What Are Capital Credits?
A cooperative does not earn profits in the sense that other businesses do. Most years, Big Horn Rural Electric Company takes in more money than it costs to provide electricity to its members. Those left over funds are called margins. Because we're a cooperative owned by the people we serve, those margins belong to the members who paid for electricity that year and are documented in a special record we call a capital credit account.
Big Horn REA maintains a capital credit account for every member that pays a bill. What we record in the capital credit account is each member's share of the margins allocated on the basis of how much electricity was used by the member. The longer you are a member, the more capital credits we record in your name. Capital credits are the value of your investment in Big Horn REA; it is not dollars in a bank account. It is similar to the equity you build in your home - as you pay down your home mortgage over time, the amount of equity you have increases. In a similar way, the longer you are a member of Big Horn REA, the more equity you build up in your capital credit account.
Your capital credits serve a special purpose for a member-owned cooperatives such as Big Horn REA. They are what you invest back into the cooperative. Capital credits reduce the need to borrow money to run the business and helps hold down rates. Electric cooperatives are a capital intensive industry, requiring a large investment in plant (lines, poles, etc) and equipment. A large amount of cash is needed to keep up with construction during periods of fast growth. Since cooperatives do not have stock that is traded on a stock exchange like many corporations, we cannot sell additional stock to meet cash needs. Instead, we have two other options: borrowing from our bank or from our members. Borrowing from our members, i.e. using capital credits, reduces the need to borrow money from the bank to run the business, and helps hold down rates.