Table of Contents

 

 

 

**UNITEDSTATESSECURITIES 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  June 30, 2008 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**

 

**THE EMPIRE DISTRICT ELECTRIC COMPANY**

(Exact name of registrant as specified in its charter)

 

| **Kansas**

(State of  Incorporation)                                               |   | **44-0236370**

(I.R.S. Employer  Identification No.) |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                                |   |                                                  |
| **602  Joplin Avenue, Joplin, Missouri**

(Address of  principal executive offices) |   | **64801**

(zip code)                                 |

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes **x** No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o                                             |   | Accelerated filer x          |
|------------------------------------------------------------------------|--------|------------------------------|
| Non-accelerated filer o (Do not check if a smaller reporting  company) |   | Smaller reporting  company o |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    Yes o  No **x**

 

As of August 1,2008, 33,888,354 shares of common stock were outstanding.

 

 

 

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Table of Contents

 

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

 

**INDEX**

 
| ** **    | ** **                                                                                  | **PAGE** |
|---------------|---------------------------------------------------------------------------------------------|----------|
|          | Forward  Looking Statements                                                                 | 3        |
|          |                                                                                        |     |
| Part I - | Financial Information:                                                                      |     |
|          |                                                                                        |     |
| Item 1.       | Financial Statements:                                                                       |     |
|          |                                                                                        |     |
|          | a.Consolidated  Statements of Operations                                                    | 4        |
|          |                                                                                        |     |
|          | b.Consolidated  Statements of Comprehensive Income                                          | 7        |
|          |                                                                                        |     |
|          | c.Consolidated  Balance Sheets                                                              | 8        |
|          |                                                                                        |     |
|          | d.Consolidated  Statements of Cash Flows                                                    | 10       |
|          |                                                                                        |     |
|          | e.Notes to  Consolidated Financial Statements                                               | 11       |
|          |                                                                                        |     |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 30       |
|          |                                                                                        |     |
|          | Executive Summary                                                                           | 30       |
|          |                                                                                        |     |
|          | Results of Operations                                                                       | 34       |
|          |                                                                                        |     |
|          | Rate Matters                                                                                | 44       |
|          |                                                                                        |     |
|          | Competition                                                                                 | 47       |
|          |                                                                                        |     |
|          | Liquidity and  Capital Resources                                                            | 48       |
|          |                                                                                        |     |
|          | Contractual  Obligations                                                                    | 52       |
|          |                                                                                        |     |
|          | Dividends                                                                                   | 52       |
|          |                                                                                        |     |
|          | Off-Balance Sheet  Arrangements                                                             | 53       |
|          |                                                                                        |     |
|          | Critical  Accounting Policies.                                                              | 53       |
|          |                                                                                        |     |
|          | Recently  Issued Accounting Standards.                                                      | 53       |
|          |                                                                                        |     |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 53       |
|          |                                                                                        |     |
| Item 4.       | Controls and Procedures                                                                     | 55       |
|          |                                                                                        |     |
| Part II- | Other Information:                                                                          |     |
|          |                                                                                        |     |
| Item 1.       | Legal  Proceedings - (none)                                                                 |     |
|          |                                                                                        |     |
| Item 1A.      | Risk Factors                                                                                | 55       |
|          |                                                                                        |     |
| 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                                        | 55       |
|          |                                                                                        |     |
| Item 5.       | Other Information                                                                           | 56       |
|          |                                                                                        |     |
| Item 6.       | Exhibits                                                                                    | 56       |
|          |                                                                                        |     |
|          | Signatures                                                                                  | 57       |

 

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**FORWARD LOOKING STATEMENTS**

 

Certainmatters discussed in this quarterly report are “forward-looking statements”intended to qualify for the safe harbor from liability established by thePrivate Securities Litigation Reform Act of 1995. Such statements address ormay address future plans, objectives, expectations and events or conditionsconcerning various matters such as capital expenditures, earnings, pension andother costs, competition, litigation, our construction program, our generationplans, our financing plans, potential acquisitions, rate and other regulatorymatters, liquidity and capital resources and accounting matters.Forward-looking statements may contain words like “anticipate,” “believe,” “expect,”“project,” “objective” or similar expressions to identify them asforward-looking statements. Factors that could cause actual results to differmaterially from those currently anticipated in such 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, SO2 and CO2 regulation);

·                  competition, including the energy imbalancemarket;

·                  electric utility restructuring, includingongoing federal 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;

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

·                  our exposure to the credit risk of ourhedging counterparties.

 

Allsuch factors are difficult to predict, contain uncertainties that maymaterially affect actual results, and may be beyond our control. New factorsemerge from time to time and it is not possible for management to predict allsuch factors or to assess the impact of each such factor on us. Anyforward-looking statement speaks only as of the date on which such statement ismade, and we do not undertake any obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which suchstatement is made.

 

We caution you that any forward-looking statementsare not guarantees of future performance and involve known and unknown risk,uncertainties and other factors which may cause our actual results, performanceor achievements to differ materially from the facts, results, performance orachievements we have anticipated in such forward-looking statements.

 

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                                                                                   | ** ** | **Three Months Ended**                              | ** **  |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                   | ** ** | **June 30**                                              | ** **  |
| ** **                                                                                                   | ** ** | **2008**                                                      | ** **  | **2007** | ** ** |
| ** **                                                                                                   | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                     |       |                                                          |        |   |   |
| Electric                                                                                                     | ** ** | **$**                                                         | **100,502** |   | $ | 97,531 |   |
| Gas                                                                                                          | ** ** | **9,148**                                                     |        | 8,438 |   |
| Water                                                                                                        | ** ** | **441**                                                       |        | 454 |   |
| Other                                                                                                        | ** ** | **1,189**                                                     |        | 826 |   |
| ** **                                                                                                   |       | **111,280**                                                   |        | 107,249 |   |
| **Operating  revenue deductions:**                                                                           |       |                                                          |        |   |   |
| Fuel                                                                                                         | ** ** | **24,165**                                                    |        | 22,189 |   |
| Purchased power                                                                                              | ** ** | **22,777**                                                    |        | 19,702 |   |
| Cost of natural  gas sold and transported                                                                    | ** ** | **5,297**                                                     |        | 4,722 |   |
| Regulated  operating expenses                                                                                | ** ** | **17,663**                                                    |        | 18,211 |   |
| Other operating  expenses                                                                                    | ** ** | **443**                                                       |        | 492 |   |
| Maintenance and  repairs                                                                                     | ** ** | **6,827**                                                     |        | 6,234 |   |
| Depreciation and  amortization                                                                               | ** ** | **13,862**                                                    |        | 13,082 |   |
| Provision for  income taxes                                                                                  | ** ** | **1,972**                                                     |        | 2,782 |   |
| Other taxes                                                                                                  | ** ** | **5,948**                                                     |        | 5,712 |   |
| ** **                                                                                                   |       | **98,954**                                                    |        | 93,126 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Operating  income**                                                                                        | ** ** | **12,326**                                                    |        | 14,123 |   |
| Other income and  (deductions):                                                                              |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                         | ** ** | **1,497**                                                     |        | 653 |   |
| Interest income                                                                                              | ** ** | **543**                                                       |        | 87 |   |
| Benefit  (provision) for other income taxes                                                                  | ** ** | **(282**                                                      | )           | 11 |   |
| Other -  non-operating expense, net                                                                          | ** ** | **(224**                                                      | )           | (241 | ) |
| ** **                                                                                                   |       | **1,534**                                                     |        | 510 |   |
| Interest  charges:                                                                                           |       |                                                          |        |   |   |
| Long-term debt                                                                                               | ** ** | **8,838**                                                     |        | 8,060 |   |
| Note payable to  securitization trust                                                                        | ** ** | **1,062**                                                     |        | 1,062 |   |
| Short-term debt                                                                                              | ** ** | **312**                                                       |        | 314 |   |
| Allowance for  borrowed funds used during construction                                                       | ** ** | **(1,514**                                                    | )           | (966 | ) |
| Other                                                                                                        | ** ** | **345**                                                       |        | 312 |   |
| ** **                                                                                                   |       | **9,043**                                                     |        | 8,782 |   |
| **Income  from continuing operations**                                                                       | ** ** | **4,817**                                                     |        | 5,851 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Loss  from discontinued operations, net of tax**                                                           | ** ** | **—**                                                    |        | (17 | ) |
|                                                                                                         |       |                                                          |        |   |   |
| **Net  income**                                                                                              | ** ** | **$**                                                         | **4,817**   |   | $ | 5,834 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - basic**                                            | ** ** | **33,775**                                                    |        | 30,384 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - diluted**                                          | ** ** | **33,807**                                                    |        | 30,406 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted** | ** ** | **$**                                                         | **0.14**    |   | $ | 0.19 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Loss  from discontinued operations per weighted average share of common stock –  basic and diluted**  | ** ** | **$**                                                         | **—**  |   | $ | (0.00 | ) |
|                                                                                                         |       |                                                          |        |   |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                      | ** ** | **$**                                                         | **0.14**    |   | $ | 0.19 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Dividends  per share of common stock**                                                                     | ** ** | **$**                                                         | **0.32**    |   | $ | 0.32 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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| ** **                                                                                                   | ** ** | **Six Months Ended**                                | ** **  |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                   | ** ** | **June 30,**                                             | ** **  |
| ** **                                                                                                   | ** ** | **2008**                                                      | ** **  | **2007** | ** ** |
| ** **                                                                                                   | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                     |       |                                                          |        |   |   |
| Electric                                                                                                     | ** ** | **$**                                                         | **208,806** |   | $ | 194,441 |   |
| Gas                                                                                                          | ** ** | **36,424**                                                    |        | 36,028 |   |
| Water                                                                                                        | ** ** | **876**                                                       |        | 904 |   |
| Other                                                                                                        | ** ** | **2,119**                                                     |        | 1,526 |   |
| ** **                                                                                                   |       | **248,225**                                                   |        | 232,899 |   |
| **Operating  revenue deductions:**                                                                           |       |                                                          |        |   |   |
| Fuel                                                                                                         | ** ** | **55,172**                                                    |        | 47,413 |   |
| Purchased power                                                                                              | ** ** | **48,712**                                                    |        | 39,921 |   |
| Cost of natural  gas sold and transported                                                                    | ** ** | **22,998**                                                    |        | 23,444 |   |
| Regulated  operating expenses                                                                                | ** ** | **35,561**                                                    |        | 35,574 |   |
| Other operating  expenses                                                                                    | ** ** | **826**                                                       |        | 835 |   |
| Maintenance and  repairs                                                                                     | ** ** | **12,393**                                                    |        | 17,012 |   |
| Depreciation and  amortization                                                                               | ** ** | **27,483**                                                    |        | 25,780 |   |
| Provision for  income taxes                                                                                  | ** ** | **5,089**                                                     |        | 4,431 |   |
| Other taxes                                                                                                  | ** ** | **13,106**                                                    |        | 12,453 |   |
| ** **                                                                                                   |       | **221,340**                                                   |        | 206,863 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Operating  income**                                                                                        | ** ** | **26,885**                                                    |        | 26,036 |   |
| Other income and  (deductions):                                                                              |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                         | ** ** | **2,615**                                                     |        | 1,559 |   |
| Interest income                                                                                              | ** ** | **623**                                                       |        | 181 |   |
| Benefit  (provision) for other income taxes                                                                  | ** ** | **(270**                                                      | )           | 21 |   |
| Other -  non-operating expense, net                                                                          | ** ** | **(462**                                                      | )           | (485 | ) |
| ** **                                                                                                   |       | **2,506**                                                     |        | 1,276 |   |
| Interest  charges:                                                                                           |       |                                                          |        |   |   |
| Long-term debt                                                                                               | ** ** | **16,911**                                                    |        | 15,004 |   |
| Note payable to  securitization trust                                                                        | ** ** | **2,125**                                                     |        | 2,125 |   |
| Short-term debt                                                                                              | ** ** | **843**                                                       |        | 1,342 |   |
| Allowance for  borrowed funds used during construction                                                       | ** ** | **(2,862**                                                    | )           | (2,120 | ) |
| Other                                                                                                        | ** ** | **567**                                                       |        | 578 |   |
| ** **                                                                                                   |       | **17,584**                                                    |        | 16,929 |   |
| **Income  from continuing operations**                                                                       | ** ** | **11,807**                                                    |        | 10,383 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Loss  from discontinued operations, net of tax**                                                           | ** ** | **—**                                                    |        | (48 | ) |
|                                                                                                         |       |                                                          |        |   |   |
| **Net  income**                                                                                              | ** ** | **$**                                                         | **11,807**  |   | $ | 10,335 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - basic**                                            | ** ** | **33,717**                                                    |        | 30,341 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - diluted**                                          | ** ** | **33,747**                                                    |        | 30,361 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted** | ** ** | **$**                                                         | **0.35**    |   | $ | 0.34 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Loss  from discontinued operations per weighted average share of common stock –  basic and diluted**  | ** ** | **$**                                                         | **—**  |   | $ | (0.00 | ) |
|                                                                                                         |       |                                                          |        |   |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                      | ** ** | **$**                                                         | **0.35**    |   | $ | 0.34 |   |
|                                                                                                         |       |                                                          |        |   |   |
| **Dividends  per share of common stock**                                                                     | ** ** | **$**                                                         | **0.64**    |   | $ | 0.64 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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| ** **                                                                                                      | ** ** | **Twelve Months Ended**                             | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                      | ** ** | **June 30,**                                             | ** **  |
| ** **                                                                                                      | ** ** | **2008**                                                      | ** **  | **2007** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                        |       |                                                          |        |   |   |
| Electric                                                                                                        | ** ** | **$**                                                         | **439,525** |   | $ | 405,691 |   |
| Gas                                                                                                             | ** ** | **60,273**                                                    |        | 59,547 |   |
| Water                                                                                                           | ** ** | **1,851**                                                     |        | 1,893 |   |
| Other                                                                                                           | ** ** | **3,837**                                                     |        | 2,867 |   |
| ** **                                                                                                      |       | **505,486**                                                   |        | 469,998 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                          |        |   |   |
| Fuel                                                                                                            | ** ** | **121,319**                                                   |        | 97,705 |   |
| Purchased power                                                                                                 | ** ** | **86,463**                                                    |        | 72,127 |   |
| Cost of natural  gas sold and transported                                                                       | ** ** | **37,180**                                                    |        | 37,992 |   |
| Regulated  operating expenses                                                                                   | ** ** | **71,354**                                                    |        | 68,244 |   |
| Other operating  expenses                                                                                       | ** ** | **1,601**                                                     |        | 1,556 |   |
| Maintenance and  repairs                                                                                        | ** ** | **27,439**                                                    |        | 29,804 |   |
| Loss on plant  disallowance                                                                                     | ** ** | **—**                                                    |        | 828 |   |
| Gain on sale of  assets                                                                                         | ** ** | **(1,241**                                                    | )           | — |   |
| Depreciation and  amortization                                                                                  | ** ** | **54,302**                                                    |        | 45,532 |   |
| Provision for  income taxes                                                                                     | ** ** | **15,074**                                                    |        | 21,184 |   |
| Other taxes                                                                                                     | ** ** | **25,580**                                                    |        | 23,978 |   |
| ** **                                                                                                      |       | **439,071**                                                   |        | 398,950 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Operating  income**                                                                                           | ** ** | **66,415**                                                    |        | 71,048 |   |
| Other income and  (deductions):                                                                                 |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                            | ** ** | **3,979**                                                     |        | 2,841 |   |
| Interest income                                                                                                 | ** ** | **768**                                                       |        | 377 |   |
| Provision for  other income taxes                                                                               | ** ** | **(319**                                                      | )           | (15 | ) |
| Other -  non-operating expense, net                                                                             | ** ** | **(946**                                                      | )           | (1,005 | ) |
| ** **                                                                                                      |       | **3,482**                                                     |        | 2,198 |   |
| Interest  charges:                                                                                              |       |                                                          |        |   |   |
| Long-term debt                                                                                                  | ** ** | **33,027**                                                    |        | 28,761 |   |
| Note payable to  securitization trust                                                                           | ** ** | **4,250**                                                     |        | 4,250 |   |
| Short-term debt                                                                                                 | ** ** | **2,441**                                                     |        | 2,366 |   |
| Allowance for  borrowed funds used during construction                                                          | ** ** | **(5,484**                                                    | )           | (4,015 | ) |
| Other                                                                                                           | ** ** | **1,058**                                                     |        | 1,074 |   |
| ** **                                                                                                      |       | **35,292**                                                    |        | 32,436 |   |
| **Income  from continuing operations**                                                                          | ** ** | **34,605**                                                    |        | 40,810 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Earnings  from discontinued operations, net of tax**                                                          | ** ** | **111**                                                       |        | 75 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Net  income**                                                                                                 | ** ** | **$**                                                         | **34,716**  |   | $ | 40,885 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding – basic**                                          | ** ** | **32,265**                                                    |        | 30,250 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding – diluted**                                        | ** ** | **32,294**                                                    |        | 30,266 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**    | ** ** | **$**                                                         | **1.07**    |   | $ | 1.35 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Earnings  from discontinued operations per weighted average share of common stock –  basic and diluted** | ** ** | **$**                                                         | **.01**     |   | $ | 0.00 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                         | ** ** | **$**                                                         | **1.08**    |   | $ | 1.35 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Dividends  per share of common stock**                                                                        | ** ** | **$**                                                         | **1.28**    |   | $ | 1.28 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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**THE EMPIRE DISTRICT ELECTRICCOMPANY**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (UNAUDITED)**

