and leaseback of AVS II, WAPA was still responsible for a share of the common
facilities’ interest. It is also uncontested that Basin “made a deliberate decision” to
retire non-AVS debt with $99.5 million from the AVS II sale. Again, this was entirely
appropriate, since Basin could do what ever it wanted with the proceeds from AVS II
so long as it dealt with the consequences correctly. Finally, it is also uncontested that
this decision indirectly led to a continuing overcharge to WAPA. Basin admitted as
much when it returned the $2.4 million.

       What is lacking from this analysis is any evidence that Basin knew, or acted in
reckless disregard, of the possibility that any of the interest from this $99.5 million was
actually charged to WAPA. The only intentional act the district court pointed to was
the discharge of non-AVS debt, and Basin attempted to deal with the consequences of
this act by eliminating interest from AVS II as a cost category in WAPA’s bills.
Nowhere does the district court or Norbeck point to any evidence that Basin knew that

                                           -15-
interest from the $99.5 million was charged to WAPA through a back door, i.e.,
through interest payments from the common facilities.15

       Second, the district court holds that the audit team reviewing the Basin-WAPA
contract “deliberately selected an assumption” that the $99.5 million should be applied
to the pooled AVS debt, rather than to only the “portion of the debt remaining being
charged to WAPA.” This, however, reflects the district court’s misunderstanding of
the situation, since Basin did not maintain separate pools of debt such that it could
apply the $99.5 million directly to a certain portion of AVS debt. Had Basin used the
$99.5 million to pay off AVS debt in the first place, it would have lowered AVS pooled
debt -- including debt that was attributed to AVS I. It was entirely appropriate,
therefore, for the audit team to assume, in determining the amount of the overcharge,
that the pooled AVS debt would have been reduced by $99.5 million. If the audit team
assumed the $99.5 million was somehow applied only to debt directly charged to
WAPA, the result would be a refund greater than the original overcharge, since, as
discussed above, only a small portion of the interest from the $99.5 million was ever
charged to WAPA in the first place.

      Even if the district court was correct that the $99.5 million should have somehow
been applied directly to debt charged to WAPA, it provides no evidence that the audit
team knew or acted in reckless disregard of the possibility that its assumption was
incorrect. The audit team’s deliberate choice of this assumption cannot be fraud if they
honestly believed it was a correct assumption, and the district court does not point to
any evidence suggesting that was the case.



      15
        It appears that the district court’s analysis is infected with the same error as
Norbeck’s argument: that Basin’s decision to use $99.5 million of AVS II proceeds on
non-AVS debt was somehow inappropriate. The correct question is whether Basin
knew it was overcharging WAPA , not whether Basin knew it was paying off non-AVS
debt. The district court did not point to any evidence of this.
                                          -16-
       Finally, the district court’s reliance on the “small edges” taken by Basin in the
various areas of cost computation cannot support its decision. The district court found
that all of Basin’s other overcharges were just “simple contract breaches.” Id. at 24.
But as we mentioned above, the mere misinterpretation of a contract cannot be the
basis of a False Claims Act violation. All of these other “simple contract breaches,”
therefore, cannot provide evidence of a knowing violation of the Act.

       Other than repeating the arguments of the district court, the only evidence
Norbeck points to that could arguably support the finding of fraud are Basin documents
discussing Basin’s intent to use AVS II proceeds to pay off non-AVS debt. For
example, Norbeck points to a September 25, 1985 internal memo that he claims
demonstrates that Basin knew it was defrauding WAPA. But all this document does
to support Norbeck’s position is show that Basin intentionally used $99.5 million from
the sale of AVS II to settle non-AVS debt. As we have mentioned several times, this
decision was not inappropriate. These documents do not support the proposition that
Basin dealt with the consequences of this decision fraudulently. They do not show that
Basin knew that interest from the $99.5 million in unretired debt would get charged to
WAPA through the common facilities. As with much of Norbeck’s argument, he relies
upon the alleged misapplication of the $99.5 million from the AVS II sale to support
his argument, when such use of the money was not a misapplication in the first place.

       We believe Norbeck failed to introduce evidence showing Basin overcharged
WAPA beyond the $2.4 million Basin returned before trial. For this reason, we find
the district court erred in determining that Basin overcharged WAPA more than this
$2.4 million. We further believe that Norbeck has failed to provide any evidence that
Basin submitted these payments with the reckless disregard for the truth necessary
under the False Claims Act. We therefore reverse the district court’s judgment against
Basin on this issue.




                                          -17-
                 PART III. TEN-YEAR VS. TWENTY-YEAR
                        AMORTIZATION PERIOD

      A. Background

       Basin next appeals the district court’s ruling that it breached the Basin-WAPA
contract by choosing a ten-year amortization period for the AVS common facilities.
Both Norbeck and the Government argue the district court correctly held Basin’s ten-
year amortization period breached the contract. We agree with Basin and reverse the
district court’s award of damages.

       Generating and Transmitting (“G & T”) businesses, like Basin, make huge
investments in plants and facilities. G & T’s need to recover these costs, but to attempt
to recover their investment in the first few years of a plant’s operation would lead to
outrageous prices for consumers. Therefore, G & T’s commonly amortize these costs
by spreading them into rates over a period of years. This ensures that rates remain
stable and that G & T’s recover their investment.

        In line with this practice, Basin decided to amortize the costs of the common
facilities into rates over a lengthy period. Although Basin used a twenty-year period
for the common facilities at another power station (the Laramie River Station (“LRS”)
completed in the late 1970s), it chose a ten-year amortization period for the AVS
common facilities. This ten-year period increased the amortization rate and raised
prices to WAPA approximately $3.6 million over the life of the Basin-WAPA contract.
The Government claims that Basin’s choice of a ten-year amortization period violated
the implied covenant of good faith present in every contractual relationship.

      The Basin-WAPA contract allowed Basin to amortize common facilities’
investment into WAPA price rates. No contractual provision required Basin to choose
any particular amortization period, so long as the method for calculating the

                                          -18-
amortization rate was consistent with applicable RUS and GAAP rules. The
Government does not contend that the choice of a ten-year period violated these rules.
Instead, the Government argues Basin breached the implied covenant of good faith,
pointing to the choice of a twenty-year amortization period for common facilities at the
LRS station, an internal Basin memorandum suggesting a twenty-year amortization
period was more in line with the useful life of the AVS common facilities, and Basin’s
switch to a twenty-year period shortly after the end of the Basin-WAPA contract.

      While the Government relies on this evidence to argue Basin acted in bad faith,
Basin tells a different story. According to Basin, its outside auditor, Coopers and
Lybrand (“Coopers”), required it to choose a ten-year amortization period. Coopers
apparently felt that Basin’s twenty-year amortization period did not guarantee that
Basin would recover its investment in the common facilities quickly enough. Basin
admits that it switched to a twenty-year period shortly after the Basin-WAPA contract
ended, but argues it did so only because Coopers finally agreed that a twenty-year
period was appropriate for the AVS facility. The Government and Norbeck believe
Basin’s explanation is a smokescreen and assert that Basin chose the ten-year
amortization period simply to raise prices to WAPA.

        Apparently disturbed that Basin had used a twenty-year amortization period at
the LRS project, and that Basin reverted to a twenty-year period for the AVS common
facilities shortly after the Basin-WAPA contract expired, the district court found for
WAPA, holding that “the requirement for consistency and uniformity [is] controlling.”
Basin, No. A1-95-003, slip op. at 11. The district court agreed that the discussions
relating to a ten-year amortization period between Coopers and Basin took place, and
further conceded that Basin wisely feared its outside auditors. See id. at 9. The district
court believed that if Basin did not satisfy Coopers’ concerns regarding the
amortization rate, Coopers “would be forced to issue a ‘qualified’ opinion, which could
have serious consequences to the business being audited.” Id. at 8. The district court
believed, however, that “no witness or testimony carries [the discussions between

                                           -19-
Coopers and Basin] into the Manager’s office or into the Board Room of the
Cooperative.”16 Id. at 9.

