Capital Credits: Frequently Asked Questions
Dakota Electric Association was formed in 1937 as a cooperative. A cooperative is different from a stock corporation, a partnership or other forms of legal ownership in that it is owned only by its membership. Dakota Electric members have the right to elect a board of directors. This form of ownership also has the advantage of being exempt from federal and state income taxes, per the Internal Revenue Service and Minnesota state law.
Electric utilities are a capital intensive industry, requiring a large investment in plant and equipment. 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 equity from our members. As you know, a bank will not lend 100 percent of the cash that a company or individual needs. They need to see that others have invested too.
This is where capital credits come into the picture for a cooperative like Dakota Electric. Capital credits (also called margins or equity) are the members’ ownership, or capital investment, in Dakota Electric. Capital credits represent the difference between total revenue received and operating expenses for each year. After the books are closed at the end of each year, this difference is allocated to each member according to the amount of their annual electric bill. The more electricity purchased from Dakota Electric, the larger the share of margins allocated. This allocation cannot be paid out in cash, however, because it is the member’s investment required by the bank.
Dakota Electric does not pay interest on capital credits balances because this money would have to be collected from our members to be paid to our members. This would amount to paying interest to you while making our electric rates higher than they need to be. At investor-owned utilities, such as Xcel Energy, the difference between total revenue received and operating expenses for each year is either kept by the utility or paid out as a cash dividend to individuals who hold stock in that corporation. In other words, an investor-owned utility’s profit is paid to its stockholders instead of its members. In a cooperative like Dakota Electric, the margins go back to the members because they are also the owners. So, although it may take a long time for Dakota Electric to return your capital credits, you do get these margins back.
No capital credits allocations were made in 2004, 2008 and 2009 because there were no margins during those years.
Each year the board of directors, which is elected by our members, reviews our financial position and our debt covenants and determines the most financially prudent amount of capital credits to retire or pay out. Since our goal is to keep electric rates as low as possible, there is usually a very small margin or profit left after expenses are paid each year.
For example, if our margins for a year were $1 million and the total number of members was 105,000, the average amount that could have been paid would only have been $9.52 per member. But, since it is prudent to increase the owner investment in Dakota Electric as we continue to build our distribution system to serve the growing Dakota County area, this $1 million is not cash in the bank. Instead, it is invested in the utility plant, poles, transformers, wires, etc. needed to run the business.
Returning capital credits to our members is our goal and our commitment and is required by the Internal Revenue Service. However, Dakota Electric will only return capital credits when it is financially prudent for the long-term health of the cooperative. The majority of members, when asked if they prefer low rates or a capital credits check for a few dollars, choose low rates.
It is legal for Dakota Electric to keep capital credits until the board of directors declares a payout. As a cooperative, this complies with the laws of the State of Minnesota and the Internal Revenue Service and is also in accordance with Dakota Electric’s bylaws. A decision about whether or not to pay capital credits is made year by year based on the financial position of Dakota Electric at that time. Currently, the equity of Dakota Electric is made up of margins earned from 1992 forward.
After the books are closed and audited at the end of each year, we allocate each member a portion of any margins Dakota Electric had. The capital credit allocation information shows your portion of the margins and your total capital credit balance accumulated to date for that property address. This allocation of margins is required by Minnesota state law and the Internal Revenue Service.
If you are a current member, the capital credits statement information for your current residence is printed on your bill, usually in August or September. If you have left our service area, you will not automatically receive capital credit information because you have not accumulated any additional capital credits, but you may request an account statement at any time.
For information about your capital credit account balance, please call 651-463-6218 or email [email protected].
The board of directors has not declared this amount payable yet. It is your share of Dakota Electric’s margins, but it is not cash. This amount will be paid to you when the board of directors has determined it is fiscally prudent and in the best interest of all members to do so.
The board of directors, when they have decided that it is fiscally prudent to make a payout of capital credits, determines the method, basis, priority and order of retirement of capital credit account balances. Members who have left Dakota Electric’s service area after June 30, 1998, have the option of leaving their capital credits with Dakota Electric to be paid out in the future as determined by the board of directors, or receiving their capital credit account balance at a discounted rate. The payout, if chosen, appears as a credit on the final electric bill. This option was developed because it saves Dakota Electric the administrative cost of tracking these members’ address changes in the future. Members who moved out of Dakota Electric’s service area prior to July 1, 1998 are not eligible to receive their capital credits unless they meet the criteria below.
The payout option is based on the following:
- Payments will be discounted at a rate approved by the board of directors. Currently, that rate is 8% per year based on a 20-year payback cycle.
- Payments will be limited to a maximum of $5,000 per residential account per year. Any remaining amount will be paid in future years.
The board of directors has approved the policy of discounting early capital credits payouts so that all are made on a fair and equal basis. For example, $10 received in cash today is worth more than $10 received 20 years from now. So, to put early payouts (for estates, age 65 and disconnecting members after July 1, 1998) on an equal basis with those who will have to wait for their payments, we discount them.
Contact Dakota Electric at 651-463-6218 to request the proper forms to complete for an estate payment. Members age 65 or older may send requests for payment, along with a copy of a driver’s license or other proof of age, to Dakota Electric at the contact information below. Your capital credit balance will be paid on a discounted basis. Payment is issued within 45 days of receipt of any required documentation.
Dakota Electric requests that former members keep us up to date with their current address. If we attempt to send you a capital credit check and it is returned by the post office due to an outdated address, we must follow state laws for the unclaimed property. We will publish the information on our website in an attempt to find the rightful owner of the money. We continue to publish and carry unclaimed capital credits amounts on our books for up to seven years. If, after the required time, we still have not located you, the law requires us to either turn the money over to the state or donate it to a charitable organization. Our current policy, as set by the board of directors, is to donate all unclaimed capital credits money to local community colleges and schools for student scholarships and educational purposes.
Currently, due to security issues, you are not able to access information on your specific capital credit account. However, you may request a copy and we will be happy to send you one.