Co-ops in the Community

Capital credits: one of the many benefits of being a cooperative member.

Cooperatives are nonprofit, member-owned electric utilities. Co-ops have two basic sources of capital to finance long-term investment in electric utility infrastructure: debt and equity. Debt is money borrowed from outside sources such as banks. Equity is money invested by co-op member-owners. Equity investments made by members of the cooperative are called capital credits.

When a cooperative collects more money than it spends to provide electric service, the difference is called a margin. Having a margin for a given year does not mean there is excess cash in a bank account. Often, the money that appears as a margin on the books has been invested in the electric system. The capital in the term capital credits refers to funds from cooperative member-owners that have been invested in capital equipment such as power lines and substations.

Margins are allocated or assigned to members who belong to the cooperative during the year in which a margin is generated. Margins are allocated proportionally based on the total amount a member paid for electricity during the margin year. This is accomplished by dividing the total margins by total revenue and multiplying the resulting percentage by each member's energy consumption for the year. Each member's portion is referred to as a capital credit allocation.

Cooperatives are allowed by law to use capital credit allocation funds for:

• Payment of the principal portion of the co-op’s long-term debt, as required by its mortgage agreements
• The cost of adding new power lines to a growing electric system
• Costs associated with upgrading outdated infrastructure

Capital credits may be paid at a future date if the cooperative's financial position is adequate to return a portion of equity to member-owners. The co-op’s board determines whether to make a general capital credit retirement to current and former members. A retirement is approved only if the board determines that the financial condition of the cooperative is adequate to support the payout. When the board of directors authorizes a portion of previously allocated capital credits to be returned to members or former members, the amount is said to be retired. Because the cooperative is a nonprofit organization, no interest or dividends are paid on capital credits.

After a member moves out of the co-op’s service are, most cooperatives keep the capital credits accumulated, to be refunded with the general retirements. When a former member cannot be located to receive a capital credit retirement, many cooperatives use the unclaimed money to fund scholarships for area students.

Some cooperatives do not use a capital credit model.