       On appeal, the Government urges this court to affirm the district court’s finding.
Although the district court did not identify any specific legal ground for finding Basin
breached the contract, and while no specific provision of the contract demanded that
Basin choose any particular amortization period (as long as it complied with RUS
rules), the Government believes that by choosing a ten-year period, Basin breached its
implied duty of good faith and fair dealing.17

      B. Analysis: Good Faith and Consistency

        We review the district court’s legal conclusions, including the application of
accounting principles, de novo. See Hercules Inc. v. United States, 626 F.2d 832, 835
(Ct.Cl. 1980) (“the application of accounting rules to a finite problem raises an issue
of contract interpretation, which is an issue of law.”). The application of the implied
covenant of good faith is also an issue of contract interpretation that we review de
novo. See Taylor Equipment, Inc. v. John Deere Co., 98 F.3d 1028, 1031 (8th Cir.
1996). Federal common law governs the interpretation and construction of a contract
between the United States and another party. See United States v. Applied Pharmacy


      16
        The district court’s finding that “no witness” carried Coopers’ concerns into
the manager’s office is clearly erroneous. Both Robert McPhail, the General Manager
of Basin, and Howard Easton, the head of power marketing, testified that they wanted
to use a twenty-year amortization period for the AVS common facilities, but were
prevented from doing so by Coopers. (Trial Tr. of Robert McPhail at 25-26; Trial Tr.
of Howard Easton at 28-29, 50, 62-63).
      17
         Norbeck also asks us to reverse the district court’s finding that Basin did not
submit these charges in violation of the False Claims Act. Since we reverse the district
court’s finding that Basin committed a breach of contract, we have no need to discuss
this issue.
                                          -20-
Consultants, Inc., 182 F.3d 603, 604 (8th Cir. 1999); United States v. Tharp, 973 F.2d
619, 620 (8th Cir. 1992). When applying the “federal common law” of contracts, “that
law must take into account the best in modern decision and discussion.” Montana
Power Co. v. United States, 8 Cl.Ct. 730, 735 (Cl.Ct. 1985).

       The Government correctly urges every contract implies that each party will act
in good faith. See Restatement (Second) of Contracts, § 205 (1981) (“Every contract
imposes upon each party a duty of good faith and fair dealing in its performance and
its enforcement.”). Courts must be careful when considering good faith, however, as
it does not imply “an everflowing cornucopia of wished-for legal duties.”
Comprehensive Care Corp. v. RehabCare Corp., 98 F.3d 1063, 1066 (8th Cir. 1996).
Nor should good faith be construed to “give rise to new obligations not otherwise
contained in the contract’s express terms.” Id.

       The good faith covenant does not impose a general requirement that a party act
reasonably. Rather, the covenant acts merely as a gap filler to deal with circumstances
not contemplated by the parties at the time of contracting. Kham & Nate’s Shoes No.
2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir. 1990) (“Good faith is
a compact reference to an implied undertaking not to take opportunistic advantage in
a way that could not have been contemplated at the time of [the contract’s] drafting,
and which therefore was not resolved explicitly by the parties.”) (quotations omitted).
Since good faith is merely a way of effectuating the parties intent in unforseen
circumstances, the implied covenant has “nothing to do with the enforcement of terms
actually negotiated” and cannot “block [the] use of terms that actually appear in the
contract.” Continental Bank, N.A. v. Everett, 964 F.2d 701, 705 (7th Cir. 1992).

       The Basin-WAPA contract gave Basin broad authority to determine its costs, as
long as the determination satisfied RUS and GAAP requirements. We think it clear
that the good faith duty did not require Basin to choose a particular amortization period.
As the Tenth Circuit explained in Big Horn Coal Co. v. Commonwealth Edison Co.,

                                           -21-
852 F.2d 1259, 1267-68 (10th Cir. 1988):

      [I]t is possible to so draw a contract as to leave decisions absolutely to the
      uncontrolled discretion of one of the parties and in such a case the issue
      of good faith is irrelevant. . . . [in such case] the parties expressly
      contracted for the unconditional right and thus they cannot reasonably
      expect any special implied protection.

This conclusion is in accord with the purpose of the covenant to “protect the reasonable
expectations of the parties by implying terms into agreement.” Id. at 1267 (quotations
omitted). Our review of other legal authorities convinces us that the Big Horn Coal
approach is a sound one.

       For example, in Barseback Kraft AB v. United States, 36 Fed. Cl. 691 ( Fed. Cl.
1996), the court faced a remarkably similar dispute involving the implied duty and one
party’s authority to set prices. Two foreign utilities contracted with the United States
Enrichment Corporation (USEC) for the sale of uranium enrichment services. The
foreign utilities argued that the USEC breached its Uniform Commercial Code
(“U.C.C.”) duty of good faith by setting unreasonable prices. Although the court
rejected the application of the U.C.C., it noted, referring to the common law duty of
good faith, that “there are Federal Government contract/common law principles
paralleling the U.C.C. that could provide similar protections to the plaintiffs.” Id. at
705. The court nevertheless rejected the application of the common law duty of good
faith because “the parties contracted for a pricing provision that provides the USEC
with the discretion to set the price for contracts. Both parties were aware, and the
contracts specifically allowed, that the USEC could unilaterally establish prices under
the contracts.” Id. at 706. Thus, where a contract gives broad discretion to set prices
to one of the parties, the court held it was inappropriate to use the implied covenant to,
in effect, rewrite the bargained-for terms of the contract by limiting the price-setting




                                           -22-
party’s discretion.18 See also Taylor, 98 F.3d at 1031-33 (holding implied covenant of
good faith should not be used to rewrite a contract provision that gives broad discretion
to one of the parties).19 Cf. Hubbard Chevrolet Co. v. General Motors Corp., 873 F.2d
873, 877-78 (5th Cir. 1989) (holding implied covenant had “no role to play” in a
dispute over refusal to approve dealer’s relocation because the contract gave the party
discretion to reject relocation).

       The present case falls within this line of cases. The contract provided Basin with
discretion to determine its costs, so long as such costs fell within applicable RUS and
GAAP rules. To use the good faith covenant to limit Basin’s discretion to choose rates
would require us to rewrite the contract and give WAPA benefits for which it did not
bargain. Beyond being unfair to Basin, “in commercial transactions, it does not in the
end promote justice to seek strained interpretations in aid of those who do not protect


      18
         The Barseback court identified a second ground for refusing to apply the good
faith doctrine, which applies here as well. The Barseback court was “unwilling to infer
a good-faith limitation on the USEC’s pricing discretion because the contracts already
include[d] a significant, bargained-for limitation on the USEC’s pricing discretion.”
Barseback Kraft AB, 36 Fed. Cl. at 706. This limitation was a “ceiling price” on costs,
determined by a formula that accounted for electrical prices and the purchasing power
of the dollar. This ceiling was a “significant limitation” on the USEC’s authority to set
prices for which the “plaintiffs bargained.” Id. Likewise, Basin was limited in its
authority to set prices by applicable RUS and GAAP rules. Just as the Barseback
court, we are “unwilling to add protections beyond those significant contractual
safeguards in place and for which the plaintiffs bargained.” Id.
      19
        We should note that the Taylor case identified a second line of cases that
provide a limited role for the implied covenant in discretionary situations. Although the
Taylor court appeared to prefer our approach, the facts of the case were such that the
court did not need to decide which line of cases South Dakota courts would follow.
Under this second line of cases, the implied duty demands that the party with discretion
act honestly when using that discretion. See Taylor, 98 F.3d at 1033-34; Original Great
Am. Chocolate Chip Cookie Co., Inc. v. River Valley Cookies, Ltd., 970 F.2d 273, 280
(7th Cir. 1992).
                                          -23-
themselves.” James Baird Co. v. Gimbel Bros., 64 F.2d 344, 346 (2d Cir. 1933) (L.
Hand, J.).

       The district court held that the requirement for consistency was controlling. The
district court did not explain why consistency was controlling, but on appeal, Norbeck
argues that consistency was required by GAAP.20 We believe the district court erred
as a matter of law, however, in applying the rule of consistency. Consistency is only
one of many elements of GAAP and it should not be applied in a mechanical manner.
See Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544 (1979) (“Generally accepted
accounting principles, rather, tolerate a range of reasonable treatments, leaving the
choice among alternatives to management.”) (quotations omitted). The rule of Thor
limits the district court, in reviewing an accountant’s work, to deciding only whether
the accountant chose a procedure from “the universe of generally accepted accounting
principles.” Godchaux v. Conveying Techniques, Inc., 846 F.2d 306, 315 (5th Cir.
1988). Further, the GAAP principles must be examined in relation to the type of
business involved. See id.; Pittsburgh Coke & Chem. Co. v. Bollo, 560 F.2d 1089,
1092 (2d Cir. 1977). Thus, the district court’s review was limited to determining
whether the accounting principle of consistency demanded Basin treat the AVS and
LRS common facility amortization rates consistently.