** **
| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                       | ** ** | **June 30,**                | ** ** |
| ** **                                                                                                       | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**               | ** ** |
|                                                                                                             |       |                             |       |   |   |
| Net income                                                                                                       | ** ** | **$**                            | **4,817**  |   | $ | 5,834 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability | ** ** | **(1,713**                       | )          | (216 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **22,806**                       |       | 5,731 |   |
| Income taxes                                                                                                     | ** ** | **(8,036**                       | )          | (2,101 | ) |
| Net change in  unrealized gain on derivative contracts                                                           | ** ** | **13,057**                       |       | 3,414 |   |
|                                                                                                             |       |                             |       |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                            | **17,874** |   | $ | 9,248 |   |

** **
| ** **                                                                                                       | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                       | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                       | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**             | ** ** |
|                                                                                                             |       |                           |       |   |   |
| Net income                                                                                                       | ** ** | **$**                          | **11,807** |   | $ | 10,335 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability | ** ** | **(2,573**                     | )          | (52 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **33,829**                     |       | 8,611 |   |
| Income taxes                                                                                                     | ** ** | **(11,909**                    | )          | (3,261 | ) |
| Net change in  unrealized gain on derivative contracts                                                           | ** ** | **19,347**                     |       | 5,298 |   |
|                                                                                                             |       |                           |       |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                          | **31,154** |   | $ | 15,633 |   |

** **
| ** **                                                                                                             | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                             | ** ** | **June 30,**                 | ** ** |
| ** **                                                                                                             | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| ** **                                                                                                             | ** ** | **($-000’s)**                | ** ** |
|                                                                                                                   |       |                              |       |   |   |
| Net income                                                                                                             | ** ** | **$**                             | **34,716** |   | $ | 40,885 |   |
| Reclassification  adjustments for gains included in net income  or reclassified to regulatory asset or  liability | ** ** | **(4,130**                        | )          | (567 | ) |
| Net change in  fair market value of open derivative contracts for period                                               | ** ** | **30,445**                        |       | 3,380 |   |
| Income taxes                                                                                                           | ** ** | **(10,026**                       | )          | (1,072 | ) |
| Net change in  unrealized gain on derivative contracts                                                                 | ** ** | **16,289**                        |       | 1,741 |   |
|                                                                                                                   |       |                              |       |   |   |
| **Comprehensive  income**                                                                                              | ** ** | **$**                             | **51,005** |   | $ | 42,626 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*****

 

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**THE EMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                            | ** ** | **June 30, 2008** | ** **    | **December 31, 2007** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|---------------|---------------------------------|------------|
| ** **                                            | ** ** | **($-000’s)**          | ** **    |
| **Assets**                                            |       |                        |          |                            |       |
| Plant and property, at original cost:                 |       |                        |          |                            |       |
| Electric                                              | ** ** | **$**                       | **1,465,034** |                            | $          | 1,409,217 |   |
| Natural gas                                           | ** ** | **55,022**                  |          | 54,715                          |       |
| Water                                                 | ** ** | **10,474**                  |          | 10,353                          |       |
| Other                                                 | ** ** | **27,480**                  |          | 26,355                          |       |
| Construction work in progress                         | ** ** | **214,112**                 |          | 167,049                         |       |
| ** **                                            |       | **1,772,122**               |          | 1,667,689                       |       |
| Accumulated depreciation and amortization             | ** ** | **510,656**                 |          | 488,816                         |       |
| ** **                                            |       | **1,261,466**               |          | 1,178,873                       |       |
|                                                  |       |                        |          |                            |       |
| Current assets:                                       |       |                        |          |                            |       |
| Cash and cash equivalents                             | ** ** | **3,349**                   |          | 4,043                           |       |
| Accounts receivable – trade, net                 | ** ** | **37,651**                  |          | 38,011                          |       |
| Accrued unbilled revenues                             | ** ** | **16,734**                  |          | 20,886                          |       |
| Accounts receivable – other                      | ** ** | **12,008**                  |          | 15,465                          |       |
| Fuel, materials and supplies                          | ** ** | **49,040**                  |          | 49,482                          |       |
| Unrealized gain in fair value of derivative contracts | ** ** | **18,228**                  |          | 2,499                           |       |
| Prepaid expenses                                      | ** ** | **3,356**                   |          | 3,308                           |       |
| ** **                                            |       | **140,366**                 |          | 133,694                         |       |
| Noncurrent assets and deferred charges:               |       |                        |          |                            |       |
| Regulatory assets                                     | ** ** | **93,124**                  |          | 92,785                          |       |
| Goodwill                                              | ** ** | **39,492**                  |          | 39,492                          |       |
| Unamortized debt issuance costs                       | ** ** | **9,443**                   |          | 6,662                           |       |
| Unrealized gain in fair value of derivative contracts | ** ** | **32,269**                  |          | 17,520                          |       |
| Other                                                 | ** ** | **3,774**                   |          | 4,048                           |       |
| ** **                                            |       | **178,102**                 |          | 160,507                         |       |
| Total Assets                                          | ** ** | **$**                       | **1,579,934** |                            | $          | 1,473,074 |   |

 

(Continued)

 

*Seeaccompanying Notes to Consolidated Financial Statements*****

 

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| ** **                                                                                         | ** ** | **June 30, 2008** | ** **    | **December 31, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **($-000’s)**          | ** **    |
| **Capitalization and Liabilities**                                                                 |       |                        |          |                            |       |
| Common stock, $1 par value, 33,860,214 and 33,605,871 shares issued and  outstanding, respectively | ** ** | **$**                       | **33,860**    |                            | $          | 33,606 |   |
| Capital in excess of par value                                                                     | ** ** | **482,038**                 |          | 477,385                         |       |
| Retained earnings                                                                                  | ** ** | **7,375**                   |          | 17,153                          |       |
| Accumulated other comprehensive income, net of income tax                                          | ** ** | **30,379**                  |          | 11,032                          |       |
| Total common stockholders’ equity                                                             | ** ** | **553,652**                 |          | 539,176                         |       |
|                                                                                               |       |                        |          |                            |       |
| Long-term debt:                                                                                    |       |                        |          |                            |       |
| Note payable to securitization trust                                                               | ** ** | **50,000**                  |          | 50,000                          |       |
| Obligations under capital lease                                                                    | ** ** | **263**                     |          | 349                             |       |
| First mortgage bonds and secured debt                                                              | ** ** | **332,930**                 |          | 242,959                         |       |
| Unsecured debt                                                                                     | ** ** | **248,522**                 |          | 248,572                         |       |
| Total long-term debt                                                                               | ** ** | **631,715**                 |          | 541,880                         |       |
| Total long-term debt and common stockholders’ equity                                          | ** ** | **1,185,367**               |          | 1,081,056                       |       |
|                                                                                               |       |                        |          |                            |       |
| Current liabilities:                                                                               |       |                        |          |                            |       |
| Accounts payable and accrued liabilities                                                           | ** ** | **74,358**                  |          | 79,229                          |       |
| Current maturities of long-term debt                                                               | ** ** | **155**                     |          | 150                             |       |
| Short-term debt                                                                                    | ** ** | **12,000**                  |          | 33,040                          |       |
| Customer deposits                                                                                  | ** ** | **8,860**                   |          | 8,414                           |       |
| Interest accrued                                                                                   | ** ** | **6,147**                   |          | 5,147                           |       |
| Unrealized loss in fair value of derivative contracts                                              | ** ** | **2,978**                   |          | 1,611                           |       |
| Taxes accrued                                                                                      | ** ** | **9,532**                   |          | 2,931                           |       |
| Current deferred income taxes                                                                      | ** ** | **6,439**                   |          | 381                             |       |
| ** **                                                                                         |       | **120,469**                 |          | 130,903                         |       |
| Commitments and contingencies (Note 6)                                                             |       |                        |          |                            |       |
| Noncurrent liabilities and deferred credits:                                                       |       |                        |          |                            |       |
| Regulatory liabilities                                                                             | ** ** | **62,480**                  |          | 58,107                          |       |
| Deferred income taxes                                                                              | ** ** | **173,677**                 |          | 165,989                         |       |
| Unamortized investment tax credits                                                                 | ** ** | **3,323**                   |          | 3,441                           |       |
| Pension and other postretirement benefit obligations                                               | ** ** | **14,876**                  |          | 14,115                          |       |
| Unrealized loss in fair value of derivative contracts                                              | ** ** | **454**                     |          | 698                             |       |
| Other                                                                                              | ** ** | **19,288**                  |          | 18,765                          |       |
| ** **                                                                                         |       | **274,098**                 |          | 261,115                         |       |
| Total Capitalization and Liabilities                                                               | ** ** | **$**                       | **1,579,934** |                            | $          | 1,473,074 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                    | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **June 30,**              | ** ** |
| ** **                                                                    | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **($-000’s)**             | ** ** |
| **Operating  activities:**                                                    |       |                           |       |   |   |
| Net income                                                                    | ** ** | **$**                          | **11,807** |   | $ | 10,335 |   |
| Adjustments to  reconcile net income to cash flows from operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                | ** ** | **29,471**                     |       | 28,675 |   |
| Pension and  other postretirement benefit costs                               | ** ** | **4,720**                      |       | 4,278 |   |
| Deferred income  taxes and unamortized investment tax credit, net             | ** ** | **556**                        |       | (591 | ) |
| Allowance for  equity funds used during construction                          | ** ** | **(2,615**                     | )          | (1,559 | ) |
| Stock  compensation expense                                                   | ** ** | **1,543**                      |       | 1,411 |   |
| Non-cash  (gain)/loss on derivatives                                          | ** ** | **(1,705**                     | )          | 255 |   |
| Cash flows  impacted by changes in:                                           |       |                           |       |   |   |
| Accounts  receivable and accrued unbilled revenues                            | ** ** | **11,751**                     |       | (4,817 | ) |
| Fuel, materials  and supplies                                                 | ** ** | **442**                        |       | 1,557 |   |
| Prepaid  expenses, other current assets and deferred charges                  | ** ** | **(1,588**                     | )          | (4,911 | ) |
| Accounts payable  and accrued liabilities                                     | ** ** | **4,134**                      |       | (5,827 | ) |
| Customer  deposits, interest and taxes accrued                                | ** ** | **8,101**                      |       | 8,934 |   |
| Other  liabilities and other deferred credits                                 | ** ** | **(496**                       | )          | 315 |   |
|                                                                          |       |                           |       |   |   |
| Net cash  provided by operating activities of continuing operations           | ** ** | **66,121**                     |       | 38,055 |   |
| Net cash  provided by operating activities of discontinued operations         | ** ** | **—**                     |       | 129 |   |
| **Net  cash provided by operating activities**                                | ** ** | **66,121**                     |       | 38,184 |   |
|                                                                          |       |                           |       |   |   |
| **Investing  activities:**                                                    |       |                           |       |   |   |
| Capital  expenditures – regulated                                        | ** ** | **(114,130**                   | )          | (83,780 | ) |
| Capital  expenditures and other investments – other                      | ** ** | **(919**                       | )          | (1,695 | ) |
| Proceeds from  the sale of property, plant and equipment                      | ** ** | **807**                        | ** ** | **—** | ** ** |
| Proceeds from  the sale of other business                                     | ** ** | **—**                     |       | 2,500 |   |
|                                                                          |       |                           |       |   |   |
| Net cash used in  investing activities of continuing operations               | ** ** | **(114,242**                   | )          | (82,975 | ) |
| Net cash used in  investing activities of discontinued operations             | ** ** | **—**                     |       | (7 | ) |
| **Net  cash used in investing activities**                                    | ** ** | **(114,242**                   | )          | (82,982 | ) |
|                                                                          |       |                           |       |   |   |
| **Financing  activities:**                                                    |       |                           |       |   |   |
| Proceeds from  first mortgage bonds - electric                                | ** ** | **89,950**                     |       | 79,831 |   |
| Long-term debt  issuance costs                                                | ** ** | **(907**                       | )          | (1,076 | ) |
| Debt financing  costs                                                         | ** ** | **(2,189**                     | )          | — |   |
| Proceeds from  issuance of common stock net of issuance costs                 | ** ** | **3,366**                      |       | 2,805 |   |
| Net short-term  debt (repayments)                                             | ** ** | **(21,040**                    | )          | (27,158 | ) |
| Dividends                                                                     | ** ** | **(21,586**                    | )          | (19,424 | ) |
| Other                                                                         | ** ** | **(167**                       | )          | (218 | ) |
|                                                                          |       |                           |       |   |   |
| Net cash  provided by financing activities of continuing operations           | ** ** | **47,427**                     |       | 34,760 |   |
| Net cash used in  financing activities of discontinued operations             | ** ** | **—**                     |       | (45 | ) |
| **Net  cash provided by financing activities**                                | ** ** | **47,427**                     |       | 34,715 |   |
|                                                                          |       |                           |       |   |   |
| **Net  decrease in cash and cash equivalents**                                | ** ** | **(694**                       | )          | (10,083 | ) |
|                                                                          |       |                           |       |   |   |
| **Cash  and cash equivalents at beginning of period**                         | ** ** | **4,043**                      |       | 12,303 |   |
|                                                                          |       |                           |       |   |   |
| **Cash  and cash equivalents at end of period**                               | ** ** | **$**                          | **3,349**  |   | $ | 2,220 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**Note 1- Summary of Significant Accounting Policies**

 

We operate our businesses as three segments: electric,gas and other. 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 providesnatural gas distribution to communities in northwest, north central and westcentral Missouri. Our other segment primarily consists of a 100% interest inEmpire District Industries Inc., a subsidiary for our fiber optics business.These businesses are held by our wholly-owned subsidiary, EDE Holdings, Inc.(EDE Holdings).

 

The accompanying interimfinancial statements do not include all disclosures included in the annualfinancial statements and therefore should be read in conjunction with thefinancial statements and notes thereto included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007.

 

The information furnished reflects all adjustments, consisting only ofnormal recurring adjustments, which are in our opinion necessary to statefairly the results for the interim periods as well as present these periods ona consistent basis with the financial statements for the fiscal year ended December 31,2007. Certain reclassifications have been made to prior year information toconform to the current year presentation.

 

**Note 2- Recently Issued Accounting Standards**

 

On September 15, 2006,Statement of Financial Accounting Standards (SFAS) No. 157, “Fair ValueMeasurements,” (FAS 157) was issued. We adopted this statement on January 1,2008. See Note 13 for the discussion of this adoption and the effect of FASBStaff Position (FSP) 157-2 which amended FAS 157 to delay the effective datefor all non-financial assets and liabilities.

 

On February 15, 2007,the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “TheFair-Value Option for Financial Assets and Financial Liabilities – including anamendment of FAS 115” (FAS 159). Under FAS 159, a company may elect to measureeligible financial assets and financial liabilities at fair value. Unrealizedgains and losses on items for which the fair value option has been elected arereported in earnings at each subsequent reporting date. FAS 159 is effectivefor financial statements issued for fiscal years beginning after November 15,2007. FAS 159 had no effect on our financial statements.

 

OnApril 30, 2007, the FASB issued FASB Staff Position No. 39-1 (FIN39), an “Amendment of FASB Interpretation No. 39”. FIN 39 is effective forfiscal years ending after November 15, 2007. It amends paragraph 3 ofInterpretation 39 to replace the terms “conditional contracts and exchangecontracts” with the term “derivative instruments as defined in FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities”. It also amendsparagraph 10 of Interpretation 39 to permit a reporting entity to offset fairvalue amounts recognized for the right to reclaim cash collateral (areceivable) or the obligation to return cash collateral (a payable) againstfair value amounts recognized for derivative instruments executed with the samecounterparty under the same master netting arrangement that have been offset inaccordance with that paragraph. We currently do not apply this offsettingalternative.

 

On December 1, 2007,the FASB issued SFAS 141(R) “Business Combinations” (FAS 141(R)) and SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51” (FAS 160). FAS 141(R) and FAS 160 are effective forbusiness combinations entered into in fiscal years beginning on or after December 15,2008. FAS 141(R) changes the definitions of a business and a businesscombination, and will result in more transactions recorded as businesscombinations. Certain acquired contingencies will be recorded

 

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initially at fair value on the acquisitiondate, transactions and restructuring costs generally will be expensed asincurred and in partial acquisitions, companies generally will record 100percent of the assets and liabilities at fair value, including goodwill.

 

In April 2008, the FASBissued SFAS 161 “Disclosure About Derivative Instruments and Hedging Activities,an Amendment of FASB Statement No. 133” (FAS 161). FAS 161 enhances thecurrent disclosure framework in FAS 133, “Accounting for Derivative Instrumentsand Hedging Activities.” FAS 161 is effective for periods beginning after November 15,2008. We do not expect the adoption of FAS 161 to have a material effect on ourfinancial statement disclosures.

 

See Note 1 under “Notes toConsolidated Financial Statements” in our Annual Report on Form 10-K forthe year ended December 31, 2007 for further information regardingrecently issued accounting standards.

