Empire takes out loan for $7.5 million

Empire takes out loan for $7.5 million

Money will cover failed REAnet venture

April 24, 2001

By Janelle Holden
Journal Staff Writer

Empire Electric Association took out a $7.5 million loan on Friday to cover the line of credit the association guaranteed when it formed its now-bankrupt for-profit subsidiary, REAnet.

Empire’s board of directors opted to cover the line of credit that comes due in August with a 20-year loan from the National Rural Utilities Cooperative Financing Association.

"When REAnet declared bankruptcy, they were in default of the NCSC (National Cooperative Services Corpor-ation) line of credit. NCSC issued a demand to Empire Electric to pay, based on our guarantee. And we have no other choice; we have to honor that demand," explained Neal Stephens, general manager of Empire.

On April 3, REAnet declared Chapter 11 bankruptcy to keep its creditors at bay until the company could re-organize and collect its assets. The telecommunications company was founded by Empire and the La Plata Electric Association in 1998, after each guaranteed $7.5 million of REAnet’s $15 million line of credit.

REAnet currently owes $20.6 million to its creditors.

Empire is also responsible for any unpaid interest on the line of credit and loan-capital term certificates, which are equity investments in the bank providing the loan.

"We’re taking out a 20-year loan on an unsecured basis, and I hope that our financial status improves in future years so that we can prepay some principal and interest on this loan and get back to a point where we’re paying some capital credits," said Stephens.

The interest rate for Empire’s loan has yet to be determined.

By law, the associations cannot raise electricity rates to make up for a loss from a diversified business, but they can use their available cash on hand, such as capital credits. Capital credits are profit-margin refunds usually divvied up between Empire’s 13,000 members. Stephens said the co-operative may still give out capital credits over the course of the loan.

"Those are decisions the board will have to make in future, and it really depends on our financial condition at the time on whether to pay out capital credits or accelerate payment of this loan," explained Stephens.

Last year, Empire issued $800,000 in capital credits.

If REAnet should go into Chapter 7 bankruptcy, which requires the company’s liquidation, or LPEA and Empire sell their principal interest in the company, the proceeds will be split between the two electric associations and used to pay down the debt.

Empire and LPEA originally started REAnet because U S West refused to build a fiber-optics network in the area, and because they wanted to diversify before the electrical market was deregulated and they faced competition from larger utilities.

LPEA and Empire, the principal stockholders of REAnet, have been trying to sell their shares to other investors, but have yet to find a buyer who is financially solvent.