      We believe the district court erred in applying consistency to this issue. As the
Government’s brief indicates, the accounting principle of consistency requires that like
transactions be treated the same, and as the district court’s findings indicate, the
treatment of G & T amortization rates changed dramatically between the time the LRS


      20
         The Government’s brief mentions the principle of consistency, but does not
argue that Basin violated GAAP rules, relying instead on the good faith covenant. In
fact, one of the Government’s witnesses testified that Basin’s amortization rate did not
violate GAAP. (Trial Tr. of Ned Christiansen at 163; see also Trial Tr. of Arvle Hix
at 58-59). Norbeck alone argues that Basin’s treatment violates GAAP, and he relies
on the testimony of Heitger.
                                          -24-
and AVS stations were complete. See Basin, No. A1-95-003, slip op. at 8-9. Because
G & T’s dramatically overbuilt capacity during the 1970s, there was a great concern
that G & T’s would be unable to recover up-front expenditures on projects like the
AVS facility. See id. at 8. As a result, the FASB enacted FAS 71, which establishes
the GAAP that amortization rates must be based upon a reasonable rate of recovery.
See id. The lack of a specific time table, and continuing concerns about long
amortization rates, caused the FASB to try to amend FAS 71 through the adoption of
FAS 92. FAS 92 sought to limit a new amortization period to a maximum of ten
years.21 Id. at 8-9.

        The Government and Norbeck argue that FAS 92 never bound Basin, but this
argument misses the point. FAS 71, FAS 92, and the continuing concern over
amortization rates, show that the LRS facility and the AVS facility were not similarly
situated. Whether or not Basin was bound by FAS 92 does not alter the fact that Basin
(and Coopers) had every reason to be concerned over a twenty-year amortization
period. For the district court to require that the AVS project and the LRS project be
treated consistently turns the accounting principle of consistency into a wooden rule
that is applied mechanically without taking into account changing circumstances and
the range of reasonable alternatives available to accountants. See Thor, 439 U.S. at
544 (“Accountants long have recognized that generally accepted accounting principles
are far from being a canonical set of rules that will ensure identical accounting
treatment of identical transactions.”) (quotations omitted).

       Two sophisticated commercial entities, Basin and WAPA, entered into a contract
that gave Basin discretion to set prices within RUS rules and GAAP. Basin used a ten-
year amortization period for the common facilities, which fully complied with these


      21
          FAS 71 was adopted in 1982, after Basin began amortizing the LRS common
facilities, but before Basin adopted the ten-year amortization period for the AVS
common facilities. FAS 92 was proposed and finally adopted several years later.
                                         -25-
requirements, and set its prices accordingly. Since there is no question that Basin fully
complied with the negotiated contract terms, we believe that the implied covenant of
good faith should not be used to give WAPA more protection than for which they
actually bargained.

       For these reasons, we hold the district court erred in finding Basin breached its
contract with WAPA by choosing a ten-year amortization period. We therefore reverse
the district court’s judgment against Basin relating to the ten-year amortization issue.
In view of the fact that we find no breach of contract, Norbeck’s appeal on the fraud
issue, which the district court dismissed, is no longer a viable claim.

                        PART IV. IMPUTED INTEREST

      A. Background

       Norbeck on cross-appeal claims that Basin, with reckless indifference, breached
its contract with WAPA by imputing post-construction interest on its general fund loan
to the AVS project and charging that interest to WAPA.22 According to Norbeck,
imputing interest in this manner violated the terms of the contract, as well as GAAP.
Basin maintains that it did not breach the contract by billing WAPA for its share of
imputed interest on the general fund loan. Although Basin acknowledges that it
computed the cost of borrowing from its general fund and charged WAPA its
proportionate share, it maintains that its actions were within the four corners of the
contract. According to Basin, the contract only prohibited Basin from including
imputed interest on its financial statements, which it did not do.

      The district court did not determine whether Basin in fact charged WAPA for


      22
        Norbeck brings this claim under the False Claims Act. The Government
supports his position in its briefs.
                                          -26-
imputed interest or whether imputing interest violated the Basin-WAPA contract.
Rather, it concluded that “whatever Basin Electric may have done or not done with
interest on General Fund investment in AVS Unit II after it came on line, is justified in
view of its structure” as a member cooperative. Basin, No. A1-95-003, slip op. at 20.
Acknowledging its foray from the record, the court analogized Basin to an investor-
owned utility and assumed that Basin’s general fund was comprised of surplus dollars
from Basin’s business operations, which were to be refunded to the members based on
their share of business with Basin.23 See id. As such, the court reasoned that the
general fund loan was not drawn from Basin’s equity capital, but that it was more akin
to a loan from Basin’s members.

       Basin financed much of the AVS project with borrowed funds that were
guaranteed by the RUS. However, at some point during the construction period the
relationship between Basin and RUS was disrupted by disagreement on a separate
issue. RUS refused to guarantee further funds for the AVS project until the


      23
         The district court’s characterization of Basin’s general fund differs somewhat
from Basin’s own characterization. When asked to describe Basin’s general fund at
trial, Shawn Deisz testified as follows:

             A good portion of those funds come from our membership.
             Members loan us money, per se, through what we call the
             member investment program. Basin Electric allows its
             members to lend money to Basin. We pay them a return on
             it, and because we are able to accumulate those dollars or
             those investments in a larger pot, the purpose of that is so
             that we can earn a higher rate of return for the members and
             they can get a better rate than going down to their bank and
             putting the money in. So they invest a large amount of
             money with us and that comprises a good portion of the
             general fund.

(Trial Tr. of Shawn Deisz at 117).
                                          -27-
disagreement was resolved. Because it could not attain RUS-guaranteed funding, Basin
borrowed from its own general fund to finance continued construction of the AVS
project.

      The parties do not dispute the legitimacy of Basin’s general fund loan to the
AVS project. What is disputed is the extent to which the Basin-WAPA contract
allowed Basin to impute interest on this loan and include that interest as a cost of power
to WAPA.24

       Imputed interest is a term that takes on a variety of meanings, depending on the
context in which it is used. In a general sense, imputed interest is an accounting fiction
that describes the time value of money. In the instant case, imputed interest refers to
the interest charges on Basin’s general fund loan to the AVS project, which was an
internal borrowing transaction. On Basin’s books, the loan resulted in an interest
charge to the AVS project and an interest income entry to the general fund. However,
these bookkeeping entries did not result in actual interest payments, or cash inflows to
and outflows from those accounts. Thus, the interest was imputed from one set of
Basin’s books to another, and not actually paid.

       To understand the imputed interest issue presented in this case, it also is
necessary to understand the RUS System, which is the organizing principle for
determining costs under the Basin-WAPA contract. RUS is an agency of the United
States Department of Agriculture that provides financing and technical assistance to


      24
         The interest at issue is attributable to the AVS common facilities. WAPA
purchased power from AVS II, which used a part of the common facilities to generate
that power. Accordingly, interest charges from the common facilities were associated
with producing power generated from AVS II and Basin included it as a cost of power
under the Basin-WAPA contract. Interest on financing for AVS II is not at issue in this
case because when Basin sold and leased it back, Basin’s lease costs replaced the
interest costs for that facility.
                                           -28-
utilities in rural America. One of RUS’s functions is to guarantee loans for rural
electric cooperative projects. Central to RUS’s loan-making process is its assessment
and regulation of a cooperative’s financial condition. For this reason, the RUS adopted
the RUS System, which provides accounting methodologies and procedures so that the
RUS accurately can assess “all of the dealings, business and affairs of the borrower.”
7 C.F.R. § 1767.11. Although the RUS System is used to regulate and assess the
financial viability of rural electric utilities, it does not purport to describe any method
for utilities to bill purchasers. Nevertheless, the Basin-WAPA contract provided that
each month Basin would determine its fixed costs for producing power from AVS II
based on the summation of sixteen accounts from the RUS System.

       The RUS System account at issue in this case is “427-Interest.” The regulations
provide that account 427 “shall include the amount of interest on outstanding long-term
debt issued or assumed by the utility.” 7 C.F.R. § 1767.23. The definition does not
mention imputed interest on general funds and the parties have not pointed to any other
part of the regulations that discusses or defines the term.

       The experts who testified at trial agreed that imputed interest is a real and actual
cost of getting an asset ready for service and an appropriate entry in account 427 during
the construction period. When construction is finished, all interest costs (real or
imputed, external or internal) incurred during the construction period are capitalized
along with the other costs of construction and recovered from ratepayers through
depreciation. From this point forward, interest is no longer capitalized but rather, is
charged as an expense against operations and recovered through rates. The RUS
System does not provide for imputed interest on a general fund loan after a facility
becomes operational. In contrast, the parties seem to agree that interest on funds from
third party lenders may be included in account 427 both during and after construction.



      When presented with a question about internal borrowing, Roberta Purcell, Chief

                                           -29-
of Technical Accounting and Auditing Staff at RUS, testified as follows:

             Q. Is there any problem -- if you’ve got several divisions or
      projects or units within a cooperative, is there any problem with one of
      those divisions or projects borrowing money from the other and paying
      interest on that money?

            A. There’s no problem with that. There’s no restriction with that.
      That would be eliminated when you prepare Basin’s books in total.