 

**Note 3– Regulatory Matters**

 

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

 

**Regulatory Assets and Liabilities**

 
| **(In thousands)**                        | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Regulatory  Assets:**                        |       |                        |       |                            |       |
| Income taxes                                   |       | $                           | 31,883     |                            | $          | 30,947 |   |
| Unamortized loss  on reacquired debt           |       | 14,152                      |       | 14,813                          |       |
| Unamortized loss  on interest rate derivative  |       | 2,563                       |       | 2,719                           |       |
| Asbury five-year  maintenance                  |       | 2,075                       |       | 2,054                           |       |
| Pension and  other postretirement benefits (1) |       | 21,149                      |       | 22,760                          |       |
| Ice storm costs                                |       | 16,014                      |       | 15,518                          |       |
| Asset retirement  obligation                   |       | 3,044                       |       | 2,971                           |       |
| Other                                          |       | 2,244                       |       | 1,003                           |       |
| **Total**                                      |       | $                           | 93,124     |                            | $          | 92,785 |   |

** **
| **(In thousands)**                        | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Regulatory  Liabilities:**                   |       |                        |       |                            |       |
| Income taxes                                   |       | $                           | 11,041     |                            | $          | 11,214 |   |
| Unamortized gain  on interest rate derivative  |       | 4,306                       |       | 4,391                           |       |
| Cost of removal                                |       | 39,099                      |       | 35,724                          |       |
| Pensions and  other postretirement benefits(2) |       | 7,433                       |       | 5,126                           |       |
| Other                                          |       | 601                         |       | 1,652                           |       |
| **Total**                                      |       | $                           | 62,480     |                            | $          | 58,107 |   |

 

----

(1) Primarily reflects regulatory assetsresulting from the adoption of FAS 158 and regulatory accounting for EDGacquisition costs.

(2) Includes the effect of 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 benefit costs. Since January 1, 2008, approximately$2.3 million in additional regulatory liabilities and corresponding expenseincreases have been recognized.

 

**Note 4– Risk Management andDerivative Financial Instruments**

 

We utilize derivatives tohelp manage our natural gas commodity market risk resulting from purchasingnatural gas, to be used as fuel in our electric business and for sale in ournatural gas business, on the volatile spot market and to manage certaininterest rate exposure.

 

As of June 30, 2008 andDecember 31, 2007, we have recorded the following assets and liabilitiesrepresenting the fair value of derivative financial instruments:

 

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**AssetDerivatives**

 
| ** **                               | ** ** | ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | ** **                              | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **(in thousands)**                  | ** ** | **Balance Sheet Classifications**       | ** ** | **Fair Value**    | ** ** | **Fair Value**        | ** ** |
| Derivatives  designated as hedging       |       |                                    |       |              |       |                  |       |
| instruments  under FAS 133**(1)**        |       |                                    |       |              |       |                  |       |
| Natural gas  contracts, electric segment |       | Current assets                          |       | $                 | 17,614     |                  | $          | 2,435 |   |
|                                     |       | Non-current assets and deferred charges |       | 32,269            |       | 17,520                |       |
| Derivatives not  designated as hedging   |       |                                    |       |              |       |                  |       |
| instruments  under FAS 133               |       |                                    |       |              |       |                  |       |
| Natural gas  contracts, gas segment      |       | Current assets                          |       | 614               |       | 64                    |       |
| **Total  derivative assets**             | ** ** | ** **                              | ** ** | **$**             | **50,497** | ** **            | **$**      | **20,019** | ** ** |

 

----

(1)** **Statement of Financial AccountingStandards (SFAS)**No. 133 “Accounting for Derivative Instrumentsand Hedging Activities” (FAS 133).**

 

**LiabilityDerivatives**

 
| ** **                               | ** ** | ** **                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | ** **                                   | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **(in thousands)**                  | ** ** | **Balance Sheet Classifications**            | ** ** | **Fair Value**    | ** ** | **Fair Value**        | ** ** |
| Derivatives  designated as hedging       |       |                                         |       |              |       |                  |       |
| instruments  under FAS 133               |       |                                         |       |              |       |                  |       |
| Natural gas  contracts, electric segment |       | Current liabilities                          |       | $                 | 2,330      |                  | $          | 1,154 |   |
|                                     |       | Non-current liabilities and deferred charges |       | 93                |       | 698                   |       |
|                                     |       |                                         |       |              |       |                  |       |
| Derivatives not  designated as hedging   |       |                                         |       |              |       |                  |       |
| instruments  under FAS 133               |       | ** **                                   |       |              |       |                  |       |
| Natural gas  contracts, gas segment      | ** ** | Current liabilities                          | ** ** | 648               |       | 457                   | ** ** |
|                                     | ** ** | Non-current liabilities and deferred charges | ** ** | 361               |       | —                | ** ** |
| **Total  derivative liabilities**        | ** ** | ** **                                   | ** ** | **$**             | **3,432**  | ** **            | **$**      | **2,309** | ** ** |

 

*Electric*

 

A $30.4 million net of tax,unrealized gain representing the fair market value of our electric segmentderivative contracts treated as cash flow hedges is recognized as AccumulatedOther Comprehensive Income in the capitalization section of the balance sheetas of June 30, 2008. The tax effect of $18.7 million on this gain isincluded in deferred taxes. These amounts will be adjusted cumulatively on amonthly basis during the determination periods, beginning July 1, 2008 andending on September 30, 2011. As of June 30, 2008, approximately$16.9 million of unrealized gains are applicable to financial instruments whichwill settle within the next twelve months.

 

The following table setsforth the actual pre-tax gains/(losses) from the qualified portion of our hedgingactivities for settled contracts for the electric segment for each of theperiods ended June 30:

** **
| **Derivatives in FAS 133 Cash Flow** | ** ** | **Income  Statement  Classification** | ** ** | **Amount of Gain / (Loss) Reclassed from OCI into Income -(Effective  portion)   ** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Hedging Relationships**                                | ** ** | **of Gain / (Loss)**   | ** ** | **Three Months Ended**                                                                                                                     | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **(in thousands)**                                       | ** ** | **on Derivative**                | ** ** | **2008**                                                                                                                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Commodity  contracts – electric segment                  |       | Fuel Expense                          |       | $                                                                                                                                                    | 1,713      |   | $ | 216 |   | $ | 2,573 |   | $ | 52 |   | $ | 4,130 |   | $ | 567 |   |
|                                                               |            |                                       |            |                                                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 the electric segment for each of the periods ended June 30:

 

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| **Derivatives in FAS 133 Cash Flow** | ** ** | **Income  Statement  Classification of** | ** ** | **Amount of Gain / (Loss) Recognized in Income on Derivative-  (Ineffective)** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| **Hedging Relationships**                                | ** ** | **Gain / (Loss) on**                | ** ** | **Three Months Ended**                                                                                            | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **(in thousands)**                                       | ** ** | **Derivative**                                | ** ** | **2008**                                                                                                                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Commodity  contracts – electric segment                  |       | Fuel Expense                                  |       | $                                                                                                                           | 1          |   | $ | 40 |   | $ | (267 | ) | $ | — |   | $ | 14 |   | $ | — |   |
|                                                               |            |                                               |            |                                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table setsforth “mark-to-market” pre-tax gains/(losses) from derivatives not designatedas hedging instruments under FAS 133 for the electric segment for each of theperiods ended June 30:

 
| **Derivatives Not Designated as Hedging** | ** ** | **Income  Statement  Classification of** | ** ** | **Amount of Gain / (Loss) Recognized in Income on Derivative** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Instruments Under FAS 133(1)**               | ** ** | **Gain / (Loss) on**                | ** ** | **Three Months Ended**                                                                            | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **(in thousands)**                                       | ** ** | **Derivative**                                | ** ** | **2008**                                                                                                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Commodity  contracts – electric segment                  |       | Fuel Expense                                  |       | $                                                                                                           | —     |   | $ | — |   | $ | 302 |   | $ | — |   | $ | 302 |   | $ | — |   |
|                                                               |            |                                               |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)** ** All of our gashedging activities are related to stabilizing fuel costs as part of our fuelprocurement program and are not speculative activities. If conditions change,such as a planned unit outage, we may need to re-designate and/or unwind someof our previous derivatives designated under FAS 133. In this instance, these derivativeswould be classified into the category above.

 

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 July 18, 2008,94% of our anticipated volume of natural gas usage for our electric operationsfor the remainder of year 2008 is hedged, either through physical or financialcontracts, at an average price of $6.895 per Dekatherm (Dth). In addition, thefollowing volumes and percentages of our anticipated volume of natural gasusage for our electric operations for the next five years are hedged at thefollowing average prices per Dth:

** **
| **Year** | ** ** | **% Hedged** | ** ** | **Dth Hedged** | ** ** | **Average Price** | ** ** |
|----------|------------|-------------------|------------|---------------------|------------|------------------------|------------|
| 2009     |       | 60%               |       | 5,161,000           |       | $                      | 6.390      |   |
| 2010     |       | 40%               |       | 3,740,000           |       | $                      | 6.197      |   |
| 2011     |       | 34%               |       | 3,200,000           |       | $                      | 5.561      |   |
| 2012     |       | 13%               |       | 1,200,000           |       | $                      | 7.295      |   |
| 2013     |       | 13%               |       | 1,200,000           |       | $                      | 7.295      |   |

 

On February 15, 2008,we unwound 992,000 Dths of physical gas contracts originally scheduled fordelivery in July and August of 2010 and 2011. This transactionresulted in a gain of approximately $1.3 million after tax which was recordedin the Statement of Operations in the first quarter of 2008. We believe it isprobable that we will take physical delivery under the remaining physical gasforward contracts.

 

*Gas*

 

Weattempt to mitigate our natural gas price risk for our gas segment by acombination of (1) injecting natural gas into storage during theoff-heating season months, (2) purchasing physical forward contracts and (3) purchasingfinancial derivative contracts. We target to have 95% of our storage capacityfull by November 1 for the upcoming winter heating season. As the winter progresses,gas is withdrawn from storage to serve our customers. As of July 17, 2008,we had 0.7 million Dths in storage on the three pipelines that serve ourcustomers. This represents 36% of our storage capacity. Our long-term hedgestrategy is to mitigate price volatility for our customers by hedging a minimumof 50% of current year, up to 50% of second year and up to 20% of third year

 

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expected gas usage by the beginning of the Actual CostAdjustment (ACA) year at September 1.A Purchased Gas Adjustment (PGA) clause is included in our rates for our gassegment operations, therefore, we mark to market any unrealized gains or lossesand any realized gains or losses relating to financial derivative contracts toa regulatory asset or regulatory liability account on our balance sheet.

 

The following table setsforth “mark-to-market” pre-tax gains / (losses) from financial hedginginstruments for the gas segment for each of the periods ended June 30.These gains and losses are recorded to a regulatory asset or liability accountdue to our commission approved natural gas cost recovery mechanism discussedabove.

 
| **Derivatives Not Designated as**     | ** ** | **Balance Sheet  Classification of** | ** ** | **Amount of Gain / (Loss) Recognized on Balance Sheet** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **Hedging Instruments Under FAS 133** | ** ** | **Gain or (Loss) on**           | ** ** | **Three Months Ended**                                                                | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **(in thousands)**                              | ** ** | **Derivative**                                 | ** ** | **2008**                                                                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Commodity  contracts – gas segment              |       | Regulatory assets                              |       | $                                                                                               | (395       | ) | $ | (345 | ) | $ | (71 | ) | $ | (311 | ) | $ | (1,262 | ) | $ | (1,894 | ) |
|                                                      |            |                                                |            |                                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 5–Financing**

 

On May 16, 2008, weissued $90 million principal amount of first mortgage bonds. The net proceedsof approximately $89.4 million, less$0.3 million of legal and other financing fees, were added to ourgeneral funds and used primarily to pay down short-term indebtedness incurred,in part, as a result of our on-going construction program.

 

On March 11, 2008, we amended the Indenture of Mortgage and Deedof Trust of The Empire District Electric Company (EDE Mortgage) in order toprovide us with additional flexibility to pay dividends to our shareholders byincreasing the basket available to pay dividends by $10.75 million. Theamendment followed the successful completion of a solicitation of consents fromthe holders of our First Mortgage Bonds outstanding under the EDE Mortgage. Wereceived consents from holders of 94.46% in aggregate principal amount of theoutstanding bonds and paid fees of approximately $1.6 million to the consentingbondholders.

 

On December 12, 2007, we sold 3,000,000shares of our common stock in an underwritten public offering for $23.00 pershare. The sale resulted in net proceeds of approximately $65.7 million ($69.0million less issuance costs of $3.3 million). The proceeds were added to ourgeneral funds and used to pay down short-term indebtedness incurred, in part,as a result of our on-going construction program.

 

On July 15, 2005, weentered into a $150 million unsecured revolving credit facility until July 15,2010. Borrowings (other than through commercial paper) are at the bank’s primecommercial rate or LIBOR plus 100 basis points based on our current creditratings and the pricing schedule in the line of credit facility. On March 14,2006, we entered into the First Amended and Restated Unsecured Credit Agreementwhich amends and restates the $150 million unsecured revolving credit facility.The principal amount of the credit facility was increased to $226 million, withthe additional $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 $27.5 million as of August 1, 2008. The unallocated credit facility isused for 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 June 30, 2008, 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

 

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operations.There were no outstanding borrowings under this agreement at June 30,2008, however, $12.0 million of the availability thereunder was used at suchdate to back up our outstanding commercial paper.

 

**Note 6 – Commitments and Contingencies**

 

We are a party to variousclaims and legal proceedings arising out of the normal course of our business.Management regularly analyzes this information, and has provided accruals forany liabilities, in accordance with the guidelines of Statement of Financial AccountingStandards SFAS 5, “Accounting for Contingencies” (FAS 5). In the opinion ofmanagement, it is not probable, given the company’s defenses, that the ultimateoutcome of these claims and lawsuits will have a material adverse affect uponour financial condition, or results of operations or cash flows.

 

**Coal,Natural Gas and Transportation Contracts**

 

We have entered into longand short-term agreements to purchase coal and natural gas for our energysupply and natural gas operations. Under these contracts, the natural gassupplies are divided into firm physical commitments and derivatives that areused to hedge future purchases. The firm physical gas and transportationcommitments total $46.9 million for July 1, 2008 through June 30,2009, $45.7 million for July 1, 2009 through June 30, 2011, $44.1million for July 1, 2011 through June 30, 2013 and $61.4 million for July 1,2013 and beyond. In the event that this gas cannot be used at our plants, thegas would remain in storage or be liquidated at market price.

 

We have coal supplyagreements and transportation contracts in place to provide for the delivery ofcoal to the plants. These contracts are written with Force Majeure clauses thatenable us to reduce tonnages or cease shipments under certain circumstances orevents. These include mechanical or electrical maintenance items, acts of God,war or insurrection, strikes, weather and other disrupting events. This reducesthe risk we have for not taking the minimum requirements of fuel under thecontracts. Due to the extended Asbury maintenance outage from December 9,2007 through February 10, 2008, we issued force majeure notices to ourWestern coal suppliers and to the railroads suspending Western coal shipmentsduring the outage. This relieved us of our contractual obligations to receiveshipments of coal to the extent caused by the Asbury outage. The minimumrequirements are $26.0 million for July 1, 2008 through June 30,2009, and $21.0 million for July 1, 2009 through June 30, 2011.

 

**PurchasedPower**

 

We currently supplement ouron-system generating capacity with purchases of capacity and energy from otherutilities in order to meet the demands of our customers and the capacitymargins applicable to us under current pooling agreements and National ElectricReliability Council (NERC) rules.

 

We have contracted withWestar Energy for the purchase of capacity and energy through May 31,2010. Commitments under this contract total approximately $31.0 million throughMay 31, 2010.

 

We also have a long term (30year) agreement for the purchase of capacity from the Plum Point EnergyStation, a new 665-megawatt, coal-fired generating facility which is beingbuilt near Osceola, Arkansas. Construction began in the spring of 2006 withcompletion scheduled for 2010. We have the option to convert the 50 megawattscovered by the purchased power agreement into an ownership interest in 2015.Commitments under this contract total approximately $48.0 million through June 30,2015.

 

We have entered into a20-year purchased power agreement with Cloud County Windfarm, LLC, owned byHorizon Wind Energy, Houston, Texas to purchase the energy generated at theapproximately 105-megawatt Phase 1 Meridian Way Wind Farm to be located inCloud County, Kansas and a 20-year contract with Elk River Windfarm, LLC, ownedby IBERDROLA RENEWABLES, Inc. (formerly known as PPM Energy), to purchasethe energy generated at the 150-megawatt Elk River Windfarm located in ButlerCounty, Kansas. Although these agreements

 

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areconsidered operating leases under Generally Accepted Accounting Principles(GAAP), payments for these wind agreements are recorded as purchased powerexpenses, and, because of the contingent nature of these payments, are notincluded in the operating lease obligations discussed below.

 

**NewConstruction**

 

On March 14, 2006, weentered into contracts to purchase an undivided interest in 50 megawatts of thePlum Point Energy Station’s new 665-megawatt, coal-fired generating facilitywhich is being built near Osceola, Arkansas. The estimated cost isapproximately $86.5 million, excluding AFUDC.

 

On June 13, 2006, weannounced we had entered into an agreement with Kansas City Power &Light (KCP&L) to purchase an undivided ownership interest in the coal-firedIatan 2 generating facility. We will own 12%, or approximately 100 megawatts,of the 850-megawatt unit. Construction began in the spring of 2006 withcompletion scheduled for 2010. On May 7, 2008, KCP&L announced anupdate of their estimated construction figures for the construction of theIatan 2 plant and for the environmental upgrades at the Iatan 1 plant. Ourshare of the Iatan 2 construction costs will increase from a range ofapproximately $183.6 million to $200.5 million to a range of approximately $218million to $230 million. All of these estimated construction expendituresexclude AFUDC. The updated estimate of our share of the cost for environmentalupgrades at the Iatan 1 plant is a range of approximately $56 million to $60million, representing an increase of 22%-30% compared to the previous estimateof approximately $46 million. The in-service date for the Iatan No. 1project is expected to be February 2009.

