**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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** **

| **(Mark One)** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      |
| **x**          | ** ** | **Quarterly report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                    |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      |
| ** **     | ** ** | **For the quarterly period ended March 31, 2007 or**                                                                                                                                                                                                                                                                                            |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      |
| **o**          | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                   |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      |
| ** **     | ** ** | **For the transition period from                           to                          .** |

 

**Commission file number: 1-3368**

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

(Exact name of registrant as specified in its charter)

| **Kansas**                                | ** ** | **44-0236370**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State of  Incorporation)                 |       | (I.R.S. Employer  Identification No.) |
|                                      |       |                                  |
| **602  Joplin Street, Joplin, Missouri**  | ** ** | **64801**                             |
| (Address of  principal executive offices) |       | (zip code)                            |

 

Registrant’s telephone number: **(417) 625-5100**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark if the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Act.  (Check one):

| Large accelerated  filer o | Accelerated  filer x | Non-accelerated  filer o |
|---------------------------------|---------------------------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of May 1, 2007, 30,362,953 shares of common stockwere outstanding.

 

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**INDEX**
|          |   | Forward Looking  Statements                                                                 |   |   |
|----------|--------|---------------------------------------------------------------------------------------------|--------|--------|
|     |   |                                                                                        |   |   |
| Part I - |   | Financial Information  (Unaudited):                                                         |   |   |
|     |   |                                                                                        |   |   |
| Item 1.  |   | Consolidated  Financial Statements:                                                         |   |   |
|     |   |                                                                                        |   |   |
|     |   | a.   Consolidated  Statements of Operations                                  |   |   |
|     |   |                                                                                        |   |   |
|     |   | b.   Consolidated  Statements of Comprehensive Income                        |   |   |
|     |   |                                                                                        |   |   |
|     |   | c.   Consolidated  Balance Sheets                                            |   |   |
|     |   |                                                                                        |   |   |
|     |   | d.   Consolidated Statements of Cash  Flows                                  |   |   |
|     |   |                                                                                        |   |   |
|     |   | e.   Notes  to Consolidated Financial Statements                             |   |   |
|     |   |                                                                                        |   |   |
| Item 2.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
|     |   |                                                                                        |   |   |
|     |   | Executive  Summary                                                                          |   |   |
|     |   |                                                                                        |   |   |
|     |   | Results of Operations                                                                       |   |   |
|     |   |                                                                                        |   |   |
|     |   | Rate Matters                                                                                |   |   |
|     |   |                                                                                        |   |   |
|     |   | Competition                                                                                 |   |   |
|     |   |                                                                                        |   |   |
|     |   | Liquidity and  Capital Resources                                                            |   |   |
|     |   |                                                                                        |   |   |
|     |   | Contractual  Obligations                                                                    |   |   |
|     |   |                                                                                        |   |   |
|     |   | Dividends                                                                                   |   |   |
|     |   |                                                                                        |   |   |
|     |   | Off-Balance Sheet  Arrangements                                                             |   |   |
|     |   |                                                                                        |   |   |
|     |   | Critical  Accounting Policies.                                                              |   |   |
|     |   |                                                                                        |   |   |
|     |   | Recently  Issued Accounting Standards.                                                      |   |   |
|     |   |                                                                                        |   |   |
| Item 3.  |   | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |   |
|     |   |                                                                                        |   |   |
| Item 4.  |   | Controls and  Procedures                                                                    |   |   |
|     |   |                                                                                        |   |   |
| Part II- |   | Other Information:                                                                          |   |   |
|     |   |                                                                                        |   |   |
| Item 1.  |   | Legal Proceedings - (none)                                                                  |   |   |
|     |   |                                                                                        |   |   |
| Item 1A. |   | Risk Factors                                                                                |   |   |
|     |   |                                                                                        |   |   |
| Item 2.  |   | Unregistered Sales of Equity Securities and Use of  Proceeds - (none)                       |   |   |
|     |   |                                                                                        |   |   |
| Item 3.  |   | Defaults Upon Senior Securities - (none)                                                    |   |   |
|     |   |                                                                                        |   |   |
| Item 4.  |   | Submission  of Matters to a Vote of Security Holders                                        |   |   |
|     |   |                                                                                        |   |   |
| Item 5.  |   | Other Information                                                                           |   |   |
|     |   |                                                                                        |   |   |
| Item  6. |   | Exhibits                                                                                    |   |   |
|     |   |                                                                                        |   |   |
|     |   | Signatures                                                                                  |   |   |

 

2

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**FORWARD LOOKING STATEMENTS**

Certain matters discussed in this quarterly reportare “forward-looking statements” intended to qualify for the safe harbor fromliability established by the Private Securities Litigation Reform Act of 1995.Such statements address or may address future plans, objectives, expectationsand events or conditions concerning various matters such as capitalexpenditures, earnings, pension and other costs, competition, litigation, ourconstruction program, our generation plans, our financing plans, potentialacquisitions, rate and other regulatory matters, liquidity and capitalresources and accounting matters. Forward-looking statements may contain wordslike “anticipate,” “believe,” “expect,” “project,” “objective” or similarexpressions to identify them as forward-looking statements. Factors that couldcause actual results to differ materially from those currently anticipated insuch statements include:

·                  the amount, terms and timing of rate reliefwe seek and related matters;

·                  the cost and availability of purchased powerand fuel, and the results of our activities (such as hedging) to reduce thevolatility of such costs;

·                  weather, business and economic conditions andother factors which may impact sales volumes and customer growth;

·                  operation of our electric generationfacilities and electric and gas transmission and distribution systems;

·                  the costs and other impacts resulting fromnatural disasters, such as tornados and ice storms;

·                  the periodic revision of our construction andcapital expenditure plans and cost estimates;

·                  legislation;

·                  regulation, including environmentalregulation (such as NOx regulation);

·                  competition, including the implementation ofthe energy imbalance market;

·                  electric utility restructuring, including ongoingfederal activities and potential state activities;

·                  the impact of electric deregulation onoff-system sales;

·                  changes in accounting requirements;

·                  other circumstances affecting anticipatedrates, revenues and costs;

·                  the timing of, accretion estimates, andintegration costs relating to, completed and contemplated acquisitions and theperformance of acquired businesses;

·                  matters such as the effect of changes incredit ratings on the availability and our cost of funds;

·                  interruptions or changes in our coaldelivery, gas transportation or storage agreements or arrangements;

·                  the success of efforts to invest in anddevelop new opportunities; and

·                  costs and effects of legal and administrativeproceedings, settlements, investigations and claims.

All such factors are difficult to predict, containuncertainties that may materially affect actual results, and may be beyond ourcontrol. New factors emerge from time to time and it is not possible formanagement to predict all such factors or to assess the impact of each suchfactor on us. Any forward-looking statement speaks only as of the date on whichsuch statement is made, and we do not undertake any obligation to update anyforward-looking statement to reflect events or circumstances after the date on whichsuch statement is made.

Wecaution you that any forward-looking statements are not guarantees of futureperformance and involve known and unknown risk, uncertainties and other factorswhich may cause our actual results, performance or achievements to differmaterially from the facts, results, performance or achievements we haveanticipated in such forward-looking statements.

3

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**PARTI.  FINANCIAL INFORMATION**

**Item 1.  ConsolidatedFinancial Statements**

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
| ** **                                                                                                      | ** ** | **Three Months Ended**                              | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **March 31,**                                            | ** ** |
| ** **                                                                                                      | ** ** | **2007**                                                      | ** ** | **2006** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)** | ** ** |
| **Operating  revenues:**                                                                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** |
| Electric                                                                                                        | ** ** | **$**                                                         | **96,908** |   | $ | 82,717 |   |
| Gas                                                                                                             | ** ** | **27,590**                                                    |       | — |   |
| Water                                                                                                           | ** ** | **450**                                                       |       | 369 |   |
| Non-regulated                                                                                                   | ** ** | **992**                                                       |       | 897 |   |
|                                                                                                            | ** ** | **125,940**                                                   |       | 83,983 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                          |       |   |   |
| Fuel                                                                                                            | ** ** | **25,224**                                                    |       | 20,879 |   |
| Purchased power                                                                                                 | ** ** | **20,218**                                                    |       | 19,928 |   |
| Cost of natural gas sold and transported                                                                        | ** ** | **18,722**                                                    |       | — |   |
| Regulated – other                                                                                          | ** ** | **17,359**                                                    |       | 12,869 |   |
| Non-regulated – other                                                                                      | ** ** | **605**                                                       |       | 602 |   |
| Maintenance and repairs                                                                                         | ** ** | **10,780**                                                    |       | 5,210 |   |
| Depreciation and amortization                                                                                   | ** ** | **12,778**                                                    |       | 9,274 |   |
| Provision for income taxes                                                                                      | ** ** | **1,629**                                                     |       | 1,143 |   |
| Other taxes                                                                                                     | ** ** | **6,741**                                                     |       | 4,785 |   |
|                                                                                                            | ** ** | **114,056**                                                   |       | 74,690 |   |
| **Operating  income**                                                                                           | ** ** | **11,884**                                                    |       | 9,293 |   |
| Other income and  (deductions):                                                                                 |       |                                                          |       |   |   |
| Allowance for equity funds used during construction                                                             | ** ** | **906**                                                       |       | 125 |   |
| Interest income                                                                                                 | ** ** | **94**                                                        |       | 86 |   |
| Provision for other income taxes                                                                                | ** ** | **10**                                                        |       | 24 |   |
| Other - non-operating income                                                                                    | ** ** | **36**                                                        |       | — |   |
| Other - non-operating expense                                                                                   | ** ** | **(281**                                                      | **)**      | (205 | ) |
|                                                                                                            | ** ** | **765**                                                       |       | 30 |   |
| Interest  charges:                                                                                              |       |                                                          |       |   |   |
| Long-term debt                                                                                                  | ** ** | **6,944**                                                     |       | 5,938 |   |
| Note payable to securitization trust                                                                            | ** ** | **1,063**                                                     |       | 1,063 |   |
| Short-term debt                                                                                                 | ** ** | **1,029**                                                     |       | 376 |   |
| Allowance for borrowed funds used during  construction                                                          | ** ** | **(1,155**                                                    | **)**      | (385 | ) |
| Other                                                                                                           | ** ** | **268**                                                       |       | 250 |   |
|                                                                                                            | ** ** | **8,149**                                                     |       | 7,242 |   |
| **Income  from continuing operations**                                                                          | ** ** | **4,500**                                                     |       | 2,081 |   |
| **Loss  from discontinued operations, net of tax**                                                              | ** ** | **—**                                                    |       | (469 | ) |
| **Net  income**                                                                                                 | ** ** | **$**                                                         | **4,500**  |   | $ | 1,612 |   |
| **Weighted  average number of common shares outstanding - basic**                                               | ** ** | **30,298**                                                    |       | 26,133 |   |
| **Weighted  average number of common shares outstanding - diluted**                                             | ** ** | **30,318**                                                    |       | 26,153 |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**    | ** ** | **$**                                                         | **0.15**   |   | $ | 0.08 |   |
| **Earnings  from discontinued operations per weighted average share of common stock –  basic and diluted** | ** ** | **$**                                                         | **—** |   | $ | (0.02 | ) |
| **Total  earnings per weighted average share of common stock – basic and diluted**                         | ** ** | **$**                                                         | **0.15**   |   | $ | 0.06 |   |
| **Dividends per share of common  stock**                                                                        | ** ** | **$**                                                         | **0.32**   |   | $ | 0.32 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

4

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(Continued)**

 

 
| ** **                                                                                                      | ** ** | **Twelve Months Ended**                             | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                      | ** ** | **March 31,**                                            | ** **  |
| ** **                                                                                                      | ** ** | **2007**                                                      | ** **  | **2006** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                        | ** ** | ** **                                                    | ** **  | ** ** | ** ** |
| Electric                                                                                                        | ** ** | **$**                                                         | **396,837** |   | $ | 368,391 |   |
| Gas                                                                                                             | ** ** | **52,735**                                                    |        | — |   |
| Water                                                                                                           | ** ** | **1,924**                                                     |        | 1,494 |   |
| Non-regulated                                                                                                   | ** ** | **3,914**                                                     |        | 3,517 |   |
|                                                                                                            | ** ** | **455,410**                                                   |        | 373,402 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                          |        |   |   |
| Fuel                                                                                                            | ** ** | **98,300**                                                    |        | 110,884 |   |
| Purchased power                                                                                                 | ** ** | **66,630**                                                    |        | 60,532 |   |
| Cost of natural gas sold and transported                                                                        | ** ** | **34,007**                                                    |        | — |   |
| Regulated – other                                                                                          | ** ** | **64,577**                                                    |        | 52,901 |   |
| Non-regulated – other                                                                                      | ** ** | **2,561**                                                     |        | 2,546 |   |
| Maintenance and repairs                                                                                         | ** ** | **28,719**                                                    |        | 21,285 |   |
| Loss on plant disallowance                                                                                      | ** ** | **828**                                                       |        | — |   |
| Depreciation and amortization                                                                                   | ** ** | **42,216**                                                    |        | 36,486 |   |
| Provision for income taxes                                                                                      | ** ** | **22,332**                                                    |        | 13,535 |   |
| Other taxes                                                                                                     | ** ** | **22,983**                                                    |        | 19,615 |   |
|                                                                                                            | ** ** | **383,153**                                                   |        | 317,784 |   |
| **Operating  income**                                                                                           | ** ** | **72,257**                                                    |        | 55,618 |   |
| Other income and  (deductions):                                                                                 |       |                                                          |        |   |   |
| Allowance for equity funds used during construction                                                             | ** ** | **2,186**                                                     |        | 410 |   |
| Interest income                                                                                                 | ** ** | **396**                                                       |        | 359 |   |
| Provision for other income taxes                                                                                | ** ** | **3**                                                         |        | (22 | ) |
| Other - non-operating income                                                                                    | ** ** | **51**                                                        |        | 5 |   |
| Other - non-operating expense                                                                                   | ** ** | **(1,053**                                                    | **)**       | (948 | ) |
|                                                                                                            | ** ** | **1,583**                                                     |        | (196 | ) |
| Interest  charges:                                                                                              |       |                                                          |        |   |   |
| Long-term debt                                                                                                  | ** ** | **26,953**                                                    |        | 23,750 |   |
| Note payable to securitization trust                                                                            | ** ** | **4,250**                                                     |        | 4,250 |   |
| Short-term debt                                                                                                 | ** ** | **2,929**                                                     |        | 571 |   |
| Allowance for borrowed funds used during  construction                                                          | ** ** | **(3,620**                                                    | **)**       | (606 | ) |
| Other                                                                                                           | ** ** | **1,046**                                                     |        | 695 |   |
|                                                                                                            | ** ** | **31,558**                                                    |        | 28,660 |   |
| **Income  from continuing operations**                                                                          | ** ** | **42,282**                                                    |        | 26,762 |   |
| **Loss  from discontinued operations, net of tax**                                                              | ** ** | **(114**                                                      | **)**       | (1,132 | ) |
| **Net  income**                                                                                                 | ** ** | **$**                                                         | **42,168**  |   | $ | 25,630 |   |
| **Weighted  average number of common shares outstanding - basic**                                               | ** ** | **29,303**                                                    |        | 25,995 |   |
| **Weighted  average number of common shares outstanding - diluted**                                             | ** ** | **29,316**                                                    |        | 26,017 |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**    | ** ** | **$**                                                         | **1.44**    |   | $ | 1.03 |   |
| **Earnings  from discontinued operations per weighted average share of common stock –  basic and diluted** | ** ** | **$**                                                         | **—**  |   | $ | (0.04 | ) |
| **Total  earnings per weighted average share of common stock – basic and diluted**                         | ** ** | **$**                                                         | **1.44**    |   | $ | 0.99 |   |
| **Dividends  per share of common stock**                                                                        | ** ** | **$**                                                         | **1.28**    |   | $ | 1.28 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

5

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (UNAUDITED)**
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                                                             | ** ** | **($-000’s)**               | ** ** |
|                                                                                                                   | ** ** | ** **                       |       |   |   |
| Net income                                                                                                             | ** ** | **$**                            | **4,500**  |   | $ | 1,612 |   |
| Reclassification  adjustments for (gain)/loss included in net income or reclassified to  regulatory asset or liability | ** ** | **164**                          |       | (936 | ) |
| Net change in  fair value of open derivative contracts for period                                                      | ** ** | **2,881**                        |       | (6,024 | ) |
| Income taxes                                                                                                           | ** ** | **(1,160**                       | **)**      | 2,652 |   |
| Net change in  unrealized gain/(loss) on derivative contracts                                                          | ** ** | **1,885**                        |       | (4,308 | ) |
| ** **                                                                                                             | ** ** | ** **                       |       |   |   |
| **Comprehensive  income/(loss)**                                                                                       | ** ** | **$**                            | **6,385**  |   | $ | (2,696 | ) |

 
| ** **                                                                                                       | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                       | ** ** | **March 31,**                | ** ** |
| ** **                                                                                                       | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**                | ** ** |
|                                                                                                             | ** ** | ** **                        |       |   |   |
| Net income                                                                                                       | ** ** | **$**                             | **42,168** |   | $ | 25,630 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability | ** ** | **(219**                          | **)**      | (3,888 | ) |
| Net change in  fair value of open derivative contracts for period                                                | ** ** | **(4,699**                        | **)**      | 9,753 |   |
| Income taxes                                                                                                     | ** ** | **1,874**                         |       | (2,251 | ) |
| Net change in  unrealized gain/(loss) on derivative contracts                                                    | ** ** | **(3,044**                        | **)**      | 3,614 |   |
| ** **                                                                                                       | ** ** | ** **                        |       |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                             | **39,124** |   | $ | 29,244 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

6

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED BALANCE SHEETS(UNAUDITED)**
| ** **                                             | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **($-000’s)**           | ** ** |
| **Assets**                                             |       |                         |       |                            |       |
| Plant and property, at  original cost:                 |       |                         |       |                            |       |
| Electric                                               |       | $                            | 1,321,103  |                            | $          | 1,291,533 |   |
| Gas                                                    |       | 53,242                       |       | 51,936                          |       |
| Water                                                  |       | 10,149                       |       | 10,126                          |       |
| Non-regulated                                          |       | 23,641                       |       | 23,285                          |       |
| Construction work in progress                          |       | 128,841                      |       | 111,918                         |       |
|                                                   |       | 1,536,976                    |       | 1,488,798                       |       |
| Accumulated depreciation and  amortization             |       | 467,410                      |       | 457,804                         |       |
|                                                   |       | 1,069,566                    |       | 1,030,994                       |       |
|                                                   |       |                         |       |                            |       |
| Current assets:                                        |       |                         |       |                            |       |
| Cash and cash equivalents                              |       | 24,626                       |       | 12,355                          |       |
| Accounts receivable – trade,  net                 |       | 36,572                       |       | 33,477                          |       |
| Accrued unbilled revenues                              |       | 10,836                       |       | 14,866                          |       |
| Accounts receivable – other                       |       | 9,237                        |       | 13,234                          |       |
| Fuel, materials and supplies                           |       | 45,054                       |       | 46,618                          |       |
| Unrealized gain in fair value  of derivative contracts |       | 6,473                        |       | 3,819                           |       |
| Prepaid expenses                                       |       | 2,564                        |       | 3,731                           |       |
|                                                   |       | 135,362                      |       | 128,100                         |       |
| Noncurrent assets and deferred  charges:               |       |                         |       |                            |       |
| Regulatory assets                                      |       | 96,799                       |       | 94,395                          |       |
| Goodwill                                               |       | 39,362                       |       | 39,323                          |       |
| Unamortized debt issuance  costs                       |       | 6,843                        |       | 6,044                           |       |
| Unrealized gain in fair value  of derivative contracts |       | 13,072                       |       | 11,811                          |       |
| Other                                                  |       | 5,104                        |       | 5,221                           |       |
|                                                   |       | 161,180                      |       | 156,794                         |       |
| Total Assets                                           |       | $                            | 1,366,108  |                            | $          | 1,315,888 |   |