             Q. And if there was -- truly was a loan that documented that
      relationship and that transaction, that wouldn’t even be an imputed
      interest issue, would it, again as long as when you took the accounting for
      this division and this division and this division and put it together, you
      were not reflecting imputed interest?

             A. If you had a separate set of books for each division and one
      division actually loaned money to another and you had a note that
      represented that, in effect that would not be imputed interest. It would be
      interest for that particular division. But, again, it would be eliminated out
      in the consolidation of the divisions.

(Trial Tr. of Roberta Purcell at 41-42).

      Norbeck claims that Basin knowingly overstated the cost of power to WAPA by
imputing interest on the general fund loan after AVS II went on-line. According to
Norbeck, imputing interest in this manner violated the RUS System specified in the
contract, as well as GAAP. Norbeck argues that imputed interest on general funds after
the construction period does not fall under the RUS System’s allowance for general
funds used during the construction period and does not otherwise constitute interest on
long-term debt under account 427. As for Basin’s violation of GAAP, Norbeck relies




                                           -30-
on the premise that the Basin-WAPA contract was a cost contract.25 According to
Norbeck, only historical costs can be assigned to a cost contract and imputed interest
is not a historical cost under GAAP. At the heart of Norbeck’s argument is the notion
that the general fund loan was not a loan at all. Rather, when the construction bills
came in for the AVS project, Basin simply paid them from its equity reserves. Norbeck
reasons that imputed interest was not the cost of borrowing funds in this case, but
simply a mechanism for Basin to earn profit on equity capital it had in the bank.

       In support of his position, Norbeck points to the terms of the Basin-WAPA
contract, which adopt sixteen accounts from the RUS System for the purpose of
determining the fixed cost component of power.26 By adopting these accounts,
Norbeck contends that Basin also was contractually obligated to adhere to the
requirements of the RUS System, including the prohibition on allocating imputing post-
construction interest to account 427. Specifically, Norbeck argues that because the
contract, by virtue of adopting the RUS System, prohibits recording post-construction
imputed interest in account 427, it also prohibits billing WAPA for post-construction
imputed interest in account 427.

      Norbeck insists that Purcell’s testimony about internal borrowing was limited to
a scenario involving an actual loan. The distinguishing characteristic, according to
Norbeck, is that actual loans generate actual interest. In contrast, internal transfers
such as the general fund loan in this case, involve imputed, or fictional, interest. To
prove the fictional nature of the transaction, Norbeck points out that there are no
documents or other evidence to prove the legal existence of the general fund loan or its
terms, such as a note or repayment schedule. He also points to a Basin memo that


      25
        The RUS System regulations define cost as “the amount of money actually paid
for property or services.” 7 C.F.R. § 1767.10.
      26
         The cost of power under the contract also included “variable or energy related
costs,” for which a separate set of RUS System accounts were specified.
                                          -31-
characterizes the general fund loan as non-cash “dummy payments.” This leads
Norbeck to conclude that the general fund loan and imputed interest are accounting
fictions that should not have been recorded in account 427 or charged to WAPA under
the contract.

        Basin responds that its accounting for imputed interest fully complied with
RUS’s requirements. The RUS System allows for imputed interest under account 427
because that interest is a legitimate component of the asset’s value. In contrast, post-
construction imputed interest is not a component cost of the asset and cannot be
capitalized. If post-construction imputed interest were included in a cooperative’s
financial statements, it would overestimate the financial strength of the cooperative and
provide a faulty basis for the RUS’s financing decisions. Basin explains that although
it tracked imputed interest costs in account 427 both during and after construction, it
did not compromise the integrity of the RUS System because that interest was
eliminated on the company’s consolidated books. The result, according to Basin, is
that its financial statements accurately portrayed the value of the AVS facility in
accordance with the requirements and goals of the RUS System.

       Basin acknowledges that it would have been improper under the RUS System
to capitalize account 427 imputed interest on the general fund loan after the
construction period because doing so would inflate the value of the asset on Basin’s
financial statements. Thus, it did not capitalize these interest costs. It did, however,
calculate the cost of borrowing from its general fund and allocate charges to account
427 for purposes of billing WAPA and other customers their share of those charges.27


       27
          In its initial brief on the issue, Basin suggests that its loan from the general fund
is better characterized as a loan from its members. According to Basin, its general fund
largely is comprised of funds its members invest through the membership investment
program. The purpose of the program is for Basin to pool members’ individual
investments into a larger pot and earn a higher rate of return than what members
otherwise would be able to earn by investing individually. Basin explains that it was
                                             -32-
Basin explains that the cost of borrowing money to build the common facilities was
associated with the cost of producing power from AVS II and therefore appropriately
was billed to WAPA. Basin’s position is that these interest charges are proper whether
the source of funds is internal (Basin’s general fund) or external (a third party lender).

      Basin understands Purcell’s testimony to mean that as long as post-construction
imputed interest does not appear on its financial statements and is not capitalized,
recording imputed interest in account 427 is allowed under the RUS System.
Accordingly, Basin concludes that its methodology for computing interest on the
general fund loan and charging WAPA its proportionate share, was entirely proper
under the RUS System and by extension, the Basin-WAPA contract.

      B. Analysis

       Despite the accounting principles and contract law that weigh heavily in the
balance, the resolution of this issue must be based on the legal principles underpinning
the False Claims Act. As explained in Part II, the False Clams Act prohibits any
person from knowingly presenting a false or fraudulent claim for payment or approval
by the federal government. See 31 U.S.C. § 3729(a)(1). A prima facie case under the
statute requires that (1) the defendant made a claim against the United States; (2) the
claim was false or fraudulent; and (3) the defendant knew the claim was false or
fraudulent. Id.

      The rules surrounding imputed interest and their application in the context of the
Basin-WAPA contract are not as straightforward as the parties would have this court
believe. As an initial matter, the Government, arguing on behalf of Norbeck,
acknowledges that the RUS System does not prescribe a method for billing. This is an


entitled to calculate and charge interest on the general fund loan in order to ensure
financial benefit to its members through the member investment program.
                                           -33-
important consideration, given that the breach of contract alleged by Norbeck involves
over-billing.

       Equally troubling is Norbeck’s reading of the regulations that purport to explain
the proper implementation of the RUS System. Because post-construction imputed
interest is not discussed in the regulations, Norbeck reasons that it is prohibited under
427 or any other account. This line of reasoning borrows from the legal maxim
expressio unius est exclusio alterius (the expression of one thing excludes others not
expressed) and we are not satisfied that it is appropriately applied in this case.28 See
Herman & MacLean v. Huddleston, 459 U.S. 375, 387 n.23 (1983) (rejecting
application of the rule and embracing the idea that such canons “long have been
subordinated to the doctrine that courts will construe the details of an act in conformity
with its dominating general purpose.”) (quoting Securities and Exch. Comm’n v. C. M.
Joiner Leasing Corp., 320 U.S. 344, 350-51 (1943)); Bailey v. Federal Intermediate
Credit Bank of St. Louis, 788 F.2d 498, 500 (8th Cir. 1986) (noting that “[t]he
applicability of ‘expressio unius’ depends upon the intent of the drafters of a statute,
and the maxim should be invoked only when other aids to interpretation suggest that
the language at issue was meant to be exclusive.”). Nothing in the regulations suggests
that Basin’s inclusion of post-construction interest for the purpose of billing AVS
participants their proportionate share of that cost runs afoul of the RUS System. At
minimum, we find that the regulations that govern RUS account 427 do not contain a
mandatory exclusion of post-construction imputed interest for purposes of billing. See
United States ex rel. Oliver v. Parsons Co., 195 F.3d 457, 463 (9th Cir. 1999) (noting


      28
        The Government broadly asserts that “the RUS Uniform System of Accounts
quite clearly prohibits even recording imputed interest as a cost in Account 427,
regardless of its effect on the financial statements.” (Letter Br. for Govt. at 3). This
prohibition is anything but clear. Although experts testified that imputed interest on
general funds is allowed during construction but disallowed once a facility becomes
operational, we find no place in the regulations that explicitly prohibits imputed interest
from being recorded in account 427.
                                           -34-
that where the issue is whether accounting practices complied with the federal Cost
Accounting Standards there is a difference between regulations that are mandatory and
those that are discretionary).

