Capital Credits Another Co-op Advantage

Editorial by Scott Handy, President/CEO, from March Highline Notes

Every once in awhile you may notice several pages of names published in the Highline Notes, this being one of those issues. These names are people who did not cash the capital credit checks sent them by Cass County Electric Cooperative over the past year. They are for the most part former members, and were receiving electric service from CCEC in the mid-1980s. If you know anyone on the list, please let them know they have some money coming. If you have a current address or any other information that might help us find them, please let us know.

Some of you are probably wondering what capital credits are and why we are trying to find these people to give them money. This is a good opportunity to share some information on why cooperative membership has several unique advantages.

Capital credits represent the  amount of annual revenues that are in excess of our annual expenses. We also call this amount margins, and they would be called profits in the investor-owned utility world. Cooperatives operate on a not-for-profit basis, but we are required by our bankers and by prudent business practices to have an adequate level of margins at the end of the year. When the books are closed, these margins are allocated as capital credits to each member who did business with CCEC that year on a pro-rata basis, based on the amount of revenue each member contributed in that year. You get a notice each year on your bill of what the prior year’s capital credit allocation was for you, and what your total amount of capital credits is.

These funds are retained by the cooperative for a period of years and used primarily to help fund a portion of our capital expenditures in utility plant. The period of retention is currently about 25 years, and has recently been as high as 28 years. When the retention period is over the capital credits are paid out in cash on a first-in, first-out basis. This practice helps keep current rates lower and helps keep the long term debt of the cooperative lower.

The board of directors makes the decision on how much capital to retire annually after the books are closed on the previous year. In 2012, nearly $1.6 million of capital credits were paid back to members receiving service in 1983, 1984 and 1985. At its January meeting, the CCEC board approved paying out another $1.05 million which will fully retire capital credits for 1986 and 1987. We anticipate being able to retire about a million dollars of capital credits per year for the next several years, which will further shorten the retention period.

The decisions to retire capital credits, how much, and to whom require a real balancing act. Capital credits are the property of the members and represent their ownership of the company. While retained, these funds help build equity and a strong balance sheet, which is what helped us absorb over $5 million of a wholesale power rate increase in 2011, and continue to absorb about $2.5 million of that increase each year. Retiring capital credits at a faster pace would require higher electric rates, which we believe is not in anyone’s best interest, and would also reduce equity, which we’ve worked very hard to build up over the past 12 years.

If you became a CCEC member after the mid 1980s, you might wonder what benefit your capital credits are to you. That’s a fair question, and we recognize that ~25 years is a long time to wait to have these credits returned to you in the form of cash. That’s why, when it became clear that margins were on track to exceed the budget for 2012, the board approved the first-ever “PPA Holiday.” This is the equivalent of getting a “capital credit” check in the current year, with the added benefit that ALL current members received the discount, not just those who were members in the mid-1980s. We will be watching carefully for more opportunities to provide other current-year discounts to today’s members while still recognizing our responsibility to retire previously allocated capital credits on a first-in, first-out basis.

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