 

A new combustion turbinepreviously scheduled to be installed by the summer of 2011 will be delayed forat least one year as our generation regulation needs for our purchased poweragreements are being met through a combination of our existing units and theSPP energy imbalance market.

 

**Leases**

 

On June 25, 2007, weentered into a 20-year purchased power agreement with Cloud County Windfarm,LLC, owned by Horizon Wind Energy, Houston, Texas. The agreement provides for a20-year term commencing with the commercial operation date, which is expectedto be about January 1, 2009. We will begin taking delivery of the energyat that time. Pursuant to the terms of the agreement, we will purchase all ofthe output from the approximately 105-megawatt Phase 1 Meridian Way Wind Farmto be located in Cloud County, Kansas. We do not own any portion of thewindfarm. Annual payments are contingent upon output of the facility and canrange from zero to a maximum of approximately $14.6 million based on a 20-yearaverage cost.

 

On December 10, 2004,we entered into a 20-year contract with Elk River Windfarm, LLC to purchase theenergy generated at the 150-megawatt Elk River Windfarm located in ButlerCounty, Kansas. We have contracted to purchase approximately 550,000megawatt-hours of energy per year, or approximately 10% of our annual needs,under the contract, which was declared commercial on December 15, 2005. Wedo not own any portion of the windfarm. Payments for wind energy from the ElkRiver Windfarm are contingent upon output of the facility. Annual payments canrun from zero to a maximum of approximately $16.9 million based on a 20-yearaverage cost.

 

Payments for these windagreements are recorded as purchased power expenses, and, because of thecontingent nature of these payments, are not included in the operating leaseobligations shown below.

 

Wealso currently have short-term operating leases for two unit trains to meetcoal delivery demands and garage and office facilities for our electric segmentand six service center properties for our gas segment. In addition we have afive-year capital lease for telephone equipment.

 

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Ourlease obligations over the next five years are as follows (in thousands):

 
| **Capital Leases**                          | ** ** |
|--------------------------------------------------|------------|
| 2008                                             |       | $ | 288 |   |
| 2009                                             |       | 288 |   |
| 2010                                             |       | 100 |   |
| 2011                                             |       | 1 |   |
| Thereafter                                       |       | — |   |
| **Total  minimum payments**                      | ** ** | **$** | **677** | ** ** |
| Less amount  representing maintenance            |       | 225 |   |
| **Net  minimum lease payments**                  | ** ** | **452** | ** ** |
| Less amount  representing interest               |       | 33 |   |
| **Present  value of net minimum lease payments** | ** ** | **$** | **419** | ** ** |

 

** **

 
| **Operating Leases**        |       |   |      |       |
|-----------------------------|------------|--------|-----------|------------|
| 2008                        |       | $      | 1,243     |       |
| 2009                        |       | 373    |      |
| 2010                        |       | 382    |      |
| 2011                        |       | 251    |      |
| 2012                        |       | 185    |      |
| Thereafter                  |       | 592    |      |
| **Total  minimum payments** | ** ** | **$**  | **3,026** | ** ** |

 

Thegross amount of assets recorded under capital leases totaled $1.3 million at June 30,2008. The accumulated amount of amortization for our capital leases was $0.3million at June 30, 2008.

 

**Environmental Matters**

 

We are subject to variousfederal, state, and local laws and regulations with respect to air and waterquality and with respect to hazardous and toxic materials and wastes, includingtheir identification, transportation, disposal, record-keeping and reporting, aswell as other environmental matters. We believe that our operations are incompliance with present 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).

 

SO2Emissions. Under the 1990 Amendments, the amount of SO2 anaffected unit can emit is regulated. Each existing affected unit has beenallocated a specific number of emission allowances, each of which allows theholder to emit one ton of SO2. Utilities covered by the 1990 Amendments musthave emission allowances equal to the number of tons of SO2 emitted during agiven year by each of their affected units. The annual reconciliation ofallowances, which occurs on a facility wide basis, is held each March 1for the previous calendar year. Allowances may be traded between plants orutilities or “banked” for future use. A market for the trading of emissionallowances exists on the Chicago Board of Trade. The Environmental ProtectionAgency (EPA) withholds annually a percentage of the emission allowancesallocated to each affected unit and sells those emission allowances through adirect auction. We receive compensation from the EPA for the sale of thesewithheld allowances.

 

Our Asbury, Riverton andIatan coal plants burn a blend of low sulfur Western coal (Powder River Basin)and higher sulfur blend coal and petroleum coke, or burn 100% low sulfurWestern coal. In addition, tire-derived fuel (TDF) is used as a supplementalfuel at the Asbury Plant. The

 

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RivertonPlant can also burn natural gas as its primary fuel. The State Line Plant, theEnergy Center Units 3 and 4 and Riverton Unit 12 are gas-fired facilities anddo not receive SO2 allowances. In the near term, annual allowance requirementsfor the State Line Plant, the Energy Center Units 3 and 4 and Riverton Unit 12,which are not expected to exceed 20 allowances per year, will be transferredfrom our inventoried bank of allowances. In 2007, the combined actual SO2allowance need for all affected plant facilities exceeded the number ofallowances allocated to us by the EPA. Based on our March 1, 2008 EPAreconciliation, we had approximately 24,000 banked SO2 allowances at December 31,2007 as compared to 31,000 at December 31, 2006. We project that our 2008emissions will again exceed the number of allowances allocated by the EPA by anamount approximately equal to the difference during 2007.

 

When our SO2 allowance bankis exhausted, we will need to purchase additional SO2 allowances or build aFlue Gas Desulphurization (FGD) scrubber system at our Asbury Plant. Based oncurrent and projected SO2 allowance prices and high-level estimated FGDscrubber construction costs ($81 million in 2010 dollars), we expect it will bemore economical for us to purchase SO2 allowances than to build a scrubber atthe Asbury Plant. We would expect the costs of SO2 allowances to be fullyrecoverable in our rates.

 

On July 14, 2004, wefiled an application with the MPSC seeking an order authorizing us to implementa plan for the management, sale, exchange, transfer or other disposition of ourSO2 emission allowances issued by the EPA. On March 1, 2005, the MPSCapproved a Stipulation and Agreement granting us authority to manage our SO2allowance inventory in accordance with our SO2 Allowance Management Policy(SAMP). The SAMP allows us to swap banked allowances for future vintageallowances and/or monetary value and, in extreme market conditions, to sell SO2allowances outright for monetary value. The Stipulation and Agreement becameeffective March 11, 2005, although we have not yet swapped or sold anyallowances. Our banked allowances are not assigned a cost value. The allowancesare removed from inventory on a FIFO basis.

 

NOxEmissions. The Asbury, Iatan, State Line, Energy Center andRiverton Plants are each in compliance with the NOx limits applicable to themunder the 1990 Amendments as currently operated.

 

The Asbury Plant receivedpermission from the Missouri Department of Natural Resources (MDNR) to burn TDFat a maximum rate of 2% of total fuel input. During 2007, approximately 2,651tons of TDF were burned. This is equivalent to 265,100 discarded passenger cartires.

 

Under the MDNR’s MissouriNOx Rule, our Iatan, Asbury, State Line and Energy Center facilities, likeother facilities in Western Missouri, are generally subject to a maximum NOxemission rate of 0.35 lbs/MMBtu during the ozone season of May 1 through September 30.However, facilities which burn at least 100,000 passenger tire equivalents ofTDF per year, including our Asbury Plant, are 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 at this time.

 

In March 2008, the EPAlowered the National Ambient Air Quality Standard (NAAQS) for ozone from 84 ppbto 75 ppb. Ozone, also called ground level smog, is formed by the mixing of NOxand Volatile Organic Compounds (VOCs) in the presence of sunlight. It ispossible that most of southwest Missouri will be classified as non-attainmentor non-classified by the EPA in 2010 or later. We anticipate that the EPA willclassify the Kansas City area, where Iatan 1 is located, as non-attainment in2010. At this time we do not foresee the need for additional pollution controlsdue to the ozone reduction. In addition, our units do not emit appreciableVOCs. We do not anticipate that southeast Kansas will be classified asnon-attainment under the new ozone NAAQS.

 

Clean Air Interstate Rule (CAIR)

 

The EPA issued its finalCAIR on March 10, 2005. CAIR governed NOx and SO2 emissions from fossilfueled units greater than 25 megawatts in 28 states, including Missouri, whereour Asbury, Energy Center, State Line and Iatan Plants are located and Arkansaswhere the Plum Point Energy Station is being constructed. Kansas was notincluded in CAIR and our Riverton Plant was not affected. The CAIR was notdirected to specific generation units, but instead, required the states

 

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(includingMissouri and Arkansas) to develop specific State Implementation Plans (SIPS) tocomply with specific NOx and SO2 state-wide annual budgets.

 

On July 11, 2008, theU.S. Court of Appeals for the District of Columbia Circuit vacated the CAIR Rule andremanded it back to the EPA. It is not known at this time how the remand willaffect us until CAIR has been finally adjudicated.

 

The EPA must decide whetherit will appeal the ruling, modify CAIR to address the vacated issues, rescindCAIR or replace CAIR. Missouri and Arkansas submitted CAIR SIPS to the EPA.These SIPS were approved and remain in effect until the EPA provides guidanceto the states regarding the U.S. Court of Appeals ruling. No guidance has yetbeen issued by the EPA or the states of Missouri and Arkansas.

 

CAIR would have regulatedSO2 by increasing the 1990 Amendments to the Clean Air Act surrender rate of 1allowance for 1 ton of SO2 emissions to 2:1 in 2010 and 2.86:1 in 2015.

 

If the CAIR rulemaking isultimately revoked by the EPA, and, subsequently, the states rescind theirSIPS, the Clean Air Visibility Rule which includes Best Available RetrofitTechnology (BART) requirement re-emerges under current law. Missouri hadadopted CAIR as the mechanism to comply with BART. Kansas had adopted a specificBART plan, but Riverton is not considered a BART facility in the Kansas plan.

 

In order to help meet previously anticipatedCAIR requirements and to meet air permit requirements for Iatan Unit 2,pollution control equipment is being installed on Iatan Unit 1 with thein-service date expected to be February 2009. This equipment includes aSelective Catalytic Reduction (SCR) system, an FGD scrubber and a baghouse,with our share of the capital cost estimated to be between $56 million and $60million, excluding AFUDC. Of this amount, approximately $3.9 million wasincurred in 2006 and $12.1 million in 2007 with estimated expenditures ofapproximately $25.7 million in 2008 and $17.5 million in 2009. This project wasalso included as part of our Experimental Regulatory Plan approved by the MPSC.

 

Also to help meet previouslyanticipated CAIR requirements and the existing Missouri NOx Rule, weconstructed an SCR at Asbury that was completed in November 2007 andplaced in service in February 2008 at a total cost of approximately $31.0million (excluding AFUDC), of which $28.1 million was expended through December 31,2007 with the remainder expended in 2008. This project was also included aspart of our Experimental Regulatory Plan approved by the MPSC.

 

CleanAir Mercury Rule (CAMR)

 

On March 15, 2005, theEPA issued the CAMR regulations for mercury emissions by power plants under therequirements of the 1990 Amendments to the Clean Air Act. The new mercuryemission limits for Phase 1 were scheduled to go into effect January 1,2010 and remain in effect until January 1, 2018. Beginning January 1,2018, more restrictive mercury emission limits were scheduled to go into effectfor Phase 2 of CAMR. These regulations were challenged in the U.S. Court ofAppeals for the District of Columbia Circuit by a group of states led by NewJersey. On February 8, 2008, the Court of Appeals issued its opinion andvacated the EPA’s CAMR regulations. The EPA is required to reconsider theregulation of mercury under Section 112 of the 1990 Amendments.

 

The EPA has not yet issuedguidance to the states regarding the vacated regulation and recommended futureactions. Based on CAMR, we installed a mercury analyzer at Asbury during late2007 and scheduled the installation of two mercury analyzers at Riverton during2008 in order to verify our mercury emissions and to meet the compliance dateof January 1, 2009 for mercury analyzers and the Phase 1 mercury emissioncompliance date of January 1, 2010. We will complete the installation ofthe mercury analyzers at Riverton in anticipation of future mercuryregulations.

 

After being finallyadjudicated, if the CAMR rulemaking is ultimately revoked by the EPA, MaximumAchievable Control Technology (MACT) re-emerges under current law. No specificMACT rulemakings have yet been adopted in Missouri or Kansas.

 

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CO2 Emissions

 

Our coal and gas plants emit carbon dioxide (CO2), agreenhouse gas. Although not currently regulated, increasing public concern andpolitical pressure from local, regional, national and international bodies mayresult in the passage of new laws mandating limits on greenhouse gas emissionssuch as CO2. Several bills addressing climate change have been introduced inthe U.S. Congress and, in April 2007, the U.S. Supreme Court issued adecision ruling the EPA improperly declined to address CO2 impacts in arule-making related to new motor vehicle emissions. While this decision is notdirectly applicable to power plant emissions, the reasoning of the decisioncould affect other regulatory programs. Various proposals in the U.S. Congresscould require us to purchase offsets or allowances for some or all of our CO2emissions, or otherwise affect us based on the amount of CO2 we generate. Theimpact on us of any future greenhouse gas regulation will depend in large parton the details of the requirements and the timetable for mandatory compliance.

 

*Water.* We operateunder the Kansas and Missouri Water Pollution Plans that were implemented inresponse to the Federal Water Pollution Control Act Amendments of 1972. TheAsbury, Iatan, Riverton, Energy Center and State Line plants are in compliancewith applicable regulations and have received discharge permits and subsequentrenewals as required. The State Line permit was renewed in May 2007. TheEnergy Center permit was renewed in September 2005 and the Asbury Plantpermit was renewed in December 2005.

 

The Riverton Plant isaffected by final regulations for Cooling Water Intake Structures issued underthe Clean Water Act (CWA) Section 316(b) Phase II. The regulationsbecame final on February 16, 2004 and required the submission of aSampling Report and Comprehensive Demonstration Study with the permit renewalin 2008. A Proposal for Information Collection (PIC) was approved by the KansasDepartment of Health and Environment (KDHE). Aquatic sampling commenced in April 2006in accordance with the PIC and was completed in August 2007. Analysis ofthe sampling and summary reports was completed during the first quarter of 2008and submitted to the KDHE. These reports indicate that the effect of thecooling water intake structure on Empire Lake’s aquatic life is insignificant.The need for a further Demonstration Study is not expected. On January 25,2007, the United States Court of Appeals for the Second Circuit remanded keysections of the EPA’s February 16, 2004 regulations. On July 9, 2007, the EPA suspended theregulation and is expected to revise and re-propose the regulation by December 2008.We will monitor the EPA revision process and comment appropriately. Inaddition, on April 14, 2008 certiorari was granted by the United StatesSupreme Court limited to the review as to whether Section 316(b) ofthe CWA authorized the EPA to compare costs with benefits in determining thebest technology available for minimizing adverse environmental impacts atcooling water intake structures. The permit renewal application was preparedand submitted in June 2008. Under the initial 316(b) regulations, wedid not expect costs associated with compliance to be material. We willreassess costs after the Supreme Court issues its ruling and the revised rules arecomplete.

 

*Other.*Under Title Vof the 1990 Amendments, we must obtain site operating permits for each of ourplants from the authorities in the state in which the plant is located. Thesepermits, which are valid for five years, regulate the plant site’s total airemissions; 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 will be required by the renewed permit forAsbury. We estimate that the capital costs associated with the CAM plan willnot exceed $2 million.

 

A new air permit was issuedfor the Iatan Generating Station on January 31, 2006. The new permitcovers the entire Iatan Generating Station and includes the existing Unit No. 1and Iatan Unit No. 2 currently under construction. The new permit limitsUnit No. 1 to a maximum of 6,600 MMBtu per hour of heat input. The 6,600MMBtu per hour heat input limit is in effect until the new SCR, scrubber, andbaghouse are completed, currently estimated to be in February of 2009.

 

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**GasSegment**

 

Theacquisition of Missouri Gas involved the property transfer of two formermanufactured 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. Site #2 hasreceived a letter of no further action from the MDNR. A Change of Use requestand work plan was approved by the MDNR allowing us to expand our existingservice center at Site #1 in Chillicothe, Missouri. This project, which wascompleted in October 2007, included the removal of all excavated soil andthe addition of a new concrete surface replacing the existing gravel at a costof approximately $0.1 million. We estimate further remediation costs at thesetwo sites to be no more than approximately $0.2 million, based on our bestestimate at this time. This estimated liability is recorded under noncurrentliabilities and deferred credits. In our agreement with the MPSC approving theacquisition of Missouri Gas, it was agreed that we could reflect a liabilityand offsetting regulatory asset not to exceed $260,000 for the acquired sites.The MPSC agreed that up to $260,000 of costs related to the clean up of theseMGP sites would be allowed for future rate recovery. Accordingly, we concludedthat rate recovery was probable and at the acquisition date, a regulatory assetof $260,000 was recorded as part of the purchase price allocation based on ouragreement with the MPSC, and in accordance with Statement of FinancialAccounting Standards No. 71 – “Accounting for the Effects of Certain Typesof Regulation” (FAS 71).