       Based on the evidence in the record, we find that the transaction between Basin’s
general fund and the AVS project fits into the scenario presented to Purcell. Although
it may not have been a separate unit or division of the company, the AVS project
certainly was a “project” that was accounted for in a separate set of books. A schedule
of repayment for the general fund loan to the project was recorded on a master
amortization schedule along with other AVS debt. Despite that the source of the funds
at issue was Basin’s internal fund, rather than a third party lender, the transaction was
nevertheless a loan. The regulations do not define what constitutes a loan under the
RUS System. Courts have defined “loan” in a variety of contexts. After reviewing
well-settled definitions of the term in other circuits, this court has stated that where one
party advances money to another, who in turn agrees to repay the loan with interest,
there is a loan. See United States Dept. of Health and Human Servs. v. Smith, 807
F.2d 122, 124-25 (8th Cir. 1986). In this case, Basin’s general fund advanced money
to the AVS project. The amortization spread sheet indicates that the AVS participants
were to repay the advance, with interest. This evidence is sufficient to have created a
loan. When the accounting for the general fund and the AVS project were combined
in Basin’s consolidated books, no imputed interest was reflected. According to
Purcell’s testimony, this transaction does not create an imputed interest situation in the
eyes of RUS.

       If we view the transaction outside the strict confines of the RUS System, the
ultimate resolution of the issue becomes more clear. Basin financed the construction
of the AVS facility with loans from various sources, both external and internal. There
is a cost of borrowing associated with such loans. The parties agree that there is no
prohibition in the RUS System or otherwise in the contract that prohibited Basin from
charging WAPA its proportionate share of interest expenses on a third party loan.

                                            -35-
Given our analysis of the general fund loan in this case, nothing in the contract prohibits
Basin from charging WAPA its proportionate share of interest on the general fund loan.



        A contract is to be interpreted in light of the totality of the circumstances that
surrounded its formation, and the principal purpose of the parties is given great weight.
See Restatement (Second) of Contracts § 202(1). To interpret the words and conduct
of the parties to a contract, we must put ourselves in the position of Basin and WAPA
at the time the contract was made. See id., at cmt. b. The Basin-WAPA contract was
a cost contract. In other words, the contract provided that Basin would charge WAPA
for the cost of producing the power WAPA purchased from AVS II. At the onset of
the AVS project, and when the parties signed the Basin-WAPA contract, Basin
anticipated that construction would be funded by loans from outside investors. It was
not until 1983 that Basin had to borrow from its own general fund to finance
construction of the AVS facility. Thus, at the time Basin and WAPA negotiated the
contract, we must assume that WAPA understood its cost of power would include
interest on the loans used to finance construction. We decline to interpret the contract
in such a way that would reward WAPA, and Norbeck by extension, for an
unanticipated course of events that shifted the source of money used to construct the
AVS facility.

       The question of whether Basin breached the Basin-WAPA contract is relevant,
but not a conclusive factor in the analysis of Norbeck’s False Claims Act claim. As we
have noted, a breach of contract alone does not constitute a false claim for payment.
 See Butler, 71 F.3d at 329. Therefore, even if we were to find that Basin breached the
contract by virtue of post-construction imputed interest charges, Norbeck must still
satisfy the third element of his case: that Basin knew the claim was false or fraudulent.

       Knowledge under the False Claims Act is civil in nature and a showing of
specific intent to defraud is not required. See 31 U.S.C. § 3729(b). However, a

                                           -36-
Relator must, at a minimum, prove that the defendant acted with deliberate ignorance
or reckless disregard for the truth or falsity of the information. See id. Our analysis of
the Basin-WAPA contract and the RUS System, in light of the facts of this case, led us
to conclude that Basin’s interpretation and performance under the contract was
reasonable. See Oliver, 195 F.3d at 463 (explaining that the reasonableness of a
defendant’s interpretation of those standards are relevant to whether the defendant
knowingly submitted a false claim). We find that Norbeck’s claim under the False
Claims Act fails because he did not prove that Basin acted with the requisite
knowledge. Accordingly, we affirm the district court’s dismissal of Norbeck’s imputed
interest claim.

                         PART V. COAL OVERCHARGE

      On cross-appeal, the Government claims that Basin breached its contract with
WAPA by overcharging WAPA for the cost of coal burned in AVS II. Under the
Basin-WAPA contract, the cost of coal was a component part of the overall price of
power. Basin would determine the cost of coal burned in AVS II, calculate WAPA’s
proportionate share, and plug that amount into the pricing formula used to calculate
WAPA’s monthly bill.

        A number of factors went into Basin’s determination of its coal costs. At issue
in this case is a discount Basin received on the coal it purchased from the ANG Coal
Gasification Company (“ANG”) and a per ton amortization charge Basin included as
a cost of power to help cover the expenses it incurred to finance the Freedom Mine.29
The Government’s claim for breach is twofold: first, that Basin failed to include the

      29
         The supply chain of coal to AVS II was multi-faceted. For purposes of this
case, the Freedom Mine sat at the beginning of the chain. The coal then traveled
through the Dakota Coal Company, which was a subsidiary of Basin. Next the coal
moved to the nearby gasification plant. Finally, ANG delivered the coal to the AVS
facility where it was burned by AVS I and AVS II.
                                           -37-
full benefit of the coal quantity discount when it determined the cost of coal burned in
AVS II; and second, that the spreadsheet Basin used to calculate the Freedom Mine
amortization charge was fundamentally flawed such that WAPA was charged more
than its share for the Freedom Mine expenses.

      The district court found for Basin on both claims.

      A. Coal Quantity Discount

             1. Background

       Basin and ANG had a dual contractual relationship whereby each bought from
and sold to the other. Basin purchased coal for AVS I and AVS II from ANG pursuant
to a Joint Coal Supply Agreement (“JCSA”). Under the JCSA, ANG sold the coal to
Basin at a discount equal to approximately fifty-eight cents per ton of coal burned in
AVS II.30 See JCSA ¶ 5.6(a)(1). A related Power Supply Agreement (“PSA”) between


      30
        ANG discounted the coal because Basin agreed to purchase “coal fines” (the
smaller pieces of screened coal with a lower BTU content), which allowed ANG to use
the larger pieces of coal with the higher energy value at the gasification plant. In
exchange for buying the lower grade coal, Basin wanted ANG to cover a royalty charge
Basin paid on each ton of coal it purchased from ANG. According to the trial
testimony of Mark Foss, Basin’s general counsel, the parties came to a “classic
compromise:” ANG would pay half of the override that Basin otherwise would have
to pay on the coal it purchased from ANG.

        Foss testified that to arrive at half the override, the discount could have been
based on the amount of coal burned in AVS I, the amount of coal burned in AVS II, or
half the amount of coal burned in AVS I and II together. Ultimately, the discount was
structured to provide Basin with an incentive to get AVS II on-line as soon as possible.
ANG stood to benefit if the discount was based on the coal burned on AVS II because
the PSA provided that once AVS II went on-line, ANG would pay a lower rate for the
power it purchased from Basin. Basin, in turn, had an incentive to complete AVS II
                                         -38-
Basin and ANG provided that ANG would purchase power from Basin at a rate that
included the coal quantity discount defined in the JCSA. Although under the JCSA
Basin’s discount was based on the amount of coal burned in AVS II, the PSA provided
that “[f]or Unit 1 and Unit 2 . . . Fuel and Fuel Related Costs shall also include the full
benefit of the quantity discount” in the JCSA. PSA, Art. I.

       The coal burned in AVS II was a “variable or energy related cost[]” under the
Basin-WAPA contract. Since the coal quantity discount defined in the JCSA was based
on the amount of coal burned in AVS II, the Government reasons that the entire
discount should have been subtracted from the cost of coal burned in that facility. Had
Basin allocated the discount in this way, WAPA would have benefitted by paying a
lower price for power from AVS II. Instead, Basin diluted the discount by subtracting
it from the cost of coal for the entire AVS project, which included AVS I. Because the
coal quantity discount was based on the amount of coal burned in AVS II, and cost-
based contractors like Basin may not elect to retain the benefits of rebates or discounts
that they obtain as a result of purchases made to fulfill the contract, the Government
argues that Basin breached the contract by failing to pass on the entire discount to
WAPA.

      The Government rejects as irrelevant the PSA’s treatment of the coal quantity
discount. As an initial matter, the Government argues that the JCSA and the PSA are


because the coal quantity discount was to take effect once that facility started burning
coal.

        ANG applied the discount to Basin’s monthly coal bill. For example, ANG’s
invoice to Basin for July 1986 lists the total amount of coal delivered to the AVS
facility, “Less: Quantity discount for coal consumed by Unit II.” Thus, although the
discount was measured by the amount of coal burned in AVS II, the bill combined the
total amount of coal delivered to AVS I and II.



                                           -39-
two separate agreements dealing with different subject matters: the former deals with
coal and the latter deals with power. Moreover, the JCSA contains an integration
clause, which states that the JCSA “supersedes all prior agreements and understandings
of the parties with respect to the transactions contemplated hereby,” and that “the
parties shall look only to this Joint Coal Supply Agreement for the rights and
obligations of the parties with respect to each other related to the subject matter
hereof.” JCSA § 12.12. According to the Government, this clause precludes the
possibility that the proper application of the coal quantity discount is contained in the
PSA.