 

**(continued)**

*Seeaccompanying Notes to Consolidated Financial Statements*

** **

7

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED BALANCE SHEETS (UNAUDITED(Continued)**

 
| ** **                                                                                         | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **($-000’s)**           | ** ** |
| **Capitalization and Liabilities**                                                                 |       |                         |       |                            |       |
| Common stock, $1 par value,  30,348,199 and 30,250,566 shares issued and outstanding, respectively |       | $                            | 30,348     |                            | $          | 30,251 |   |
| Capital in excess of par value                                                                     |       | 408,704                      |       | 406,650                         |       |
| Retained earnings                                                                                  |       | 17,667                       |       | 22,916                          |       |
| Accumulated other  comprehensive income, net of income tax                                         |       | 10,677                       |       | 8,792                           |       |
| Total common stockholders’  equity                                                            |       | 467,396                      |       | 468,609                         |       |
|                                                                                               |       |                         |       |                            |       |
| Long-term debt:                                                                                    |       |                         |       |                            |       |
| Note payable to securitization  trust                                                              |       | 50,000                       |       | 50,000                          |       |
| Obligations under capital  lease                                                                   |       | 472                          |       | 512                             |       |
| First mortgage bonds and  secured debt                                                             |       | 242,928                      |       | 163,088                         |       |
| Unsecured debt                                                                                     |       | 248,742                      |       | 248,837                         |       |
| Total long-term debt                                                                               |       | 542,142                      |       | 462,437                         |       |
| Total long-term debt and  common stockholders’ equity                                         |       | 1,009,538                    |       | 931,046                         |       |
|                                                                                               |       |                         |       |                            |       |
| Current liabilities:                                                                               |       |                         |       |                            |       |
| Accounts payable and accrued  liabilities                                                          |       | 45,470                       |       | 51,794                          |       |
| Current maturities of  long-term debt                                                              |       | 231                          |       | 233                             |       |
| Short-term debt                                                                                    |       | 39,750                       |       | 77,050                          |       |
| Customer deposits                                                                                  |       | 7,496                        |       | 7,239                           |       |
| Interest accrued                                                                                   |       | 8,433                        |       | 3,889                           |       |
| Unrealized loss in fair value  of derivative contracts                                             |       | 675                          |       | 1,372                           |       |
| Taxes accrued                                                                                      |       | 7,737                        |       | 2,744                           |       |
| Other current liabilities                                                                          |       | 3,009                        |       | 1,790                           |       |
|                                                                                               |       | 112,801                      |       | 146,111                         |       |
| Commitments and contingencies  (Note 8)                                                            |       |                         |       |                            |       |
| Noncurrent liabilities and  deferred credits:                                                      |       |                         |       |                            |       |
| Regulatory liabilities                                                                             |       | 52,315                       |       | 49,822                          |       |
| Deferred income taxes                                                                              |       | 141,321                      |       | 140,838                         |       |
| Unamortized investment tax  credits                                                                |       | 3,918                        |       | 3,971                           |       |
| Pension and other  postretirement benefit obligations                                              |       | 26,471                       |       | 26,458                          |       |
| Unrealized loss in fair value  of derivative contracts                                             |       | 1,661                        |       | —                          |       |
| Other                                                                                              |       | 18,083                       |       | 17,642                          |       |
|                                                                                               |       | 243,769                      |       | 238,731                         |       |
| Total Capitalization and Liabilities                                                               |       | $                            | 1,366,108  |                            | $          | 1,315,888 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements**.*

8

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**THE EMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)**
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **($-000’s)**               | ** ** |
| **Operating  activities:**                                                    | ** ** | ** **                       |       |   |   |
| Net income                                                                    | ** ** | **$**                            | **4,500**  |   | $ | 1,612 |   |
| Adjustments to reconcile net income to cash flows  from operating activities: | ** ** | ** **                       |       |   |   |
| Depreciation and amortization                                                 | ** ** | **14,532**                       |       | 10,388 |   |
| Pension expense                                                               | ** ** | **2,141**                        |       | 1,376 |   |
| Deferred income taxes, net                                                    | ** ** | **(399**                         | **)**      | 156 |   |
| Investment tax credit, net                                                    | ** ** | **(53**                          | **)**      | (24 | ) |
| Allowance for equity funds used during construction                           | ** ** | **(906**                         | **)**      | (125 | ) |
| Stock compensation expense                                                    | ** ** | **838**                          |       | 638 |   |
| Unrealized (gain)/loss on derivatives                                         | ** ** | **40**                           |       | (995 | ) |
| Cash flows impacted by changes in:                                            | ** ** | ** **                       |       |   |   |
| Accounts receivable and accrued unbilled revenues                             | ** ** | **3,049**                        |       | 12,935 |   |
| Fuel, materials and supplies                                                  | ** ** | **1,564**                        |       | (3,426 | ) |
| Prepaid expenses and deferred charges                                         | ** ** | **(3,696**                       | **)**      | (336 | ) |
| Accounts payable and accrued liabilities                                      | ** ** | **(6,106**                       | **)**      | (21,309 | ) |
| Customer deposits, interest and taxes accrued                                 | ** ** | **9,807**                        |       | 6,609 |   |
| Other liabilities and other deferred credits                                  | ** ** | **218**                          |       | (88 | ) |
|                                                                          | ** ** | ** **                       |       |   |   |
| Net cash provided by operating activities of  continuing operations           | ** ** | **25,529**                       |       | 7,411 |   |
| Net cash provided by operating activities of  discontinued operations         | ** ** | **—**                       |       | 649 |   |
| **Net  cash provided by operating activities**                                | ** ** | **25,529**                       |       | 8,060 |   |
| ** **                                                                    | ** ** | ** **                       |       |   |   |
| **Investing  activities:**                                                    | ** ** | ** **                       |       |   |   |
| Capital expenditures – regulated                                         | ** ** | **(48,171**                      | **)**      | (27,425 | ) |
| Capital expenditures and other investments –  non-regulated              | ** ** | **(694**                         | **)**      | (561 | ) |
| Proceeds from the sale of non-regulated business                              | ** ** | **2,500**                        | ** ** | **—** | ** ** |
|                                                                          | ** ** | ** **                       |       |   |   |
| Net cash used in investing activities of continuing  operations               | ** ** | **(46,365**                      | **)**      | (27,986 | ) |
| Net cash used in investing activities of  discontinued operations             | ** ** | **—**                       |       | (97 | ) |
| **Net  cash used in investing activities**                                    | ** ** | **(46,365**                      | **)**      | (28,083 | ) |
| ** **                                                                    | ** ** | ** **                       |       |   |   |
| **Financing  activities:**                                                    | ** ** | ** **                       |       |   |   |
| Proceeds from first mortgage bonds                                            | ** ** | **79,831**                       |       | — |   |
| Long-term debt issuance costs                                                 | ** ** | **(910**                         | **)**      | — |   |
| Proceeds from issuance of common stock net of  issuance costs                 | ** ** | **1,338**                        |       | 1,052 |   |
| Net proceeds/(repayments) from short-term borrowings                          | ** ** | **(37,300**                      | **)**      | 15,048 |   |
| Dividends                                                                     | ** ** | **(9,695**                       | **)**      | (8,364 | ) |
| Other                                                                         | ** ** | **(157**                         | **)**      | (154 | ) |
| ** **                                                                    | ** ** | ** **                       |       |   |   |
| Net cash provided by financing activities of  continuing operations           | ** ** | **33,107**                       |       | 7,582 |   |
| Net cash (used in) financing activities of  discontinued operations           | ** ** | **—**                       |       | (150 | ) |
| **Net  cash provided by financing activities**                                | ** ** | **33,107**                       |       | 7,432 |   |
| ** **                                                                    | ** ** | ** **                       |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                     | ** ** | **12,271**                       |       | (12,591 | ) |
| ** **                                                                    | ** ** | ** **                       |       |   |   |
| **Cash  and cash equivalents at beginning of period**                         | ** ** | **12,355**                       |       | 15,941 |   |
| ** **                                                                    | ** ** | ** **                       |       |   |   |
| **Cash  and cash equivalents at end of period**                               | ** ** | **$**                            | **24,626** |   | $ | 3,350 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

9

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note 1 - Summary of SignificantAccounting Policies**

We operate our businessesas three segments:  electric, gas andother. The Empire District Electric Company (EDE), a Kansas corporationorganized in 1909, is an operating public utility engaged in the generation,purchase, transmission, distribution and sale of electricity in parts ofMissouri, Kansas, Oklahoma and Arkansas. As part of our electric segment, wealso provide water service to three towns in Missouri. The Empire District GasCompany (EDG) is our wholly-owned subsidiary formed to hold the Missouri Gasassets acquired from Aquila, Inc. on June 1, 2006. It provides natural gasdistribution to communities in northwest, north central and west centralMissouri. Our other segment includes investments in certain non-regulatedbusinesses including fiber optics and Internet access. These businesses areheld by our wholly-owned subsidiary, EDE Holdings, Inc (EDE Holdings).

The accompanyinginterim financial statements do not include all disclosures included in theannual financial statements and therefore should be read in conjunction withthe financial statements and notes thereto included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006.

The information furnished reflects all adjustments,consisting only of normal recurring adjustments, which are in our opinionnecessary to state fairly the results for the interim periods as well aspresent these periods on a consistent basis with the financial statements forthe fiscal year ended December 31, 2006.

The Missouri Public Service Commission (MPSC) issued an orderpertaining to our electric segment on December 21, 2006 granting us an annualincrease of $29.4 million (including regulatory amortization), or 9.96%, withan effective date of January 1, 2007 and eliminating the Interim Energy Charge(IEC). The accounting treatment in this order includes regulatory amortizationwhich provides us additional cash flow through rates to begin recovery of costsassociated with our current generation expansion. This regulatory amortizationwas $2.6 million in the first quarter of 2007 and has been recorded asdepreciation expense. Additionally, the MPSC adopted an agreement of theparties to continue the FAS 87 tracker for pension costs implemented in ourMarch 2005 rate case. This order also establishes a similar mechanism for FAS106 other postretirement benefit expenses. Please see Note 9 for further discussion of pension and otherpostretirement benefit regulatorytreatment.

On February 1, 2007, the Southwest Power Pool (SPP) regionaltransmission organization (RTO) launched its Energy Imbalance Services (EIS)market. The EIS market is monitored by our Wholesale Energy group. Sales andpurchase transactions are netted on an hourly basis to determine if we are anet seller or a net purchaser. Net sales for the week are recorded asoff-system sales while net purchases are recorded as purchased power.

A major ice storm struckvirtually all areas of our electric service territory January 12-14, 2007causing substantial damage. Approximately 85,000 (52%) of our electriccustomers were without power at the height of the storm.  Costs associated with the restoration effortdue to the ice storm were approximately $29.0 million, of which $18.0 millionwas capitalized as additions to our utility plant. Approximately $4.4 millionwas recorded as maintenance expense in the first quarter of 2007 andapproximately $6.5 million was deferred as a regulatory asset as we believe itis probable that these costs will be recoverable in future electric rate cases.

10

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**Note 2 -Recently Issued Accounting Standards**

On September 15, 2006, theFASB issued FASB No. 157, “Fair Value Measurements” (FAS 157), which provides guidancefor using fair value to measure assets and liabilities. FAS 157 also respondsto investors’ requests for more information about (1) the extent to whichcompanies measure assets and liabilities at fair value, (2) the informationused to measure fair value and (3) the effect that fair-value measurements haveon earnings. FAS 157 will apply whenever another standard requires (or permits)assets or liabilities to be measured at fair value. This standard does notexpand the use of fair value to any new circumstances. FAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007and interim periods within those fiscal years. We have not yet completed ourreview regarding the impact of the adoption of this standard.

On February 15, 2007, theFASB issued FASB No. 159, “The Fair-Value Option for Financial Assets andFinancial Liabilities – including an amendment of FAS 115” (FAS 159). Under FAS159, a company may elect to measure eligible financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings at each subsequentreporting date. FAS 159 is effective for financial statements issued for fiscalyears beginning after November 15, 2007. We have not yet completed our reviewregarding the impact of the adoption of this standard.

See Note 1 under “Notes toConsolidated Financial Statements” in our Annual Report on Form 10-K for theyear ended December 31, 2006 for further information regarding recently issuedaccounting standards.

**Note 3 –FASB Interpretation No. 48 (FIN 48) – Accounting for Uncertainty in IncomeTaxes**

On July 13, 2006, the FASBissued FIN 48, which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes.” We file consolidated incometax returns in the U.S. federal and state jurisdictions. With few exceptions,we are no longer subject to U.S. federal, state and local, or non-U.S. incometax examinations by tax authorities for years before 2003. We adopted theprovisions of FIN 48**on January 1, 2007. As a result ofthe implementation of FIN 48, we recognized approximately $54,000 of additionalliability for unrecognized tax benefits, which was accounted for as a reductionto the January 1, 2007 balance of retained earnings. At January 1, 2007 andMarch 31, 2007, our balance sheet included approximately $219,000 and $237,000,respectively, of unrecognized tax benefits. At March 31, 2007, this balanceincludes $230,000 of tax positions for which the ultimate deductibility ishighly certain but for which there is uncertainty about the timing of suchdeductibility. We do not expect any material changes to unrecognized taxbenefits within the next twelve months. Because of the impact of deferred taxaccounting, other than interest and penalties, the disallowance of the shorterdeductibility period would not affect the annual effective tax rate but wouldaccelerate the payment of cash to the taxing authority to an earlier period. Werecognize interest accrued and penalties related to unrecognized tax benefitsin other expenses.

**Note 4 –Regulatory Matters**

Thefollowing table sets forth the components of our regulatory assets andliabilities on our consolidated balance sheet.

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**Regulatory Assets and Liabilities**
| **(In thousands)**                                    | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Regulatory  Assets:**                                    |       |                         |       |                            |       |
| **Income taxes**                                           |       | $                            | 28,429     |                            | $          | 27,893 |   |
| **Unamortized loss on reacquired debt**                    |       | 15,805                       |       | 16,136                          |       |
| **Unamortized loss on interest rate derivative**           |       | 2,956                        |       | 3,035                           |       |
| **Pension and other postretirement benefits(1)**           |       | 38,512                       |       | 40,145                          |       |
| **Asset retirement obligation**                            |       | 3,078                        |       | 3,022                           |       |
| **Unrecovered purchased gas costs and Kansas fuel  costs** |       | 659                          |       | 3,024                           |       |
| **Ice storm costs**                                        |       | 6,542                        |       | —                          |       |
| **Other**                                                  |       | 818                          |       | 1,140                           |       |
| **Total**                                                  |       | $                            | 96,799     |                            | $          | 94,395 |   |

 
| **(In thousands)**                          | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Regulatory  Liabilities:**                     |       |                         |       |                            |       |
| **Income taxes**                                 |       | $                            | 11,708     |                            | $          | 12,100 |   |
| **Unamortized gain on interest rate derivative** |       | 4,519                        |       | 4,561                           |       |
| **Gain on disposition of emission allowances**   |       | 326                          |       | 361                             |       |
| **Cost of removal**                              |       | 33,456                       |       | 31,461                          |       |
| **Pensions and other postretirement benefits**   |       | 2,083                        |       | 1,339                           |       |
| **Kansas fuel costs**                            |       | 223                          |       | —                          |       |
| **Total**                                        |       | $                            | 52,315     |                            | $          | 49,822 |   |

 

----

(1)Primarily reflects regulatory assets resulting from the adoption of FAS 158 andregulatory accounting for EDG acquisition costs.

Pensionand Other Postretirement Benefits:  As discussed in Note 1,effective January 1, 2007, the MPSC granted regulatory treatment for our otherpostretirement benefit costs andcorresponding increases in regulatory liabilities for our electric operationssimilar to the treatment already in place for our pension costs. We nowrecognize a regulatory asset or liability, respectively, for costs incurredthat are more or less than those allowed in rates for the Missouri (EDE andEDG) and Kansas (EDE) portion of pension costs and the Missouri EDE portion ofother postretirement benefitcosts. Since January 1, 2007, approximately $0.7 million in additional expensesand corresponding increases in regulatory liabilities have been recognized.

**Note 5– Acquisition of Missouri Natural Gas Distribution Operations**

On September 21, 2005, weannounced that we had entered into an Asset Purchase Agreement with Aquila,Inc., pursuant to which we agreed to acquire the Missouri natural gasdistribution operations of Aquila, Inc. This acquisition was completed by ourwholly-owned subsidiary, The Empire District Gas Company (EDG), on June 1,2006. We expect this acquisition to help diversify our weather risk, balancingour current summer air conditioning peak with a natural gas winter heatingpeak. This transaction was subject to the approval of the MPSC, which wasobtained, effective May 1, 2006. The total purchase price, including working capitaland net plant adjustments but excluding acquisition costs, was $102.5 million.We recorded $39.4 million of goodwill as a result of the acquisition.  All of this goodwill is expected to be taxdeductible.

**The components of thepurchase price allocation for the Missouri Gas acquisition are shown below.Assets and liabilities were valued at fair value. In the case of property,plant and equipment, fair value was calculated in a manner consistent with theamount recoverable for regulatory treatment.**

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** **
| (In thousands)               | ** ** | **Missouri Gas** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| **Purchase  Price:**              |       |                  |       |
| **Cash paid**                     |       | $                     | 102,502    |   |
| **Acquisition costs**             |       | 2,316                 |       |
| **Total**                         |       | $                     | 104,818    |   |
| ** **                        |       |                  |       |
| **Allocation:**                   |       |                  |       |
| **Property, plant and equipment** |       | $                     | 52,226     |   |
| **Current assets**                |       | 15,515                |       |
| **Goodwill**                      |       | 39,362                |       |
| **Other assets**                  |       | 11,082                |       |
| **Other liabilities**             |       | (13,367               | )          |
| **Total**                         |       | $                     | 104,818    |   |

 

The following presents certain consolidated proforma financialinformation for the three months ended March 31, 2006 and the twelve monthsended March 31, 2007 and 2006 as if our acquisition of Missouri Gas had beencompleted as of April 1, 2005. These estimates are based on historical resultsof the Missouri Gas operations, provided to us by Aquila, Inc., and areunaudited.
|                                                                    | ** ** | **Three Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| **($-000’s except per share amounts)**    | ** ** | **2006**                         | ** ** | **2007**                          | ** ** | **2006** | ** ** |
|                                                               |       |                             |       |                              |       |   |   |
| Revenues                                                           |       | $                                | 108,467    |                              | $          | 460,570 |   | $ | 431,569 |   |
|                                                               |       |                             |       |                              |       |   |   |
| Net income from  continuing operations                             |       | 3,837                            |       | 42,084                            |       | 27,800 |   |
|                                                               |       |                             |       |                              |       |   |   |
| Earnings per share from  continuing operations - basic and diluted |       | $                                | 0.14       |                              | $          | 1.44 |   | $ | 0.93 |   |

 

**Note 6 – Risk Management and Derivative FinancialInstruments**

*Electric*

Weutilize derivatives to help manage our natural gas commodity market riskresulting from purchasing natural gas, to be used as fuel, on the volatile spotmarket and to manage certain interest rate exposure.

