Capital Credits Information

Chugach has two ways to finance long-term capital investments: borrowed money and the margins it makes in years when revenue exceeds expenses.

Retained margins are equity for Chugach. Margins are also the basis of the capital credits program. As a not-for-profit, member-owned cooperative, Chugach allocates margins to the members of record for the year in which they were earned, in proportion to the amount they paid for electric service.

Chugach strives to balance these two sources of capital. Balance is important. An excessive proportion of debt would lead to higher interest rates. On the other hand, a higher equity level from retained margins means less money is being returned to members of record through capital credits retirements.

Different cooperatives have different needs, and make decisions accordingly. Chugach strives to maintain an approximate debt-to-equity ratio of 70-30.

Like other capital-intensive utility cooperatives, Chugach retains margins for a period of time before returning them to members of record through an action called a capital credits "retirement." Retirements are not automatic. Each must be specifically authorized by the board of directors after considering the impact on the finances of the cooperative. Across the county many -- if not most -- electric co-ops return capital credits after approximately 20 years.

As long as capital needs are relatively flat, regular capital credits retirements are relatively predictable and likely. However, when borrowing goes up additional margins needs to be retained in order to strive for that debt-equity balance that is so important in the financial markets.

Electric utilities don't always have level financing requirements. Chugach is currently borrowing more money than normal to finance the construction of the new Southcentral Power Project. Chugach's share of the $369 million project is $256 million. As Chugach takes on the additional debt required for SPP, it is retaining additional margins to help keep its debt-to-equity ratio in balance.

The need to retain additional margins and build equity while financing SPP affects capital credits retirements. Chugach does not expect to have a general capital credits retirement before 2015. Capital credits payments to estates and the discounting program will continue, although the levels will be limited each year.

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