       Finally, the Government argues that even if the PSA and the JCSA properly were
interpreted together, their plain language limits the discount to the coal burned in
AVS II. The PSA defines the coal quantity discount according to “Section 5.6 of the
[JCSA].” PSA, Art. I. The parties agree that paragraph 5.6(a)(i) of the JCSA applies,
which by its terms confines the discount to coal “consumed by Unit 2.” JCSA
¶ 5.6(a)(i). In contrast, paragraph 5.6(a)(ii), which does not apply in this case,31 defines
the discount in terms of coal “consumed by Unit 1 or Unit 2.” JCSA ¶ 5.6(a)(ii). The
Government reasons that because (a)(i) was invoked during the performance of the
contract, the discount in fact was limited to the amount of coal burned in AVS II.

       Basin responds that the coal quantity discount is better described as a downward
price adjustment that reflects the lower grade coal it purchased for the AVS facility.
Since AVS I and AVS II equally shared the burden of burning the lower grade coal,
both units properly shared in the discount. In support of this argument, Basin contends
that its physical management, inventory and accounting system, and contractual
arrangement for purchasing the coal all show that the discount, or the reduced price,
properly was applied to the entire AVS facility.


       31
       Paragraph 5.6(a)(ii) was only triggered by the meeting of a contingency, which
was specified in paragraph 4.3(a)(ii) of the JCSA, but did not occur.
                                           -40-
       Basin first explains that it applied the discount according to the physical
allocation of the coal fines purchased from ANG. For purposes of its contract with
ANG, Basin could, and did, calculate the amount of coal burned in AVS II, which then
was used as the basis for the discount on its total monthly coal purchase. In reality,
however, Basin maintained only “one big coal pile” to supply all of its plants, which
was never in fact segregated into separate fuel supplies for AVS I and AVS II.

        Second, for its own accounting and inventory purposes, Basin used the weighted
average cost methodology, which is the industry standard for treating coal inventory.
An expert for Basin testified at trial that it would be inconsistent with the weighted
average cost system to apply the coal quantity discount to AVS II but not to AVS I.
If the discount were to be allocated only to AVS II, customers who purchased power
from AVS I would pay a higher rate than customers who purchased power from
AVS II. Basin reasons that such a result would be unreasonable because both AVS I
and AVS II burned the lower grade coal.

      Finally, Basin contends that the JCSA and the PSA are integrated agreements
that must be read in pari materia to reach the correct construction and application of the
coal quantity discount. Basin interprets these agreements together to mean that the
discount was to be measured on the tonnage burned in AVS II, but apportioned
between both units.

     The district court held that there was no breach of contract with respect to the
manner in which Basin applied the coal quantity. We agree.

              2. Analysis

       It is true, as the Government points out, that cost-based contractors are
prohibited from charging more than what is “reasonable and proper” and must limit the
costs they pass through to those that are “actually paid.” See Jensen v. Manthe, 95

                                           -41-
N.W.2d 699, 703 (Neb. 1959). This means that the contractor must credit the buyer
with discounts and credits unless the contract provides otherwise. See LaPuzza v.
Prom Town House Motor Inn, Inc., 217 N.W.2d 472, 477 (Neb. 1974). However, in
this case we are not asked to decide whether Basin did or did not credit WAPA with
the discount it received from ANG. Rather, the question before us is whether the
manner in which it apportioned that discount was proper. For the answer, we look to
the terms of the contract itself.

        The Basin-WAPA contract provides that at the end of each month Basin shall
determine its “fixed” and “variable or energy related costs associated with the
appropriate unit.” Basin-WAPA contract at Ex. A, ¶ 3, 4. Coal is listed as a variable
or energy related cost under the contract. Thus, we must determine whether Basin
properly calculated its cost of coal for AVS II. As evidenced by the parties’ arguments,
Basin’s cost of coal is not a black and white term in this case. When two good
arguments can be made for either of two contrary positions as to the meaning of a
contract provision, an ambiguity exists. See Home Ins. Co. v. Aetna Ins. Co., 236 F.3d
927, 929 (8th Cir. 2001). Whether a contract is ambiguous is a question of law subject
to de novo review. See Nebraska Pub. Power Dist. v. MidAmerican Energy Co., 234
F.3d 1032, 1040 (8th Cir. 2000). When a contract is ambiguous, the court looks to
extrinsic evidence, such as the nature and the subject matter of the contract and the
facts and circumstances surrounding its negotiation, to discern how the parties intended
to define the contract terms. See AgGrow Oils, L.L.C. v. National Union Fire Ins. Co.
of Pittsburgh, PA, -- F.3d --, No. 99-4319, 2001 WL 219144, at *2 (8th Cir. Mar. 7,
2001).

      Basin entered into its contract with WAPA two years after it executed the JCSA
and PSA with ANG. Based on this chronology, when Basin contracted to sell power
to WAPA, its understanding of the cost to produce power was based, in part, on its
contractual arrangement to purchase coal from ANG. Therefore, we look to the JCSA,
which contains the coal quantity discount, as extrinsic evidence to ascertain the

                                          -42-
meaning of Basin’s cost of coal for AVS II.

        Basin and ANG executed the JCSA and the PSA on the same day. Although the
JCSA deals with coal and the PSA deals with power, the context in which they were
negotiated reveals that these contracts were closely linked and were component parts
of a larger transaction. When two instruments are executed at the same time, by the
same parties, in the course of the same transaction, and cover the same subject matter,
they will be construed together. See Jorgensen v. Crow, 466 N.W.2d 120, 123 (N.D.
1991). Further evidence of the connection between these contracts is found in the plain
language of the PSA, which expressly cites paragraph 5.6 of the JCSA. See Lakeland
Realty Co. of Minn. v. Reese, 46 N.W.2d 696, 700 (N.D. 1951) (noting that
instruments may be construed together where they reference and supplement each
other). The integration clause flagged by the Government does not prohibit our
examination of the PSA to understand the meaning of the coal quantity discount as
defined in the JCSA. It is well-established that a statement in a contract that it is
integrated is not conclusive, but only a factor to be considered. See Restatement
(Second) of Contracts, § 209 cmt. b (1981). The surrounding circumstances pointing
to the interrelatedness of the JSCA and the PSA override the possibility that Basin and
ANG intended one to be read to the exclusion of the other.

        Paragraph 5.6 of the JCSA provides that ANG is to credit Basin with a discount
equal to approximately fifty-eight cents per ton of coal consumed by AVS II. See
JCSA ¶ 5.6(a)(i). The PSA sets forth the proper application of the coal quantity
discount: “For Unit 1 and Unit 2 of the Generating Plant only, Fuel and Fuel Related
Costs shall also include the full benefit of the quantity discount on fines provided for
in Section 5.6 of the Joint Coal Supply Agreement between the parties.” PSA, Art. I.
This means that when it contracted to sell power from AVS II to WAPA, Basin
understood that its cost of coal for the entire AVS facility was reduced by the coal
quantity discount.



                                          -43-
       Course of performance also is relevant to explaining ambiguous contract terms.
See Restatement (Second) of Contracts, § 5 cmt. a. ANG did not separately bill Basin
according to the coal burned in AVS I and AVS II. Rather, ANG calculated the total
amount of coal it delivered to the AVS facility and subtracted from that the discount
based on the coal burned in AVS II. ANG’s billing method also comports with the
industry standard weighted average cost system used by Basin to track the coal supply
for the entire AVS facility. Thus, ANG’s invoices to Basin offer further proof that
although the coal quantity discount was measured by the amount of coal consumed in
AVS II, it was in fact allocated to the coal purchased for the entire AVS facility.

       With this background in mind, we find that when it entered into its contact with
WAPA, Basin intended that its cost of coal for AVS II include a proportionate share
of the coal quantity discount. Although the Government argues for a different result,
there is no evidence in the record to show that the parties understood Basin’s cost of
coal would be calculated in a different manner. For these reasons, we affirm the district
court’s finding that Basin did not breach its contract with WAPA by virtue of the
manner in which it credited WAPA with the coal quantity discount.

       B. Freedom Mine

             1. Background

       The second part of the Government’s cross-appeal on the coal pricing issue
relates to Basin’s alleged overcharges to WAPA based on the Freedom Mine
amortization rate, which was a component of the price WAPA paid for power under the
Basin-WAPA contract.

        The Freedom Mine provided coal for the production of power from the AVS
facility. Basin was contractually obligated to fund a portion of Freedom Mine



                                          -44-
development and future reclamation costs.32 Basin’s Freedom Mine related costs were
twofold: it directly financed a portion of mine development and it also made interest-
free loans to the Coteau Properties Company (“Coteau”), which operated the mine.
Basin estimated total expenditures and loans based on engineering reports that
projected Coteau’s estimated financial needs over a certain period of time.

