Capital Credit Policy

CAPITAL CREDIT POLICY #A012

PAULDING PUTNAM ELECTRIC COOPERATIVE, INC.

I. Objective: Equity Management Plan

To establish guidelines and procedures for insuring that the Cooperative maintains appropriate financial ratios to insure long-term financial stability.

II. Policy:

A. Equity: Effective January 1, 2015, the Cooperative shall maintain a minimum Equity to Total Assets ratio of 50%. The board shall review this ratio annually.

B. Times Interest Earned Ratio (TIER): The Cooperative shall maintain a minimum TIER of 2.0 in two of the preceding three years.

C. Plant Investment: The Cooperative shall invest in utility plant to insure that reliability standards are met as directed in the Cooperative’s Strategic Plan. A Construction Work Plan (CWP) shall be developed on 4-year intervals. Plant investment shall be a minimum of 5% annually.

D. Capital Credit Refund Rotation Cycle: Capital Credits shall be retired to patrons on a cycle that matches the Cooperative’s expected life of plant assets used to serve member needs; the rotation cycle shall be 40 years. The Board of Trustees shall determine annual general retirements and estate retirements. Estate retirements may be paid upon death at the option of the estate on a discounted basis. The discount shall be based on the rotation cycle and the cooperatives average cost of debt.

E. General Cash Balances: The Cooperative shall maintain cash reserves in adequate amounts to insure timely payments of all debts and to insure proper funding of planned and approved system improvements. It shall be the goal of the Cooperative to have minimum cash reserves equal to approximately 45 days of operating expenses (including purchased power cost) on hand at all times.

F. Long-Term Debt Financing (LTD): The Cooperative shall manage LTD in order to reduce risk exposure to interest costs. LTD shall be used to leverage investment in utility plant, but shall be restricted to no more than fifty percent (50%) of the planned investment in any given Construction Work Plan.

G. Forecasts & Budgets: The management shall use items A through F in the formation of all forecasts and budgets.

H. Electric Rates: The electric rates charged to members of the Cooperative shall be developed to produce margins to meet the goals established in this policy.

III. Responsibility:

A. The General Manager shall be responsible for seeing that the provisions of this policy are carried out.

B. The Board of Trustees shall be responsible for approving all rate schedules and for insuring member rates support the Cooperative’s Equity Management Plan, Mission Statement and Strategic Goals.

GENERAL POLICY ON THE RETIREMENT OF CAPITAL CREDITS

EFFECTIVE JANUARY 1, 2015

Overview:

This policy shall support the intentions of the Code of Regulations and shall in no way supersede or change the Code of Regulations. In all cases the Code of Regulations shall be the final determination in regards to Capital Credit Retirements. See Article VIII of the Cooperative’s Code of Regulations.

It is the desire of the Board of Trustees to retire capital credits annually to the membership, this includes both general and estate retirements. The Cooperative’s management shall plan and budget for the annual retirement and such amount shall be approved by the Board of Trustees as part of the annual operating & capital budget of the cooperative.

All funds collected in excess of total expenses (operating & non-operating margins) on an annual basis shall be allocated to member Patronage Capital Credit accounts on a pro-rata basis.

The Board of Trustees shall approve, as part of the annual budget, the amount of Capital Credits to be retired during the budget year – both Estate and General Retirements. Management shall recommend a level of retirement consistent with the Cooperative’s Budget, Equity Management Plan, Cash Flow Analysis, and the Financial Forecast.

General Retirement:

The general retirement of patronage capital shall be paid annually to all members of record (for the years being retired) during the month of December. The board approved general retirement amount shall be paid to all outstanding (unretired) years on a percentage basis. The percentage basis shall be determined by Board and Management annually.

The general retirement shall be paid on a rotation cycle based on the life of the plant and equipment used to serve member needs. The rotation cycle shall be 40 years. The general retirement shall be calculated based on beginning of year total member equity.

The general retirement amount may be adjusted at any time by the Board of Trustees.

Estate Retirements:

All estate retirements must be approved by the Board of Trustees prior to payment.

The total estate retirements for the year may not exceed 25% of the budgeted amount for general retirements.

All estate retirements paid shall be discounted to the present value based on the rotation cycle for general retirements. The discount rate shall equal the Cooperative’s average cost of debt at the previous year end. All estate requests shall have the option of receiving the immediate, discounted payment or receiving annual general retirements. It shall be the responsibility of the estate to supply accurate payment information to the Cooperative (I.E. future mailing address). The cooperative shall provide a form for all estate applications which clearly identifies the request for early discounted capital credit payment.

The Cooperative shall provide a clear accounting of the discounting method and formula upon request of any estate, prior to the retirement. The discount shall be based on the rotation cycle for general retirements and the cooperatives average cost of debt at the prior year. The rotation cycle and cost of debt shall be established on January 1st of each year and shall remain in effect for the entire year unless changed by board resolution.

Other Capital Credit:

The legally surviving spouse; if the named account holder is deceased than the account shall be transferred into the name of the surviving spouse without an estate retirement being processed. The surviving spouse shall execute an application for service and all accounts receivable balances and accrued capital credits shall remain with the surviving spouse.

Business Accounts: Retirements to a business shall be treated in the same fashion as any other member leaving the system. Businesses that close or transfer ownership must provide legal documentation as to the status of the capital credits, within thirty days (30) of closure or transfer. Lacking any legal documents the cooperative shall consider the capital credits as assets sold or transferred to the new business or owners. It shall be the responsibility of the business owners or successors to provide legal documents establishing the status of the capital credits, within thirty (30) days of any change in ownership status.

Failure to provide such documentation will limit the Cooperative’s ability to pay capital credits. If a business is sold, the name shall be changed on the account and no new capital credit number (member number) shall be issued. All accrued capital credits shall remain as part of the business. If the previous owner supplies legal documentation that the capital credits remain the property of the previous owner, then the Cooperative shall maintain capital credit records for the previous owner and the new owner shall be issued a new capital credit number (member number) and begin accumulating capital credits. Businesses shall only receive general retirements when declared by the Board of Trustees; no early retirements shall be permitted even if the business is no longer operating.

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