By now, most of our members should have received a capital credit check in the mail. The check may be a result of power you purchased in the years 1992 and 1993, or it may be a result of power you purchased in 2007. For some of you, it could be both.
Capital credit allocations and payments from a cooperative are kind of confusing, and itâ€™s no surprise they are often misunderstood. I have often said theyâ€™re not as good as cash in the bank, but they are better than the proverbial â€œkick in the pants.â€ Actually, they are a lot better. When you purchase electricity from Nodak, unless we have a really bad year financially, you will earn a small piece of equity in the business. Itâ€™s isnâ€™t like stock you buy with cash, and you canâ€™t redeem it for cash at will. In fact, there are no guarantees you will ever get anything for your allocation of equity. It simply means that you and about 25,000 other current and past members have equity ownership in the cooperative assets.
This allocation is done every year, and right now, our members have â€œownershipâ€ in about 45% of our assets. The lending institutions have claim to the other 55%. Now comes the payment part. Every cooperative has a strategy regarding when, and if, they will â€œretireâ€ membersâ€™ equity by issuing capital credit checks. Nodakâ€™s policy is to pay off membersâ€™ equity in the form of cash in 20 years or less. As you can see, we are now paying off equity that was earned 15 and 16 years ago. The funds to pay these capital credits come from debt financing, current yearâ€™s margins, or a combination of both. For this reason, a small part of the rate you paid in 2007 is being used to pay back capital credits earned 16 years ago.
So, why donâ€™t we just forget about this complicated capital credit stuff and just keep the rates lower? First and foremost, we need to finance a portion of our assets with equity. We canâ€™t finance 100% of the cooperative assets with debt. No lending institution would do that, and if they did, the interest rates would be much higher. You, the ratepayer, would pay for that added interest expense in your electric bills, so in fact, your electric rates would not go down. In essence, a small amount you pay for your electricity goes to equity, which you will likely get back 15 or 20 years from now. If we didnâ€™t do that, a similar amount would be needed to pay off high debt financing, which you would never get back.
Finally, why are we paying back part of the equity earned in 2007 already in 2008? The answer is because our margins in 2007 were higher than budgeted. For the size of our cooperative, we need margins between $2 million and $2.5 million to keep our present equity/debt balance. Because we had a very good year, our margins ended up to be in excess of $3 million. For that reason, your board decided to retire 25% of last yearâ€™s margins immediately, which is really a rebate on your purchases for the previous year. This is done only when the board feels that the previous yearâ€™s margins were higher than needed.
Your capital credit check is truly an extra benefit of doing business with a cooperative. It may not be as big as the economic stimulus check you get from Uncle Sam, but Iâ€™m sure everyone will be able to put it to good use.