       Basin amortized its Freedom Mine development costs (direct expenditures and
imputed interest on loans) and recovered those costs through a per ton charge levied on
the coal burned at the AVS facility. This charge was factored into the price of power
paid by AVS II participants, including WAPA.

       Basin calculated its per-ton amortization rate using five factors: (a) the
amortization period; (b) the coal tonnage; (c) Coteau’s principal payments; (d)
additional expenditures; and (e) the interest rate for imputing interest. A Basin
bookkeeper plugged the information into a spreadsheet and adjusted the rate until it
“zeroed out” at the end of the amortization period. The result would serve as the
amortization rate for the year. Basin re-calculated the amortization rate at the beginning
of each year, annually adjusting each factor in the equation according to the “best
available information” at the time.33




       32
        Basin shared this obligation with ANG, which operated the nearby gasification
plant. Basin’s estimated obligation constituted approximately fifty-three percent of the
Freedom Mine costs and ANG was to fund the difference of forty-seven percent.
       33
        On at least three occasions Basin recalculated its amortization rate mid-year
when it received more accurate data. In March 1986, Basin reduced the rate from
$2.2465 per ton to $1.9487 per ton, and made the change in its fuel register retroactive
to January 1986. In March 1988, Basin again reduced the rate from $.7942 per ton to
$.7650 per ton, and made the adjustment effective as of January 1988. Then in June
1990, Basin increased the rate from $.8233 to $.8945 and made the change retroactive
to January 1990.
                                           -45-
       The Government does not complain about Basin’s formula for calculating the
amortization rate. Rather, the Government claims that Basin made fundamental errors
in the 1986 and 1987 spreadsheets with regard to the variables representing the
amortization period and additional expenditures.

       The district court found that the spreadsheets computing the Freedom Mine
amortization rate for 1986 and 1987 “[did not] add up” and included costs for advances
from Basin to Coteau, “which were in fact never made.” Basin, No. 90-345, slip op. at
14. The result, according to the district court, is that when the numbers are viewed in
retrospect, they “appear to have little relationship with reality.” Id. at 15. Although the
court determined that the errors were caused by inaccurate estimates and faulty
assumptions, it found that such errors did not require Basin to make retroactive
adjustments. Under applicable accounting standards, estimated advances need not be
retroactively corrected as long as such estimates were made in accord with the best
available information at the time and modified in subsequent years to reflect any
changes based on new information. Ultimately, the court concluded that the
Government did not carry its burden of proving that Basin overcharged WAPA via the
Freedom Mine deferral.

              2. Analysis

       The elements of a prima facie case for breach of contract are (1) the existence
of a contract; (2) breach of the contract; and (3) damages which flow from the breach.
See Moorhead Const. Co. v. City of Grand Forks, 508 F.2d 1008, 1015 n.10 (8th Cir.
1975). The plaintiff bears the burden of proving each element.

       The price WAPA paid for power under the Basin-WAPA contract was based on
the cost of production. The cost calculation methodology set forth in the contract was
based on the fixed and variable or energy related cost of producing power.
Accordingly, to prevail in its breach of contract claim against Basin, the Government

                                           -46-
must show first, that WAPA’s share of the Freedom Mine amortization rate did not
represent a true cost of producing the power it purchased and second, that the
miscalculated rate resulted in an overcharge to WAPA.

              a. Amortization Period

       Basin’s amortization spreadsheet originally was structured for a thirty-two year
amortization period to correspond to the term of its contractual obligation to finance the
Freedom Mine. The Government complains that the 1986 amortization schedule for the
Freedom Mine was only completed through the first nineteen years, which increased
the annual amortization rate from what it would have been if it were carried through for
the entire thirty-two year term. By increasing the annual amortization rate in this way,
the Government complains that WAPA was unfairly burdened with paying more of the
rate than it would have if a thirty-two year schedule were used.34 The district court did
not make any specific findings on this issue.

       Although the Government complains that Basin’s switch from thirty-two to
nineteen years unfairly shifted the financial burden of the Freedom Mine deferral to
WAPA, it does not explain how that change amounts to a breach of contract by Basin.
The Government also fails to explain how this switch constituted a material calculation
error that Basin was required to retroactively adjust under GAAP.

       We find no breach of contract with regard to Basin’s change of the amortization
period. The record shows that Basin had a legitimate reason for changing the
amortization period. In 1988, ANG failed and was being operated by the Department
of Energy, which wanted to sell it. In 1988, Basin acquired the assets of ANG from the
Government. The acquisition plan called for Basin to form a subsidiary, Dakota Coal


       34
        The 1987 spreadsheet was calculated over a thirty-three year amortization
period, although subsequent spreadsheets used a nineteen year period.
                                           -47-
Company, which would acquire the assets and liabilities of ANG, as well as Basin’s
obligations to finance the Freedom Mine. As a result, on November 19, 1988, the
obligation to advance funds to Coteau was transferred from Basin and ANG to the
Dakota Coal Company.

      Basin made its final loan to Coteau in 1988, which Coteau was to repay through
March 2003. Basin then revised its amortization schedule so that the Freedom Mine
amortization period would correspond with expiration of its last loan to Coteau.

       Since the majority of the Freedom Mine amortization rate was based on imputed
interest on Coteau’s final note to Basin, we agree with Basin that it was reasonable to
link the amortization period to the date when the final payment on that note was due.
In any event, the Government has failed to prove any breach of contract with regard to
the change in the amortization term.

             b. Additional Expenditures

      The Government’s allegations that Basin erred with regard to the additional
expenditures column of the Freedom Mine amortization spreadsheet are two-fold.35


      35
        At trial, Deisz acknowledged the lack of information about what comprised the
“additional expenditures” column:

                    What I don’t know and was not able to find out was
             for the column of additional expenditures it says
             expenditures. It doesn’t say additional advances on the
             note. It says additional expenditures. If, in fact, those
             expenditures were not all advances, future advances on the
             note, but, in fact, expenditures that Basin Electric was going
             to incur and collect through the amortization of the rate,
             there’s no error. It’s right. I don’t know if the additional
             expenditures are all advances or if, in fact, they include
                                         -48-
First, the Government claims that the amortization spreadsheets projected more money
going to Coteau in loans than was to be received from Coteau in repayments. Although
the loans to Coteau were interest free, with imputed interest to be paid by AVS
participants, Coteau was responsible for repaying the principal. Second, the
Government claims that Basin imputed interest on additional advances that were not in
fact made.

       In 1986 Coteau’s outstanding note balance was $41,712,484. Basin’s
amortization spreadsheet for that same year forecast additional expenditures in the
amount of $12,629,190. If the additional expenditures figure represents an interest-free
loan, rather than a direct expenditure by Basin, Coteau’s total projected indebtedness
to Basin as of 1986 was $54,341,674. However, the Coteau note payments calculated
on the 1986 spreadsheet only amounted to $45,779,178, leaving a discrepancy of
$8,562,496. According to the Government, Basin made up the difference between
Coteau’s note principal and repayments by increasing the amortization rate. The
Government concludes that WAPA’s share of the 1986 amortization rate wrongly
included note principal.

      A similar discrepancy is evidenced on Basin’s 1987 spreadsheet. In that year,


             other expenditures.

                                         ****

                    Nobody who was around could recall how that
             additional expenditure played into the deferral and how it
             was supposed to be part of new advances or part of
             additional expenditures or what it was a part of it. There
             wasn’t anybody around anymore that had done that back in
             those years.

(Trial Tr. of Shawn Deisz at 71, 172).
                                          -49-
Coteau’s note balance was $41,408,362 and the projected additional expenditures
totaled $81,045,715. Again, assuming the additional expenditures column represents
loans that were to be repaid, Coteau’s total projected indebtedness to Basin as of 1987
amounted to $122,454,077. Coteau’s projected payments on the same spreadsheet only
totaled $64,687,180, leaving a discrepancy of $57,766,897. According to the
Government, this $58 million also was amortized through the per-ton rate, rather than
calculated into Coteau’s payments, resulting in an overcharge to WAPA in 1987.

        Basin responds that the Government cannot bear its burden of proving breach on
this theory because of the unavailability of complete source documentation relating to
the Freedom Mine amortization calculations, which were made more than a decade
before this issue was brought to trial. The only available witness was the bookkeeper
who simply plugged the numbers into the spreadsheet. No other witnesses who were
involved in the development of the amortization formula or the numbers that went into
it were available to testify. Moreover, many of Basin’s records for 1986 and 1987 have
either been lost or destroyed in the course of business. However, based on the
information that is currently available about those years, a Basin executive explained
that there were in fact plausible explanations for the figures that were used to calculate
the amortization rate. Basin concludes that the Government’s bold assertion of breach
cannot stand on the piecemeal evidence it presented at trial.