 

**Note 7 – Retirement Benefits**

 

Net periodic benefit pension cost, some of which is capitalized as acomponent of labor cost and some of which is deferred as a regulatory asset, iscomprised of the following components (in thousands):

 
| ** **                              | ** ** | **Three  months ended June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Pension  Benefits**                 | ** ** | **SERP** | ** ** | **Other  Postretirement Benefits** | ** ** |
| ** **                              | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                            |       | $                                     | 863        |   | $ | 875 |   | $ | 12 |   | $ | 13 |   | $ | 407 |   | $ | 525 |   |
| Interest cost                           |       | 2,245                                 |       | 2,044 |   | 32 |   | 29 |   | 910 |   | 975 |   |
| Expected return  on plan assets         |       | (2,680                                | )          | (2,588 | ) | — |   | — |   | (938 | ) | (825 | ) |
| Amortization of  prior service cost (1) |       | 186                                   |       | 94 |   | (2 | ) | (3 | ) | (253 | ) | (125 | ) |
| Amortization of  net actuarial loss (1) |       | 404                                   |       | 650 |   | 30 |   | 37 |   | 140 |   | 300 |   |
| **Net  periodic benefit cost**          | ** ** | **$**                                 | **1,018**  | ** ** | **$** | **1,075** | ** ** | **$** | **72** | ** ** | **$** | **76** | ** ** | **$** | **266** | ** ** | **$** | **850** | ** ** |

 
| ** **                              | ** ** | **Six  months ended June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **Pension  Benefits**               | ** ** | **SERP** | ** ** | **Other  Postretirement Benefits** | ** ** |
| ** **                              | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                            |       | $                                   | 1,725      |   | $ | 1,750 |   | $ | 24 |   | $ | 25 |   | $ | 814 |   | $ | 1,050 |   |
| Interest cost                           |       | 4,491                               |       | 4,087 |   | 63 |   | 59 |   | 1,820 |   | 1,950 |   |
| Expected return  on plan assets         |       | (5,359                              | )          | (5,175 | ) | — |   | — |   | (1,876 | ) | (1,650 | ) |
| Amortization of  prior service cost (1) |       | 372                                 |       | 188 |   | (4 | ) | (6 | ) | (505 | ) | (250 | ) |
| Amortization of  net actuarial loss (1) |       | 807                                 |       | 1,300 |   | 61 |   | 73 |   | 279 |   | 600 |   |
| **Net  periodic benefit cost**          | ** ** | **$**                               | **2,036**  | ** ** | **$** | **2,150** | ** ** | **$** | **144** | ** ** | **$** | **151** | ** ** | **$** | **532** | ** ** | **$** | **1,700** | ** ** |

 
| ** **                              | ** ** | **Twelve  months ended June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Pension  Benefits**                  | ** ** | **SERP** | ** ** | **Other  Postretirement Benefits** | ** ** |
| ** **                              | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                            |       | $                                      | 3,468      |   | $ | 3,385 |   | $ | 49 |   | $ | 49 |   | $ | 1,468 |   | $ | 1,915 |   |
| Interest cost                           |       | 8,641                                  |       | 7,991 |   | 122 |   | 111 |   | 3,287 |   | 3,714 |   |
| Expected return  on plan assets         |       | (10,484                                | )          | (10,208 | ) | — |   | — |   | (3,624 | ) | (3,076 | ) |
| Amortization of  prior service cost (1) |       | 772                                    |       | 434 |   | (10 | ) | (5 | ) | (1,266 | ) | (512 | ) |
| Amortization of  net actuarial loss (1) |       | 2,108                                  |       | 2,970 |   | 134 |   | 146 |   | 831 |   | 1,798 |   |
| **Net  periodic benefit cost**          | ** ** | **$**                                  | **4,505**  | ** ** | **$** | **4,572** | ** ** | **$** | **295** | ** ** | **$** | **301** | ** ** | **$** | **696** | ** ** | **$** | **3,839** | ** ** |

 

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(1) 2007 and 2008 amounts are amortized from our regulatory assetrecorded upon adoption of FAS 158.

 

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Based on the performance of our pension plan assets through January 1,2007 and 2008, we were not required by law to fund any additional minimumEmployee Retirement Income Security Act of 1974 (ERISA) amounts with respect to2007 or 2008.

 

We expect to make other postretirement benefit contributions of $1.1million in 2008, of which $0.9 million has been made as of June 30, 2008.

 

**Note 8 – Stock-Based Awards and Programs**

 

Werecognized the following amounts in compensation expense and tax benefits forall of our stock-based awards and programs for the applicable periods ended June 30:

 

                                     **         ****              **

 
| ** **                  | ** ** | **Three Months  Ended** | ** ** | **Six  Months Ended** | ** ** | **Twelve  Months Ended** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------|------------|
| **(in thousands)**     | ** ** | **2008**                | ** ** | **2007**              | ** ** | **2008**                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Compensation  Expense**   |       | $                       | 503        |                  | $          | 513                      |       | $ | 1,377 |   | $ | 1,266 |   | $ | 2,234 |   | $ | 1,997 |   |
| **Tax  Benefit Recognized** |       | 181                     |       | 187                   |       | 505                      |       | 465 |   | 813 |   | 726 |   |
|                             |            |                         |            |                       |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Activityfor our various stock plans for the six months ended June 30, 2008 issummarized below:

 

**Performance-Based Restricted Stock Awards**

 

The fair value of theestimated shares to be awarded under the 2008 grant of restricted stock wasestimated on the date of grant using a Monte Carlo option valuation model. The2007 grant was estimated on the date of grant using a lattice-based optionvaluation model. The assumptions used in each model are noted in the followingtable:

 
| ** **                               | ** ** | **2008**  | ** ** | **2007**       | ** ** |
|------------------------------------------|------------|-----------|------------|----------------|------------|
| Risk-free  interest rate                 |       | 2.44%     |       | 5.09% to 4.88% |       |
| Expected  volatility of Empire stock     |       | 19.9%     |       | 16.6%          |       |
| Expected  volatility of peer group stock |       | 20.3%     |       | 18.9%          |       |
| Expected  dividend yield on Empire stock |       | 5.4%      |       | 5.55%          |       |
| Expected  forfeiture rates               |       | 3%        |       | 3%             |       |
| Plan cycle                               |       | 3 years   |       | 3 years        |       |
| EDE percentile  performance              |       | 24th      |       | 25th           |       |
| Fair value  percentage                   |       | 113.0%    |       | 107.73%        |       |
| Grant date                               |       | 1/30/2008 |       | 1/31/2007      |       |
| Grant date fair  value per share         |       | $24.78    |       | $25.65         |       |

 

                Non-vestedrestricted stock awards (based on target number) as of June 30, 2008 and 2007and changes during the six months ended June 30, 2008 and 2007 were asfollows:

 
| ** **                        | ** ** | **YTD 2008**               | ** ** | ** **                                            | ** ** | **YTD 2007**                   | ** ** | ** **                                            | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|
| ** **                        | ** ** | **Number of  shares** | ** ** | **Weighted Average  Grant Date Price** | ** ** | **Number of shares** | ** ** | **Weighted Average  Grant Date Price** | ** ** |
|                              |       |                       |       |                                                  |       |                           |       |                                                  |       |
| **Nonvested  at January 1,** |       | 43,400                     |       | $                                                     | 23.02      |                           | 38,800     |                                                  | $          | 22.25 |   |
| **Granted**                       |       | 21,000                     |       | $                                                     | 21.92      |                           | 17,700     |                                                  | $          | 23.81 |   |
| **Awarded**                       |       | (6,486                     | )          | $                                                     | 22.77      |                           | (7,598     | )                                                     | $          | 21.79 |   |
| **Not  Awarded**                  |       | (5,614                     | )          |                                                  |       | (5,502                         | )          |                                                  |       |
|                              |       |                       |       |                                                  |       |                           |       |                                                  |       |
| **Nonvested  at June 30,**   |       | 52,300                     |       | $                                                     | 22.64      |                           | 43,400     |                                                  | $          | 23.02 |   |

 

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At June 30, 2008, therewas $0.7 million of total unrecognized compensation cost related to estimatedoutstanding awards. This cost will be recognized over the outstanding yearsremaining in the vesting period.

 

**Stock Options**

 

Asummary of option activity under the plan during the six months ended June 30,2008 and 2007 is presented below:

 
| ** **                      | ** ** | **2008**    | ** ** | **2007**     | ** ** |
|---------------------------------|------------|-------------|------------|--------------|------------|
| ** **                      | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **  | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                      | ** ** | ** **  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                      | ** ** | **Options** | ** ** | **Price**    | ** ** | **Options** | ** ** | **Price** | ** ** |
| Outstanding at  January 1, |       | 149,200     |       | $            | 23.04      |   | 135,000 |   | $ | 22.21 |   |
| Granted                         |       | 56,400      |       | $            | 21.92      |   | 64,200 |   | $ | 23.83 |   |
| Exercised                       |       | —      |       |         |       | (50,000 | ) | $ | 21.79 |   |
| Outstanding at  June 30,   |       | 205,600     |       | $            | 22.73      |   | 149,200 |   | $ | 23.04 |   |
| Exercisable at  June 30,   |       | 43,300      |       | $            | 22.67      |   | 4,200 |   | $ | 21.79 |   |

 

Theaggregate intrinsic value at June 30, 2008 was $0. The aggregate intrinsicvalue at June 30, 2007 was less than $0.1 million. The intrinsic value ofthe unexercised options is the difference between Empire’s closing stock priceon the last day of the quarter and the exercise price multiplied by the numberof in the money options had all option holders exercised their option on thelast day of the quarter. The intrinsic value is zero if such closing price isless than the exercise price.

 

Therange of exercise prices for the options outstanding at June 30, 2008 was$21.79 to $23.81. The weighted-average remaining contractual life ofoutstanding options at June 30, 2008 and 2007 was 7.6 years and 8.1 years,respectively. As of June 30, 2008, there was $0.4 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** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2008**           | ** ** | **2007** | ** ** |
| **Weighted  average fair value of grants** |       | $                  | 2.42       |   | $ | 2.38 |   |
| **Risk-free  interest rate**               |       | 3.38               | %          | 4.68 | % |
| **Dividend  yield**                        |       | 5.40               | %          | 5.33 | % |
| **Expected  volatility**                   |       | 20.0               | %          | 16.13 | % |
| **Expected  life in months**               |       | 78                 |       | 60 |   |
| **Grant  Date**                            |       | 1/30/08            |       | 1/31/07 |   |
|                                            |            |                    |            |  |  |  |  |

 

**EmployeeStock Purchase Plan**

 

OurEmployee Stock Purchase Plan (ESPP) permits the grant to eligible employees ofoptions to purchase common stock at 90% of the lower of market value at date ofgrant or at date of exercise. The lookback feature of this plan is valued at90% of the Black-Scholes methodology plus 10% of the maximum subscriptionprice. As of June 30, 2008, there were 442,009 shares available forissuance in this plan. The adoption of FAS 123(R) did not change thevaluation of the options granted under this plan.

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Subscriptions  outstanding at June 30 |       | 49,960   |       | 42,578   |       |
| Maximum  subscription price                |       | $        | 18.57      | (1)      | $          | 21.23 |   |
| Shares of stock  issued                    |       | 38,803   |       | 37,686   |       |
| Stock issuance  price                      |       | $        | 18.61      |     | $          | 20.05 |   |

 

----

(1) Stockwill be issued on the closing date of the purchase period, which runs from June 1,2008 to May 31, 2009.

 

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Assumptionsfor valuation of these shares are shown in the table below.

 

**ESPP**

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |
| **Weighted  average fair value of grants** |       | $        | 3.46       |     | $          | 3.40 |   |
| **Risk-free  interest rate**               |       | 2.17     | %          | 4.98     | %          |
| **Dividend  yield**                        |       | 6.20     | %          | 5.43     | %          |
| **Expected  volatility**                   |       | 26.00    | %          | 18.01    | %          |
| **Expected  life in months**               |       | 12       |       | 12       |       |
| **Grant  Date**                            |       | 6/2/08   |       | 6/1/07   |       |
|                                            |            |          |            |          |            |  |  |

 

**Note 9 - Regulated Operating Expenses**

 

The following table sets forth the major components comprising “Regulatedoperating expenses” under “Operating Revenue Deductions” on our consolidatedstatements of operations (in thousands) for all periods presented ended June 30:

 
| ** **                                         | ** ** | **Three  Months  Ended** | ** ** | **Three  Months  Ended** | ** ** | **Six  Months  Ended** | ** ** | **Six  Months  Ended** | ** ** | **Twelve  Months  Ended** | ** ** | **Twelve  Months  Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                         | ** ** | **2008**                 | ** ** | **2007**                 | ** ** | **2008**               | ** ** | **2007**               | ** ** | **2008**                  | ** ** | **2007**                  | ** ** |
| Electric  transmission and distribution expense    |       | $                        | 2,687      |                     | $          | 2,314                  |       | $                      | 5,344      |                      | $          | 4,379                     |       | $ | 10,432 |   | $ | 8,755 |   |
| Natural gas  transmission and distribution expense |       | 475                      |       | 425                      |       | 949                    |       | 868                    |       | 1,836                     |       | 1,788                     |       |
| Power operation  expense (other than fuel)         |       | 2,716                    |       | 2,625                    |       | 5,429                  |       | 4,984                  |       | 10,861                    |       | 9,976                     |       |
| Customer  accounts and assistance expense          |       | 2,439                    |       | 2,222                    |       | 4,987                  |       | 4,340                  |       | 9,845                     |       | 8,933                     |       |
| Employee pension  expense (1)                      |       | 1,568                    |       | 1,574                    |       | 3,122                  |       | 3,390                  |       | 6,285                     |       | 5,790                     |       |
| Employee  healthcare plan (1)                      |       | 1,944                    |       | 2,428                    |       | 3,887                  |       | 4,205                  |       | 7,581                     |       | 8,199                     |       |
| General office  supplies and expense               |       | 2,400                    |       | 2,602                    |       | 4,842                  |       | 5,168                  |       | 9,968                     |       | 9,405                     |       |
| Administrative  and general expense                |       | 2,555                    |       | 2,709                    |       | 5,551                  |       | 5,574                  |       | 11,090                    |       | 11,603                    |       |
| Allowance for  uncollectible accounts              |       | 879                      |       | 1,312                    |       | 1,450                  |       | 2,666                  |       | 3,456                     |       | 3,795                     |       |
| Total                                              |       | $                        | 17,663     |                     | $          | 18,211                 |       | $                      | 35,561     |                      | $          | 35,574                    |       | $ | 71,354 |   | $ | 68,244 |   |

 

----

(1) Includeseffects of regulatory treatment for pension and other postretirement benefitsbut does not include capitalized portion or amount deferred to a regulatoryasset.

 

**Note 10– Segment Information**

 

We operate our business as three segments:  electric, gas and other. As part of ourelectric segment, we also provide water service to three towns in Missouri. EDGis our wholly owned subsidiary formed to hold the Missouri Gas assets acquiredfrom Aquila, Inc. on June 1, 2006. The other segment consistsprimarily of a subsidiary for our fiber optics business.

 

In August 2006, we sold our controlling 52%interest in MAPP, a company that specialized in close-tolerance custommanufacturing for the aerospace, electronics, telecommunications and machineryindustries*.* In December 2006, we sold our100% interest in Conversant, Inc., a software company that marketedCustomer Watch, an Internet-based customer information system software. On September 28,2007, we sold our 100% interest in Fast Freedom, Inc., an Internet serviceprovider. For financial reporting purposes, MAPP, Conversant and Fast Freedom,all of which were formerly within our other segment, have been classified asdiscontinued operations and are not included in our segment information.

 

The tables below present statement of income information, balance sheetinformation and capital expenditures of our business segments.

