Capital Credits

Capital credits are sometimes hard for our members to understand. They are a vital function and foundation of the cooperative business structure of providing electricity to our member/owners at cost. The following Q&A will help you better understand capital credits. URE member service representatives can always answer your additional questions by calling our main number, 937-642-1826.

What are Capital Credits?
Why are Capital Credits important?
What does URE do with Capital Credits?
What is the difference between allocated and retired Capital Credits?
How does URE determine who receives Capital Credits?
How are Capital Credits recorded?
How do I know the amount of Capital Credits I have?
How are Capital Credits disbursed?
Do members receive interest on Capital Credits?
What happens when a member moves off the URE system?
What happens to a member’s Capital Credits if the person dies?
Why are early retirements to Capital Credits discounted?
How is the discount rate determined?
Does the member have to report Capital Credits on tax returns?
Why does URE not charge a lower rate instead of retaining Capital Credits?
Why are Capital Credits important to the board?
Why are Capital Credits important to the members?
When did URE begin retiring Capital Credits?
What is the dollar amount of Capital Credits URE has retired to date?

What are Capital Credits?
An electric cooperative does not earn profits in the sense other businesses do. Instead, excess annual revenues remaining after all expenses have been paid (margins) are returned (allocated) to the members in proportion to their use of the co-op’s services. Think of it as an “I Owe You” since the allocation process is not an immediate payment.

Why are Capital Credits important?
Capital credits are one of the key advantages of being a member and demonstrate member ownership. They represent your contributions to the cooperative’s equity.

What does URE do with Capital Credits?
Capital credits are a significant source of capital (cash) for most electric cooperatives and are used to help meet the expenses of the co-op, such as; paying for new equipment to serve members, paying wages and repaying debt. Capital credits help keep rates at a competitive level by reducing the amount of funds that must be borrowed.

What is the difference between allocated and retired Capital Credits?
Allocated capital credits appear as an entry on the permanent financial records of URE and reflect the amount of your equity or ownership in URE. When capital credits are retired, a check is issued or a credit is applied to a monthly invoice and your equity in URE is reduced.

How does URE determine who receives Capital Credits?
Capital credits are allocated to each member after the close of an operating year and the amount is based on how much electricity you purchased from the cooperative. The allocation method is based on the percentage of the annual revenue of each retail rate class to total system revenues. The assignment to each patron, within the rate class, is then based on kWhs purchased to total kWhs purchased within their respective rate class.

How are Capital Credits recorded?
Every member has a separate capital credit account number, specific to the member, regardless of the number of electric accounts or rate class of each account. The capital credit allocation for each member is tracked by year and separated into distribution and generation amounts.

How do I know the amount of Capital Credits I have?
Each year, within eight months after the close of an operating year (December 31), URE provides notification of the prior year’s allocation of capital credit on the electric bill. The notification is broken down by distribution and generation amounts for that year and the total for each. Rather than provide this information as a separate mailing, this is printed on the member’s electric bill to reduce cost.

How are Capital Credits disbursed?
| Every year the board of trustees determines if the co-op’s financial position permits the retirement, or refund, of capital credits and, if so, what amount of capital credits will be refunded.

URE typically follows the First-In-First-Out (FIFO) method of retiring, or the oldest capital credit paid in is paid out first, but URE has also used a hybrid method combining FIFO with a small percentage of a more current year.  This is done in an effort to demonstrate the cooperative difference to our less tenured members.

URE may choose to apply the capital credit retirement to your account instead of cutting and mailing a check as a means reduce expenses and keep your rates low.

Do members receive interest on Capital Credits?
Interest is not paid on capital credits per the cooperative’s By-laws. If the cooperative were to pay interest, the money to pay that interest would have to be collected from the members through higher electric rates.

What happens when a member moves off the URE system?
A member who terminates service no longer receives additional capital credit allocations. The balance in the member’s capital credit account is maintained until it is retired or paid in full through general retirements or to their estate. The exception to this is:

1. An inactive member with less than $100 can receive a voluntary special early retirement at a discounted rate.

2. An inactive member with a bad debt owed to URE will have their capital credit retired early at the discounted rate and applied against the bad debt.

3. If URE has authorized a general retirement and is unable to locate an inactive member after four years and with proper public listing of these accounts, the capital credit is reallocated to the current members with the next allocation. It is very important that after you move off URE that the office is notified of your current address so you can receive future capital credit retirements.

What happens to a member’s Capital Credits if the person dies?
If the membership is a joint membership, then the capital credits can be transferred to the surviving spouse. At that point the membership is converted to a single membership.

Capital credits in the member’s account belong to the member’s estate. In order to assist the member’s heirs in closing the estate, the capital credits are retired as a special early retirement. A representative of the estate must request the capital credits by submitting a copy of the death certificate and completing an estate application for payment form.

The heirs could decide to leave the capital credits with the cooperative and retire it at the normal retirement dates, thus receiving 100 percent at the non discounted amount.

Why are early retirements to Capital Credits discounted?
In the interest of fairness to all members, discounting the early retirement of capital credits reflect the net present value of making a capital credit retirement now that would otherwise be made at a later date. Or said another way, the value of the dollars they receive today is greater than the value those dollars would have if received some time later.

If capital credits are paid out early then URE has to replace the capital with other money at an approximate weighted cost of capital in the form of loans and member equity from retail rates.

From the board’s point of view, URE normally “holds” the member’s capital credits for approximately 20 years before returning the capital to pay for plant (poles, wire, transformers, etc.), thus reducing the need to borrow long-term loan funds. Any early retirement therefore is discounted.

How is the discount rate determined?
The discount rate for the early retirement of capital credits are the weighted average cost of the Debt Capital blended interest rate for all outstanding loans and the cost of Equity Capital based on the estimated compound growth rate in Net Utility Plant combined with a 20 Year Capital Credit rotation.

Does the member have to report Capital Credits on tax returns?
Capital credits are a return of money as an overpayment for electric service in a previous year and are not taxable.

Why does URE not charge a lower rate instead of retaining Capital Credits?
The board of trustees has a fiscal responsibility to maintain the financial integrity of URE in a way that provides competitive rates, satisfies our lender requirements, and allows for the return of capital credits to members.

Why are Capital Credits important to the board?
As a 501 (C) (12) electric cooperative under the Internal Revenue Code, the allocation and retirement of capital credits are one of the more important principals of operating as a not-for-profit electric cooperative business and crucial for maintaining income tax exempt status.

Why are Capital Credits important to the members?
Capital credits represent each member’s share of the cooperative’s margin and ownership of their cooperative.

When did URE begin retiring Capital Credits?
On May 20, 1936, URE was incorporated. The first patronage capital credit retirement began in 1969 as a special early retirement to the estates of deceased members.

On Dec. 12, 1981, the board adopted an Equity Development Plan including a program to begin a general retirement with the goal to reach a 20-year rotation cycle or, for example, retiring capital credits from 1989 in 2009. The first general retirement was made in 1982 beginning with the first year URE made a margin. $65,000 was retired, representing patronage capital earned for years 1943-1952.

The 20-year rotation was achieved in 1986 and later accelerated to a 15-year cycle in the late 1990s.  Due to accelerated plant growth and demand for capital, the 15-year rotation cycle is being moved back to the original 20-year general retirement rotation.

What is the dollar amount of Capital Credits URE has retired to date?
Through the end of 2009, URE has paid back approximately $14,800,000 to our member/owners since it began retiring capital credits in 1969.