A cooperative does not earn profits in the sense that other businesses do. Instead, any margins (revenue remaining after all expenses have been paid) are returned to the members in proportion to their usage of the co-op’s services through Capital Credit allocations and retirements. Capital Credits represent each member’s share of the Cooperative’s margins and ownership of the co-op.
Every business needs to maintain a suitable balance between debt and equity to ensure financial health and stability. Capital Credits are the most significant source of equity for most electric cooperatives. Equity is used to help meet the expenses of the co-op, such as paying for new equipment to serve members and repaying debt. Capital Credits help keep rates at a competitive level by reducing the amount of funds that must be borrowed.
Capital Credits are allocated to each member of MEC every year based on their economic participation with the Cooperative - how much they paid into the Cooperative for electric service. The Board of Directors determines the basis for the allocation.
MEC notifies members of annual Capital Credit allocations through a letter and/or bill message and newsletter article.
Each year the Board of Directors determines whether the co-op’s financial position permits the return, or retirement, of Capital Credits and, if so, what amount of Capital Credits will be retired.
The Board also decides the method for determining which Capital Credits are returned. At this time, MEC retires Capital Credits using the First-in, First-out, or FIFO, method. That means that the Capital Credits that have been invested in the Cooperative for the longest period of time are returned to members first. We are generally on a 15 to 17 year cycle - which means Capital Credits allocated in 1999 are likely to be returned to members in 2015.
Some other co-ops retire Capital Credits using a percentage method, which means a portion of the total amount of Capital Credits is allocated to a member over time and then are returned each year.
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 in full.
It is the former member’s responsibility to notify the co-op of any changes in address, so that they can be located when it is time for MEC to retire Capital Credits allocated to their former membership account.
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, MEC offers a special Capital Credit retirement of the outstanding balance of the deceased member’s Capital Credit account, at a discount.
The Board of Directors have a fiscal responsibility to maintain the financial integrity of the cooperative in a way that provides competitive rates and allows the return of Capital Credits to members. Having a sound equity management plan and a commitment to serving the members are both key to achieving this.
Capital Credits are a return of money paid for electricity in a previous year and are generally not taxable income for residential consumers. Commercial and industrial consumers should discuss any Capital Credit retirements with their tax advisers.