This month, capital credit checks will be mailed out. If you purchased power from Nodak during the year 2002, you will be receiving a check. If you purchased power from either Nodak Electric Cooperative or Sheyenne Valley Electric Cooperative in 1984, you will also be receiving a check. The two cooperatives merged in 2001, and in both cases, the oldest unpaid capital credits are for the year 1984.
For those who do not understand the cooperative form of ownership, here is how it works. The day you begin purchasing power from the cooperative, you are a member. At the end of each year, if our revenue exceeded our expenses, the excess margins are allocated to those members who purchased power during the year. The amount allocated to you is dependent on how much electricity you purchased. You are notified of the amount of your allocation, and although there is no guarantee your allocation will be paid, you at least know you have a little bit of equity in the cooperative.
The most common questions at this point are what happened to the extra revenue and why don’t you pay me the difference right now? In answer to these questions, the excess revenue was spent on capital improvements to the system which are amortized over many years. System improvements for a cooperative are financed partially with debt financing and partially with equity financing from the member/owners of the cooperative. Having equity financing keeps our annual debt service cost down and helps to keep our electric rates lower.
At this point of the story, we are normally asked a number of logical questions, such as is it fair you keep my equity for nearly 20 years, interest free, just so you can keep the rates lower? What if I leave the cooperative next year? Why should I care if the electric rates are lower in the future?
The answer to the first question is yes, it is fair to hold your equity for the purpose of keeping rates lower. You see, the rates you have paid while purchasing power from the cooperative have been lower because of the members who left equity with the cooperative before you. The equity you earned but left with the cooperative in 2003 will similarly benefit ratepayers in future years.
Essentially, Nodak tries to rotate equity on a cycle of roughly 20 years. We are pretty close to that rotation cycle as we will be paying out all remaining capital credits earned in 1984. The board of directors also considers each year if it is appropriate to pay back a portion of the capital credits earned during the previous year. They have been doing this in recent years when the following two criteria are met. First, they retire capital credits from the previous year only when margins are higher than expected. Some years, due to weather conditions or below-normal operating expenses, our margins are higher than budgeted for a calendar year. The board may then look at the excess as a windfall that should be paid back the following year. Second, however, the board must feel that the cooperative is in strong enough financial condition to make a payment on the normal rotation cycle as well as a retirement for the previous year. Just because the cooperative has one exceptional year does not automatically mean we are in a strong enough position to pay out both the normal rotation payment plus a current payment.
The good news this year is that the board has determined the cooperative can indeed make this dual payment. Our outstanding capital credits for the year 1984 are approximately $800,000. In the year 2002, our net margins were $2.5 million. The board has elected to pay out 20% of the 2002 margins, which is roughly $500,000. Therefore, the total amount of capital credit checks paid out this year will be approximately $1.3 million.
The earning and payment of capital credits is one benefit of receiving electric service from a cooperative. However, this is really a reflection of a stronger benefit, which is that of having equity in the cooperative. Your owner equity entitles you to vote for or run for a position on the board of directors. It also entitles you to vote for bylaw changes and have direct input into the operation of the cooperative.
We hope you enjoy the capital credit check you receive this year, and we hope you take advantage of your right to participate in the operation of the cooperative.