Frequently Asked Questions About Capital Credits
Q: What are capital credits?
A: Capital credits are one of the many benefits of cooperative membership. Because SREC is a not-for-profit cooperative, it does not earn profits. Capital credits are margins that remain after all expenses have been paid. These margins are then allocated to the members of the Cooperative after the Cooperative’s annual independent financial statement audit.
Q: What are margins?
A: As outlined in the Cooperative’s bylaws, margins result from revenues in excess of operating expense in connection with furnishing electric service. These margins represent profit in a given year which is allocated to each member’s capital credit accounts. Margins are necessary in order to provide the Cooperative with working capital used to maintain and/or improve its infrastructure.
Q: What is the difference between allocated and retired capital credits?
A: An allocation determines your share of the Cooperative’s margins in a particular year. Margins are allocated in proportion to member’s electric usage. This is referred to as your capital credit allocation.
A retirement is the amount you receive back as a capital credit refund. Once allocated, the assigned margins (or capital credits) are retained by the Cooperative as a source of working capital used to maintain and/or improve its infrastructure.
Q: How are capital credits disbursed?
A: Each year, SREC’s Board of Directors review the financial condition of the Cooperative to determine if a retirement of capital credits can be made. Capital credits are retired using a FIFO/Percentage method. That means the capital credits that have been invested in the Cooperative for the longest period of time are returned first. Capital credit retirement checks will be mailed to current and former members during the month of October once approved by the Board of Directors. The Cooperative is currently retiring capital credits on a 25 year rotation cycle.
Q: What happens to a member’s capital credits if the member moves away from the system?
A: 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 important you keep us informed of your current address and telephone number so you will receive your check when retirements are approved and paid out.
Q: Is the capital credit check considered income and will I be taxed?
A: Patronage capital retirement payouts are generally nontaxable income if energy was used for residential purposes. Patronage capital retirement payouts may be subject to tax if the energy was used for nonresidential purposes, such as in a trade or business that takes a deduction for the original purchase of electric. We suggest that you consult with your tax advisor regarding your personal situation.
Q: What happens when joint owners of a membership divorce or separate?
A: In the case of dissolution of marriage, the Cooperative must receive appropriate legal documentation as proof of the dissolution of marriage between spouses in order to make any changes in the ownership of the capital credits. Otherwise, if the capital credits were associated with a joint membership, they will remain in both members’ names. If the capital credits were associated with a single membership, the capital credits will remain in the original members’ name.
Q: What happens to my family member’s capital credits if they have passed away?
A: SREC’s Board of Directors will allow the capital credits to be retired early or paid back to the legal representative(s) of your family member’s estate. Capital credits that are claimed early due to the death of a family member are returned at a discounted rate. This discounted rate is used to determine the present value of the immediate payout of the deceased member’s capital credits. Present value is essentially a calculation to determine the current value of a future payment (the current value of $1 increases as time passes). The discount or present value rate for an immediate estate payout is calculated using: (1) the deceased member’s capital credit account balance to be paid out in future years; (2) an interest rate which is equivalent to the Cooperative’s current average cost of capital; (3) the Cooperative’s current capital credit payout rotation cycle. For instance, if a deceased member has $1000 of capital credits which is scheduled to be on the cooperative current 25 year rotation cycle at the average cost of capital of 3%, the calculation would be: 3% per year, for 25 years is equivalent to approximately 47.76%. 47.76% of $1000 is equal to $477.60 or the present value of the payout. Forms to apply for an estate retirement payout are available at both of the Cooperative’s office locations. Forms may also be downloaded from the “Member Services” section of the Cooperative’s website. The required paperwork is to be received by March 31st of each year to be eligible for an estate retirement payout in June of that year, pending the approval of SREC’s Board of Directors.