Capital Credits Explained

Capital credits are a unique feature specific to the cooperative business model. At the end of each year, BARC’s financial statements show whether revenue exceeded costs and resulted in a margin. This margin is “allocated” to electric consumers’ accounts as capital credits based on how much electricity each consumer uses and pays for throughout the year. Capital credits are primarily used by BARC to fund long-term capital investments, such as new electric facilities, electric system upgrades, and equipment. Over time, capital credits are returned to consumers (called a “retirement”) on a first-in, first-out (FIFO) basis.

As a not-for-profit organization, BARC does not raise capital from outside shareholders or investors. Capital needs are funded from just two places: capital credits and long-term debt. While BARC could incur debt for 100% of its capital needs, this would result in additional interest expense that BARC would need to recover through increased electric rates. Likewise, BARC could fund 100% of its capital needs through capital credits; however, this too would result in increased electric rates. An underlying principle of the cooperative business model is to strike an appropriate balance between capital credits and debt. Each cooperative has different circumstances, and thus the right balance for BARC may not be the ideal balance for another cooperative. The ultimate goal of the board and management team is to maintain a balance that provides for the capital needs of the electric system and maintains affordable electric rates.

Several financial factors influence retirements, including margins, cash and equity. During some years, the Co-op may experience high growth in new services, requiring significant capital expenditures. Similarly, severe storms may result in the need to spend unbudgeted funds to repair lines. Each year, BARC’s Board of Directors considers these factors and decides whether to retire capital credits based on the financial health of the Cooperative.

BARC requests that current and former electric consumers keep their mailing information current at all times, even if they move off-system. At the time of retirement, if BARC does not have updated mailing information, then retirements will be designated as unclaimed and revert to the Cooperative after a period of time.

WHAT ARE CAPITAL CREDITS?

As a not-for-profit cooperative, BARC is more than just an electric provider, and you’re more than just a customer. Members are owners with a financial interest in the cooperative, and capital credits are one of several benefits unique to cooperative membership.

When revenues exceed expenses, BARC doesn’t technically earn profits; instead, it earns margins. Each year, these margins are assigned to members in proportion to the amount of electricity billed to them during that year. These capital credits reflect your ownership in BARC but are not immediately returned to you. The cooperative uses capital credits to fund operating activities and reduce borrowing, with the intent of repaying them to members in later years.

A retirement cycle is the period between the allocation (accrual) and retirement (return) of capital credits. BARC operates on a 20- to 30-year retirement cycle reflective of the average borrowing terms with its lenders.

WHERE DOES THE MONEY COME FROM?

Member-owned, not-for-profit electric co-ops set rates to generate enough money to pay operating costs, make payments on any loans, and provide an emergency reserve. At the end of each year, we subtract operating expenses from the operating revenue collected during the year. The balance is called an operating margin.

ARE CAPITAL CREDITS RETIRED EVERY YEAR?

Each year, the BARC Board of Directors makes a decision on whether to retire capital credits. This decision is based on many factors, including restrictions put in place by government institutions and the overall financial health of the cooperative. During some years, the co-op may experience high growth in the number of new accounts, or severe storms may result in the need to spend additional funds to repair lines.

These and other events might increase costs and decrease member equity, causing the board not to retire capital credits. It is necessary to maintain an appropriate amount of equity in every business in order to stay in business. For this reason, BARC’s ability to retire capital credits reflects the cooperative’s strength and financial stability. The board alone decides whether to retire capital credits.

DO I LOSE MY CAPITAL CREDITS IN THE YEARS THE CO-OP DECIDES NOT TO MAKE RETIREMENTS?

No. All capital credits allocated for every year members have been served by BARC are maintained until such time as the board retires them. Prior to this year, BARC retired all capital credits through 1997.

HOW MUCH HAS BARC PAID IN TOTAL CAPITAL CREDITS RETIREMENTS SINCE IT BEGAN IN 1938?

BARC has paid $13 million in capital credits retirements to current and former members to date.

WHAT IF I HAVE MOVED?

If you move or no longer have electric service with BARC, it is important that you inform the cooperative of your current address, so that future retirements can be properly mailed to you. If you purchased electricity during the years being retired, then you are entitled to a capital credit retirement, even if you move out of the BARC service area. If it has your current address, then BARC will send your retirement check by mail.