 

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| ** **                                | ** ** | **For the quarter ended June 30, 2008** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                          | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                     | 100,943    |   | $ | 9,148 |   | $ | 1,321 |   | $ | (132 | ) | $ | 111,280 |   |
| Depreciation and  amortization            |       | 13,055                                                                |       | 481 |   | 326 |   | — |   | 13,862 |   |
| Federal and  state income taxes           |       | 2,467                                                                 |       | (403 | ) | 190 |   | — |   | 2,254 |   |
| Operating income                          |       | 11,713                                                                |       | 261 |   | 352 |   | — |   | 12,326 |   |
| Interest income                           |       | 552                                                                   |       | 149 |   | — |   | (158 | ) | 543 |   |
| Interest expense                          |       | 9,680                                                                 |       | 991 |   | 44 |   | (158 | ) | 10,557 |   |
| Income from  AFUDC (debt and equity)      |       | 3,011                                                                 |       | — |   | — |   | — |   | 3,011 |   |
| Income (loss)  from continuing operations |       | 5,157                                                                 |       | (648 | ) | 308 |   | — |   | 4,817 |   |
|                                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                     | 48,579     |   | $ | 453 |   | $ | 667 |   |   |   | $ | 49,699 |   |
|                                           |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **For the quarter ended June 30, 2007** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                          | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                     | 97,984     |   | $ | 8,438 |   | $ | 923 |   | $ | (96 | ) | $ | 107,249 |   |
| Depreciation and  amortization            |       | 12,369                                                                |       | 471 |   | 242 |   | — |   | 13,082 |   |
| Federal and  state income taxes           |       | 3,235                                                                 |       | (469 | ) | 5 |   | — |   | 2,771 |   |
| Operating income                          |       | 13,859                                                                |       | 97 |   | 167 |   | — |   | 14,123 |   |
| Interest income                           |       | 256                                                                   |       | 147 |   | — |   | (316 | ) | 87 |   |
| Interest expense                          |       | 8,916                                                                 |       | 976 |   | 172 |   | (316 | ) | 9,748 |   |
| Income from  AFUDC (debt and equity)      |       | 1,618                                                                 |       | 1 |   | — |   | — |   | 1,619 |   |
| Income (loss)  from continuing operations |       | 6,592                                                                 |       | (736 | ) | (5 | ) | — |   | 5,851 |   |
|                                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                     | 40,149     |   | $ | 469 |   | $ | 1,118 |   | — |   | $ | 41,736 |   |
|                                           |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **For the six months ended June 30, 2008** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **($-000’s)**                   | ** ** | **Electric**                                                                  | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information** |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Revenues                             |       | $                                                                             | 209,682    |   | $ | 36,424 |   | $ | 2,382 |   | $ | (263 | ) | $ | 248,225 |   |
| Depreciation and  amortization       |       | 25,874                                                                        |       | 961 |   | 648 |   | — |   | 27,483 |   |
| Federal and  state income taxes      |       | 3,955                                                                         |       | 1,106 |   | 298 |   | — |   | 5,359 |   |
| Operating income                     |       | 22,659                                                                        |       | 3,639 |   | 587 |   | — |   | 26,885 |   |
| Interest income                      |       | 655                                                                           |       | 264 |   | — |   | (296 | ) | 623 |   |
| Interest expense                     |       | 18,658                                                                        |       | 1,981 |   | 103 |   | (296 | ) | 20,446 |   |
| Income from  AFUDC (debt and equity) |       | 5,476                                                                         |       | 1 |   | — |   | — |   | 5,477 |   |
| Income from  continuing operations   |       | 9,516                                                                         |       | 1,806 |   | 485 |   | — |   | 11,807 |   |
|                                 |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**            |       | $                                                                             | 102,826    |   | $ | 890 |   | $ | 1,082 |   |   |   | $ | 104,798 |   |
|                                      |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                           | ** ** | **For the six months ended June 30, 2007** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **($-000’s)**                   | ** ** | **Electric**                                                                  | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information** |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Revenues                             |       | $                                                                             | 195,345    |   | $ | 36,028 |   | $ | 1,719 |   | $ | (193 | ) | $ | 232,899 |   |
| Depreciation and  amortization       |       | 24,364                                                                        |       | 938 |   | 478 |   | — |   | 25,780 |   |
| Federal and  state income taxes      |       | 3,807                                                                         |       | 582 |   | 21 |   | — |   | 4,410 |   |
| Operating income                     |       | 22,976                                                                        |       | 2,702 |   | 358 |   | — |   | 26,036 |   |
| Interest income                      |       | 522                                                                           |       | 185 |   | — |   | (526 | ) | 181 |   |
| Interest expense                     |       | 17,274                                                                        |       | 1,963 |   | 338 |   | (526 | ) | 19,049 |   |
| Income from  AFUDC (debt and equity) |       | 3,665                                                                         |       | 14 |   | — |   | — |   | 3,679 |   |
| Income from  continuing operations   |       | 9,436                                                                         |       | 926 |   | 21 |   | — |   | 10,383 |   |
| ** **                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**            |       | $                                                                             | 88,056     |   | $ | 733 |   | $ | 1,811 |   |   |   | $ | 90,600 |   |
|                                      |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **For the twelve months ended June 30, 2008** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|
| **($-000’s)**                   | ** ** | **Electric**                                       | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information** |       |                                               |       |   |   |   |   |   |   |   |   |
| Revenues                             |       | $                                                  | 441,376    |   | $ | 60,273 |   | $ | 4,344 |   | $ | (507 | ) | $ | 505,486 |   |
| Depreciation and  amortization       |       | 51,147                                             |       | 1,912 |   | 1,243 |   | — |   | 54,302 |   |
| Federal and  state income taxes      |       | 13,739                                             |       | 1,095 |   | 559 |   | — |   | 15,393 |   |
| Operating income                     |       | 59,904                                             |       | 5,626 |   | 885 |   | — |   | 66,415 |   |
| Interest income                      |       | 695                                                |       | 454 |   | — |   | (381 | ) | 768 |   |
| Interest expense                     |       | 37,166                                             |       | 3,974 |   | 17 |   | (381 | ) | 40,776 |   |
| Income from  AFUDC (debt and equity) |       | 9,459                                              |       | 4 |   | — |   | — |   | 9,463 |   |
| Income from  continuing operations   |       | 31,916                                             |       | 1,849 |   | 840 |   | — |   | 34,605 |   |
| ** **                           |       |                                               |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**            |       | $                                                  | 203,316    |   | $ | 2,180 |   | $ | 4,277 |   |   |   | $ | 209,773 |   |
|                                      |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **For the twelve months ended June 30, 2007** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                                     | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                                | 407,583    |   | $ | 59,547 |   | $ | 3,254 |   | $ | (386 | ) | $ | 469,998 |   |
| Depreciation and  amortization            |       | 42,756                                                                           |       | 1,851 |   | 925 |   | — |   | 45,532 |   |
| Federal and  state income taxes           |       | 21,027                                                                           |       | 190 |   | (18 | ) | — |   | 21,199 |   |
| Operating income                          |       | 66,271                                                                           |       | 4,035 |   | 742 |   |   |   | 71,048 |   |
| Interest income                           |       | 1,257                                                                            |       | 223 |   | — |   | (1,103 | ) | 377 |   |
| Interest expense                          |       | 32,737                                                                           |       | 3,986 |   | 832 |   | (1,103 | ) | 36,452 |   |
| Income from  AFUDC (debt and equity)      |       | 6,783                                                                            |       | 73 |   | — |   | — |   | 6,856 |   |
| Income (loss)  from continuing operations |       | 40,565                                                                           |       | 336 |   | (91 | ) |   |   | 40,810 |   |
|                                      |       |                                                                             |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures(1)**              |       | $                                                                                | 152,100    |   | $ | 1,356 |   | $ | 2,502 |   |   |   | $ | 155,958 |   |
|                                           |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **As of June 30, 2008** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| **($-000’s)**             | ** ** | **Electric**                                | ** ** | **Gas****(1)** | ** ** | **Other** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                                           | 1,513,525  |   | $ | 124,141 |   | $ | 22,529 |   | $ | (80,261 | ) | $ | 1,579,934 |   |
|                                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

 

(1) Includesgoodwill of $39,492

 

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| ** **                     | ** ** | **As of December 31, 2007** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| **($-000’s)**             | ** ** | **Electric**                                    | ** ** | **Gas****(1)** | ** ** | **Other** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                                            |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                                               | 1,395,289  |   | $ | 121,918 |   | $ | 22,101 |   | $ | (66,234 | ) | $ | 1,473,074 |   |
|                                |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

 

(1) Includesgoodwill of $39,492.

 

**Note 11– Discontinued Operations**

 

In August 2006, we sold our controlling 52%interest in MAPP, a company that specialized in close-tolerance custommanufacturing for the aerospace, electronics, telecommunications and machineryindustries*.* In December 2006, we sold our100% interest in Conversant, Inc., a software company that marketedCustomer Watch, an Internet-based customer information system software. On September 28,2007, we sold our 100% interest in Fast Freedom, Inc., an Internet serviceprovider. We have reported MAPP, Conversant and Fast Freedom’s results asdiscontinued operations. A summary of the components of gains or losses fromdiscontinued operations for all periods reported as of June 30, follows:

 
| ** **                                               | ** ** | **For the  three months ended June 30, 2007** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|
| **($-000’s)**                                       | ** ** | **Fast Freedom**                              | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Revenues                                                 |       | $                                                  | 310        |   | $ | 310 |   |
| Expenses                                                 |       | 337                                                |       | 337 |   |
| Losses from  discontinued operations before income taxes |       | (27                                                | )          | (27 | ) |
| Income tax                                               |       | 10                                                 |       | 10 |   |
| Minority  interest                                       |       | —                                             |       | — |   |
| Income tax –  minority interest                     |       | —                                             |       | — |   |
| **Loss  from discontinued operations**                   | ** ** | **$**                                              | **(17**    | **)** | **$** | **(17** | **)** |

 
| ** **                                               | ** ** | **For the  six months ended June 30, 2007** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ -000’s)**                                 | ** ** | **Fast Freedom**                            | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues                                                 |       | $                                                | 622        |   | $ | 622 |   |
| Expenses                                                 |       | 699                                              |       | 699 |   |
| Losses from  discontinued operations before income taxes |       | (77                                              | )          | (77 | ) |
| Income tax                                               |       | 29                                               |       | 29 |   |
| Minority  interest                                       |       | —                                           |       | — |   |
| Income tax –  minority interest                     |       | —                                           |       | — |   |
| **Loss  from discontinued operations**                   | ** ** | **$**                                            | **(48**    | **)** | **$** | **(48** | **)** |

 
| ** **                                                 | ** ** | **For the  twelve months ended June 30, 2008** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($-000’s)**                                         | ** ** | **Fast Freedom**                               | ** ** | **Total** | ** ** |
| ** **                                                 |       |                                                |       |   |   |
| Revenues                                                   |       | $                                                   | 282        |   | $ | 282 |   |
| Expenses                                                   |       | 103                                                 |       | 103 |   |
| Earnings from  discontinued operations before income taxes |       | 179                                                 |       | 179 |   |
| Income tax                                                 |       | (68                                                 | )          | (68 | ) |
| Minority  interest                                         |       | —                                              |       | — |   |
| Income tax –  minority interest                       |       | —                                              |       | — |   |
| **Gain  from discontinued operations**                     | ** ** | **$**                                               | **111**    | ** ** | **$** | **111** | ** ** |

 

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| ** **                                               | ** ** | **For the  twelve months ended June 30, 2007** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($-000’s)**                                       | ** ** | **MAPP**                                            | ** ** | **Conversant** | ** ** | **Fast Freedom** | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                   | 1,904      |   | $ | 883 |   | $ | 1,301 |   | $ | 4,088 |   |
| Expenses                                                 |       | 2,040                                               |       | 1,815 |   | 1,513 |   | 5,368 |   |
| Losses from  discontinued operations before income taxes |       | (136                                                | )          | (932 | ) | (212 | ) | (1,280 | ) |
| Gain on disposal                                         |       | 272                                                 |       | 555 |   | — |   | 827 |   |
| Income tax                                               |       | 52                                                  |       | 355 |   | 81 |   | 488 |   |
| Minority  interest                                       |       | 65                                                  |       | — |   | — |   | 65 |   |
| Income tax –  minority interest                     |       | (25                                                 | )          | — |   | — |   | (25 | ) |
| **Gain  (loss) from discontinued operations**            |       | $                                                   | 228        |   | $ | (22 | ) | $ | (131 | ) | $ | 75 |   |

 

**Note 12–FAS 157 – Fair Value Measurements**

 

In September 2006,Statement of Financial Accounting Standards (SFAS) No. 157, “Fair ValueMeasurements,” (FAS 157) was issued. This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.This statement applies under other accounting pronouncements that require orpermit fair value measurements. FASB Staff Position (FSP) 157-1, issued in February 2008,amended FAS 157 to exclude FASB Statement No. 13, “Accounting for Leases”(FAS 13) and other FAS 157 accounting pronouncements that address fair valuemeasurements for purposes of lease classification or measurement under FAS 13.FASB Staff Position (FSP) 157-2 amended FAS 157 to delay the effective date ofFAS 157 for all nonfinancial assets and nonfinancial liabilities to fiscalyears beginning after November 15, 2008.

 

The adoption of FAS 157 forfinancial assets and financial liabilities, effective January 1, 2008 didnot have a material impact on our consolidated financial position, results ofoperations and cash flows. We are evaluating the effect the adoption of FAS 157for nonfinancial assets and nonfinancial liabilities will have on ourconsolidated financial position, results of operations and cash flows.

 

FAS 157 establishes athree-tier fair value hierarchy, which prioritizes the inputs used in measuringfair value. These tiers include: (i) Level 1, defined as quoted prices inactive markets for identical instruments; (ii) Level 2, defined as inputsother than quoted prices in active markets that are either directly orindirectly observable; and (iii) Level 3, defined as unobservable inputsin which little or no market data exists, therefore requiring an entity todevelop its own assumptions.

 

The following fair valuehierarchy table presents information about our assets measured at fair valueusing the market value approach on a recurring basis as of June 30, 2008:

 

 

 
| ** **                              | ** ** | **Fair  Value Measurements at Reporting Date Using** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| **($ in 000’s)  Description** | ** ** | **As of  6/30/08**                                   | ** ** | **Quoted Prices in   Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Net derivative  assets*                 |       | $                                                    | 47,065     |   | $ | 10,957 |   | $ | 36,108 |   | — |   |
| Cash and cash  equivalents              |       | 1,477                                                |       | 1,477 |   | — |   | — |   |
|                                         |            |                                                      |            |  |  |  |  |  |  |  |  |  |

 

----

*Theonly recurring liabilities are derivative related and are netted against theasset amounts shown in the table above. 

 

Wedid not have any gains or losses for valuation using significant unobservableinputs.

 

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**Note 13–Income Taxes**

 

We adopted the provisions ofFASB Interpretation No. 48, “Accountingfor Uncertainty in**Income Taxes,”**on January 1, 2007. Wedecreased our estimate of unrecognized tax benefits during the quarter ended March 31,2008 as a review of certain amended returns by the Joint Committee on Taxationwas completed. The Joint Committee accepted our tax position which led us torecognize certain tax benefits previously unrecognized. We do not expect anysignificant changes to our unrecognized tax benefits over the next twelvemonths. The reserve balance related to unrecognized tax benefits as of June 30,2008 and December 31, 2007 was $219,000 and $328,000, respectively.

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**EXECUTIVE SUMMARY**

 

Weoperate our businesses as three segments: electric, gas and other. The****Empire District Electric Company (EDE) is an operatingpublic utility engaged in the generation, purchase, transmission, distributionand sale of electricity in parts of Missouri, Kansas, Oklahoma and Arkansas. Aspart of our electric segment, we also provide water service to three towns inMissouri. The Empire District Gas Company (EDG) is our wholly owned subsidiaryformed to hold the Missouri Gas assets acquired from Aquila, Inc. on June 1,2006. It provides natural gas distribution to customers in 44 communities innorthwest, north central and west central Missouri. Our other segment consistsprimarily of our fiber optics business. During the twelve months ended June 302008, 87.3% of our gross operating revenues were provided from sales from ourelectric segment (including 0.4% from the sale of water), 11.9% from our gassegment and 0.8% from our other segment.

 

InAugust 2006, we sold our controlling 52% interest in Mid-America PrecisionProducts (MAPP), which specialized in close-tolerance custom manufacturing. In December 2006,we sold our 100% interest in Conversant, Inc., a software company thatmarketed Customer Watch, an Internet-based customer information systemsoftware. On September 28, 2007, we sold our 100% interest in Fast Freedom, Inc.,an Internet service provider. For financial reporting purposes, MAPP,Conversant and Fast Freedom, all of which were formerly within our othersegment, have been classified as discontinued operations and are not includedin our segment information.

 

 

***Electric Segment***

 

The primary drivers of ourelectric operating revenues in any period are: (1) rates we can charge ourcustomers, (2) weather, (3) customer growth and (4) generaleconomic conditions. The utility commissions in the states in which we operate,as well as the Federal Energy Regulatory Commission (FERC), set the rates whichwe can charge our customers. In order to offset expenses, we depend on ourability to receive adequate and timely recovery of our costs (primarily fueland purchased power) and/or rate relief. We assess the need for rate relief inall of the jurisdictions we serve and file for such relief when necessary.Weather affects the demand for electricity. Very hot summers and very coldwinters 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 1.4% to 1.6% over the nextseveral years. Our electric customer growth for the twelve months ended June 30,2008 was 0.7%. We define electric sales growth to be growth in kWh sales periodover period excluding the impact of weather. The primary drivers of electricsales growth are customer growth and general economic conditions.

 

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The primary drivers of our electric operatingexpenses in any period are: (1) fuel and purchased power expense, (2) maintenanceand repairs expense, including repairs following severe weather and plantoutages, (3) taxes and (4) non-cash items such as depreciation andamortization expense. Fuel and purchased power costs are our largest expenseitems. Several factors affect these costs, including fuel and purchased powerprices, plant outages and weather, which drives customer demand. In order tocontrol the price we pay for fuel for electric generation and purchased power,we have entered into long and short-term agreements to purchase power(including wind energy) and coal and natural gas for our energy supply. Wecurrently engage in hedging activities in an effort to minimize our risk fromvolatile natural gas prices.

 

***Gas Segment***

 

The primary drivers of ourgas operating revenues in any period are: (1) rates we can charge ourcustomers, (2) weather, (3) customer growth, (4) the cost ofnatural gas and interstate pipeline transportation charges and (5) generaleconomic conditions. The MPSC sets the rates which we can charge our customers.In order to offset expenses, we depend on our ability to receive adequate andtimely recovery of our costs (primarily commodity natural gas) and/or raterelief. We assess the need for rate relief and file for such relief whennecessary. However, as part of the unanimous stipulation and agreement filedwith the MPSC on March 1, 2006 and approved on April 18, 2006, wehave agreed 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,which generally corresponds with the heating season. Customer growth, which isthe growth in the number of customers, contributes to the demand for gas. Our gas segment customer contraction for thetwelve months ended June 30, 2008 was 4.1%, which we believe was due tohigher gas prices and general economic conditions. We expect our annual gas customergrowth to be up to 1% over the next several years. We define gas sales growthto be growth in mcf sales excluding the impact of weather. The primary driversof gas sales growth are customer growth and general economic conditions.