A $10.7 million net of tax,unrealized gain representing the fair market value of derivative contractstreated as cash flow hedges is recognized as Accumulated Other ComprehensiveIncome in the capitalization section of the balance sheet as of March 31, 2007.The tax effect of $6.6 million on this gain is included in deferred taxes.These amounts will be adjusted cumulatively on a monthly basis during thedetermination periods, beginning April 1, 2007 and ending on September 30,2011. At the end of each determination period, or if cash flow hedge treatmentis discontinued, any gain or loss for that period related to the instrumentwill be reclassified to fuel expense.

We record unrealizedgains/(losses) on the ineffective portion of our gas hedging activities in “Fuel”under the Operating Revenue Deductions section of our statement of operationssince all of our gas hedging activities are related to stabilizing fuel costsas part of our fuel procurement program and are not speculative activities.

The following table setsforth “mark-to-market” pre-tax gains/(losses) from the ineffective portion ofour hedging activities for electric generation and the actual pre-taxgains/(losses) from the qualified portion of our hedging activities for settledcontracts included in “Fuel” for each of the periods ended March 31:

13

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|                            | ** ** | **Three months ended** | ** ** | **Twelve months ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| **(In thousands)**    | ** ** | **2007**                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                 | ** ** | ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Ineffective****Portion** |       | $                                | (30        | )                                 | $          | (34 | ) | $ | (30 | ) | $ | (1,236 | ) |
| ** **                 |       |                             |       |                              |       |   |   |   |   |
| **Qualified Portion**      |       | $                                | (143       | )                                 | $          | 937 |   | $ | 241 |   | $ | 5,274 |   |

 

We also enter intofixed-price forward physical contracts for the purchase of natural gas, coaland purchased power. These contracts are not subject to the fair valueaccounting of FAS 133 because they are considered to be normal purchases. Wehave instituted a process to determine if any future executed contracts thatotherwise qualify for the normal purchases exception contain a price adjustmentfeature and will account for these contracts accordingly.

As of April 13, 2007, 87% ofour anticipated volume of natural gas usage for our electric operations for theremainder of year 2007 is hedged, either through physical or financialcontracts, at an average price of $6.257 per Dekatherm (Dth). In addition, thefollowing volumes and percentages of our anticipated volume of natural gasusage for our electric operations for the next six years are hedged at thefollowing average prices per Dth:
| Year | ** ** | **% Hedged** | ** ** | **Dth Hedged** | ** ** | **Average Price** | ** ** |
|------|------------|-------------------|------------|---------------------|------------|------------------------|------------|
| 2008 |       | 77                | %          | 7,315,000           |       | $                      | 6.829      |   |
| 2009 |       | 45                | %          | 4,696,000           |       | $                      | 6.060      |   |
| 2010 |       | 39                | %          | 3,696,000           |       | $                      | 5.422      |   |
| 2011 |       | 40                | %          | 3,696,000           |       | $                      | 5.422      |   |
| 2012 |       | 13                | %          | 1,200,000           |       | $                      | 7.295      |   |
| 2013 |       | 13                | %          | 1,200,000           |       | $                      | 7.295      |   |

 

*Gas*

Weattempt to mitigate our natural gas price risk for our gas segment by acombination of (1) injecting natural gas into storage during the off-heatingseason months, (2) purchasing physical forward contracts and (3) purchasingfinancial derivative contracts. As of April 20, 2007, we have none of ourexpected usage hedged for the upcoming winter heating season (November 2007through March 2008) with physical forward contracts or financial derivativecontracts. We target to have 95% of our storage capacity full by November 1 ofthe upcoming winter heating season. As of April 21, 2007, we have 0.5 millionDths in storage on the three pipelines that serve our customers. Thisrepresents 24% of our storage capacity leaving 1.5 million Dths to be injectedinto storage by November 1, 2007 to meet our 95% target. Our long-term hedgepositions for gas purchased for resale are still in the development process. A purchased gas adjustment (PGA) clauseis included in our rates for our gas segment operations, therefore, we mark tomarket any unrealized gains or losses and any realized gains or losses relatingto financial derivative contracts to a regulatory asset or regulatory liabilityaccount on our balance sheet.

**Note 7 – Financing**

On March 26, 2007, EDE issued $80 million principal amount of FirstMortgage Bonds, 5.875% Series due 2037. The net proceeds of $79.1 million, less$0.2 million of legal and other financing fees, were added to our general fundsand used to pay down short-term indebtedness incurred as a result of ouron-going construction program.

On July 15, 2005, we entered into a $150 million unsecured revolvingcredit facility until July 15, 2010. Borrowings (other than through commercialpaper) are at the bank’s prime 

14

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commercialrate or LIBOR plus 100 basis points based on our current credit ratings and thepricing schedule in the line of credit facility. On March 14, 2006, we enteredinto the First Amended and Restated Unsecured Credit Agreement which amends andrestates the $150 million unsecured revolving credit facility. The principalamount of the credit facility was increased to $226 million, with theadditional $76 million allocated to support a letter of credit issued inconnection with our participation in the Plum Point Energy Station project.This extra $76 million of availability reduces over a four year period in linewith the amount of construction expenditures we owe for Plum Point Unit 1 andwas $61.5 million as of April 1, 2007. The unallocated credit facility is usedfor working capital, general corporate purposes and to back-up our use ofcommercial paper. This facility requires our total indebtedness (which does notinclude our note payable to the securitization trust) to be less than 62.5% ofour total capitalization at the end of each fiscal quarter and our EBITDA(defined as net income plus interest, taxes, depreciation and amortization) tobe at least two times our interest charges (which includes interest on the notepayable to the securitization trust) for the trailing four fiscal quarters atthe end of each fiscal quarter. Failure to maintain these ratios will result inan event of default under the credit facility and will prohibit us fromborrowing funds thereunder. As of March 31, 2007, we are in compliance withthese ratios. This credit facility is also subject to cross-default if wedefault on in excess of $10 million in the aggregate on our other indebtedness.This arrangement does not serve to legally restrict the use of our cash in thenormal course of operations. There were no outstanding borrowings under thisagreement at March 31, 2007, however, $39.8 million of the availabilitythereunder was used at such date to back up our outstanding commercial paper.

**Note 8 –Commitments and Contingencies**

We are a party to various claims and legal proceedings arising out ofthe normal course of our business. Management regularly analyzes thisinformation, and has provided accruals for any liabilities, in accordance withthe guidelines of Statement of Financial Accounting Standards SFAS 5, “Accountingfor Contingencies” (FAS 5). In the opinion of management, it is not probable,given the company’s defenses, that the ultimate outcome of these claims andlawsuits will have a material adverse affect upon our financial condition, orresults of operations or cash flows.

**Coal,Natural Gas and Transportation Contracts**

We have entered into long and short-term agreements to purchase coaland natural gas for our energy supply and natural gas operations. Under thesecontracts, the natural gas supplies are divided into firm physical commitmentsand derivatives that are used to hedge future purchases. The firm physical gasand transportation commitments total $50.9 million for April 1, 2007 throughMarch 31, 2008, $60.2 million for April 1, 2008 through March 31, 2010, $45.5million for April 1, 2010 through March 31, 2012 and $74.4 million for April 1,2012 and beyond. In the event that this gas cannot be used at our plants, thegas would be liquidated at market price.

We have coal supply agreements and transportation contracts in place toprovide for the delivery of coal to the plants. These contracts are writtenwith Force Majeure clauses that enable us to reduce tonnages or cease shipmentsunder certain circumstances or events. These include mechanical or electricalmaintenance items, acts of God, war or insurrection, strikes, weather and otherdisrupting events. This reduces the risk we have for not taking the minimumrequirements of fuel under the contracts. The minimum requirements are $25.5million for April 1, 2007 through March 31, 2008, $30.4 million for April 1,2008 through March 31, 2010 and $4.1 million for April 1, 2010 through March31, 2012.

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**PurchasedPower**

We currently supplement our on-system generating capacity withpurchases of capacity and energy from other utilities in order to meet thedemands of our customers and the capacity margins applicable to us undercurrent pooling agreements and National Electric Reliability Council (NERC)rules.

We have contracted with Westar Energy for the purchase of capacity andenergy through May 31, 2010. Commitments under this contract totalapproximately $51.3 million through May 31, 2010.

We also have a long term agreement for the purchase of capacity fromthe Plum Point Energy Station, a new 665-megawatt, coal-fired generatingfacility which will be built near Osceola, Arkansas. We have the option toconvert the 50 megawatts covered by the purchased power agreement into anownership interest in 2015. Commitments under this contract total approximately$53.0 million through December 31, 2015.

**NewConstruction**

On March 14, 2006, we entered into contracts to purchase an undividedinterest in 50 megawatts of the Plum Point Energy Station’s new 665-megawatt,coal-fired generating facility which will be built near Osceola, Arkansas.  The estimated cost is approximately $103million in direct costs, including AFUDC. In addition, we entered into an agreement with KCP&L on June 13,2006 to purchase an undivided ownership interest in the proposed coal-firedIatan 2.  We will own 12%, orapproximately 100 megawatts, of the proposed 850-megawatt unit.  Our share of the Iatan 2 costs will rangefrom approximately $183.6 million to $200.5 million, excluding AFUDC.

**Leases**

On December 10, 2004, we entered into a 20-year contract with Elk RiverWindfarm, LLC to purchase the energy generated at the 150-megawatt Elk RiverWindfarm located in Butler County, Kansas. We have contracted to purchaseapproximately 550,000 megawatt-hours of energy per year, or 10% of our annualneeds under the contract, which was declared commercial on December 15, 2005.We do not own any portion of the windfarm. Payments for wind energy from theElk River Windfarm are contingent upon output of the facility. Payments can runfrom zero to a maximum of $15.2 million based on a 20 year average cost and theestimated output of 550,000 megawatt hours. These costs are recorded aspurchased power expenses, and are not included in the operating leaseobligations shown below.

We also currently have short-term operatingleases for two unit trains to meet coal delivery demands and garage and officefacilities for our electric segment and five service center properties for ourgas segment. In addition we have a five-year capital lease for telephoneequipment.

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Our obligations over the next five years areas follows:
| (In thousands)                          | ** ** | **Capital Leases** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| 2007                                         |       | $                       | 288        |   |
| 2008                                         |       | 288                     |       |
| 2009                                         |       | 288                     |       |
| 2010                                         |       | 169                     |       |
| 2011                                         |       | 2                       |       |
| Thereafter                                   |       | —                  |       |
| Total minimum  payments                      |       | $                       | 1,035      |   |
| Less amount  representing maintenance        |       | 346                     |       |
| Net minimum  lease payments                  |       | 689                     |       |
| Less amount  representing interest           |       | 74                      |       |
| Present value of net  minimum lease payments |       | $                       | 615        |   |

 
| (In thousands)    | ** ** | **Operating Leases** | ** ** |
|------------------------|------------|---------------------------|------------|
| 2007                   |       | $                         | 1,471      |   |
| 2008                   |       | 1,353                     |       |
| 2009                   |       | 459                       |       |
| 2010                   |       | 292                       |       |
| 2011                   |       | 199                       |       |
| Thereafter             |       | 1,161                     |       |
| Total minimum payments |       | 4,935                     |       |
|                        |            |                           |            |  |

 

The accumulated amount of amortization forour capital leases was $0.2 million at March 31, 2007.

**Environmental Matters**

We are subject to various federal, state, and local laws andregulations with respect to air and water quality and with respect to hazardousand toxic materials and wastes, including their identification, transportation,disposal, record-keeping and reporting, including asbestos, as well as otherenvironmental matters. We believe that our operations are in compliance withpresent laws and regulations.

**ElectricSegment**

*Air.* The 1990Amendments to the Clean Air Act, referred to as the 1990 Amendments, affect theAsbury, Riverton, State Line and Iatan Power Plants and Units 3 and 4 (the FT8peaking units) at the Empire Energy Center. The 1990 Amendments requireaffected plants to meet certain emission standards, including maximum emissionlevels for sulfur dioxide (SO2) and nitrogen oxides (NOx). The Asbury Plantbecame an affected unit under the 1990 Amendments for SO2 on January 1, 1995and for NOx as a Group 2 cyclone-fired boiler on January 1, 2000. The IatanPlant became an affected unit for both SO2 and NOx on January 1, 2000. TheRiverton Plant became an affected unit for NOx in November 1996 and for SO2 onJanuary 1, 2000. The State Line Plant became an affected unit for SO2 and NOxon January 1, 2000. Units 3 and 4 at the Empire Energy Center became affectedunits for both SO2 and NOx in April 2003. The new Riverton Unit 12 became anaffected unit in January 2007.

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SO2 Emissions.Under the 1990 Amendments, the amount of SO2 an affected unit can emit isregulated. Each existing affected unit has been awarded a specific number ofemission allowances, each of which allows the holder to emit one ton of SO2.Utilities covered by the 1990 Amendments must have emission allowances equal tothe number of tons of SO2 emitted during a given year by each of their affectedunits. Allowances may be traded between plants or utilities or “banked” forfuture use. A market for the trading of emission allowances exists on theChicago Board of Trade. The Environmental Protection Agency (EPA) withholdsannually a percentage of the emission allowances awarded to each affected unitand sells those emission allowances through a direct auction. We receivecompensation from the EPA for the sale of these withheld allowances.

In 2006, our Asbury, Riverton and Iatan plants burned a blend of lowsulfur Western coal (Powder River Basin) and higher sulfur blend coal andpetroleum coke, or burned 100% low sulfur Western coal. In addition,tire-derived fuel (TDF) was used as a supplemental fuel at the Asbury Plant.The Riverton Plant can also burn natural gas as its primary fuel. The StateLine Plant, the Energy Center Units 3 and 4 and the new Riverton Unit 12 aregas-fired facilities and do not receive SO2 allowances. In the near term,annual allowance requirements for the State Line Plant, the Energy Center Units3 and 4 and Riverton Unit 12, which are not expected to exceed 20 allowancesper year, will be transferred from our inventoried bank of allowances. In 2006,the combined actual SO2 allowance need for all affected plant facilitiesexceeded the number of allowances awarded to us by the EPA, therefore, as ofDecember 31, 2006, we had 31,000 banked SO2 allowances as compared to 41,000 atDecember 31, 2005. Based on current SO2 allowance usage projections, we willneed to construct a scrubber at Asbury or purchase additional SO2 allowancessometime before 2011.

On July 14, 2004, we filed an application with the MPSC seeking anorder authorizing us to implement a plan for the management, sale, exchange,transfer or other disposition of our SO2 emission allowances issued by the EPA.On March 1, 2005, the MPSC approved a Stipulation and Agreement granting usauthority to manage our SO2 allowance inventory in accordance with our SO2Allowance Management Policy (SAMP). The SAMP allows us to swap bankedallowances for future vintage allowances and/or monetary value and, in extrememarket conditions, to sell SO2 allowances outright for monetary value. TheStipulation and Agreement became effective March 11, 2005, although we have notyet swapped or sold any allowances.

SO2 emissions will be further regulated as described in the Clean AirInterstate Rule section below.

NOx Emissions.The Asbury, Iatan, State Line, Energy Center and Riverton Plants are each incompliance with the NOx limits applicable to them under the 1990 Amendments ascurrently operated.

The Asbury Plant received permission from the Missouri Department ofNatural Resources (MDNR) to burn TDF at a maximum rate of 2% of total fuelinput. During 2006, approximately 5,794 tons of TDF were burned. This isequivalent to 579,400 discarded passenger car tires.

Under the MDNR’s Missouri NOx Rule, our Iatan, Asbury, State Line andEnergy Center facilities, like other facilities in Western Missouri, aregenerally subject to a maximum NOx emission rate of 0.35 lbs/mmBtu. However,facilities which burn at least 100,000 passenger tire equivalents of TDF peryear, including our Asbury Plant, are only subject to a higher NOx emissionlimit of 0.68 lbs/mmBtu. All of our plants currently meet the required emissionlimits and additional NOx controls are not required.

NOx is further regulated as described in the Clean Air Interstate Rulebelow.

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Clean Air Interstate Rule (CAIR)

The EPA issued its final CAIR on March10, 2005. CAIR governs NOx and SO2 emissions from fossil fueled units greaterthan 25 megawatts and will affect 28 states, including Missouri, where ourAsbury, Energy Center, State Line and Iatan Plants are located and Arkansaswhere the future Plum Point Energy Station will be located.

The CAIR is not directed to specificgeneration units, but instead, require the states (including Missouri andArkansas) to develop State Implementation Plans (SIPs) to comply with specificNOx and SO2 state-wide annual budgets. Until these plans are finalized, wecannot determine the allowed emissions of NOx and SO2 for the Asbury, EnergyCenter, State Line and Iatan Plants in Missouri or the Plum Point EnergyStation in Arkansas.

In order to help meet anticipated CAIR requirementsand to meet air permit requirements for Iatan Unit 2, we are installingpollution control equipment on Iatan Unit 1 which will be completed around theend of 2008. This equipment includes a Selective Catalytic Reduction (SCR)system, a Flue Gas Desulphurization (FGD) system and a baghouse, with our shareof the capital cost estimated at $45 million, excluding AFUDC. Of this amount,approximately $3.9 million was incurred in 2006. Approximately $15.9 million in2007 and $24.6 million in 2008 are included in our current capital expendituresbudget. These projects were included as part of our Experimental RegulatoryPlan approved by the MPSC.

Also to help meet anticipated CAIR requirements, weare constructing an SCR at Asbury. We expect the SCR to be in service aroundJanuary of 2008. We have awarded a contract and the SCR is under constructionand will be tied into the existing unit during our scheduled 2007 fall outage.Our current cost estimate for the SCR at Asbury is $30 million, which is alsoincluded in our current capital expenditures budget.  This project was also included as part of ourExperimental Regulatory Plan approved by the MPSC.

We also expect that additional pollution controlequipment to comply with CAIR may become economically justified at the AsburyPlant sometime prior to 2015 and may include a FGD and a baghouse at anestimated capital cost of $100 million. At this time, we do not anticipate theinstallation of additional pollution control equipment at the Riverton Plant.

CleanAir Mercury Rule (CAMR)

On March 15, 2005, the EPA issued theCAMR regulations for mercury emissions by power plants under the requirementsof the 1990 Amendments to the Clean Air Act. The new mercury emission limits will go into effect January 1, 2010.

The CAMR is not directed to specificgeneration units, but instead, requires the states (including Missouri, Kansasand Arkansas) to develop State Implementation Plans (SIP) to comply with aspecific mercury state-wide annual budgets. Until these state plans arefinalized, we cannot determine the allowed emissions for mercury for theAsbury, Energy Center, State Line and Iatan Plants in Missouri, the Plum PointEnergy Station in Arkansas or the Riverton Plant in Kansas. The proposed SIPsfor all states include allowance trading programs for mercury that could allowcompliance without additional capital expenditures.

Based on initial testing and anticipatedSIPs, we believe we will be granted enough mercury allowances on January 1,2010 in aggregate to meet our anticipated mercury emissions.  We are adding mercury analyzers at Asbury andRiverton during 2007 to get more specific data on our mercury emissions and tomeet the compliance date of January 1, 2009 for mercury analyzers and themercury emission compliance date of January 1, 2010.

*Water.* Weoperate under the Kansas and Missouri Water Pollution Plans that wereimplemented in response to the Federal Water Pollution Control Act Amendmentsof 1972. The 

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Asbury,Iatan, Riverton, Energy Center and State Line plants are in compliance withapplicable regulations and have received discharge permits and subsequentrenewals as required. The renewal for the State Line permit is under draftreview with public notice expected in the first half of 2007. The Energy Centerpermit was renewed in September 2005 and the Asbury Plant permit was renewed inDecember 2005.