        The Government’s second charge of breach regarding additional expenditures
is that the amortization spreadsheets for 1986 and 1987 included advances to Coteau
that were in fact never made. According to the Government, these so-called “phantom
advances” increased the amortization rate and in turn, increased the price Basin charged
WAPA for power. Despite accounting principles that generally require prospective, not
retroactive, adjustments to balance sheets, the Government maintains that Basin
contractually was obligated to credit WAPA for the overcharge once it realized that the
projected advances were not in fact made to Coteau.



                                           -50-
        In support of its argument, the Government points to the terms of the Basin-
WAPA contract. Although the contract stated that Basin would “submit an estimated
monthly bill to the United States within fifteen (15) days after the end of the month,”
it also provided that “[m]onthly adjustments [would] be made to correct for differences
between estimated and actual bills.” WAPA-Basin contract at ¶ 9(i). The Government
argues that this provision in the contract supersedes any accounting principle that might
otherwise suggest retroactive adjustments are not required. However, the Government
points out that in this case GAAP actually required Basin to credit WAPA for the
overcharge. Under GAAP, material errors such as the one promulgated by the phantom
advances must be made on a retroactive basis. Thus, the Government concludes that
Basin breached the contract by virtue of the phantom advances whether the issue is
analyzed under the strict terms of the contract or under GAAP.

       Basin responds that its amortization schedules necessarily and permissibly were
based on Coteau’s estimated and projected needs for the Freedom Mine. To support
its argument that the methodology for estimating and updating the annual Freedom
Mine amortization rate comported with GAAP, Basin points to the conclusion of the
outside audit performed by Coopers. After reviewing Basin’s amortization
methodologies, data and calculations, Coopers concluded that Basin’s procedures with
respect to the Freedom Mine amortization rate were both “reasonable and proper.”
Basin also explains that the experts who testified at trial all agreed that it was proper
for Basin to base estimated additional expenditures to Coteau on the “best available
information” at the time the estimates were made and that GAAP requires prospective
adjustments to be made as the “best available information” changes.36 Under GAAP,


       36
        However, the Government’s experts testified that the skewed numbers
produced by the spreadsheets should have raised a red flag to Basin and that Basin
should have acted to correct the errors. For instance, Ned Christiansen, an accountant
with KPMG, testified on cross-examination that “[t]he 1986 advance of twelve million
dollars wasn’t really hindsight for them. When they were preparing 1987, they would
have known that twelve million dollars hadn’t been advanced, and that should have
                                          -51-
retroactive adjustments are reserved only for material error. Thus, under-estimates or
over-estimates in an amortization calculation only should be changed prospectively
when annual adjustments to the rate are made.

       The district court was correct that the spreadsheets for 1986 and 1987 do not add
up in the sense that they reflect more going to Coteau than collected from Coteau over
the course of the amortization period.37 Basin does not attempt to justify the
discrepancy under any accounting or legal principle. Rather, it focuses on how the
additional expenditures column in the spreadsheets necessarily was based on estimates
and calculated using the best available information at the time.

       However, this reasoning does not explain why the spreadsheets forecasted more
being paid to Coteau than collected from it over the life of the amortization period. The
Freedom Mine amortization rate was to include Basin’s direct expenditures on the mine
and imputed interest on advances to Coteau. Principal on advances was not a legitimate
component of the rate. Despite the admittedly sparse evidence the Government set forth


triggered somebody to . . . evaluate these advances.” (Trial Tr. of Ned Christiansen at
118). Christiansen went on to explain that as time went on Basin did a better job of
analyzing the future and preparing the amortization schedule.
       37
         The Government points out that despite confusion in the evidence as to whether
the additional expenditures constituted direct expenditures by Basin (which Coteau was
not obligated to repay) or additional advances (upon which Coteau was obligated to
repay principal, but not interest), the district court made a finding of fact that the money
reflected on the spreadsheets were advances. See Basin, No. A1-95-003, slip op. at
14-15. The only evidence to the contrary that Basin presented at trial was speculation
by a Basin executive who asserted that there were “plausible” explanations for the
numbers. Basin does not seek to clarify the issue on appeal and refers to the additional
expenditures column as “advances” in its briefs. For this reason, we find that the
additional expenditures column constituted additional advances on the loan, with
principal to be repaid by Coteau and imputed interest to be recovered through AVS
participants.
                                            -52-
at trial to support its claim, when weighed against Basin’s response that there are
“plausible explanations” for the Freedom Mine figures, the claim deserves attention.

       According to the calculations and spreadsheets introduced at trial, the rate
included principal. Moreover, under GAAP these erroneous calculations constitute a
material error that must be retroactively corrected. Our concern is not with the
accounting resolution of Basin’s books, however. Our focus is whether the errors
warranted a refund to WAPA. Basin acknowledges that it did not retroactively adjust
the Freedom Mine amortization rate for preceding years, or credit WAPA for the
overcharge on a prospective basis. Thus, insofar as the amortization rate included
principal on advances to Coteau, Basin breached the contract.

       Upon review of the record it is also clear that Basin included advances in the
1986 and 1987 spreadsheet that were not in fact made. It is true that under GAAP, as
long as Basin’s projected additional expenditures on the Freedom Mine were based on
the best available information at the time, it was not required to make retroactive
adjustments. It is also true that Coopers audited Basin’s financial statements with regard
to the Freedom Mine amortization rate and found that Basin’s methodology was
“reasonable and proper.” But the question of whether Basin overcharged WAPA under
the contract is not solved by accounting principles. Rather, the terms of the contract
govern what was and was not an appropriate component of the cost WAPA paid for
power.38 Accordingly, we find that Basin also breached the contract with respect to the

       38
         We find the Government’s argument based on paragraph 9(i) of the Basin-
WAPA contract to be unpersuasive. Although the provision states that Basin would
submit to WAPA an estimated monthly bill, which thereafter would be adjusted to
reflect the actual bill, Basin argues that the intent and purpose of this provision was to
adjust WAPA’s bills according to WAPA’s actual consumption of power, not Basin’s
actual cost of producing that power. This is a reasonable interpretation if it is true that
WAPA’s power consumption readily was determinable on a monthly basis, while the
actual cost of producing that power was not. For instance, the Freedom Mine deferral
rate, which factored into Basin’s cost of producing WAPA’s power, was calculated on
                                           -53-
advances in the 1986 and 1987 spreadsheets which were not in fact made.

       This finding of breach, however, does not necessarily mean that the Government
will be successful on its Freedom Mine claim, as its claim is inextricably intertwined
with it proving any damages it suffered as a result of the breach. Accordingly, we
reverse and remand this claim to the district court for a determination of damages, if any.

                              PART VI. CONCLUSION

       In conclusion, the resolution of this case on appeal is as follows. First, on the
issue of the sale/leaseback of AVS II appealed by Basin, we find that the district court
erred in determining that Basin overcharged WAPA more than the $2.4 million it
refunded prior to this litigation. We also find that the district court erred in determining
that Basin submitted the $2.4 million in overcharges with the intent necessary for a False
Claims Act violation. We therefore reverse the district court’s judgment for Norbeck
under the False Claims Act. Second, on Basin’s appeal of the 10/20 amortization issue,
we find that the district court erred when it found that Basin breached its contract with
WAPA by choosing a ten-year amortization period. In view of our holding that Basin
did not breach its contract with WAPA by choosing a ten year amortization period,
Norbeck’s claim of fraud on this issue, which the district court dismissed, is no longer
a viable claim and is ordered dismissed. Third, on the issue of imputed interest cross-
appealed by Norbeck, we affirm the district court’s dismissal of this claim. Finally, on
the Government’s cross-appeal of the coal pricing issue, we affirm in part, and reverse
and remand in part. We affirm the district court’s finding that Basin did not breach its
contract with WAPA by virtue of the manner in which it apportioned the coal quantity
discount. However, we reverse the district court’s finding with regard to the Freedom



an annual basis, which would have rendered the contract’s monthly adjustment
provision meaningless in terms of that variable. For this reason, the contract provision
relied on by the Government does not support its argument.
                                            -54-
Mine amortization rate. Therefore, we reverse and remand the Freedom Mine issue to
the district court for a determination of damages, if any. On Norbeck’s False Claims
Act claims that are reversed and the Government’s claim involving the coal quantity
discount, we remand to the district court with directions that these claims be dismissed
with prejudice.

BEAM, Circuit Judge, concurring.

      I concur in the result only.

      A true copy.

             Attest:

                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                          -55-
