CAPITAL CREDITS

By Pat McGonagle, Vice President & Chief Financial Officer

Your cooperative operates under a unique, member-owned structure that separates itself from investor-owned utilities. One of the most important financial principles behind a cooperative is the allocation and eventual return (retirement) of capital credits to our members. These credits are the margins—or profits—earned by the cooperative at the end of each fiscal year. Instead of distributing profits to outside shareholders, the cooperative returns margins to our members based on how much consumption each member used in comparison to total system usage during the year. This system ensures that our members are both consumers and stakeholders in the organization.

What are Capital Credits?

Capital credits are the members’ share of the cooperative’s annual margins. Each year, after covering all operating expenses, your cooperative calculates their net margin. This surplus is then allocated to members in proportion to their energy usage. For example, if a member used 2% of the cooperative’s electricity that year, they would be allocated 2% of the total margin. These allocations are recorded in a member’s capital credit account.

However, capital credits are not immediately paid out. They are retained by the cooperative for a period of time to maintain financial stability, reduce the need for borrowing, and fund infrastructure improvements. This practice allows cooperatives to operate efficiently and keep electricity rates affordable.

When and How are They Paid?

Licking Rural Electric (LRE) is the only cooperative within The Energy Cooperative currently retiring (paying out) capital credits due to bank covenants and company bylaws.

LRE sets its schedule for retiring capital credits by monitoring the financial health of the cooperative and board approval.

Typically, the cooperative retires capital credits on a first-in, first-out basis, meaning the oldest credits are paid first. LRE follows a hybrid approach, paying a portion of older and newer credits to balance equity among long-term and newer members.

When capital credits are retired, members receive a check or bill credit. This not only reflects the cooperative’s financial strength but also reinforces the principle that the members are the true owners of the utility.

Discounted Capital Credits For Estates

In the event of a member’s death, LRE offers the option to settle the deceased member's capital credit account early. Rather than waiting for the usual retirement schedule, the estate can request a discounted lump-sum payout. This allows heirs to access the funds sooner, though at a reduced rate.

The discount reflects the time value of money—the concept that a dollar today is worth more than a dollar tomorrow. Since the cooperative is paying out future credits early, it applies a present value calculation to determine the discounted amount. This ensures fairness to both the estate and the remaining membership, as it avoids placing financial strain on the cooperative.

To claim discounted capital credits, the estate executor typically submits legal documentation such as a death certificate, proof of authority, and a completed request form to company representatives. The cooperative’s board then reviews and approves the payout in accordance with company policy.

Final Thoughts

Capital credits highlight the cooperative difference: returning value to members rather than investors. While retirement schedules vary, the principle remains consistent - members receive their share of margins over time. And through discounted payouts to estates, cooperatives provide a thoughtful and financially responsible way to handle a member’s legacy.