Capital credits come from the money left over after all expenses are paid in a given year. At the end of the year, that money is credited to each member’s account according to the amount of electricity purchased. Assigning capital credits to members, instead of paying dividends to distant stockholders, is just part of the accountability your cooperative offers you.
The credit remains on the utility’s books for a time and is used as a sort of interest-free loan from the members, who benefit by not having to pay interest on money borrowed from an outside source. When the cooperative’s finances permit, that money is returned to members in the form of capital credits checks.
Looking Out for You!
Unlike many other businesses, cooperatives do not have shareholders who expect to make money from the operation of the company. Instead, consumers of a cooperative are member-owners of the company.
The primary objective of an investor-owned company is to make a profit. An electric cooperative is different. It is a not-for-profit business that exists solely to provide its members with electricity.
In a cooperative, net margins don’t belong to the company; they belong to the individual members paying their monthly service bills. In effect, the members are the shareholders.
Why Not Just Break Even?
Since the cooperative assigns any leftover money back to the members, it seems like we should establish a budget to merely break even every year. However, that isn’t possible—or desirable. The business of building power lines is very expensive, and maintaining them is subject to outside forces such as weather. It is impossible to plan so precisely in advance that revenues and expenses come out exactly even at year end.
What’s more, a cooperative must show a margin at the end of each year to prove to its lenders it is financially sound — and some margin must remain after expenses are paid so the business can continue to operate. Like other businesses, electric cooperatives must have money on hand to provide current operating funds and set up a reserve against emergencies.
Whatever monies that may be accumulated at year end always belong to the members. Being paid for patronizing your own company is just another way we are looking out for you!
Retiring capital credits is a unique business practice that allows cooperatives to give back margins. That process is just one part of the co-op difference, but often capital credits are misunderstood. To better educate our members about capital credits, we have listed some frequently asked questions and answers.
Q: What are capital credits?
A: Capital credits are one of the many benefits of co-op membership. As a cost-of-service energy provider, South Plains EC doesn’t earn profits. Instead, co-ops use the term margins, which is revenue remaining at the end of the year after all bills are paid. Capital credits reflect each member’s equity in, and contribution of capital to, the cooperative.
Q: What’s the difference between allocation and retirement?
A: An allocation is your share of the margins. We set this money aside to use as operating capital for improvements and maintenance; it also helps the co-op meet equity ratios with lenders. A retirement is the amount you receive in a check or as a credit on your bill. It is a percentage of your allocations accumulated over the years.
Q: What happens to the capital credits of a member who dies?
A: It remains in place for the member’s heirs. A representative of the estate must keep contact information current.
Q: Why does the cooperative need to accumulate equity?
A: Your equity in the co-op reduces the need for us to raise rates or borrow as much money to meet expenses. Every business must have equity to continue to survive.
Q: What happens to my capital credits if I move?
A: Your capital credits remain on our books until they are retired. That’s why it’s important to let us know of any address changes.
Q: Are capital credits retired every year?
A: Each year, your board of directors decides whether to retire capital credits based on the co-op’s financial health. SPEC’s ability to retire capital credits reflects the cooperative’s strength and financial stability.
Q: Where does the money come from?
A: Co-ops set rates to generate enough money to pay operating costs, make payments on any loans and provide an emergency reserve. At the end of each year, we subtract operating expenses from the operating revenue collected during the year. The balance is called an operating margin.