 

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 second quarter of 2008, basic anddiluted earnings per weighted average share of common stock were $0.14 ascompared to $0.19 in the second quarter of 2007. For the six months ended June 30,2008, basic and diluted earnings per weighted average share of common stockwere $0.35 as compared to $0.34 for the six months ended June 30, 2007.For the twelve months ended June 30, 2008, basic and diluted earnings perweighted average share of common stock were $1.08 as compared to $1.35 for thetwelve months ended June 30, 2007. As reflected in the table below, theprimary positive driver for all periods presented was increased electricrevenues, while increased total electric fuel and purchased power costs was theprimary negative driver for all periods presented. Increased depreciation wasalso a negative driver for all periods presented but primarily for the twelvemonths ended June 30, 2008 mainly due to $5.1 million of regulatoryamortization related to the December 21, 2006 Missouri rate order that hasbeen recorded as depreciation expense during this twelve-month period.

 

The following reconciliation of basicearnings per share between the three months, six months and twelve months endedJune 30, 2007 versus June 30, 2008 is a non-GAAP presentation. Webelieve this information is useful in understanding the fluctuation in earningsper share between the prior and current years. The reconciliation presents theafter tax impact of significant items and 

 

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componentsof the statement of operations on a per share basis before the impact ofadditional stock issuances which is presented separately. Earnings per sharefor the three months, six months and twelve months ended June 30, 2007 and2008 shown in the reconciliation are presented on a GAAP basis and are the sameas the amounts included in the statements of operations. This reconciliationmay not be comparable to other companies or more useful than the GAAPpresentation included in the statements of operations.

** **
| ** **                                                         | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| **Earnings  Per Share – 2007**                                | ** ** | **$**                        | **0.19**   | ** **                 | **$**      | **0.34**                      | ** ** | **$** | **1.35** | ** ** |
|                                                               |       |                         |       |                       |       |                          |       |
| **Revenues**                                                       |       |                         |       |                       |       |                          |       |
| Electric  on-system                                                |       | $                            | (0.01      | )                          | $          | 0.15                          |       | $ | 0.42 |   |
| Electric off –  system and other                              |       | 0.08                         |       | 0.18                       |       | 0.31                          |       |
| Gas                                                                |       | 0.02                         |       | 0.01                       |       | 0.01                          |       |
| Water                                                              |       | —                       |       | —                     |       | —                        |       |
| Other                                                              |       | 0.01                         |       | 0.01                       |       | 0.02                          |       |
| **Expenses**                                                       | ** ** | ** **                   | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Electric fuel                                                      |       | (0.04                        | )          | (0.18                      | )          | (0.51                         | )          |
| Purchased power                                                    |       | (0.07                        | )          | (0.20                      | )          | (0.31                         | )          |
| Cost of natural  gas sold and transported                          |       | (0.01                        | )          | 0.01                       |       | 0.02                          |       |
| Regulated –  electric segment                                 |       | 0.01                         |       | (0.01                      | )          | (0.08                         | )          |
| Regulated –gas  segment                                       |       | —                       |       | 0.01                       |       | 0.01                          |       |
| Maintenance and  repairs                                           |       | (0.01                        | )          | 0.11                       |       | 0.05                          |       |
| Depreciation and  amortization                                     |       | (0.02                        | )          | (0.04                      | )          | (0.19                         | )          |
| Other taxes                                                        |       | (0.01                        | )          | (0.02                      | )          | (0.03                         | )          |
| Interest charges                                                   |       | (0.02                        | )          | (0.03                      | )          | (0.09                         | )          |
| AFUDC                                                              |       | 0.03                         |       | 0.04                       |       | 0.05                          |       |
| Loss on plant  allowance                                           |       | —                       |       | —                     |       | 0.02                          |       |
| Gain on sale of  assets                                            |       | —                       |       | —                     |       | 0.03                          |       |
| Change in  effective income tax rates                              |       | —                       |       | (0.01                      | )          | 0.05                          |       |
| Other income and  deductions                                       |       | —                       |       | 0.01                       |       | 0.01                          |       |
| Dilutive effect  of additional shares issued in December 2007 |       | (0.01                        | )          | (0.03                      | )          | (0.06                         | )          |
| **Earnings  Per Share – 2008**                                | ** ** | **$**                        | **0.14**   | ** **                 | **$**      | **0.35**                      | ** ** | **$** | **1.08** | ** ** |

 

**RecentActivities**

 

***Financing***

 

On May 16, 2008, weissued $90 million principal amount of first mortgage bonds. The net proceedsof approximately $89.4 million, less$0.3 million of legal and other financing fees, were added to ourgeneral funds and used primarily to pay down short-term indebtedness incurred,in part, as a result of our on-going construction program.

 

***Amendment of EDE Mortgage***

 

On March 11, 2008, weamended the Indenture of Mortgage and Deed of Trust of The Empire DistrictElectric Company (EDE Mortgage) in order to provide us with additionalflexibility to pay dividends to our shareholders by increasing the basketavailable to pay dividends by $10.75 million. The amendment followed thesuccessful completion of a solicitation of consents from the holders of ourFirst Mortgage Bonds outstanding under the EDE Mortgage. We received consentsfrom holders of 94.46% in aggregate principal amount of the outstanding bondsand paid fees of approximately $1.6 million to the consenting bondholders. See “—Dividends” below.

 

***Asbury SCR and Maintenance Outage***

 

We constructed an SCR at Asbury that wascompleted in November 2007 and placed in service in February 2008.The total cost of the SCR project was approximately $31.0 million

 

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(excluding AFUDC), of which$28.1 million was expended through December 31, 2007 with the remainderexpended in 2008. This project was alsoincluded as part of our Experimental Regulatory Plan approved by the MPSC. We combinedthis project with our five year Asbury maintenance outage.

 

OurAsbury units went off-line September 21, 2007 and were expected to be backon-line during the last week of November, during which time we expected to tiein the SCR. However, on December 7,2007, during the reassembly of the generator, the unit failed inspection. On December 9,2007 it was determined that corrective action would be necessary and thatadditional work would require the unit to remain on outage an additional 60days. The unit was returned to service on February 10, 2008. We had to replace the energy that would havebeen generated by our coal-fired units at the Asbury plant with energygenerated at our gas plants and with purchased power. After assessing theactual cost of the incremental purchased power and gas-fired generation, weestimate the planned outage added incremental expenses of approximately $8.7million for the fourth quarter of 2007. We estimate the extended outageincreased expenses an additional $3.5 million in the fourth quarter of 2007 (December 8-December 31,2007) and an additional $5.8 million in the first quarter of 2008 (January 1-February 10,2008).

 

***Regulatory Matters***

 

On October 1, 2007, wefiled a request with the MPSC for an annual increase in base rates for ourMissouri electric customers in the amount of $34.7 million, or 10.11%. Werequested recovery of our investment in the new 150-megawatt combustionturbine, Unit 12, at our Riverton plant, capital expenditures associated withthe construction of a selective catalytic reduction system at our Asbury Plant,capital expenditures and expenses related to the January and December 2007ice storms and other changes in our underlying costs. We also requestedimplementation of a fuel adjustment clause in Missouri which would permit thedistribution to Missouri customers of changes in fuel and purchased powercosts.

 

The MPSC issued an order on July 30, 2008, effective August 9,2008, granting an annual increase in base rates for Missouri electric customersin the amount of $22.0 million, or 6.7%, based on a 10.8% return on equity. Weanticipate that the new rates will go into effect by September 1, 2008.The order contains two components. The first component provides an addition tobase rates of approximately $27.7 million. This increase in base rates waspartially offset by a $5.7 million downward adjustment to regulatoryamortization, which is the second component. Regulatory amortization providesus additional cash through rates during the current construction cycle. Thisconstruction, which is part of our long-range plan to ensure reliability,includes the facilities at the Riverton Power Plant and Iatan 2 Power Plant, aswell as environmental improvements at the Asbury Power Plant and at Iatan 1.The regulatory amortization is now approximately $4.5 million. The MPSC alsoauthorized a fuel adjustment clause for our Missouri customers. The MPSCestablished a base rate for the recovery of fuel and purchased power expensesused to supply energy and the clause permits the distribution to customers of95% of the changes in fuel and purchased power costs above or below the base.Rates related to the fuel adjustment clause will be modified twice a year subjectto the review and approval by the MPSC. The MPSC also approved the Stipulationsand Agreements providing for the recovery of deferred expenses for the 2007 icestorms and continuation of the pension and other post-retirement employeebenefits trackers established in our 2006 Missouri rate case. The MPSC orderalso established a two-way tracker, which allows us to defer the amount overand under the cost of compliance to a regulatory asset or liability, for thecost of compliance with the vegetation and infrastructure reliability rules adoptedby the MPSC which had an effective date of July 2008.

 

With regard to our 2006 Missouri rate case,on March 19, 2007, the Office of Public Counsel (OPC) filed a Petition forWrit of Mandamus with the Missouri Supreme Court seeking an order requiring theMissouri Public Service Commission (MPSC) to vacate and rescind its December 29,2006 order approving tariffs and directing the MPSC to provide an effectivedate for any subsequent tariff approval order that allows at least ten days toprepare and file an application for rehearing. On October 30, 2007, the SupremeCourt issued an opinion directing the MPSC to vacate its December 29 orderapproving tariffs and allow the OPC a reasonable time to prepare and file anapplication for

 

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rehearing. The Court did not examine thelawfulness or reasonableness of the substance of the MPSC’s December 29,2006 order approving tariffs, and considered only the timing of the issuance ofthe order. The Court also did not consider the underlying tariffed rates whichcontinue in force and in effect.

 

Actingupon the opinion of the Missouri Supreme Court, the MPSC issued an order on December 4,2007, effective December 14, 2007, vacating the December 29, 2006order and re-approving the tariffs and the same resulting increase in rates.The OPC and intervenors Praxair, Inc. and Explorer Pipeline Company, filedapplications for rehearing with the MPSC regarding this order. Theseapplications for rehearing remain pending before the MPSC.

 

OnMarch 26, 2008, the MPSC issued its Order Granting Reconsideration ofReport and Order, to be effective April 5, 2008, and its Report and OrderUpon Reconsideration, to be effective April 5, 2008, in which the MPSCmade additional findings and reaffirmed the rate increase originally authorizedin December of 2006. In this order, the MPSC made two adjustments. Anincrease in the return on rate base was offset by a decrease in the regulatoryamortization from $10.4 million to $10.2 million. The OPC and intervenorsPraxair and Explorer Pipeline filed applications for rehearing regarding thisReport and Order Upon Reconsideration. These applications for rehearing remainpending before the MPSC.

 

Alsowith regard to the 2006 Missouri rate case, on March 18, 2008, the OPCfiled a Petition for Writ of Mandamus with the Missouri Supreme Court to forcethe MPSC to comply with the Missouri Supreme Court’s opinion and order of October 30,2007. The OPC, the MPSC, the intervenors and Empire have filed written briefsand made oral arguments.

 

Wefiled applications for Accounting Authority Orders in Oklahoma and Kansas andfiled a request for storm recovery in Arkansas respecting costs incurred due tothe two major ice storms in 2007. On May 23, 2008, the Arkansas PublicService Commission issued an Order allowing us to defer approximately $0.4million of extraordinary incremental expenses incurred as a result of the 2007ice storms as a regulatory asset and amortize such costs over a 5 year periodbeginning with the first full month following the storms. On June 24,2008, the State Corporation Commission of the State of Kansas issued an Orderapproving our application for an accounting order to accumulate and defer forrecovery in future rate case proceedings, approximately $1.1 million of 2007ice storm costs as a regulatory asset to be amortized over a 10-year period. OnJune 25, 2008, the Corporation Commission of Oklahoma issued a Final Orderapproving a Joint Stipulation and Settlement Agreement giving us permission todefer and record approximately $0.5 million of 2007 ice storm costs as aregulatory asset and authorizing recovery of the regulatory asset over a fiveyear period, via a rider effective July 1, 2008. We were granted raterecovery of the Missouri ice storm costs as part of the order issued by the MPSC on July 30, 2008 as discussed above.

 

Foradditional information, see “Rate Matters” below.

 

**RESULTS OF OPERATIONS**

 

The following discussion analyzes significant changes in the results ofoperations for the three-month, six-month and twelve-month periods ended June 30,2008, compared to the same periods ended June 30, 2007.

 

The following table represents our results ofoperations by operating segment for the applicable periods ended June 30:

 
| ** **                           | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| **(in millions)**               | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                   |       |                           |       |                              |       |   |   |   |   |   |   |
| Income from  continuing operations   |       |                   |       |                           |       |                              |       |   |   |   |   |   |   |
| Electric                             |       | $                      | 5.2        |                           | $          | 6.6                               |       | $ | 9.5 |   | $ | 9.4 |   | $ | 31.9 |   | $ | 40.6 |   |
| Gas                                  |       | (0.6                   | )          | (0.8                           | )          | 1.8                               |       | 0.9 |   | 1.8 |   | 0.3 |   |
| Other                                |       | 0.3                    |       | 0.0                            |       | 0.5                               |       | 0.0 |   | 0.9 |   | (0.1 | ) |
| Income from  continuing operations   |       | $                      | 4.8        |                           | $          | 5.8                               |       | $ | 11.8 |   | $ | 10.3 |   | $ | 34.6 |   | $ | 40.8 |   |
| Income from  discontinued operations |       | —                 |       | —                         |       | —                            |       | — |   | 0.1 |   | 0.1 |   |
| Net income                           |       | $                      | 4.8        |                           | $          | 5.8                               |       | $ | 11.8 |   | $ | 10.3 |   | $ | 34.7 |   | $ | 40.9 |   |

 

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**Differences could occur due to rounding.*

 

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***ElectricSegment***

 

**Overview**

 

Our electric segment income from continuing operations for the secondquarter of 2008 was $5.2 million as compared to $6.6 million for the secondquarter of 2007.

 

Electric segment operating revenues comprised approximately 90.7% ofour total operating revenues during the second quarter of 2008. Of our totalelectric operating revenues during the second quarter of 2008, approximately36.2% were from residential customers, 31.5% from commercial customers, 16.5%from industrial customers, 4.4% from wholesale on-system customers, 7.3% fromwholesale off-system transactions and 4.1% from miscellaneous sources,primarily public authorities. The percentage of revenues provided from ourwholesale off-system transactions has increased during the second quarter of2008 as compared to the second quarter of 2007, primarily due to salesfacilitated by the SPP Energy Imbalance Services (EIS) market that began on February 1,2007.

 

The amounts and percentage changes from the prior periods inkilowatt-hour (“kWh”) sales and operating revenues by major customer class foron-system sales for the applicable periods ended June 30, were as follows:

 
| ** **             | ** ** | **kWh Sales (in millions)** | ** ** | **kWh Sales (in millions)** | ** ** | **kWh Sales (in millions)** | ** ** |
|------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **Second**                  | ** ** | **Second**                  | ** ** | ** **                  | ** ** | **6 Months** | ** ** | **6 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Quarter**                 | ** ** | **Quarter**                 | ** ** | **%**                       | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| **(in millions)** | ** ** | **2008**                    | ** ** | **2007**                    | ** ** | **Change***                 | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential            |       | 381.6                       |       | 378.7                       |       | 0.8                         | %          | 975.1 |   | 923.9 |   | 5.5 | % | 1,981.7 |   | 1,956.3 |   | 1.3 | % |
| Commercial             |       | 392.5                       |       | 398.4                       |       | (1.5                        | )          | 771.4 |   | 756.1 |   | 2.0 |   | 1,626.1 |   | 1,601.0 |   | 1.6 |   |
| Industrial             |       | 269.5                       |       | 289.5                       |       | (6.9                        | )          | 531.6 |   | 544.9 |   | (2.4 | ) | 1,097.0 |   | 1,135.5 |   | (3.4 | ) |
| Wholesale  On-System   |       | 83.7                        |       | 82.5                        |       | 1.4                         |       | 169.1 |   | 162.7 |   | 3.9 |   | 348.8 |   | 339.0 |   | 2.9 |   |
| Other**                |       | 30.0                        |       | 27.6                        |       | 8.8                         |       | 62.0 |   | 55.7 |   | 11.5 |   | 123.1 |   | 115.3 |   | 6.8 |   |
| Total On-System        |       | 1,157.3                     |       | 1,176.7                     |       | (1.6                        | )          | 2,509.2 |   | 2,443.3 |   | 2.7 |   | 5,176.7 |   | 5,147.1 |   | 0.6 |   |

 
| ** **                    | ** ** | **Operating Revenues  ($ in millions)** | ** ** | **Operating Revenues  ($ in millions)** | ** ** | **Operating Revenues  ($ in millions)** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **Second**                                   | ** ** | **Second**                                   | ** ** | ** **                                   | ** ** | **6 Months** | ** ** | **6 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Quarter**                                  | ** ** | **Quarter**                                  | ** ** | **%**                                        | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| **($ in millions)** | ** ** | **2008**                                     | ** ** | **2007**                                     | ** ** | **Change***                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential                   |       | $                                            | 36.3       |                                         | $          | 36.2                                         |       | 0.2 | % | $ | 85.0 |   | $ | 80.9 |   | 5.0 | % | $ | 178.6 |   | $ | 169.5 |   | 5.4 | % |
| Commercial                    |       | 31.7                                         |       | 32.0                                         |       | (0.9                                         | )          | 59.6 |   | 58.3 |   | 2.2 |   | 130.3 |   | 123.7 |   | 5.3 |   |
| Industrial                    |       | 16.6                                         |       | 17.4                                         |       | (4.8                                         | )          | 31.4 |   | 31.9 |   | (1.5 | ) | 67.2 |   | 66.5 |   | 1.1 |   |
| Wholesale  On-System          |       | 4.4                                          |       | 4.3                                          |       | 4.1                                          |       | 9.5 |   | 8.6 |   | 11.0 |   | 19.4 |   | 17.5 |   | 10.5 |   |
| Other**                       |       | 2.6                                          |       | 2.3                                          |       | 11.4                                         |       | 5.2 |   | 4.6 |   | 13.2 |   | 10.7 |   | 9.5 |   | 12.5 |   |
| Total On-System               |       | $                                            | 91.6       |                                         | $          | 92.2                                         |       | (0.6 | ) | $ | 190.7 |   | $ | 184.3 |   | 3.5 |   | $ | 406.2 |   | $ | 386.7 |   | 5.0 |   |

 

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**Percentage changes are based on actual kWh sales and revenues and maynot agree to the rounded amounts shown above.*

***Other kWh sales and other operating revenues include street lighting,other public authorities and interdepartmental usage.*

 

***Quarter Ended June 30, 2008 Compared toQuarter Ended June 30, 2007***

 

**On-System Operating Revenues and Kilowatt-Hour Sales**

 

KWh sales for our on-system customers decreased during the secondquarter of 2008 as compared to the second quarter of 2007. Revenues for ouron-system customers decreased approximately $0.6 million, or 0.6%. Weather andother related factors decreased revenues by an estimated $2.5 million comparedto last year’s second quarter. Total cooling degree days (the cumulative numberof degrees that the average temperature for each day during that period wasabove 65*°* F) for the second quarter of 2008 were 32.7%less than the same period last year and 4.2% less than the 30-year average.Partially offsetting these factors were sales growth, which

 

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contributed an estimated $0.9 million during the second quarter of 2008,and rate changes which contributed an estimated $1.0 million.