The Riverton Plant is affected by final regulations for Cooling WaterIntake Structures issued under the Clean Water Act Section 316(b) Phase II. Theregulations became final on February 16, 2004 and require the submission of aComprehensive Demonstration Study with the permit renewal in 2008. A Proposalfor Information Collection (PIC) has been approved by the Kansas Department ofHealth and Environment. Aquatic sampling commenced in April 2006 in accordancewith the PIC and was completed in March 2007. On January 25, 2007, the UnitedStates Court of Appeals for the Second Circuit remanded key sections of the EPA’sFebruary 16, 2004 regulations. At this time, the schedule for reconsiderationand revisions is not known. We will be engaged with the EPA in itsreconsideration and revision process. Data collection will continue under thePIC and will be expanded as needed to limit increased costs, if any, due to theEPA’s reconsiderations. At this time, we do not expect costs associated withcompliance to be material.

*Other.*UnderTitle V of the 1990 Amendments, we must obtain site operating permits for eachof our plants from the authorities in the state in which the plant is located.These permits, which are valid for five years, regulate the plant site’s totalemissions; including emissions from stacks, individual pieces of equipment,road dust, coal dust and other emissions. We have been issued permits forAsbury, Iatan, Riverton, State Line and the Energy Center Plants. We submittedthe required renewal applications for the State Line and Energy Center Title Vpermits in 2003 and the Asbury Title V permit in 2004 and will operate underthe existing permits until the MDNR issues the renewed permits. A ComplianceAssurance Monitoring (CAM) plan is required by the renewed permit for Asbury.We estimate that the capital costs associated with the CAM plan will not exceed$2 million.

A new air permit was issued for the Iatan GeneratingStation on January 31, 2006. The new permit covers the entire Iatan GeneratingStation and includes the existing Unit No. 1 and the to-be-constructed IatanUnit No. 2. The new permit limits Unit No. 1 to a maximum of 6,600 MMBtu perhour of heat input. This heat input limit only allows Unit No. 1 to produce atotal of 652 net megawatts and, as a result, our share decreased from 80megawatts to 78 megawatts. The 6,600 MMBtu per hour heat input limit is ineffect until the new SCR, scrubber, and baghouse are completed, currentlyestimated to be late in the fourth quarter of 2008.

**GasSegment**

The acquisition of Missouri Gas involved the property transfer of twoformer manufactured gas plant (MGP) sites previously owned by Aquila, Inc. andits predecessors. Site #1 is listed in the MDNR Registry of Confirmed Abandonedor Uncontrolled Hazardous Waste Disposal Sites in Missouri (the MDNR Registry).Site #2 has received a letter of no further action from the MDNR. We arereviewing various actions that may be undertaken to reduce environmental andhealth risks associated with the MDNR Registry site.

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**Note 9 –Pension and Other Postretirement Benefits**

The components of our net periodic cost of pension(expensed and capitalized) and other postretirement benefits (in thousands) aresummarized below:
|                                         | ** ** | **Pension Benefits**                            | ** ** | **Other Postretirement Benefits** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **Three months ended March 31,** | ** ** |
| ** **                              | ** ** | **2007**                                             | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                            |       | $                                                    | 875        |                                        | $          | 875 |   | $ | 525 |   | $ | 500 |   |
| Interest cost                           |       | 2,044                                                |       | 1,750                                       |       | 975 |   | 825 |   |
| Expected return  on plan assets         |       | (2,588                                               | )          | (2,200                                      | )          | (825 | ) | (675 | ) |
| Amortization of  prior service cost (1) |       | 94                                                   |       | 100                                         |       | (125 | ) | (100 | ) |
| Amortization of  net actuarial loss (1) |       | 650                                                  |       | 825                                         |       | 300 |   | 600 |   |
| Net periodic benefit  cost (2)          |       | $                                                    | 1,075      |                                        | $          | 1,350 |   | $ | 850 |   | $ | 1,150 |   |

 
|                                         | ** ** | **Pension Benefits**                             | ** ** | **Other Postretirement Benefits** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **Twelve months ended March 31,** | ** ** |
| ** **                              | ** ** | **2007**                                              | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                            |       | $                                                     | 3,402      |                                        | $          | 3,472 |   | $ | 1,891 |   | $ | 2,020 |   |
| Interest cost                           |       | 7,767                                                 |       | 6,710                                       |       | 3,576 |   | 3,162 |   |
| Expected return  on plan assets         |       | (9,900                                                | )          | (7,976                                      | )          | (2,932 | ) | (2,443 | ) |
| Amortization of  prior service cost (1) |       | 441                                                   |       | 469                                         |       | (487 | ) | (559 | ) |
| Amortization of  transition obligation  |       | —                                                |       | —                                      |       | — |   | 809 |   |
| Amortization of  net actuarial loss (1) |       | 3,145                                                 |       | 3,257                                       |       | 2,098 |   | 1,945 |   |
| Net periodic benefit  cost (2)          |       | $                                                     | 4,855      |                                        | $          | 5,932 |   | $ | 4,146 |   | $ | 4,934 |   |
|                                         |            |                                                       |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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(1) Amortized from our regulatory asset recorded upon adoption of FAS158.

(2) Does not include the effect of regulatory accounting expenses,discussed in Note 4.

Based on the performanceof our pension plan assets through January 1, 2006 and 2007, we were notrequired under the Employee Retirement Income Security Act of 1974 (ERISA) tofund any additional minimum ERISA amounts with respect to 2006 or 2007.

We expect to make other postretirement benefitcontributions of $4.0 million in 2007, of which $1.0 million has been made asof March 31, 2007.

**Note 10 – Stock-Based Awards and Programs**

We recognized the following amounts (in thousands) in compensationexpense and tax benefits for all of our stock-based awards and programs for theapplicable periods ended March 31:
|                             | ** ** | **Three Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **2007**                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Compensation  Expense**   |       | $                                | 422        |                              | $          | 345 |   | $ | 859 |   | $ | 1,573 |   |
| **Tax  Benefit Recognized** |       | 152                              |       | 122                               |       | 291 |   | 563 |   |
|                             |            |                                  |            |                                   |            |  |  |  |  |  |  |  |  |

 

The first quarter 2007 activity for our various stock plans issummarized below:

**Performance-Based RestrictedStock Awards**

The fair value of theestimated shares to be awarded under each grant of restricted stock wasestimated on the date of grant using a lattice-based option valuation modelwith the assumptions noted in the following table:

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|                                          | ** ** | **2007**        | ** ** | **2006**        | ** ** |
|------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Risk-free  interest rate                 |       | 5.09%  to 4.88% |       | 4.60%  to 4.54% |       |
| Expected  volatility of Empire stock     |       | 16.6%           |       | 15.2%           |       |
| Expected  volatility of peer group stock |       | 18.9%           |       | 19.8%           |       |
| Expected  dividend yield on Empire stock |       | 5.55%           |       | 5.80%           |       |
| Expected  forfeiture rates               |       | 3%              |       | 3%              |       |
| Plan cycle                               |       | 3  years        |       | 3  years        |       |
| EDE percentile  performance              |       | 25th            |       | 33rd            |       |
| Fair value  percentage                   |       | 107.73%         |       | 108.13%         |       |
| Grant date                               |       | 1/31/2007       |       | 2/01/2006       |       |
| Grant date fair value  per share         |       | $25.65          |       | $24.04          |       |

 

Non-vested restricted stockawards (based on target number) as of March 31, 2007 and 2006 and changesduring the three months ended March 31, 2007 and 2006 were as follows:
| ** **                   | ** ** | **YTD 2007**              | ** ** | **YTD 2006**                                           | ** ** |
|------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                   | ** ** | **Number of shares** | ** ** | **Weighted Average Grant   Date Price** | ** ** | **Number of shares** | ** ** | **Weighted Average Grant Date   Price** | ** ** |
| **Nonvested  at January 1,** |       | 38,800                         |       | $                                                           | 22.25      |   | 40,300 |   | $ | 20.76 |   |
| **Granted**                  |       | 17,700                         |       | $                                                           | 23.81      |   | 13,600 |   | $ | 22.23 |   |
| **Awarded**                  |       | (7,598                         | )          | $                                                           | 21.79      |   | (7,954 | ) | $ | 18.25 |   |
| **Not  Awarded**             |       | (5,502                         | )          |                                                        |       | (7,146 | ) |   |   |
| ** **                   |       |                           |       |                                                        |       |   |   |   |   |
| **Nonvested at March 31,**   |       | 43,400                         |       | $                                                           | 23.02      |   | 38,800 |   | $ | 22.25 |   |

 

At March 31, 2007, there was$0.5 million of total unrecognized compensation cost related to estimatedoutstanding awards. This cost will be recognized over the outstanding yearsremaining in the vesting period.

**StockOptions**

A summary of option activity under the plan during the three monthsended March 31, 2007 and 2006 is presented below:
|                              | ** ** | **2007**    | ** ** | **2006**     | ** ** |
|------------------------------|------------|-------------|------------|--------------|------------|
| ** **                   | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | ** **  | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                   | ** ** | ** **  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                   | ** ** | **Options** | ** ** | **Price**    | ** ** | **Options** | ** ** | **Price** | ** ** |
| Outstanding at  December 31, |       | 135,000     |       | $            | 22.21      |   | 142,500 |   | $ | 20.84 |   |
| Granted                      |       | 64,200      |       | $            | 23.81      |   | 41,700 |   | $ | 22.23 |   |
| Exercised                    |       | 50,000      |       | $            | 21.79      |   | 49,200 |   | $ | 18.25 |   |
| Outstanding at March 31, (1) |       | 149,200     |       | $            | 23.04      |   | 135,000 |   | $ | 22.21 |   |

 

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(1) 2007 includes4,200 shares at weighted average price of $21.79, which are vested andexercisable. All others are non-vested.

The aggregate intrinsic value at March 31, 2007 was $0.2 million. Theaggregate intrinsic value at March 31, 2006 was less than $0.1 million. Theintrinsic value of the unexercised options is the difference between Empire’sclosing stock price on the last day of the quarter and the exercise pricemultiplied by the number of in the money options had all option holdersexercised their option on the last day of the quarter.

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The range of exercise prices for the options outstanding at March 31,2007 was $21.79 to $23.81. The weighted-average remaining contractual life ofoutstanding options at March 31, 2007 and 2006 was 8.3 years and 8.8 years,respectively. As of March 31, 2007, there was $0.5 million of totalunrecognized compensation expense related to the non-vested options grantedunder the plan. That cost will be recognized over a period of 1 to 3 years.
|                                            | ** ** | **Stock Options** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2007**               | ** ** | **2006** | ** ** |
| **Weighted  average fair value of grants** |       | $                      | 2.38       |   | $ | 1.65 |   |
| **Risk-free  interest rate**               |       | 4.68                   | %          | 3.27 | % |
| **Dividend  yield**                        |       | 5.33                   | %          | 6.16 | % |
| **Expected  volatility**                   |       | 16.13                  | %          | 18.14 | % |
| **Expected  life in months**               |       | 60                     |       | 60 |   |
| **Grant Date**                             |       | 1/31/07                |       | 2/1/06 |   |
|                                            |            |                        |            |  |  |  |  |

 

**Note 11 –Accounts Receivable - Other**

The following table sets forth the major componentscomprising “Accounts receivable – other” on our consolidated balance sheet (inthousands):
| ** **                                                                                               | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Accounts receivable  for meter loops, meter bases, line extensions, highway projects, gas segment,  etc. |       | $                            | 2,653      |                            | $          | 3,249 |   |
| Accounts  receivable for non-regulated subsidiary companies                                              |       | 251                          |       | 2,698                           |       |
| Accounts  receivable from Westar Generating, Inc. for commonly-owned facility                            |       | 1,210                        |       | 1,189                           |       |
| Taxes receivable  – overpayment of estimated income taxes                                           |       | 1,666                        |       | 3,055                           |       |
| Accounts  receivable for energy trading margin deposit (1)                                               |       | 1,784                        |       | 1,967                           |       |
| Accounts  receivable for true-up on maintenance contracts (2)                                            |       | 1,543                        |       | 938                             |       |
| Other                                                                                                    |       | 130                          |       | 138                             |       |
| Total accounts  receivable – other                                                                  |       | $                            | 9,237      |                            | $          | 13,234 |   |

 

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(1) The $1.8million accounts receivable for energy trading margin deposit represents thebalance in our brokerage account as of March 31, 2007. NYMEX futures contractsare used in our hedging program of natural gas which require posting of margin.

(2) The $1.5 million in accounts receivable fortrue-up on maintenance contracts represents quarterly estimated credits fromSiemens Westinghouse related to our maintenance contract entered into in July2001 for the State Line Combined Cycle Unit (SLCC). Fortypercent of this credit belongs to Westar Generating, Inc., the owner of 40% ofthe SLCC, and has been recorded in accounts payable as of March 31, 2007.

**Note 12 -Regulated - Other Operating Expense**

The following table sets forth the major componentscomprising “Regulated – other” under “Operating Revenue Deductions” on ourconsolidated statements of operations (in thousands) for all periods presentedended March 31:

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| ** **                                         | ** ** | **Three Months   Ended  2007** | ** ** | **Three Months   Ended  2006** | ** ** | **Twelve Months  Ended  2007** | ** ** | **Twelve Months  Ended  2006** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Electric  transmission and distribution expense    |       | $                                        | 2,064      |                                     | $          | 1,960                               |       | $                                   | 8,469      |   | $ | 8,331 |   |
| Natural gas  transmission and distribution expense |       | 443                                      |       | —                                   |       | 1,485                               |       | —                              |       |
| Power operation  expense (other than fuel)         |       | 2,373                                    |       | 2,164                                    |       | 9,809                               |       | 9,536                               |       |
| Customer  accounts and assistance expense          |       | 2,315                                    |       | 1,756                                    |       | 8,836                               |       | 7,037                               |       |
| Employee pension  expense (1)                      |       | 1,817                                    |       | 846                                      |       | 5,164                               |       | 2,935                               |       |
| Employee  healthcare plan (1)                      |       | 1,777                                    |       | 1,857                                    |       | 7,584                               |       | 8,015                               |       |
| General office  supplies and expense               |       | 2,288                                    |       | 1,757                                    |       | 8,485                               |       | 6,964                               |       |
| Administrative  and general expense                |       | 2,880                                    |       | 2,270                                    |       | 11,471                              |       | 8,511                               |       |
| Allowance for  uncollectible accounts              |       | 1,354                                    |       | 237                                      |       | 3,115                               |       | 1,480                               |       |
| Miscellaneous  expense                             |       | 48                                       |       | 22                                       |       | 159                                 |       | 92                                  |       |
| Total                                              |       | $                                        | 17,359     |                                     | $          | 12,869                              |       | $                                   | 64,577     |   | $ | 52,901 |   |

 

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(1) Includes effects of regulatory treatment for pension and other postretirement benefits but does not include capitalized portion oramount deferred to a regulatory asset.

**Note 13– Segment Information**

We operate our business asthree segments:  electric, gas and other.As part of our electric segment, we also provide water service to three townsin Missouri. EDG is our wholly owned subsidiary formed to hold the Missouri Gasassets acquired from Aquila, Inc. on June 1, 2006. The other segment consistsof our businesses which are unregulated and include a 100% interest in EmpireDistrict Industries, Inc., a subsidiary for our fiber optics business and a100% interest in Fast Freedom, Inc., an Internet service provider.

We sold our controlling 52%interest in Mid-America Precision Products (MAPP) on August 31, 2006. MAPP is acompany that specializes in close-tolerance custom manufacturing for theaerospace, electronics, telecommunications and machinery industries. We alsosold our interest in Conversant, Inc., a software company that markets CustomerWatch, an Internet-based customer information system software. For financialreporting purposes, both of these businesses have been classified as adiscontinued operation and are not included in our segment information.

The tables below presentinformation about the revenues, operating income, income from continuingoperations, capital expenditures and total assets of our business segments.
| ** **                                | ** ** | **For  the quarter ended March 31, 2007** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                              | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement of Income Information**       |       |                                      |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                         | 97,361     |   | $ | 27,590 |   | $ | 1,090 |   | $ | (101 | ) | $ | 125,940 |   |
| Operating income                          |       | 9,118                                     |       | 2,605 |   | 162 |   |   |   | 11,884 |   |
| Income (loss) from  continuing operations |       | 2,843                                     |       | 1,663 |   | (6 | ) |   |   | 4,500 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| **Capital Expenditures**                  |       | $                                         | 47,949     |   | $ | 222 |   | $ | 694 |   |   |   | $ | 48,865 |   |
|                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

24

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** **
| ** **                                | ** ** | **For the quarter ended March 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                             | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement of Income Information**       |       |                                     |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                        | 83,087     |   | $ | — |   | $ | 984 |   | $ | (88 | ) | $ | 83,983 |   |
| Operating income                          |       | 9,232                                    |       | — |   | 61 |   |   |   | 9,293 |   |
| Income (loss) from  continuing operations |       | 2,050                                    |       | — |   | 31 |   |   |   | 2,081 |   |
|                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| **Capital Expenditures**                  |       | $                                        | 27,425     |   | $ | — |   | $ | 561 |   |   |   | $ | 27,986 |   |
|                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

** **
| ** **                                | ** ** | **For the twelve months ended March 31, 2007** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                   | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement of Income Information**       |       |                                           |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                              | 398,769    |   | $ | 52,735 |   | $ | 4,310 |   | $ | (404 | ) | $ | 455,410 |   |
| Operating income                          |       | 67,816                                         |       | 3,890 |   | 551 |   |   |   | 72,257 |   |
| Income (loss) from  continuing operations |       | 41,725                                         |       | 703 |   | (146 | ) |   |   | 42,282 |   |
|                                      |       |                                           |       |   |   |   |   |   |   |   |   |
| **Capital Expenditures (1)**              |       | $                                              | 136,226    |   | $ | 1,140 |   | $ | 2,634 |   |   |   | $ | 140,000 |   |
|                                           |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  Doesnot include the acquisition of Missouri gas operation.

** **
| ** **                                | ** ** | **For the twelve months ended March 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                   | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                           |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                              | 369,892    |   | $ | — |   | $ | 3,892 |   | $ | (382 | ) | $ | 373,402 |   |
| Operating income                          |       | 55,480                                         |       | — |   | 138 |   |   |   | 55,618 |   |
| Income (loss)  from continuing operations |       | 26,734                                         |       | — |   | 28 |   |   |   | 26,762 |   |
|                                      |       |                                           |       |   |   |   |   |   |   |   |   |
| **Capital Expenditures (1)**              |       | $                                              | 86,226     |   | $ | — |   | $ | 2,506 |   |   |   | $ | 88,732 |   |
|                                           |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

** **
| ** **                     | ** ** | **As of March 31, 2007** | ** ** |
|--------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **Electric**             | ** ** | **Gas(1)** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                     |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                        | 1,307,083  |   | $ | 122,878 |   | $ | 19,725 |   | $ | (83,578 | ) | $ | 1,366,108 |   |
|                                |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includesgoodwill of $39,362.

** **
| ** **                     | ** ** | **As of December 31, 2006** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **Electric**                | ** ** | **Gas**(1) | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                        |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                           | 1,249,327  |   | $ | 125,560 |   | $ | 21,659 |   | $ | (80,658 | ) | $ | 1,315,888 |   |
|                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includesgoodwill of $39,323.

