November 23, 2010

CHEC returns $938,000 in capital credits

At the Oct. 21 meeting, Cape Hatteras Electric Board of Directors authorized the return of $938,382 for its annual capital credit retirement.

Capital credits represent each member’s ownership or “equity” in the cooperative. Patronage capital, the sum of that “equity,” can be likened to the retained earnings of a for-profit or investor-owned utility. Capital credits are similar to the dividends paid to the for-profit entity’s stockholders.

Each member of a non-profit electric cooperative has a capital credit account that tracks his or her ownership in the cooperative. In June of each year, CHEC members receive notice of the amount credited to their account for the prior year. The allocation factor for every $100 dollars spent by a member on electric service in 2009 was $10.18.

Of the $938,382, 50 percent was retired on the last-in, first out (LIFO) basis, to members with service in 2009. The remaining 50 percent was retired on a first-in, first-out (FIFO) basis and will completely retire the patronage balances for members with service in the years 1976, 1977, 1978, and 1980. Zero margins were assigned for 1979.

The refund amount approved equals 60 percent of the cooperative’s 2009 margins. This is a significant increase over previous retirements, which have generally been 25 percent of the prior year margins.

However, because 2009 margins were over-budgeted margins by approximately $1 million, CHEC directors and management felt it was important to refund capital credits more aggressively than previous retirements.

To put it in perspective, prior to this retirement, CHEC had retired more than $5.1 million in capital credits since its inception in 1945. The 2010 retirement will increase that number to a total of nearly $6.1 million. This year’s retirement is 16 percent of the total amount retired in the last 65 years.

CHEC implemented a rate increase in May, 2009, in anticipation of significant increases in its wholesale power cost. However, the economic recession decreased demand for electric service and decreased natural gas prices, which resulted in lower wholesale power cost and higher margins for 2009.

Although demand has increased for 2010, primarily due to extreme weather conditions, gas prices remain low and CHEC has continued to experience lower wholesale power cost and higher margins.

Because of the numerous mounting pressures that will ultimately increase wholesale power cost, this trend is not expected to continue long-term. As long as it does, the non-profit electric cooperative says it will return a significant portion of those margins, not to stockholders, but to the members that it serves.

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