One of the advantages of being a member-owner of an electric cooperative is sharing in its success. Big Horn Rural Electric Company is proud to provide its member-owners with affordable electric rates to power their homes and businesses. Certainly, this is a measure of success. Your cooperative is equally proud to have returned $2.3 million dollars in capital credits over the last ten years - another measure of success.
However, the capital credit concept is often misunderstood. The following information is offered to help clarify this concept.
Frequently Asked Questions
A cooperative does not earn profits in the sense that other businesses do. Most years, Big Horn Rural Electric Company takes in more money than it costs to provide electricity to its members. Those left over funds are called margins. Because we're a cooperative owned by the people we serve, those margins belong to the members who paid for electricity that year and are documented in a special record we call a capital credit account.
Big Horn REA maintains a capital credit account for every member that pays a bill. What we record in the capital credit account is each member's share of the margins allocated on the basis of how much electricity was used by the member. The longer you are a member, the more capital credits we record in your name. Capital credits are the value of your investment in Big Horn REA; it is not dollars in a bank account. It is similar to the equity you build in your home - as you pay down your home mortgage over time, the amount of equity you have increases. In a similar way, the longer you are a member of Big Horn REA, the more equity you build up in your capital credit account.
Your capital credits serve a special purpose for a member-owned cooperatives such as Big Horn REA. They are what you invest back into the cooperative. Capital credits reduce the need to borrow money to run the business and helps hold down rates. Electric cooperatives are a capital intensive industry, requiring a large investment in plant (lines, poles, etc) and equipment. A large amount of cash is needed to keep up with construction during periods of fast growth. Since cooperatives do not have stock that is traded on a stock exchange like many corporations, we cannot sell additional stock to meet cash needs. Instead, we have two other options: borrowing from our bank or from our members. Borrowing from our members, i.e. using capital credits, reduces the need to borrow money from the bank to run the business, and helps hold down rates.
Each year the board of directors, which is elected by our members, reviews our financial position and determines the amount of capital credits to retire to our members. Capital credits may not be retired every year. If Big Horn REA is financially stable and the margins we've accumulated are more than we need to reserve, the board may decide to refund some of the capital credits. As a not-for-profit organization, 100% of the capital credits will be returned to member-owners, but if Big Horn REA were to retire all of the capital credits each year, it would be necessary to raise rates beyond affordable limits to generate enough capital to refund all the accrued credits.
Returning capital credits to our members is our goal and commitment. However, Big Horn REA will only return capital credits when it is financially prudent for the long-term health of the cooperative. The majority of members, when asked if they prefer low rates or a capital credit check for a few dollars, choose low rates.
Accumulated equity decreases the need for Big Horn REA to raise electric rates or borrow money for infrastructure improvements. It also makes it easier for the co-op to absorb costs associated with recovery from devastating events like widespread and severe storms.
Capital credits are allocated to every member who purchases electricity during a year in which the cooperative earned margins. For that year, capital credits are allocated proportionally according to the amount of energy purchased. No special action is required on the member’s part in order for capital credits to accumulate.
Regardless of whether you are an active or inactive member, the capital credits you’ve earned belong to you. However, capital credits do not become payable upon disconnection of the service, they remain on the books in the member’s name until the credits are retired or the member dies. The existing Capital Credit balance will be maintained in a Capital Credit account in your name until it is retired in full. When and if the Big Horn REA Board of Directors elects to retire any Capital Credits in the future, a check will be mailed to the last forwarding address on record. NOTE: It is the former Member’s responsibility to maintain a correct mailing address with Big Horn REA.
No. Capital credits are calculated based upon a member’s monthly bills. If a member is billed for electricity for even one month, they will accumulate some capital credits, provided Big Horn REA earns margins in that year.
In a capital credit allocation, the margins for a particular fiscal year are spread proportionally among the members. The amount of funds allocated to each member’s account is based on the amount of electricity the member purchased during that year. These funds are kept on Big Horn REA’s books until they can be retired. Capital credit retirement is the process of returning the accumulated credits back to the members.
Not necessarily. General retirements are issued at the discretion of Big Horn REA’s board of directors. Each year, based on the cooperative’s present financial condition and other considerations, the board of directors determines whether to issue a retirement, and if so, in what amount. Since 1997, the board has retired capital credits every other year in March on an approximate 30-year cycle (i.e. capital credits earned in 1978 were eligible for retirement in 2009; credits from 1979 were eligible for retirement in 2010, etc.).
No. Allocations are used as the operating capital of the cooperative. They are not available until a percentage is retired and refunded back to you as the Cooperative's financial condition warrants and the Board of Directors approves.
Remember that capital credit funds are used for reliability improvements and maintenance - and these are long-term investments. Capital credits cannot be refunded all at once because they help the cooperative remain financially sound, thereby ensuring a stable, reliable electric service for the benefit of the members we serve.
Yes. Big Horn REA allows that the next of kin can apply for Capital Credits that were assigned to the deceased member while that person was on our service. They have the option of either taking a lump sum distribution at a discounted value; or to leave the money in for distribution over the normal retirement period. If the second option is taken, the capital credit account would then go to the heir(s) assigned, and it would be received as the money is retired. All applications for the lump sum distribution require a photocopy of the death certificate and an Affidavit, which must be signed before a notary as well as filed with the county clerk and a certified copy presented to Big Horn REA before any estate funds can be released. If the estate was probated, we will need a copy of an Order of Distribution from the court along with the Affidavit. Also, please remember we cannot process any type of retirement of capital credits until the deceased's account shows an inactive status.
The board of directors has approved the policy of discounting early capital credit payouts so that all are made on a fair and equal basis. For example, $10 received in cash today is worth more than $10 received 20 years from now. So, to put early pay outs on an equal basis with those who will have to wait for their payments, we discount them.
Yes. For individual memberships, capital credits are handled as discussed above. In the event the capital credits belong to a joint membership (i.e. husband and wife) and one of the accountholders dies, the accumulated capital credits will transfer in their entirety to the surviving person’s account, and their membership will be converted from joint to individual status.
Big Horn REA seeks out the former member-owners who are due capital credits, even if they are no longer on our system. Big Horn REA will post the names of the member-owners who have unclaimed capital credits on our website. If the member-owner does not claim them and the capital credits remain unclaimed for 2 years or more, then they are transferred to a fund for charitable and educational purposes.
For individuals, capital credits are generally not taxable. We suggest you seek the advice of a tax professional for any specific questions.
No. Allocated capital credits may not be used to pay current bills. Your electric bill is due now, whereas you may not be entitled to be paid your capital credits for many years. Capital credits are kept in a separate accounting system apart from your billing account. When the Board decided to retire/disburse capital credits, members will receive a check made payable to the member(s) listed on the account.