25

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**Note 14 – Discontinued Operations**

In August 2006, we sold ourcontrolling 52% interest in MAPP. MAPP is a company that specializes inclose-tolerance custom manufacturing for the aerospace, electronics,telecommunications and machinery industries*.* In December2006, we sold our 100% interest in Conversant, Inc., a software company thatmarkets Customer Watch, an Internet-based customer information system software.We have reported MAPP and Conversant’s results as discontinued operations. Asummary of the components of gains or losses from discontinued operations forall periods reported as of March 31, follows (in thousands):
| ** **                                               | ** ** | **For the quarter ended March 31, 2006** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **MAPP**                                                               | ** ** | **Conversant** | ** ** | **Total** | ** ** |
| ** **                                               |       |                                                                   |       |   |   |   |   |
| Revenues                                                 |       | $                                                                      | 3,692      |   | $ | 333 |   | $ | 4,025 |   |
| Expenses                                                 |       | 3,754                                                                  |       | 1,059 |   | 4,813 |   |
| Losses from discontinued operations before income  taxes |       | (62                                                                    | )          | (726 | ) | (788 | ) |
| Income tax                                               |       | 23                                                                     |       | 277 |   | 300 |   |
| Minority  interest                                       |       | 30                                                                     |       | — |   | 30 |   |
| Income tax –  minority interest                     |       | (11                                                                    | )          | — |   | (11 | ) |
| **Gain  (loss) from discontinued operations**            | ** ** | **$**                                                                  | **(20**    | **)** | **$** | **(449** | **)** | **$** | **(469** | **)** |

 
| ** **                                               | ** ** | **For the twelve months ended March 31, 2007** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **MAPP**                                                                          | ** ** | **Conversant** | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                                                 | 5,235      |   | $ | 1,488 |   | $ | 6,723 |   |
| Expenses                                                 |       | 5,542                                                                             |       | 2,848 |   | 8,390 |   |
| Losses from discontinued operations before income  taxes |       | (307                                                                              | )          | (1,360 | ) | (1,667 | ) |
| Gain on disposal                                         |       | 272                                                                               |       | 555 |   | 827 |   |
| Income tax                                               |       | 117                                                                               |       | 518 |   | 635 |   |
| Minority  interest                                       |       | 147                                                                               |       | — |   | 147 |   |
| Income tax –  minority interest                     |       | (56                                                                               | )          | — |   | (56 | ) |
| **Gain  (loss) from discontinued operations**            | ** ** | **$**                                                                             | **173**    | ** ** | **$** | **(287** | **)** | **$** | **(114** | **)** |

 
| ** **                                                          | ** ** | **For the twelve months ended March 31, 2006** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **MAPP**                                                                          | ** ** | **Conversant** | ** ** | **Total** | ** ** |
| Revenues                                                            |       | $                                                                                 | 19,620     |   | $ | 1,891 |   | $ | 21,511 |   |
| Expenses                                                            |       | 19,021                                                                            |       | 4,031 |   | 23,052 |   |
| Earnings (losses) from discontinued operations  before income taxes |       | 599                                                                               |       | (2,140 | ) | (1,541 | ) |
| Income tax                                                          |       | (228                                                                              | )          | 815 |   | 587 |   |
| Minority  interest                                                  |       | (287                                                                              | )          | — |   | (287 | ) |
| Income tax –  minority interest                                |       | 109                                                                               |       | — |   | 109 |   |
| **Gain  (loss) from discontinued operations**                       | ** ** | **$**                                                                             | **193**    | ** ** | **$** | **(1,325** | **)** | **$** | **(1,132** | **)** |

 

26

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**Item2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**EXECUTIVE SUMMARY**

We operate our businesses as three segments:electric, gas and other. The****EmpireDistrict Electric Company (EDE) is an operating public utility engaged in thegeneration, purchase, transmission, distribution and sale of electricity inparts of Missouri, Kansas, Oklahoma and Arkansas. As part of our electricsegment, we also provide water service to three towns in Missouri. The EmpireDistrict Gas Company (EDG) is our wholly owned subsidiary formed to hold theMissouri Gas assets acquired from Aquila, Inc. on June 1, 2006. It provides naturalgas distribution to customers in 44 communities in northwest, north central andwest central Missouri. Our other segment includes investments in certainnon-regulated businesses including fiber optics and Internet access. Thesebusinesses are held in our wholly-owned subsidiary, EDE Holdings, Inc. Duringthe twelve months ended March 31, 2007, 87.1% of our gross operating revenueswere provided from sales from our electric segment (including 0.4% from thesale of water), 11.6% from the sale of gas and 0.9% from our non-regulatedbusinesses.

In August 2006, we sold our controlling 52% interestin Mid-America Precision Products (MAPP), which specializes in close-tolerancecustom manufacturing. In December 2006, we sold our 100% interest inConversant, Inc., a software company that markets Customer Watch, anInternet-based customer information system software. For financial reportingpurposes, MAPP and Conversant have been classified as discontinued operationsand are not included in our segment information.

***Electric Segment***

The primary drivers of our electric operating revenues in any periodare: (1) rates we can charge our customers, (2) weather, (3) customer growthand (4) general economic conditions. The utility commissions in the states inwhich we operate, as well as the Federal Energy Regulatory Commission (FERC),set the rates which we can charge our customers. In order to offset expenses,we depend on our ability to receive adequate and timely recovery of our costs(primarily fuel and purchased power) and/or rate relief. We assess the need forrate relief in all of the jurisdictions we serve and file for such relief whennecessary. Weather affects the demand for electricity. Very hot summers andvery cold winters increase electric demand, while mild weather reduces demand.Residential and commercial sales are impacted more by weather than industrialsales, which are mostly affected by business needs for electricity and bygeneral economic conditions. Customer growth, which is the growth in the numberof customers, contributes to the demand for electricity. We expect our annualelectric customer growth to range from approximately 1.6% to 1.9% over the nextseveral years. Our electric customer growth for the twelve months ended March31, 2007 was 1.9%. We define electric sales growth to be growth in kWh salesexcluding the impact of weather. The primary drivers of electric sales growthare customer growth and general economic conditions.

The primary drivers of our electric operatingexpenses in any period are: (1) fuel and purchased power expense, (2)maintenance and repairs expense, including repairs following severe weather,(3) taxes and (4) non-cash items such as depreciation and amortization expense.Fuel and purchased power costs are our largest expense items. Several factorsaffect these costs, including fuel and purchased power prices, plant outagesand weather, which drives customer demand. In order to control the price we payfor fuel for electric generation and purchased power, we have entered into longand short-term agreements to purchase power (including wind energy) and coaland natural gas for our energy supply. We currently engage in hedgingactivities in an effort to minimize our risk from volatile natural gas prices.

27

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***Gas Segment***

The primary drivers of our gas operating revenues in any period are:(1) rates we can charge our customers, (2) weather, (3) customer growth, (4)the cost of natural gas and interstate pipeline transportation charges and (5)general economic conditions. The MPSC sets the rates which we can charge ourcustomers. In order to offset expenses, we depend on our ability to receiveadequate and timely recovery of our costs (primarily commodity natural gas)and/or rate relief. We assess the need for rate relief and file for such reliefwhen necessary. However, as part of the unanimous stipulation and agreementfiled with the MPSC on March 1, 2006 and approved on April 18, 2006, we haveagreed to not file a rate increase request for non-gas costs prior to June 1,2009. A PGA clause is included in our gas rates, which allows us to recover ouractual cost of natural gas from customers through rate changes, which are madeperiodically (up to four times) throughout the year in response to weatherconditions, natural gas costs and supply demands. Weather affects the demandfor natural gas. Very cold winters increase demand for gas, while mild weatherreduces demand. Due to the seasonal nature of the gas business, revenues andearnings are typically concentrated in the November through March period, whichgenerally corresponds with the heating season. As a result, for the Company asa whole we expect our acquisition of Missouri Gas to allow us to help diversifyour weather risk, balancing our current summer air conditioning peak whichdrives higher electricity demand with a natural gas winter heating peak.Customer growth, which is the growth in the number of customers, contributes tothe demand for gas. We expect our annual gas customer growth to range fromapproximately 1.1% to 1.8% over the next several years. We define gas salesgrowth to be growth in mcf sales excluding the impact of weather. The primarydrivers of gas sales growth are customer growth and general economicconditions.

The primary driver of our gas operatingexpense in any period is the price of natural gas. However, because gaspurchase costs for our gas utility operations are normally recovered from ourcustomers, any change in gas prices does not have a corresponding impact onincome unless such costs are deemed imprudent or causes customers to reduceusage.

***Earnings***

During the first quarter of 2007, basic anddiluted earnings per weighted average share of common stock were $0.15 ascompared to $0.06 in the first quarter of 2006. For the twelve months endedMarch 31, 2007, basic and diluted earnings per weighted average share of commonstock were $1.44 as compared to $0.99 for the twelve months ended March 31,2006. As reflected in the table below, the primary positive drivers for thisincrease were increased electric revenues and the addition of gas revenues forboth periods and decreased total electric fuel and purchased power costs forthe twelve months ended period. These positive drivers more than offset thecost of natural gas, increased depreciation rates and the effect of the January2007 ice storm costs (reflected in maintenance and repairs) discussed below.

The following reconciliation of basicearnings per share between the three months and twelve months ended March 31,2006 versus March 31, 2007 is a non-GAAP presentation. We believe thisinformation is useful in understanding the fluctuation in earnings per sharebetween the prior and current years. The reconciliation presents the after taximpact of significant items and components of the statement of operations on aper share basis before the impact of additional stock issuances which ispresented separately. Earnings per share for the three months and twelve monthsended March 31, 2006 and 2007 shown in the reconciliation are presented on aGAAP basis and are the same as the amounts included in the statements ofoperations. This reconciliation may not be comparable to other companies ormore useful than the GAAP presentation included in the statements ofoperations.

28

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| ** **                                                | ** ** | **Three Months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **Earnings  Per Share – 2006***                      | ** ** | **$**                        | **0.06**   | ** **                    | **$**      | **0.99** | ** ** |
| ** **                                                |       |                         |       |                          |       |
| **Revenues**                                              |       |                         |       |                          |       |
| Electric  on-system                                       |       | $                            | 0.31       |                          | $          | 0.70 |   |
| Electric off –  system and other                     |       | 0.05                         |       | 0.04                          |       |
| Gas**                                                     |       | 0.69                         |       | 1.38                          |       |
| Water                                                     |       | 0.00                         |       | 0.01                          |       |
| Non – Regulated                                      |       | 0.00                         |       | 0.01                          |       |
| **Expenses**                                              | ** ** | ** **                   | ** ** | ** **                    | ** ** |
| Electric fuel                                             |       | (0.11                        | )          | 0.33                          |       |
| Purchased power                                           |       | (0.01                        | )          | (0.16                         | )          |
| Cost of natural  gas**                                    |       | (0.47                        | )          | (0.89                         | )          |
| Regulated –  electric                                |       | (0.04                        | )          | (0.08                         | )          |
| Regulated – gas                                      |       | (0.07                        | )          | (0.23                         | )          |
| Maintenance and  repairs                                  |       | (0.14                        | )          | (0.20                         | )          |
| Depreciation and  amortization                            |       | (0.09                        | )          | (0.15                         | )          |
| Other taxes                                               |       | (0.05                        | )          | (0.09                         | )          |
| Interest charges                                          |       | (0.04                        | )          | (0.15                         | )          |
| AFUDC                                                     |       | 0.04                         |       | 0.12                          |       |
| Discontinued  operations                                  |       | 0.02                         |       | 0.04                          |       |
| Loss on plant  allowance                                  |       | 0.00                         |       | (0.03                         | )          |
| Income taxes,  result of effective rate change            |       | 0.02                         |       | (0.02                         | )          |
| Other income and  deductions                              |       | 0.00                         |       | 0.03                          |       |
| Dilutive effect  of additional shares issued in July 2006 |       | (0.02                        | )          | (0.21                         | )          |
| **Earnings Per Share – 2007***                       | ** ** | **$**                        | **0.15**   | ** **                    | **$**      | **1.44** | ** ** |

 

----

** Threemonths ended and twelve months ended March 31, 2007 include the effect ofdiscontinued operations, which were losses of $0.02 and $0.04, respectively.*

*** Gas segment revenues and expenses are included from June 1, 2006.*

**RecentActivities**

***2007 Ice Storm***

A major ice storm struckvirtually all areas of our electric service territory January 12-14, 2007causing substantial damage. Approximately 85,000 (52%) of our electriccustomers were without power at the height of the storm.  Costs associated with the restoration effortdue to the ice storm were approximately $29.0 million, of which $18.0 millionwas capitalized as additions to our utility plant. Approximately $4.4 millionwas recorded as maintenance expense in the first quarter and approximately $6.5million was deferred as a regulatory asset as we believe it is probable thatthese costs will be recoverable in future electric rate cases.

***Energy Supply***

As of April 10, 2007, our new Siemens V84.3A2 combustion turbine, Unit12 at our Riverton plant, began commercial operation. Riverton Unit 12 willhave a summer rated capacity of approximately 148 megawatts, increasing our RivertonPlant’s total generating capacity to 284 megawatts.

29

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***Financing***

On March 26, 2007, EDE issued $80 millionprincipal amount of First Mortgage Bonds, 5.875% Series due 2037. The netproceeds of $79.1 million, less $0.2 million of legal and other financing fees,were added to our general funds and used to pay down short-term indebtednessincurred as a result of our on-going construction program.

***Regulatory Matters***

On December 29, 2006, the Office of Public Counsel (OPC) andintervenors Praxair, Inc. and Explorer Pipeline Company, filed an applicationwith the MPSC requesting the MPSC grant a rehearing on most of the issuesaddressed in our December 2006 Missouri rate case order and many of theprocedural issues. On December 29, 2006, we also filed an application with theMPSC requesting a rehearing on return on equity, capital structure and energycost recovery. A decision by the MPSC is pending.

Praxair and Explorer Pipeline filed a Petition for Writ of Review withthe Cole County Circuit Court on January 31, 2007. The Circuit Court issued aWrit, but the MPSC has moved to have the Writ set aside and the case dismissed.The MPSC’s motion to set aside the Writ is still pending. On March 20, 2007,Praxair and Explorer filed a motion in the Circuit Court writ proceedingrequesting an immediate stay of the effectiveness of our December 2006 Missourirate case order and the tariffs filed pursuant thereto. The stay motion remainspending before the Circuit Court.

On January 4, 2007, the OPC filed a Petition for Writ of Mandamus withthe Missouri Court of Appeals, Western District. We filed suggestions inopposition to the Petition, as did the MPSC. On March 12, 2007, the Court ofAppeals, Western District issued an order denying the OPC’s petition. On March19, 2007, the OPC filed a Petition for Writ of Mandamus with the MissouriSupreme Court seeking to have the tariffs filed by us and approved by the MPSCset aside. On May 1, 2007, the Missouri Supreme Court issued a preliminary writdirecting the MPSC to respond to the OPC’s petition. The MPSC has until May 31,2007 to file its response demonstrating that the Court should not issue a writof mandamus as requested by the OPC. We will also file a response within thattime.

For additional information, see “Rate Matters” below.

**RESULTS OF OPERATIONS**

The following discussion analyzes significant changes in the results ofoperations for the three–month and twelve-month periods ended March 31, 2007,compared to the same periods ended March 31, 2006.

The following table represents our results ofoperations by operating segment for the applicable periods ended March 31:
|                                    | ** ** | **Three Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| **(in millions)**             | ** ** | **2007**                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                             |       |                              |       |   |   |   |   |
| Income from  continuing operations |       |                             |       |                              |       |   |   |   |   |
| Electric                           |       | $                                | 2.8        |                              | $          | 2.0 |   | $ | 41.7 |   | $ | 26.7 |   |
| Gas                                |       | 1.7                              |       | —                            |       | 0.7 |   | — |   |
| Other                              |       | 0.0                              |       | 0.0                               |       | (0.1 | ) | 0.0 |   |
| Income from  continuing operations |       | $                                | 4.5        |                              | $          | 2.0 |   | $ | 42.3 |   | $ | 26.7 |   |
| Loss from  discontinued operations |       | —                           |       | (0.4                              | )          | (0.1 | ) | (1.1 | ) |
| Net income                         |       | $                                | 4.5        |                              | $          | 1.6 |   | $ | 42.2 |   | $ | 25.6 |   |

 

30

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***ElectricSegment***

**Overview**

Our electric segment income from continuing operationsfor the first quarter of 2007 was $2.8 million as compared to $2.0 million forthe first quarter of 2006.

Electric segment operating revenues comprised approximately77.3% of our total operating revenues during the first quarter of 2007. Of ourtotal electric operating revenues during the first quarter of 2007,approximately 46.1% were from residential customers, 27.2% from commercialcustomers, 14.9% from industrial customers, 4.5% from wholesale on-systemcustomers, 3.7% from wholesale off-system transactions and 3.6% frommiscellaneous sources, primarily public authorities. The breakdown of our customer classes has notsignificantly changed from the first quarter of 2006.

The amounts and percentage changes from the priorperiods in kilowatt-hour (“kWh”) sales and operating revenues by major customerclass for on-system sales for the applicable periods ended March 31, were asfollows:
| ** **           | ** ** | **kWh Sales (in millions)** | ** ** | **kWh Sales (in millions**) | ** ** |
|----------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **First**                                  | ** ** | **First**                                  | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Quarter**                                | ** ** | **Quarter**                                | ** ** | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2007**                                   | ** ** | **2006**                                   | ** ** | **% Change*** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change*** | ** ** |
| Residential          |       | 545.2                                      |       | 474.1                                      |       | 15.0 | % | 1,970.0 |   | 1,861.1 |   | 5.8 | % |
| Commercial           |       | 357.8                                      |       | 330.3                                      |       | 8.3 |   | 1,574.6 |   | 1,491.3 |   | 5.6 |   |
| Industrial           |       | 255.4                                      |       | 265.8                                      |       | (3.9 | ) | 1,135.1 |   | 1,122.6 |   | 1.1 |   |
| Wholesale  On-System |       | 80.2                                       |       | 78.0                                       |       | 2.8 |   | 339.8 |   | 331.5 |   | 2.5 |   |
| Other**              |       | 28.0                                       |       | 26.0                                       |       | 7.8 |   | 114.7 |   | 111.9 |   | 2.6 |   |
| Total On-System      |       | 1,266.6                                    |       | 1,174.2                                    |       | 7.9 |   | 5,134.2 |   | 4,918.4 |   | 4.4 |   |

 
| ** **           | ** ** | **Operating Revenues  ($ in millions)** | ** ** | **Operating Revenues  ($ in millions)** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **           | ** ** | **First**                                              | ** ** | **First**                                              | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Quarter**                                            | ** ** | **Quarter**                                            | ** ** | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2007**                                               | ** ** | **2006**                                               | ** ** | **% Change*** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change*** | ** ** |
| Residential          |       | $                                                      | 44.7       |                                                   | $          | 36.9 |   | 21.1 | % | $ | 167.2 |   | $ | 153.5 |   | 8.9 | % |
| Commercial           |       | 26.3                                                   |       | 22.7                                                   |       | 16.2 |   | 118.7 |   | 109.3 |   | 8.6 |   |
| Industrial           |       | 14.5                                                   |       | 14.0                                                   |       | 3.4 |   | 65.3 |   | 62.4 |   | 4.7 |   |
| Wholesale  On-System |       | 4.3                                                    |       | 4.3                                                    |       | (0.4 | ) | 17.5 |   | 17.5 |   | 0.4 |   |
| Other**              |       | 2.3                                                    |       | 1.9                                                    |       | 15.2 |   | 9.3 |   | 8.7 |   | 6.6 |   |
| Total On-System      |       | $                                                      | 92.1       |                                                   | $          | 79.8 |   | 15.3 |   | $ | 378.0 |   | $ | 351.4 |   | 7.6 |   |

 

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**Percentagechanges are based on actual kWh sales and revenues and may not agree to therounded amounts shown above.*

***OtherkWh sales and other operating revenues include street lighting, other publicauthorities and interdepartmental usage.*

***QuarterEnded March 31, 2007 Compared to Quarter Ended March 31, 2006***

**OperatingRevenues and Kilowatt-Hour Sales**

KWh sales for our on-systemcustomers increased during the first quarter of 2007 as compared to the firstquarter of 2006 primarily due to continued sales growth and favorable weather.Revenues for our on-system customers increased approximately $12.2 million, or15.3%. The 

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January 2007 Missouri rate increase (discussed below) contributed anestimated $5.9 million to revenues while continued sales growth contributed anestimated $2.8 million during the first quarter of 2007. The impact of weatheris difficult to estimate, especially in light of the January 2007 ice storm,but we estimate that weather increased revenues by approximately $3.6 millioncompared to last year’s first quarter. Total heating degree days (thesum of the number of degrees that the daily average temperature for each dayduring that period was below 65*°* F) for thefirst quarter of 2007 were 9.3% more than the same period last year, although12.0% less than the 30-year average. Twonew record winter peaks were set during the first quarter of 2007. A recordpeak of 1,034 megawatts was set on January 31, 2007 and was broken on February16, 2007 with another record winter peak of 1,059 megawatts. We expect ourannual electric customer growth to range from approximately 1.6% to 1.9% overthe next several years. Our electric customer growth for the twelve monthsended March 31, 2007 was 1.9%.

