Members get the credit

Members get the credit

FreeState retires $850,000 to members

FreeState Electric Cooperative members are seeing bill credits on their July bills —capital credits― for helping build, sustain and grow the cooperative. General retirements for 2017 equaled $700,000 and special retirements, such as estates and members moving off line, equaled $150,000. 

As FreeState attempts to balance capital credit retirements between margins earned decades ago versus those earned in recent years there are options to the board of directors each year on how to balance the financial needs of the cooperative and to give back to the members. The FreeState board has elected to adopt a hybrid system of a First-in-First-Out (FIFO) and Last-in-Last-Out (LIFO) retirement cycle. This approach to capital credits means a larger percentage of current membership gets money back every year. 

As a member of FreeState Electric Cooperative, you are entitled to your portion of our margins. These are called capital credits (also called patronage dividends, patronage refunds, patronage capital, or equity capital) based on how much electricity you purchased during a year. FreeState is a not-for-profit cooperative that returns excess funds because the co-op operates on an at-cost basis. 

This year, members will receive capital credit retirements through a bill credit on the July bill. This credit reflects the contribution of capital to, and ownership of, the cooperative during those years. It may seem like a long time ago, and sometimes it may be decades. However, those funds help FreeState (formerly LJEC and Kaw Valley Electric Cooperative) stabilize rates and reduce the amount borrowed to build, maintain, and expand the distribution service providing our members safe, reliable power. We also must meet the financial requirements of our lenders. 

Common Capital Credits Questions:

What are Capital Credits? 
FreeState operates on an at-cost basis by annually "allocating" to each member, based on the member's purchase of electricity, operating revenue remaining at the end of the year; later, as financial condition permits, these allocated amounts—capital credits—are retired. Capital credits represent the most significant source of equity for FreeState. Since a cooperative’s members are also the people the co-op serves, capital credits reflect each member’s ownership in, and contribution of capital to, the cooperative. This differs from dividends investor-owned utilities pay shareholders, who may or may not be customers of the utility.

Why are my capital credits less than years before? 
FreeState has adopted the hybrid system, which is different from the former Kaw Valley Electric Cooperative. This First-in-First-Out (FIFO) and Last-in-Last-Out (LIFO) retirement cycle approach to capital credits mean a larger percentage of current membership gets money back every year. This year FreeState will retire 60 percent of capital to members on the system the longest, while 40 percent of the capital is retired to members being served more recent. This disbursement formula is reviewed annually. 

In the past, fewer members benefited from capital credit retirement. Now, as FreeState begins the hybrid cycle, the returned monies are shared to more members providing more benefit to all. 

Why am I not getting the same amount allocated to me? 
FreeState allocates capital credits in a way that is fair and equitable. Each member is allocated capital credits based on their usage during a specific time. However, what is retired out to pay capital credits may only be a portion of a member’s allocation. 

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, FreeState subtracts operating expenses from the operating revenue collected during the year. The balance is called an operating “margin.” 

How are margins allocated? 
Margins are allocated to members as capital credits based on their purchases from the cooperative—how much power the member used. 

Does Westar retire capital credits? 
No. Within the electric industry, capital credits only exist at not-for-profit electric cooperatives owned by their members. Westar is an investor owned utility. Profits go to the company shareholders. 

Are capital credits retired every year?
FreeState’s Board makes the decision on whether to retire capital credits based on the financial health of the cooperative. During some years, FreeState 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 or retire only a portion. FreeState’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 FreeState decides not to retire? 
No. All capital credits allocated for every year members have been served are maintained until the board retires them.

When will FreeState retire capital credits? 
FreeState is in the process of blending two cooperatives. Capital credits are staying with each member, but to blend these two systems, the co-op will move forward with the allocation of capital credits with May usage reflected in the June billing cycle. Any capital credit retirements will be credited to June usage reflected in the July billing cycle if you are an active member of the cooperative. If you no longer live on the system, a check will be mailed to you. It is important to keep the cooperative aware of any address changes if you do move off the system. 

How often will members receive capital credits?
FreeState’s Board makes the decision annually to retire capital credits. When the cooperative is strong enough financially and member equity levels high enough, the board directs staff to retire some portion of past years’ capital credits.

Does a member have to report capital credits on tax returns? 
Capital credits are money returned for the purchase of electricity in a previous year and are not taxable income for residential customers. Commercial accounts should discuss any capital credit retirements with their tax advisors.  

Do you still have questions? Call us at 1-800-794-1989 or email us



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