The increase in residential kWh sales during the firstquarter of 2007 was primarily due to the colder weather conditions as comparedwith 2006 and continued sales growth. Revenues were also positively affected bythe January 2007 Missouri rate increase.

Commercial kWh sales increased for the first quarterof 2007 mainly due to continued sales growth while industrial kWh salesdecreased during the first quarter of 2007 as compared to the same period in2006 mainly due to a pipeline customer running at minimum output. Associatedrevenues for both our commercial and industrial customers increased reflectingthe Missouri rate increase.

On-system wholesale kWh sales increased during thefirst quarter of 2007 reflecting the continued sales growth discussed above.Revenues associated with these FERC-regulated sales decreased, however, as aresult of the fuel adjustment clause applicable to such sales. Lower fuel costsresulted in lower rates. This clause permits the distribution to customers ofchanges in fuel and purchased power costs.

**Off-SystemElectric Transactions**

In addition to sales to our own customers, we also sell power to otherutilities as available and provide transmission service through our system fortransactions between other energy suppliers. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended March 31:
|                   | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|-------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **        | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
| **(in millions)** | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| Revenues          |       | $                     | 4.2        |                  | $          | 2.3 |   |
| Expenses          |       | 2.7                   |       | 1.7                   |       |
| Net*              |       | $                     | 1.4        |                  | $          | 0.7 |   |

 

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**Differencescould occur due to rounding.*

Revenues less expenses increased during the firstquarter of 2007 as compared to the first quarter of 2006 primarily due to salesfacilitated by the SPP Energy Imbalance Services (EIS) market that began onFebruary 1, 2007. Sales from this market contributed $1.9 million to ouroff-system electric revenues in the first quarter of 2007 with $1.0 million ofrelated expense. Totalpurchase power related expenses are included in our discussion ofpurchased power costs below.

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**OperatingRevenue Deductions**

During the first quarter of 2007, total electricsegment operating expenses increased approximately $14.4 million (19.5%)compared with the same period last year. Total fuel costs increasedapproximately $4.3 million (20.8%) while purchased power costs increasedapproximately $0.3 million (1.5%) during the first quarter of 2007. Theincrease in fuel costs was primarily due to increased generation by our gasfired units in the first quarter of 2007 (an estimated $7.4 million) partiallyoffset by lower prices for both the hedged and unhedged natural gas that weburned in our gas-fired units (an estimated $4.0 million). Increased coal costs contributedapproximately $1.1 million to total fuel costs in the first quarter of 2007partially offset by decreased coal generation (approximately $0.2 million). Thenet increase in fuel and purchased power during the first quarter of 2007 ascompared to the same period last year was $4.6 million (11.4%).

Regulated – otheroperating expenses for our electric segment increased approximately $1.6million (12.5%) during the first quarter of 2007 as compared to the same periodin 2006 primarily due to a $0.8 million increase in expenses relating to ouremployee pension expense, a $0.4 million increase in uncollectible accounts, a$0.3 million increase in labor and other costs and small increases in othervarious expenses. These increases were partially offset by a $0.3 milliondecrease in employee health care expense. The increase in pension costs is primarilydue to the effects of regulatory accounting. Employee health care costs alsoincreased due to regulatory accounting but were offset by lower actuarial costsand lower active health care expenses. We defer or record pension and other postretirement benefit costs(other than EDG otherpostretirement benefit costs) if they are more or less, respectively, thanthose allowed in rates for the Missouri and Kansas portion of pension costs.

Maintenanceand repairs expense increased approximately $5.2 million (99.7%) as compared tothe first quarter of 2006 primarily due to a $5.5 million increase indistribution maintenance costs and a $0.6 million increase in maintenance andrepairs expense at the Iatan plant related to the 2007 first quarter plannedmaintenance and turbine inspection. The increase in distribution costs reflects$4.4 million related to the January 2007 ice storm. Another $1.2 millionof non-incremental tree trimming and labor maintenance cost was incurredon the ice storm that otherwise would have been spent on other projects. Theseincreases were partially offset by a $0.8 million decrease in maintenance andrepairs expense at the Asbury plant as compared to the first quarter of 2006when the Asbury plant had an unscheduled outage due to a blade failure and a$0.1 million decrease in maintenance and repairs expense for our State LineCombined Cycle (SLCC) plant.

Depreciation andamortization expense increased approximately $3.0 million (33.6%) duringthe quarter mainly due to $2.6 million of additional depreciation related tothe January 2007 Missouri rate order. Other taxes increased approximately $0.5million during the first quarter of 2007 due to increased property taxreflecting our additions to plant in service and increased municipal franchisetaxes.

***TwelveMonths Ended March 31, 2007 Compared to Twelve Months Ended March 31, 2006***

**OperatingRevenues and Kilowatt-Hour Sales**

For the twelve months ended March 31, 2007, kWh salesto our on-system customersincreased 4.4% with the associated revenues increasing approximately$26.7 million (7.6%). The January 2007 Missouri rate increase, May 2005Arkansas rate increase and January 2006 Kansas rate increase, as well as theIEC from the March 2005 Missouri rate increase, contributed an estimated $13.9 million to revenues while continuedsales growth contributed an estimated $11.6 million. Weather and other relatedfactors, including the effect of the January 2007 ice storm, had an estimated$4.7 million negative effect. Additionally, a revision to our estimate ofunbilled revenues 

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in the third quarter of 2006 contributed $5.9 million to revenuesduring the twelve months ended March 31, 2007. Residential andcommercial kWh sales and associated revenues increased primarily due to the strong sales growth andthe increase from our revisions to our estimate of unbilled revenues while theassociated revenues also increased due to the Missouri, Arkansas and Kansasrate increases. Industrial kWh sales and revenues increased for thetwelve months ended March 31, 2007 reflectingthe increased sales growth and the aforementioned rate increases. On-systemwholesale kWh sales increased reflecting the continued sales growth discussedabove. Revenues associated with these FERC-regulated sales increased less thanthe kWh sales as a result of the fuel adjustment clause applicable to suchsales.

**Off-SystemElectric Transactions**

In addition to sales to our own customers, we also sell power to otherutilities as available and provide transmission service through our system fortransactions between other energy suppliers. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended March 31:
|                   | ** ** | **2007**               | ** ** | **2006**               | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|
| ** **        | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| **(in millions)** | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| Revenues          |       | $                      | 16.2       |                   | $          | 14.9 |   |
| Expenses          |       | 11.4                   |       | 11.0                   |       |
| Net*              |       | $                      | 4.8        |                   | $          | 4.0 |   |

 

----

**Differencescould occur due to rounding.*

Revenues less expenses increased during the twelvemonths ended March 31, 2007 as compared to the same period in 2006 primarilydue to sales facilitated by the SPP EIS market that began on February 1, 2007.Sales from this market contributed $1.9 million to our off-system electricrevenues for the twelve months ended March 31, 2007 with $1.0 million ofrelated expense. Totalpurchase power related expenses are included in our discussion ofpurchased power costs below.

**OperatingRevenue Deductions**

During the twelve months ended March 31, 2007, totalelectric segment operating expenses increased approximately $16.5 million(5.3%) compared to the year ago period. Total fuel costs decreasedapproximately $12.6 million (11.4%) during the twelve months ended March 31,2007 and purchased power costs increased $6.1 million (10.1%) during the sameperiod. The increase inpurchased power costs primarily reflected our increased purchases from the ElkRiver Windfarm, LLC. The decrease in fuel costs was primarily due todecreased generation by our gas-fired units (an estimated $13.2 million) andlower prices for both the hedged and unhedged natural gas that we burned in ourgas-fired units (an estimated $2.6 million). A decrease in fuel oil generation also decreased fuel costsapproximately $2.0 million. These decreased costs were partially offsetby increased coal costs ofapproximately $4.0 million and increased coal generation (approximately $1.7million). The net decrease in fuel and purchased power during the twelvemonths ended March 31, 2007 as compared to the same period last year was $6.5million (3.8%).

Regulated – otheroperating expenses increased approximately $2.9 million (5.5%) during thetwelve months ended March 31, 2007 as compared to the same period last year dueprimarily to a $1.6 million increase in employee pension expense, a $0.6million increase in uncollectible accounts, a $0.6 million increase inprofessional services, a $0.5 million increase in customer assistance expense,a $0.5 million increase in labor costs and a $0.1 million increase intransmission and 

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distributionexpense. These increases were partially offset by a $1.1 million decrease inemployee health care expense.

Maintenance and repairs expense increasedapproximately $6.0 million (28.1%) during the twelve months ended March 31,2007, compared to the year ago period reflecting increases of approximately$6.9 million in distribution maintenance costs, including $4.4 million (and the $1.2 million non-incrementaltree trimming and labor costs in the first quarter of 2007) related to theJanuary 2007 ice storm, $1.1 million in maintenance and repairs expense for our SLCC plantrelated to the spring 2006 maintenance outage, a $0.8 million increase inmaintenance and repairs expense at the Iatan plant related to the 2007 firstquarter inspection and a $0.4 million increase in maintenance and repairs atour State Line Unit 1 plant, which had its first major inspection fromSeptember 7, 2006 until December 20, 2006. These increases were partiallyoffset by a $1.7 million decrease in maintenance and repairs expense at theAsbury plant during the twelve months ended March 31, 2007 as compared to thesame period in 2006 when the Asbury plant had an unscheduled outage due to ablade failure, a $0.7 million decrease in maintenance and repairs expense atour Riverton plant and a $0.4 million decrease at our Energy Center plant.

Depreciation andamortization expense increased approximately $4.1 million (11.7%) mainlydue to $2.6 million of additional depreciation related to the January 2007Missouri rate order as well asincreased plant in service. Other taxes increased approximately $0.7million due to increased property taxes reflecting our additions to plant inservice and increased municipal franchise taxes.

***Gas Segment***

**Gas Segment Operating Revenuesand Sales**

During the first quarter of2007, our total natural gas revenues were approximately $27.6 million. For the10 months ended (June 1, 2006 – March 31, 2007), our total natural gas revenueswere approximately $52.7 million. The winter months are high sales months forthe natural gas business, whose heating season runs from November to March ofeach year.

The following table details our natural gas sales and revenues for theperiods ended March 31, 2007:
|                            | ** ** | **Total gas delivered to customers - mcf Sales** | ** ** |
|----------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                                                            | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **First Quarter**                                                              | ** ** | **10 Months Ended*** | ** ** |
| Residential                |       | 1,368,955.0                                                                         |       | 2,470,474.8 |   |
| Commercial                 |       | 579,214.9                                                                           |       | 1,138,327.2 |   |
| Industrial                 |       | 17,907.1                                                                            |       | 49,966.5 |   |
| Public  authorities        |       | 15,651.8                                                                            |       | 27,318.2 |   |
| Total retail  sales        |       | 1,981,728.8                                                                         |       | 3,686,086.7 |   |
| Transportation  sales      |       | 1,350,675.0                                                                         |       | 3,577,018.8 |   |
| Total gas operating  sales |       | 3,332,403.8                                                                         |       | 7,263,105.5 |   |

 

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**mcfsales represent the months of June 2006 through March 2007.*
|                               | ** ** | **Operating Revenues ($ in millions)** | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                                   | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **First Quarter**                                     | ** ** | **10 Months Ended*** | ** ** |
| Residential                   |       | $                                                          | 18.6       |   | $ | 34.6 |   |
| Commercial                    |       | 7.5                                                        |       | 14.6 |   |
| Industrial                    |       | 0.2                                                        |       | 0.5 |   |
| Public  authorities           |       | 0.2                                                        |       | 0.4 |   |
| Total retail  sales revenues  |       | $                                                          | 26.5       |   | $ | 50.1 |   |
| Transportation  revenues      |       | 1.0                                                        |       | 2.5 |   |
| Total gas operating  revenues |       | $                                                          | 27.5       |   | $ | 52.6 |   |

 

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**Revenuesrepresent the months of June 2006 through March 2007 and exclude forfeiteddiscounts, reconnect fees, miscellaneous service revenues, etc.*

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**GasSegment Operating Revenue Deductions**

During the first quarter of2007, EDG’s cost of natural gas sold and transported was approximately $18.7million. For the ten months ended June 2006 through March 2007, EDG’s cost ofnatural gas sold and transported was approximately $34.0 million. The cost ofnatural gas tends to vary with changing sales requirements and unit cost ofnatural gas purchases. However, due to purchased natural gas cost recoverymechanisms for retail customers, fluctuations in the cost of natural gas havelittle effect on income. Our Purchased Gas Adjustment (PGA) Clause allows us torecover from our customers, subject to routine regulatory review, the cost ofpurchased gas supplies, including costs, cost reductions, and related carryingcosts associated with the use of financial instruments to hedge the purchaseprice of natural gas.

Total other operatingexpenses were $2.9 million for the first quarter of 2007 and $8.8 million forthe ten months ended June 2006 through March 2007. EDG had net income of $1.7million for the first quarter of 2007 and $0.7 million for the ten months endedJune 2006 through March 2007. Approximately $1.2 million in transition costswere paid to Aquila, Inc. in 2006 for billing and other transition services.These non-recurring costs ended when all services were transitioned by November1, 2006.

***Other Segment***

Our other segment includes leasing of fiberoptics cable and equipment (which we are also using in our own utilityoperations) and Internet access. The following table represents our results ofcontinuing operations for our remaining non-regulated businesses for theapplicable periods ended March 31,:
|                                                | ** ** | **Three Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| **(in millions)**                         | ** ** | **2007**                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                       |       | $                                | 1.1        |                              | $          | 1.0 |   | $ | 4.3 |   | $ | 3.9 |   |
| Expenses                                       |       | 1.1                              |       | 1.0                               |       | 4.4 |   | 3.9 |   |
| Net income (loss) from  continuing operations* |       | $                                | 0.0        |                              | $          | 0.0 |   | $ | (0.1 | ) | $ | 0.0 |   |

 

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**Differencescould occur due to rounding.*

***Consolidated Company***

**IncomeTaxes**

Ourconsolidated provision for income taxes increased approximately $0.5 millionduring the first quarter of 2007 as compared to the same period in 2006. Thisresulted from higher income, but was offset by our reduced tax rate. Ourconsolidated effective federal and state income tax rate for the first quarterof 2007 was 26.5% as compared to 34.5% for the first quarter of 2006. Thereduced effective rate is primarily caused by an adjustment to our estimate ofMedicare Part D benefits, which reduced our first quarter provisionapproximately $0.5 million. An increase in equity AFUDC, which is discussedbelow, is a non-taxable benefit which reduced our effective tax rate for thefirst quarter as well.

Ourconsolidated provision for income taxes increased approximately $8.8 millionduring the twelve months ended March 31, 2007 as compared to twelve monthsended March 31, 2006. Our effective federal and state income tax ratefor the twelve months ended March 31, 2007 was 34.0% as compared to 33.4% forthe same period in 2006.

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**NonoperatingItems**

Total allowance for funds used duringconstruction (AFUDC) increased $1.6 million in the first quarter of 2007 ascompared to 2006 and increased $4.8 million during the twelve months endedMarch 31, 2007 as compared to the same period in 2006 due to higher levels ofconstruction in each period.

Total interest charges on long-term debt increased $1.0 million (16.9%)in the first quarter of 2007 as compared to 2006 and increased $3.2 million(13.5%) for the twelve months ended March 31, 2007 as compared to the prioryear period, reflecting interest on the first mortgage bonds issued June 1,2006 by EDG to fund a portion of our acquisition of the Missouri natural gasdistribution operations from Aquila, Inc. Short-term debt interest increased$0.7 million in the first quarter of 2007 as compared to 2006 and increased$2.4 million for the twelve months ended March 31, 2007 as compared to theprior year period, reflecting increased usage of short-term debt in eachperiod.

Losses from discontinued operations were approximately $0.5 million forthe quarter ended March 31, 2006 and $0.1 million and $1.1 million in thetwelve month periods ended March 31, 2007 and 2006, respectively, whichincluded operations and gains recognized from the sales of MAPP and Conversant.

**OtherComprehensive Income**

The change in the fair value of the effectiveportion of our open gas contracts for our electric business and our interestrate derivative contracts and the gains and losses on contracts settled duringthe periods being reported, including the tax effect of these items, arereflected in our Consolidated Statement of Comprehensive Income. This netchange is recorded as accumulated other comprehensive income in thecapitalization section of our balance sheet and does not affect net income orearnings per share. All of these contracts have been designated as cash flow hedges.The unrealized gains and losses accumulated in other comprehensive income arereclassified to fuel, or interest expense, in the periods in which the hedgedtransaction is actually realized or no longer qualifies for hedge accounting.

The following table sets forth the pre-taxactivity of our natural gas contracts and interest rate contracts for ourelectric segment that have settled and been reclassified, the pre-tax change inthe fair market value (FMV) of our open contracts and the tax effect in OtherComprehensive Income for the presented periods ended March 31 (in millions):
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Twelve Months Ended** | ** ** |       |
|-----------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------|
| ** **                                          | ** ** | **2007**                         | ** ** | **2006**                          | ** ** | **2007**   | ** ** | **2006** | ** ** |
| Natural gas  contracts settled *(1)*                |       | $                                | 0.2        |                              | $          | (0.9       | ) | $ | (0.2 | ) | $ | (5.3 | ) |   |
| Interest rate  contracts settled                    | ** ** | **—**                       | ** ** | **—**                        |       | 0.0        |   | 1.4 |   |   |
| Total  contracts settled                            |       | $                                | 0.2        |                              | $          | (0.9       | ) | $ | (0.2 | ) | $ | (3.9 | ) |   |
| Change in FMV of  open contracts for natural gas    |       | $                                | 2.9        |                              | $          | (6.0       | ) | $ | (4.7 | ) | $ | 11.1 |   |   |
| Change in FMV of  open contracts for interest rates | ** ** | **—**                       | ** ** | **—**                        | ** ** | **—** |   | (1.4 | ) |   |
| Total change in FMV of open contracts               |       | $                                | 2.9        |                              | $          | (6.0       | ) | $ | (4.7 | ) | $ | 9.7 |   |   |
| Taxes                                               | ** ** | $                                | (1.2       | )                                 | $          | 2.6        |   | $ | 1.9 |   | $ | (2.2 | ) |   |
| Total change in OCI –  net of tax              |       | $                                | 1.9        |                              | $          | (4.3       | ) | $ | (3.0 | ) | $ | 3.6 |   |   |
|                                                     |            |                                  |            |                                   |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*(1) Reflected in fuel expense*

Our average cost for our open financialnatural gas hedges increased from $4.805/Dth at December 31, 2006 to $5.355/Dthat March 31, 2007.

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**RATE MATTERS**

We continually assess the need for raterelief in all of the jurisdictions we serve and file for such relief whennecessary.

***Electric Segment***

The following table sets forth informationregarding electric and water rate increases since January 1, 2004:
| ** **           | ** ** | ** **       | ** ** | **Annual**   | ** ** | **Percent**  | ** ** | ** **       | ** **      |
|----------------------|------------|------------------|------------|--------------|------------|--------------|------------|------------------|-----------------|
| ** **           | ** ** | **Date**         | ** ** | **Increase** | ** ** | **Increase** | ** ** | **Date**         | ** **      |
| **Jurisdiction**     | ** ** | **Requested**    | ** ** | **Granted**  | ** ** | **Granted**  | ** ** | **Effective**    | ** **      |
| Missouri -  Electric |       | February 1, 2006 |       | $            | 29,369,397 |         | 9.96       | %                | January 1, 2007 |   |
| Missouri - Water     |       | June 24, 2005    |       | 469,000      |       | 35.90        | %          | February 4, 2006 |            |
| Kansas -  Electric   |       | April 29, 2005   |       | 2,150,000    |       | 12.67        | %          | January 4, 2006  |            |
| Arkansas -  Electric |       | July 14, 2004    |       | 595,000      |       | 7.66         | %          | May 14, 2005     |            |
| Missouri - Electric  |       | April 30, 2004   |       | 25,705,500   |       | 9.96         | %          | March 27, 2005   |            |
|                      |            |                  |            |              |            |              |            |                  |                 |  |

 

*Missouri*

As a result of the request we filed with theMPSC on April 30, 2004 for an annual increase in base rates for our Missourielectric customers in the amount of $38,282,294, or 14.82%, the MPSC issued afinal order on March 10, 2005 approving an annual increase in base rates ofapproximately $25,705,500, or 9.96%, effective March 27, 2005. The ordergranted us a return on equity of 11%, an increase in base rates for fuel andpurchased power at $24.68/MWH and an increase in depreciation rates. The newdepreciation rates included a cost of removal component of mass property(transmission, distribution and general plant costs). In addition, the orderapproved an annual IEC of approximately $8.2 million effective March 27, 2005and expiring three years later. The IEC was $0.002131 per kilowatt hour ofcustomer usage. The MPSC allowed us to use forecasted fuel costs rather thanthe traditional historical costs in determining the fuel portion of the rateincrease. At the end of two years, an assessment would be made of the moneycollected from customers compared to the greater of the actual and prudentlyincurred costs or the base cost of fuel and purchased power set in rates. Ifthe excess of the amount collected over the greater of these two amounts wasgreater than $10 million, the excess over $10 million would be refunded to thecustomers. The entire excess amount of IEC, not previously refunded, would berefunded at the end of three years, unless the IEC was terminated earlier. Eachrefund was to include interest at the current prime rate at the time of therefund. The IEC revenues recorded since the inception of the IEC did notrecover all the Missouri related fuel and purchased power costs incurred duringthat period. From inception of the IEC through December 31, 2006, the costs offuel and purchased power were approximately $22.3 million higher than the totalof the costs in our base rates and the IEC recorded during the period,therefore, no provision for refund was recorded.

On February 1, 2006, we filed a request with the MPSC for an annualincrease in base rates for our Missouri electric customers in the amount of$29,513,713, or 9.63%. We also requested transition from the IEC to Missouri’snew fuel adjustment mechanism. The MPSC issued an order May 2, 2006, however,ruling that we may have the option of requesting that the IEC be terminated,but we may not request the implementation of an energy cost recovery mechanismwhile the current IEC is effective. The MPSC issued an order on December 21,2006 granting us an annual increase of $29,369,397 (including regulatoryamortization), or 9.96%, with an effective date of January 1, 2007 andeliminating the IEC. Pursuant to this order, the collected IEC will not be refunded.The increase

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includedan authorized return on equity of 10.9% and included our fuel and energy costsas a component of base electric rates. Of the increase, approximately $19million was granted in the form of base rates, with the remainder ofapproximately $10.4 million granted as regulatory amortization to provideadditional cash flow to enhance the financial support for our currentgeneration expansion plan. This regulatory amortization is related to ourinvestment in Iatan 2 and also includes our Riverton V84.3A2 combustion turbine(Unit 12) and the environmental improvements and upgrades at Asbury andIatan 1. This order also allowed deferral of any other postretirementbenefits that are different fromthose allowed recovery in this rate case. This treatment is similar totreatment afforded pension costs in our March 2005 rate case. This order alsoapproved regulatory treatment of additional liabilities arising from theadoption of FAS 158. We also agreed to write off $1 million of the cost of ourEnergy Center 2 construction project. The Missouri jurisdictional portion ofthis agreement resulted in a pre tax write off of $0.8 million in the fourthquarter of 2006.

On December 29, 2006, the Office of Public Counsel (OPC) andintervenors Praxair, Inc. and Explorer Pipeline Company, filed an applicationwith the MPSC requesting the MPSC grant a rehearing on most of the issuesaddressed in the December 2006 Missouri rate case order and many of theprocedural issues. On December 29, 2006, we also filed an application with theMPSC requesting a rehearing on return on equity, capital structure and energycost recovery. A decision by the MPSC is pending.

Praxair and Explorer Pipeline filed a Petition for Writ of Review withthe Cole County Circuit Court on January 31, 2007. The Circuit Court issued aWrit, but the MPSC has moved to have the Writ set aside and the case dismissed.The MPSC’s motion to set aside the Writ is still pending. On March 20, 2007,Praxair and Explorer filed a motion in the Circuit Court writ proceeding requestingan immediate stay of the effectiveness of the December 2006 Missouri rate caseorder and the tariffs filed pursuant thereto. The stay motion remains pendingbefore the Circuit Court.

On January 4, 2007, the OPC filed a Petition for Writ of Mandamus withthe Missouri Court of Appeals, Western District. We filed suggestions inopposition to the Petition, as did the MPSC. On March 12, 2007, the Court ofAppeals, Western District issued an order denying the OPC’s petition. On March19, 2007, the OPC filed a Petition for Writ of Mandamus with the MissouriSupreme Court seeking to have the tariffs filed by us and approved by the MPSCset aside. On May 1, 2007, the Missouri Supreme Court issued a preliminary writdirecting the MPSC to respond to the OPC’s petition. The MPSC has until May 31,2007 to file its response demonstrating that the Court should not issue a writof mandamus as requested by the OPC. We will also file a response within thattime.

*Kansas*

On April 29, 2005, we filed a request withthe Kansas Corporation Commission (KCC) for an increase in base rates for ourKansas electric customers in the amount of $4,181,078, or 24.64%. On October 4,2005, we and the KCC Staff filed a Motion to Approve Joint StipulatedSettlement Agreement (Agreement) with the KCC. The Agreement called for anannual increase in base rates (which includes historical fuel costs) for ourKansas electric customers of approximately $2,150,000, or 12.67%, theimplementation of an Energy Cost Adjustment Clause (ECA), a fuel rider thatwill collect or refund fuel costs in the future that are above or below thefuel costs included in the base rates and the adoption of the same depreciationrates approved by the MPSC in our 2005 Missouri rate case. In addition, we willbe allowed to change our recognition of pension costs, deferring the Kansasportion of any costs above or below the amount included in this rate case as aregulatory asset or liability. The KCC approved the Agreement on December 9,2005 with an effective date of January 4, 2006. Pursuant to the Agreement, wewere to seek KCC approval of an explicit hedging

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program in a separate docket by March 1, 2006. However, we requestedand received an extension until April 1, 2006. We made this filing on March 30,2006 and are awaiting a response from the KCC.

***Gas Segment***

On June 1, 2006, The EmpireDistrict Gas Company acquired the Missouri natural gas distribution operationsof Aquila, Inc. (Missouri Gas). The Missouri Gas properties consist of 44Missouri communities in northwest, north central and west central Missouri. Therates, excluding the cost of gas, are the same as had been in effect at Aquila,Inc. We agreed in the unanimous stipulation and agreement filed with the MPSCon March 1, 2006 and approved on April 18, 2006, to not file a rate increaserequest for non-gas costs for a period of 36 months following the closing dateof the acquisition. We have also agreed to use Aquila Inc.’s currentdepreciation rates and were allowed to adopt the pension cost recovery methodologyapproved in our electric Missouri Rate Case effective March 27, 2005.

A PGA clause is includedin our gas rates which allows for the over recovery or under recovery of actualgas costs compared to the cost of gas in the PGA rate.  This PGA clause allows us to make ratechanges periodically (up to four times) throughout the year in response toweather conditions, natural gas prices and supply demands, rather than in onepossibly extreme change per year. The Actual Cost Adjustment (ACA) is ascheduled yearly filing with the MPSC filed between October 15 and November 4each year. This filing establishes the amount to be recovered from customersfor the over/under recovered yearly amounts. A PGA is included in the ACAfiling. An optional PGA filing without the ACA can be filed up to three timeseach year, provided a filing does not occur within 60 days of a previousfiling. Our last ACA filing was completed on November 3, 2006.

**COMPETITION**

**Electric Segment**

*SPP-RTO*

FERC Order No. 2000 requires regional transmissionorganizations (RTOs), to provide real-time energy imbalance services and amarket-based mechanism for congestion management. The start of the SPP RTOenergy imbalance services market (EIS) was delayed several times in 2006 due tothe lack of SPP and market participant readiness. The SPP RTO finalized itsinitial market rules and readiness for implementation and certified itsreadiness to FERC on December 22, 2006. Additional EIS related filings at theFERC were made by the SPP RTO. On February 1, 2007, the SPP RTO launched itsEIS market. With the implementation of the SPP RTO EIS market and transmissionexpansion plans of the SPP RTO, we anticipate that our continued participationin the SPP will provide long-term benefits to our customers and other stakeholders.Although our experience to date in the EIS market is limited, it appears thatwe are realizing some modest savings. However, we are still unable to quantifythe impact of such EIS participation on our future financial position, resultsof operation or cash flows at this time.

In general, the SPP RTO EIS market is expected to provide economicalreal time energy for participating members within the SPP regional footprint.Imbalance energy prices will be based on market bids and status/availability ofdispatchable generation and transmission within the SPP market footprint. Inaddition to energy imbalance service, the SPP RTO will perform a real timesecurity-constrained economic dispatch of all generation voluntarily offeredinto the EIS market to the market participants to also serve the native load.

Wewill continue to actively engage with the SPP RTO, other members of the SPP andstaffs of our state commissions to evaluate the impact/value of EIS marketparticipation.

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*FERC Market Power Order*

In April and July 2004, FERC issued orders regarding new testingstandards for assessing market power by entities that have wholesalemarket-based rate tariffs filed with the FERC. The parameters included in thetests are such that most investor owned electric utilities fail the test withintheir own control area and are subject to a rebuttable presumption of marketpower. Entities with wholesale market based rates tariffs are subject to atriennial filing to test for market power and are required to apply the newtesting criteria. FERC determination of market power would result in theinability for a utility to continue to charge such market-based rates. InSeptember 2004, we submitted amended and updated market power analyses filings.

On March 3, 2005, the FERC issued an order commencing an investigationto determine if we had market power within our control area based on ourfailure to meet one of FERC’s wholesale market share screens. We filedresponses to that order in May and June 2005 and in early January 2006. OnAugust 15, 2006, the FERC issued its order accepting Empire’s proposedmitigation to become effective May 16, 2005, subject to a further compliancefiling as directed in the order. Relying on a series of orders issued sinceMarch 17, 2006 in other proceedings, the FERC rejected our tariff language anddirected us to file revisions to our market-based tariff to provide thatservice under the tariff applies only to sales outside our control area. TheFERC directed us to make refunds, with interest, by September 15, 2006, whichcould amount to approximately $0.6 million (excluding interest) covering over athousand hourly energy sales over the past 18 months to numerous counterpartiesexternal to our system. In response to the order, we filed a Motion ForExtension of time and expedited treatment regarding the refund and requestedthat such refund be delayed until 15 days after the FERC’s order on ourrehearing request. On September 5, 2006, the FERC granted the Motion ForExtension, as requested.

On September 14, 2006, we filed a Request For Rehearing of FERC’sAugust 15 order regarding the refund and market power mitigation we hadproposed. We requested a rehearing and a waiver of the refund requirement inits entirety. At this time, we cannot predict the outcome of these proceedings.

**Gas Segment**

Non-residential gas customers whoseannual usage exceeds certain amounts may purchase natural gas from a sourceother than EDG. EDG does not have a non-regulated energy marketing service thatsells natural gas in competition with outside sources. EDG continues to receivenon-gas related revenues for distribution and other services if natural gas ispurchased from another source by our eligible customers.

**LIQUIDITY AND CAPITAL RESOURCES**

Our primary sources of cash flow during the first quarter of 2007 were$25.5 million in internally generated funds and $79.8 million in gross proceedsfrom first mortgage bonds. Our primary uses of cash during the first quarter of2007 were $48.9 million in capital expenditures, $37.3 million in repayment ofshort-term debt and $9.7 million in dividend payments.

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**CashProvided by Operating Activities**

Our net cash flows provided by continuing operating activitiesincreased $18.1 million during the first quarter of 2007 as compared to thefirst quarter of 2006. Net income increased $2.9 million, with another $4.8million of positive impact from the effect of adjustments to net income toreconcile to cash flows (primarily the effect of increased depreciation). Adecrease in change in accounts payable and accrued liabilities was also aprimary driver adding a $15.2 million positive cash flow effect. In the firstquarter of 2006, approximately $10.5 million in accounts payable balances(primarily electric fuel) were paid. However, in the first quarter 2007,accounts payable balances grew by $4.4 million from December 31, 2006,primarily due to the payables for fuel. Cash flows were also positivelyimpacted by changes in fuel, material and supplies and customer deposits,interest and taxes. Cash flows were negatively impacted by a smaller change inaccounts receivable and unbilled revenues this year versus last year. Thenegative cash flow impact of $3.7 million for prepaid expenses, other currentassets and deferred charges includes the effect of $6.5 million in cashexpenditures for the ice storm that have been deferred as a regulatory asset.

**CapitalRequirements and Investing Activities**

Our net cash flows used in investing activities increased $18.3 millionduring the first quarter of 2007 as compared to the first quarter of 2006,primarily reflecting the ice storm and construction expenditures for Plum PointUnit 1 and Iatan 2.

Our capital expenditurestotaled approximately $48.9 million during the first quarter of 2007 comparedto approximately $28.0 million for the same period in 2006. These capitalexpenditures include AFUDC, capital expenditures to retire assets and benefitsfrom salvage.

A breakdown of the capitalexpenditures for the quarter ended March 31, 2007 is as follows:
| (in millions)                                                   | ** ** | **Capital Expenditures** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|
| Distribution and  transmission system additions                      |       | $                             | 7.2        |   |
| New Generation –  Riverton combustion turbine                   |       | 1.6                           |       |
| New Generation –  Plum Point Energy Station                     |       | 6.3                           |       |
| New Generation –  Iatan 2                                       |       | 10.3                          |       |
| Storms*                                                              |       | 16.9                          |       |
| Additions and  replacements – Asbury                            |       | 2.6                           |       |
| Additions and  replacements – Riverton, Iatan 1 and Ozark Beach |       | 1.8                           |       |
| Additions and  replacements - State Line Combined Cycle Unit         |       | 0.1                           |       |
| Additions and  replacements – State Line Unit 1                 |       | 0.1                           |       |
| Gas segment additions  and replacements                              |       | 0.2                           |       |
| Other (including  retirements and salvage -net)*                     |       | 1.1                           |       |
| Subtotal                                                             |       | $                             | 48.2       |   |
| Non-regulated  capital expenditures (primarily fiber optics)         |       | 0.7                           |       |
| TOTAL                                                                |       | $                             | 48.9       |   |

 

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*Stormsof $16.9 million and Other of $1.1 million, which relates to the cost ofremoval, are specifically related to capital expenditures associated with theJanuary 2007 ice storm.

Approximately 32% of our cash requirements for capital expendituresduring the first quarter of 2007 were satisfied internally from operations(funds provided by operating activities less dividends paid). We currentlyexpect that internally generated funds will provide approximately 33% of thefunds required for the remainder of our budgeted 2007 capital expenditures. Weintend to utilize a combination of short-term debt, the proceeds of sales oflong-term debt and/or common stock (including common stock sold under ourEmployee Stock Purchase Plan, our Dividend

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Reinvestmentand Stock Purchase Plan, and our 401(k) Plan and ESOP) to finance additionalamounts needed beyond those provided by operating activities for such capitalexpenditures. We will continue to utilize short-term debt as needed to supportnormal operations or other temporary requirements. For further information seeNote 7 of “Notes to Consolidated Financial Statements (Unaudited).”

We had estimated that our 2007 capital expenditures would totalapproximately $171.0 million (including AFUDC). However, due to the $18.0million of ice storm costs capitalized as additions to our utility plant in thefirst quarter of 2007, we now estimate our 2007 capital expenditures to beapproximately $189.0 million.

As of April 10, 2007, our new Siemens V84.3A2 combustion turbine, Unit12 at our Riverton plant, began commercial operation. Riverton Unit 12 willhave a summer rated capacity of approximately 148 megawatts, increasing ourRiverton Plant’s total generating capacity to 284 megawatts.

**FinancingActivities**

Our net cash flows used in financing activities increased $25.7 millionduring the first quarter of 2007 as compared to the first quarter of 2006resulting in a $33.1 million provision of cash in the current year. Our netcash flows used in financing activities were primarily affected by the $80million principal amount of first mortgage bonds issued March 26, 2007. The netproceeds of $79.1 million, less $0.2 million of legal and other financing fees,were added to our general funds and used to pay down short-term indebtednessincurred as a result of our on-going construction program.

We have an effective shelfregistration statement with the SEC under which approximately $243.2 million ofour common stock, unsecured debt securities, preference stock and firstmortgage bonds remain available for issuance. Of this amount, $120 million remainsavailable of the original $200 million approved by the MPSC as available forfirst mortgage bonds. We plan to use a portion of the proceeds from issuancesunder this shelf to fund a portion of the capital expenditures for our newgeneration projects.

On July 15, 2005, we entered into a $150 million unsecured revolvingcredit facility until July 15, 2010. Borrowings (other than through commercialpaper) are at the bank’s prime commercial rate or LIBOR plus 100 basis pointsbased on our current credit ratings and the pricing schedule in the line ofcredit facility. On March 14, 2006, we entered into the First Amended andRestated Unsecured Credit Agreement which amends and restates the $150 millionunsecured revolving credit facility. The principal amount of the creditfacility was increased to $226 million, with the additional $76 millionallocated to support a letter of credit issued in connection with ourparticipation in the Plum Point Energy Station project. This extra $76 millionof availability reduces over a four year period in line with the amount ofconstruction expenditures we owe for Plum Point Unit 1 and was $61.5 million asof April 1, 2007. The unallocated credit facility is used for working capital,general corporate purposes and to back-up our use of commercial paper. Thisfacility requires our total indebtedness (which does not include our notepayable to the securitization trust) to be less than 62.5% of our totalcapitalization at the end of each fiscal quarter and our EBITDA (defined as netincome plus interest, taxes, depreciation and amortization) to be at least twotimes our interest charges (which includes interest on the note payable to thesecuritization trust) for the trailing four fiscal quarters at the end of eachfiscal quarter. Failure to maintain these ratios will result in an event ofdefault under the credit facility and will prohibit us from borrowing fundsthereunder. As of March 31, 2007, we are in compliance with these ratios. Thiscredit facility is also subject to cross-default if we default on in excess of$10 million in the aggregate on our other indebtedness. This arrangement doesnot serve to legally restrict the use of our cash in the normal course ofoperations. There were no outstanding borrowings under this agreement at March31, 2007,

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however,$39.8 million of the availability thereunder was used at such date to back upour outstanding commercial paper.

Restrictions in the EDE mortgage bond indenture could affect ourliquidity. The EDE Mortgage contains a requirement that for new first mortgagebonds to be issued, our net earnings (as defined in the EDE Mortgage) for anytwelve consecutive months within the fifteen months preceding issuance must betwo times the annual interest requirements (as defined in the EDE Mortgage) onall first mortgage bonds then outstanding and on the prospective issue of newfirst mortgage bonds. Our earnings for the twelve months ended March 31, 2007would permit us to issue approximately $375.4 million of new first mortgagebonds based on this test with an assumed interest rate of 6.5%. In addition tothe interest coverage requirement, the EDE Mortgage provides that new bondsmust be issued against, among other things, retired bonds or 60% of netproperty additions. At March 31, 2007, we had retired bonds and net propertyadditions which would enable the issuance of at least $503.7 million principalamount of bonds if the annual interest requirements are met. As of March 31,2007, we are in compliance with all restrictive covenants of the EDE Mortgage.

The EDG Mortgage contains a requirement that for new first mortgagebonds to be issued, the amount of such new first mortgage bonds shall notexceed 75% of the cost of property additions acquired after the date of theMissouri Gas acquisition. At March 31, 2007, we had property additions of $0.9million. The mortgage also contains a limitation on the issuance by EDG of debt(including first mortgage bonds, but excluding short-term debt incurred in theordinary course under working capital facilities) unless, after giving effectto such issuance, EDG’s ratio of EBITDA (defined as net income plus interest,taxes, depreciation, amortization and certain other non-cash charges) tointerest charges for the most recent four fiscal quarters is at least 2.0 to 1.As of March 31, 2007, this test would not allow us to issue any new firstmortgage bonds as the gas segment has not been operational for a full year.Additionally, the transition service costs, although expected, negativelyimpact the coverage ratio.

As of March 31, 2007, our corporate credit ratings and the ratings forour securities were as follows:
|                                                  | ** ** | **Fitch** | ** ** | **Moody’s** | ** ** | **Standard & Poor’s** |
|--------------------------------------------------|------------|-----------|------------|------------------|------------|--------------------------------|
| Corporate Credit  Rating                         |       | n/r       |       | Baa2             |       | BBB-                           |
| First Mortgage  Bonds                            |       | BBB+      |       | Baa1             |       | BBB+                           |
| First Mortgage  Bonds - Pollution Control Series |       | AAA       |       | Aaa              |       | AAA                            |
| Senior Notes                                     |       | BBB       |       | Baa2             |       | BB+                            |
| Trust Preferred  Securities                      |       | BBB-      |       | Baa3             |       | BB                             |
| Commercial Paper                                 |       | F2        |       | P-2              |       | A-3                            |
| Outlook                                          |       | Stable    |       | Negative         |       | Stable                         |

 

On September 22, 2005, Standard & Poor’s (S&P), reflecting ourannouncement of our proposed acquisition of Aquila, Inc.’s Missouri natural gasproperties, placed our corporate credit rating on credit watch with negativeimplications. S&P stated that the acquisition comes in addition to ourembarking on a capital spending program that is significantly higher thanhistorical levels and will be partially debt financed. On February 13, 2006,S&P removed our corporate credit rating from credit watch, but placed us onnegative outlook. S&P also reduced the rating on our commercial paper fromA-2 to A-3 on February 21, 2006. This reduction made it more difficult for usto issue commercial paper and, as a result, our short-term debt during theperiod from February 21, 2006 to June 30, 2006, was in the form of borrowingsunder our revolving credit facility. However, beginning on June 30, 2006, wewere able to again issue commercial paper at the current rating under a newagreement with Wells Fargo Bank. On May 17, 2006, S&P lowered our long-termcorporate credit rating to BBB- from BBB, senior secured debt to BBB+ from A-,senior unsecured 

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debtrating to BB+ from BBB- and affirmed our short-term rating of A-3. S&P’sdowngrade reflected their view that our financial measures will be constrainedover the next several years by fuel and power costs that continue to exceed thelevel recoverable in rates, and by our higher-than-historical level of capitalspending, including the acquisition of Missouri Gas.

Moody’s affirmed our ratings on May 13, 2005 and revised their ratingoutlook on us from negative to stable. On January 24, 2007, Moody’s againaffirmed our ratings but changed their rating outlook on us back to negative.The change to a negative rating outlook reflects Moody’s view on thelonger-term prospects for our ratings given the sizable capital spendingprogram we have committed to through 2010 and the potential for furtherweakness in our credit metrics that could develop during this time.

In****September 2005, we entered into anagreement with Fitch Ratings to initiate coverage of us and to assign ratingsto our outstanding debt securities. On December 19, 2005, Fitch Ratingsinitiated coverage and assigned ratings (see table above) with a stable ratingoutlook. Fitch announced that their ratings reflect our low business riskposition as a regulated electric utility, a stable service territory and aseemingly improving regulatory environment in Missouri where we receiveapproximately 89% of our electric revenues. Fitch reaffirmed these ratings andoutlook on April 3, 2007.

**CONTRACTUAL OBLIGATIONS**

Setforth below is information summarizing our contractual obligations as of March31, 2007. Notincluded in these amounts are expected obligations associated with our share ofthe Iatan 2 construction and Iatan 1 environmental construction additions forwhich we have not yet been billed. Other postretirement benefit plans arefunded on an ongoing basis to match their corresponding costs, per regulatoryrequirements and have been estimated for 2007-2011 as noted below. Futurepension funding commitments are not expected to be material over the next 5years and have not been estimated for later years.
| ** **                                 | ** ** | **Payments Due by Period  (in millions)** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------|------------|
| **Contractual Obligations (1)**  | ** ** | **Total**                                                     | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| Long-term debt  (w/o discount)             |       | $                                                             | 492.7      |   | $ | — |   | $ | 20.0 |   | $ | 50.0 |   | $ | 422.7 |   |
| Note payable to  securitization trust      |       | 50.0                                                          |       | — |   | — |   | — |   | 50.0 |   |
| Interest on  long-term debt                |       | 642.3                                                         |       | 34.3 |   | 67.9 |   | 58.8 |   | 481.3 |   |
| Short-term debt                            |       | 39.8                                                          |       | 39.8 |   | — |   | — |   | — |   |
| Capital lease  obligations                 |       | 1.1                                                           |       | 0.3 |   | 0.6 |   | 0.2 |   | — |   |
| Operating lease  obligations (2)           |       | 4.9                                                           |       | 1.4 |   | 1.8 |   | 0.5 |   | 1.2 |   |
| Electric  purchase obligations (3)         |       | 379.5                                                         |       | 81.0 |   | 115.6 |   | 60.8 |   | 122.1 |   |
| Gas purchase  obligations (4)              |       | 57.1                                                          |       | 8.0 |   | 12.7 |   | 11.7 |   | 24.7 |   |
| Open purchase  orders                      |       | 63.8                                                          |       | 63.8 |   | — |   | — |   | — |   |
| Plum Point                                 |       | 60.8                                                          |       | 23.5 |   | 34.1 |   | 3.2 |   | — |   |
| SPP transmission  system upgrades          |       | 13.4                                                          |       | 8.3 |   | 5.1 |   | — |   | — |   |
| Postretirement  benefit obligation funding |       | 19.5                                                          |       | 4.1 |   | 8.1 |   | 7.3 |   | — |   |
| Other long-term  liabilities (5)           |       | 4.2                                                           |       | 0.2 |   | 0.3 |   | 0.4 |   | 3.3 |   |
|                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total Contractual  Obligations             |       | $                                                             | 1,829.1    |   | $ | 264.7 |   | $ | 266.2 |   | $ | 192.9 |   | $ | 1,105.3 |   |

 

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*(1) Some of our contractual obligations have priceescalations based on economic indices, but we do not anticipate theseescalations to be significant.*

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*(2) Excludes payments under our Elk River Wind Farmagreement, as payments are contingent upon output of the facility. Payments canrun from zero up to a maximum of $15.2 million per year based on a 20 yearaverage cost and an annual output of 550,000 megawatt hours.*

*(3) Includes a water usage contract for our SLCCfacility, fuel and purchased power contracts and associated transportationcosts, as well as purchased power for 2010 through 2015 for Plum Point.*

*(4) Represents fuel contracts and associatedtransportation costs of our gas segment.*

*(5) Other Long-term Liabilitiesprimarily represents electric facilities charges owed to City Utilities ofSpringfield, Missouri of $11,000 per month over 30 years starting in 2007.*

**DIVIDENDS**

Holders of our common stock are entitled to dividends if, as, and whendeclared by the Board of Directors, out of funds legally available therefore,subject to the prior rights of holders of any outstanding cumulative preferredstock and preference stock. Payment of dividends is determined by our Board ofDirectors after considering all relevant factors, including the amount of ourretained earnings (which is essentially our accumulated net income lessdividend payouts). As of March 31, 2007 our retained earnings balance was $17.7million, compared to $12.9 million as of March 31, 2006, after paying out $9.7million in dividends during the first quarter of 2007. A reduction of ourdividend per share, partially or in whole, could have an adverse effect on ourcommon stock price.

Our diluted earnings pershare were $0.15 for the quarter ended March 31, 2007 and were $1.39 and $0.92for the years ended December 31, 2006 and 2005, respectively. Dividends paidper share were $0.32 for the three months ended March 31, 2007 and $1.28 foreach of the years ended December 31, 2006 and 2005.

In addition, the EDEMortgage and our Restated Articles contain certain dividend restrictions. Themost restrictive of these is contained in the EDE Mortgage, which provides thatwe may not declare or pay any dividends (other than dividends payable in sharesof our common stock) or make any other distribution on, or purchase (other thanwith the proceeds of additional common stock financing) any shares of, ourcommon stock if the cumulative aggregate amount thereof after August 31, 1944(exclusive of the first quarterly dividend of $98,000 paid after said date)would exceed the earned surplus (as defined in the EDE Mortgage) accumulatedsubsequent to August 31, 1944, or the date of succession in the event that anothercorporation succeeds to our rights and liabilities by a merger orconsolidation. As of March 31, 2007, our level of earned surplus did notprevent us from issuing dividends. In addition, under certain circumstances(including defaults thereunder), our Junior Subordinated Debentures, 8-1/2%Series due 2031, reflected as a note payable to securitization trust on ourbalance sheet, held by Empire District Electric Trust I, an unconsolidatedsecuritization trust subsidiary, may also restrict our ability to pay dividendson our common stock.

**OFF-BALANCE SHEET ARRANGEMENTS**

We have no off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, changesin financial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources, other than operating leases enteredinto in the normal course of business.

**CRITICAL ACCOUNTING POLICIES**

See “Item 7 – Managements Discussion and Analysis of FinancialCondition and Results of Operations” in our Annual Report Form 10-K for theyear ended December 31, 2006 for a discussion of our critical accountingpolicies. There were no changes in these policies in the quarter ended March31, 2007.

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**RECENTLY ISSUED ACCOUNTING STANDARDS**

See Note 2 of “Notes toConsolidated Financial Statements (Unaudited)”.

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

Market risk is the exposure to a change in the valueof a physical asset or financial instrument, derivative or non-derivative,caused by fluctuations in market variables such as interest rates or commodityprices. We**handle our commodity market risk inaccordance with our established Energy Risk Management Policy, which typicallyincludes entering into various derivative transactions. We utilize derivativesto manage our gas commodity market risk and to help manage our exposureresulting from purchasing most of our natural gas on the volatile spot marketfor the generation of power for our native-load customers. See Note 6 of “Notesto Consolidated Financial Statements (Unaudited)” for further information.

*Interest Rate Risk.*We are exposed to changes in interest ratesas a result of financing through our issuance of commercial paper and othershort-term debt. We manage our interest rate exposure by limiting ourvariable-rate exposure (applicable to commercial paper and borrowings under ourunsecured credit agreement) to a certain percentage of total capitalization, asset by policy, and by monitoring the effects of market changes in interestrates.

If market interest rates average 1% more in 2007than in 2006, our interest expense would increase, and income before taxeswould decrease by less than $800,000. This amount has been determined byconsidering the impact of the hypothetical interest rates on our highestmonth-end commercial paper balance for 2006. These analyses do not consider theeffects of the reduced level of overall economic activity that could exist insuch an environment. In the event of a significant change in interest rates,management would likely take actions to further mitigate its exposure to thechange. However, due to the uncertainty of the specific actions that would betaken and their possible effects, the sensitivity analysis assumes no changesin our financial structure.

*Commodity Price Risk*. We are exposed to the impact of marketfluctuations in the price and transportation costs of coal, natural gas, andelectricity and employ established policies and procedures to manage the risksassociated with these market fluctuations, including utilizing derivatives.

We satisfied 72.5% of our2006 generation fuel supply need through coal. Approximately 85% of our 2006coal supply was Western coal. We have contracts and have accepted bindingproposals to supply fuel for our coal plants through 2010. These contracts andaccepted proposals satisfy approximately 100% of our anticipated fuelrequirements for 2007, 78% for 2008, 52% for 2009 and 41% of our 2010requirements for our Asbury and Riverton coal plants. In order to manage ourexposure to fuel prices, future coal supplies will be acquired using acombination of short-term and long-term contracts.

We are exposed to changes in market prices for natural gas we mustpurchase to run our combustion turbine generators. Our natural gas procurementprogram is designed to minimize our risk from volatile natural gas prices. Weenter into physical forward and financial derivative contracts withcounterparties relating to our future natural gas requirements that lock inprices (with respect to predetermined percentages of our expected futurenatural gas needs) in an attempt to lessen the volatility in our fuel expenseand improve predictability. We expect that increases in gas prices will bepartially offset by realized gains under financial derivative transactions. Asof April 13, 2007, 87%, or 6.5 million Dths’s, of our anticipated volume ofnatural gas usage for our electric operations for the remainder of 2007 ishedged.

Based on our expected natural gas purchases for our electric operationsfor the next twelve months, if average natural gas prices should increase 10%more than the price at March 31, 2007, our

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naturalgas expense would increase, and income before taxes would decrease byapproximately $1.6 million based on our March 31, 2007 total hedged positionsfor the next twelve months.

We attempt to mitigate a portion of our natural gas price riskassociated with our gas segment using physical forward purchase agreements,storage and derivative contracts. As of April 21, 2007, we have 0.5 millionDths in storage on the three pipelines that serve our customers. Thisrepresents 24% of our storage capacity leaving 1.5 million Dths to be injectedinto storage by November 1, 2007 to meet our 95% target. Our long-term hedgestrategy for our gas segment is still in the development process. However, dueto purchased natural gas cost recovery mechanisms for our retail customers,fluctuations in the cost of natural gas have little effect on income.

*Credit Risk*.Credit risk is the risk of financial loss to the Company if counterparties failto perform their contractual obligations. In order to minimize overall creditrisk, we maintain credit policies, including the evaluation of counterpartyfinancial condition and the use of standardized agreements that facilitate thenetting of cash flows associated with a single counterparty. In addition,certain counterparties make available collateral in the form of cash held asmargin deposits as a result of exceeding agreed-upon credit exposure thresholdsor may be required to prepay the transaction. Amounts reported as margindeposit liabilities represent funds we hold that result from various tradingcounterparties exceeding agreed-upon credit exposure thresholds. Amounts reportedas margin deposit assets represent funds held on deposit by various tradingcounterparties that resulted from us exceeding agreed-upon credit limitsestablished by the counterparties. As of March 31, 2007 and 2006, we had margindeposit assets of $1.8 million and $2.7 million, respectively, and margindeposit liabilities of $6.4 million and $8.5 million, respectively.

We sell electricity and gas and provide distribution and transmissionservices to a diverse group of customers, including residential, commercial andindustrial customers. Credit risk associated with trade accounts receivablefrom energy customers is limited due to the large number of customers. Inaddition, we enter into contracts with various companies in the energy industryfor purchases of energy-related commodities, including natural gas in our fuelprocurement process.

Our exposure to credit risk is concentrated primarily within our fuelprocurement process, as we transact with a smaller, less diverse group ofcounterparties and transactions may involve large notional volumes andpotentially volatile commodity prices. At March 31, 2007, gross credit exposurerelated to these transactions totaled $21.5 million, reflecting the unrealizedgains for contracts carried at fair value.

**Item 4.   Controlsand Procedures**

As of the end of the period covered by this report, an evaluation wascarried out, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective,in all material respects, with respect to the recording, processing,summarizing and reporting, within the time periods specified in the SEC’s rulesand forms, of information to be required to be disclosed by us in reports thatwe file or submit under the Exchange Act.

There have been no changes in our internal controlover financial reporting that occurred during the first quarter of 2007 thathave materially affectedor are reasonably likely to materially affect our internal control overfinancial reporting except with respect to the integration of EDG, our acquiredMissouri gas operations.

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**PART II.  OTHER INFORMATION**

**Item 1A.  Risk Factors.**

There have been no materialchanges to the factors disclosed in Part I, Item 1-A. Risk Factors in ourAnnual Report on Form 10-K for the year ended December 31, 2006.

**Item 4.  Submission of Matters to a Vote ofSecurity Holders.**

(a)                                  TheAnnual Meeting of Stockholders was held on April 26, 2007.

(b)                                 Thefollowing persons were re-elected Directors of Empire to serve until the 2010Annual Meeting of Stockholders:

Ross C. Hartley (26,854,382 votes for; 609,517 withheld authority).

Julio S. Leon (26,990,424 votes for; 473,475 withheld authority).

Allan T. Thoms (27,067,943 votes for; 395,957 withheld authority).

The term of office as Director of the following other Directorscontinued after the meeting:   William L.Gipson, Bill D. Helton, Kenneth R. Allen, D. Randy Laney, Myron W. McKinney, B.Thomas Mueller and Mary M. Posner.

(c)                                  Commonstockholders voted to approve the following proposal:

Ratificationof the appointment of PricewaterhouseCoopers LLP as Empire’s independentregistered public accounting firm for the fiscal year ending December 31, 2007.Passage of the proposal required the affirmative vote of a majority of thevotes cast. The proposal received 26,854,880 votes for, which is 88.91% of theoutstanding shares and 97.78% of the votes cast, and 449,200 votes against.

**Item5.  Other Information.**

For the twelvemonths ended March 31, 2007, our ratio of earnings to fixed charges was2.83x.  See Exhibit (12) hereto.

**Item6.  Exhibits.**

(a)                                  Exhibits.

(10)(a)              Form of Notice of Award of Dividend Equivalents.

(10)(b)             Form of Notice of Award of Non-Qualified StockOptions.

(10)(c)              Form of Notice of Award of Performance-BasedRestricted Stock.

(12)                            Computationof Ratio of Earnings to Fixed Charges.

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(31)(a)              Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31)(b)             Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32)(a)              Certification of Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.*

(32)(b)             Certification of Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.*

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*****Thiscertification accompanies this Report pursuant to Section 906 of theSarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company forpurposes of Section 18 or any other provision of the Securities Exchange Act of1934, as amended.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|             | **THE EMPIRE DISTRICT ELECTRIC COMPANY** |                                                       |
|-------------|------------------------------------------|------------------------------------------------------------|
|        |                                     | Registrant                                                 |
|        |                                     |
|        |                                     |
| ** **  | **By**                                   | **/s/  Gregory A. Knapp**                                  |
|        |                                     | Gregory A. Knapp                                           |
|        |                                     | Vice President –  Finance and Chief Financial Officer |
|        |                                     |                                                       |
|        |                                     |                                                       |
| ** **  | **By**                                   | **/s/  Laurie A. Delano**                                  |
|        |                                     | Laurie A. Delano                                           |
|        |                                     | Controller,  Assistant Secretary and Assistant Treasurer   |
|        |                                     |                                                       |
| May 9, 2007 |                                     |                                                       |
|             |                                          |                                                            |  |  |

 

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