 

Residential kWh sales and related revenues increased slightly duringthe second quarter of 2008, primarily as a result of sales growth, despiteunusually rainy weather during the second quarter of 2008 as compared with2007.

 

Commercial and industrial kWh sales and revenues decreased for thesecond quarter of 2008 as compared to the same period in 2007 mainly due tooverall economic conditions.

 

On-system wholesale kWh sales increased during the second quarter of2008 reflecting customer growth. Revenues associated with these FERC-regulatedsales increased more than kWh sales as a result of the fuel adjustment clauseapplicable to such sales. This clause permits the distribution to customers ofchanges in fuel and purchased power costs.

 

**Off-System Electric Transactions**

 

In addition to sales to ourown customers, we also sell power to other utilities as available and providetransmission service through our system for transactions between other energysuppliers. See “— Competition” below. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended June 30:

 
| ** **             | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **             | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
| **(in millions)** | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
|                   |       |                  |       |                  |       |
| Revenues               |       | $                     | 7.9        |                  | $          | 4.4 |   |
| Expenses               |       | 5.6                   |       | 3.3                   |       |
| Net*                   |       | $                     | 2.3        |                  | $          | 1.1 |   |

 

----

**Differences could occur due to rounding.*

 

Revenues increased during the second quarter of 2008 as compared to thesecond quarter of 2007, primarily due to sales facilitated by the SPP EISmarket that began on February 1, 2007. Sales from this market contributed$4.3 million to our off-system electric revenues in the second quarter of 2008with $2.7 million of related expense as compared to $1.4 million of electricrevenues in the second quarter of 2007 with $1.2 million of related expense.Total purchase power related expenses are included in our discussion ofpurchased power costs below.

 

**Operating Revenue Deductions**

 

During the second quarter of 2008, total electric segment operatingexpenses increased approximately $5.1 million (6.1%) compared with the sameperiod last year. Purchased power costs increased approximately $3.1 million(15.6%) during the second quarter of 2008 while total fuel costs increasedapproximately $2.0 million (8.9%). This combined increase in fuel and purchasedpower expenses of $5.1 million (12.1%) included increased costs for off-systemsales of $2.3 million. In addition, the effect of replacement power for anoutage at one of our small coal units (Riverton 8) partially drove theseincreased costs. We estimate the effect of this outage to be approximately $1.8million. The increase in purchased power costs was primarily due to higherprices. Total fuel costs increased primarily due to higher prices for both thehedged and unhedged natural gas that we burned in our gas-fired units in thesecond quarter of 2008 (an estimated $3.0 million). Increased coal generationcontributed an estimated $1.0 million to total fuel costs in the second quarterof 2008 as compared to the second quarter of 2007 when there were outages atthe Iatan and Asbury plants. Increased coal costs contributed an estimated $0.3million. These increased costs were partially offset by decreased generationfrom our gas-fired units (an estimated $2.1 million) mainly due to an extendedspring maintenance outage at the State Line Combined Cycle plant (SLCC) in April andMay of 2008 while other fuel costs decreased approximately $0.3 million.

 

Regulated operating expenses for our electric segment decreasedapproximately $0.6 million (3.5%) during the second quarter of 2008 as comparedto the same period in 2007 primarily due to

 

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decreases of $0.4 million in employee health care expense, $0.3 millionin uncollectible accounts expense and $0.1 million in injuries and damagesexpense. These decreases were partially offset by an increase of $0.4 millionin transmission and distribution expense**.**

 

Maintenance and repairs expense increased approximately $0.8 million(13.8%) in the second quarter of 2008 as compared to 2007 primarily due toincreases of $0.4 million in maintenance and repairs expense at the SLCC plantrelated to the extended spring maintenance outage in the second quarter of2008, $0.3 million in distribution maintenance expense, primarily related toincreased tree trimming efforts and second quarter 2008 tornado damage, and$0.2 million in maintenance expense at the Riverton plant due to an extendedoutage on Unit 8 to repair damage to high pressure blades discovered duringRiverton’s five–year maintenance outage in May 2008. These increases werepartially offset by a $0.3 million decrease in maintenance expense at theAsbury plant.

 

Depreciation and amortization expense increased approximately $0.7million (5.6%) during the quarter mainly due to increased plant in service.Other taxes increased approximately $0.1 million during the second quarter of2008 due to increased property tax reflecting our additions to plant in serviceand municipal franchise taxes.

 

***Six Months Ended June 30, 2008 Compared to SixMonths Ended June 30, 2007***

 

**On-System Operating Revenues and Kilowatt-Hour Sales**

 

KWh sales for our on-system customers increased during the six monthsended June 30, 2008 as compared to the six months ended June 30, 2007primarily due to continued sales growth and favorable weather in the firstquarter of 2008 as compared to 2007. Revenues for our on-system customersincreased approximately $6.4 million, or 3.5%. Sales growth contributed anestimated $2.2 million during the six months ended June 30, 2008 whilerate changes contributed an estimated $1.9 million. Weather and other relatedfactors increased revenues by an estimated $2.3 million compared to the sixmonths ended June 30, 2007.

 

The increase in residential and commercial kWh sales and revenuesduring the six months ended June 30, 2008 was primarily due to the colderweather conditions in the first quarter as compared with 2007 and continuedsales growth.

 

Industrial kWh sales and revenues decreased during the six months endedJune 30, 2008 as compared to the same period in 2007 mainly due to overalleconomic conditions.

 

On-system wholesale kWh sales increased during the six months ended June 30,2008 reflecting the continued sales growth and weather discussed above.Revenues associated with these FERC-regulated sales increased more, however, asa result of the fuel adjustment clause applicable to such sales.

 

**Off-System Electric Transactions**

 

In addition to sales to ourown customers, we also sell power to other utilities as available and providetransmission service through our system for transactions between other energysuppliers. The following table sets forth information regarding these sales andrelated expenses for the applicable periods ended June 30:

 
| ** **             | ** ** | **2008**            | ** ** | **2007**            | ** ** |
|------------------------|------------|---------------------|------------|---------------------|------------|
| ** **             | ** ** | **Six Months** | ** ** | **Six Months** | ** ** |
| **(in millions)** | ** ** | **Ended**           | ** ** | **Ended**           | ** ** |
|                   |       |                |       |                |       |
| Revenues               |       | $                   | 16.0       |                | $          | 8.6 |   |
| Expenses               |       | 11.8                |       | 6.1                 |       |
| Net*                   |       | $                   | 4.2        |                | $          | 2.5 |   |

 

----

**Differencescould occur due to rounding.*

 

Revenues increased during the six months ended June 30, 2008 ascompared to the six months ended June 30, 2007 primarily due to salesfacilitated by the SPP EIS market that began on

 

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February 1, 2007. Sales from this market contributed $7.4 millionto our off-system electric revenues in the six months ended June 30, 2008with $5.0 million of related expense as compared to $3.3 million of electricrevenues in the second quarter of 2007 with $2.2 million of related expense.Total purchase power related expenses are included in our discussion of purchasedpower costs below.

 

**Operating Revenue Deductions**

 

During the six months ended June 30, 2008, total electric segmentoperating expenses increased approximately $14.7 million (8.5%) compared withthe same period last year. Purchased power costs increased approximately $8.8million (22.0%) during the six months ended June 30, 2008 while total fuelcosts increased approximately $7.8 million (16.4%). This combined increase of$16.6 million (19.0%) included the effect of increased costs for off-systemsales of $5.7 million, and the effect of replacement power for the Asbury andRiverton 8 outages. The increase in purchased power costs primarily reflectedhigher prices for the power purchased (an estimated $6.4 million) as well asincreased purchases on the spot market for replacement energy (an estimated$2.4 million) mainly due to the extended Asbury outage in the first quarter of2008. The increase in fuel costs was primarily due to increased generation byour gas fired units in the first six months of 2008 (an estimated $6.3 million)mainly due to the extended outage at the Asbury plant that lasted into thefirst quarter of 2008, as well as an increase in off-system sales and anestimated $4.1 million increase resulting from higher costs for the natural gaswe burned in our gas-fired units. These increased costs were partially offsetas a result of the unwinding of future physical natural gas positions in February 2008that reduced fuel expense by approximately $2.1 million in the first quarter of2008. Increased coal costs contributed an estimated $0.5 million to total fuelcosts in the six months ended June 30, 2008. Decreased coal generation,mainly due to the Asbury outage in the first quarter of 2008, decreased fuelcosts an estimated $0.1 million while other fuel costs decreased approximately$0.9 million. After assessing theactual cost of the incremental purchased power and gas-fired generation, weestimate the extended outage increased expenses an additional $5.8 million inthe first quarter of 2008 (January 1-February 10, 2008).

 

Regulated operating expenses for our electric segment increasedapproximately $0.4 million (1.3%) during the six months ended June 30,2008 as compared to the same period in 2007 primarily due to increases of $1.0million in transmission and distribution expense, $0.2 million in other steampower expense, $0.2 million in general labor costs and $0.1 million in otherpower expense. These increases were partially offset by decreases of $0.6million in uncollectible accounts expense, $0.3 million in employee pensionexpense, $0.2 million in employee health care expense, and $0.1 million ininjuries and damages expense.

 

Maintenance and repairs expense decreased approximately $4.3 million(26.3%) during the six months ended June 30, 2008 primarily due to a $4.6million decrease in distribution maintenance costs, as compared to the sixmonths ended June 30, 2007 when there were $4.6 million of incrementalcosts (and $1.2 million non-incremental tree trimming and labor costs in the firstquarter of 2007) related to the January 2007 ice storm. This decrease waspartially offset by a $0.8 million increase in maintenance expenses related totornadoes and other storms in the six months ended June 30, 2008. Alsocontributing to the decrease during the six months ended June 30, 2008 wasa $0.7 million decrease in maintenance and repairs expense at the Iatan plantas compared to the same period in 2007 when there was a planned maintenance andturbine inspection in the first quarter at the Iatan plant and a $0.3 milliondecrease in maintenance and repairs expense at the Asbury plant. Thesedecreases were partially offset by a $0.7million increase in maintenance and repairs expense at the SLCC plantdue to the extended spring maintenance outage in the second quarter of 2008 anda $0.2 million increase in maintenanceand repairs expense at the Riverton plant due to the extended outage on Unit 8to repair damage to high pressure blades discovered during Riverton’s five–yearmaintenance outage in May 2008**.**

 

Depreciation and amortization expense increased approximately $1.5million (6.2%) during the six months ended June 30, 2008 mainly due toincreased plant in service. Other taxes increased approximately $0.5 millionduring the six months ended June 30, 2008 due to increased property taxesreflecting our additions to plant in service and increased municipal franchisetaxes.

 

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***Twelve Months Ended June 30, 2008 Compared toTwelve Months Ended June 30, 2007***

 

**On-System Operating Revenues and Kilowatt-Hour Sales**

 

For the twelve months ended June 30, 2008, kWh sales to ouron-system customers increased 0.6% with the associated revenues increasingapproximately $19.4 million (5.0%). Rate changes, primarily the January 2007Missouri rate increase, contributed an estimated $24.2 million to revenueswhile continued sales growth contributed an estimated $4.7 million. Ourelectric customer growth for the twelve months ended June 30, 2008 was0.7%. Weather and other related factors contributed an estimated $1.2 million.These increases were partially offset by a $5.9 million revision to ourestimate of unbilled revenues in the third quarter of 2006 and $4.7 million ofInterim Energy Charge (IEC) collected in 2006, neither of which reoccurred in2007. Residential and commercial kWh sales and associated revenues increasedprimarily due to continued sales growth while the associated revenues alsoincreased due to the Missouri rate increase. Industrial kWh sales decreased forthe twelve months ended June 30, 2008, due in part to the continuedslowdown in the building construction products industry as well as the revisionto our estimate of unbilled revenues and corresponding KWhs in the thirdquarter of 2006 that did not reoccur in 2007. Industrial revenues increased,reflecting the aforementioned rate increase. On-system wholesale kWh salesincreased reflecting the continued sales growth discussed above. Revenuesassociated with these FERC-regulated sales increased more than the kWh sales asa result of the fuel adjustment clause applicable to such sales.

 

**Off-System Electric Transactions**

 

In addition to sales to ourown customers, we also sell power to other utilities as available and providetransmission service through our system for transactions between other energysuppliers. The following table sets forth information regarding these sales andrelated expenses for the applicable periods ended June 30:

 
| ** **        | ** ** | **2008**               | ** ** | **2007**               | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|
| ** **        | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| **(in millions)** | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
|              |       |                   |       |                   |       |
| Revenues          |       | $                      | 29.9       |                   | $          | 16.1 |   |
| Expenses          |       | 21.6                   |       | 11.6                   |       |
| Net*              |       | $                      | 8.3        |                   | $          | 4.5 |   |

 

----

**Differencescould occur due to rounding.*

 

Revenues less expensesincreased during the twelve months ended June 30, 2008 as compared to thesame period in 2007 primarily due to sales facilitated by the SPP EIS marketthat began on February 1, 2007. Sales from this market contributed $12.9million to our off-system electric revenues for the twelve months ended June 30,2008 with $9.0 million of related expense as compared to $3.3 million ofelectric revenues for the twelve months ended June 30, 2007 with $2.2million of related expense. In addition, in May 2007,we entered into a contract with Kansas City Board of Public Utilities (BPU) forthe sale of energy and capacity for June through September of 2007and 2008. Capacity revenue will total approximately $1.3 million each year withthe energy portion dependent upon the number of hours the contract is utilizedby BPU. Twelve months ended June 30, 2008 revenues from the BPUcontract were approximately $2.1 million as compared to $0.3 million for thetwelve months ended June 30, 2007. Total purchase power related expensesare included in our discussion of purchased power costs below.

 

**Operating Revenue Deductions**

 

During the twelve months ended June 30, 2008, total electricsegment operating expenses increased approximately $40.2 million (11.8%) comparedto the year ago period. Total fuel costs increased approximately $23.6 million (24.2%) duringthe twelve months ended June 30, 2008 and purchased power costs increased$14.3 million (19.9%) during the same period. This combined increase of $37.9 million(22.3%) included the effect of increased costs for off-system sales of $10.0

 

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million and the effect of replacement power for the Asbury and Riverton8 outages. The increase in fuel costs was mainly due to increased generation byour gas fired units (an estimated $30.3 million) primarily inthe first quarter of 2008 and fourth quarter of 2007 due to the extended outageat the Asbury plant and to the increase in off-system sales. Also adding to theincrease were higher costs for the natural gas we burned in our gas-fired units(an estimated $1.6 million).These increased costs were partially offset as a result of the unwinding of futurephysical natural gas positions in February 2008 that reduced fuel expenseby approximately $2.1 million in the first quarter of 2008. Decreased coalgeneration, mainly due to the Asbury outage, decreased fuel costs an estimated$5.9 million, partially offset by increased coalcosts (approximately $0.7million) during the twelve months ended June 30, 2008. Other fuel costsdecreased approximately $1.0million. The increase in purchased power costs primarily reflected higherprices for the power purchased (an estimated $9.8 million) as well as increased purchases on the spot market forreplacement energy (an estimated $4.5 million) mainly in thefirst quarter of 2008 and fourth quarter of 2007 due to the extended Asburyoutage as well as the extended SLCC outage in the second quarter of 2008. After assessing the actual cost of theincremental purchased power and gas-fired generation, we estimate the extendedoutage at Asbury increased expenses an additional $5.8 million in the firstquarter of 2008 (January 1-February 10, 2008) and $3.5 million in thefourth quarter of 2007 (December 8-December 31, 2007).

 

Regulated operating expenses increased approximately $3.8 million(6.6%) during the twelve months ended June 30, 2008 as compared to thesame period last year due primarily to increases of $1.7 million intransmission and distribution expense,****$0.7 millionin customer accounts expense, $0.6 million in employee pension expense, $0.4million in general labor costs, $0.3 million in other steam power expense, $0.2million in other power expense and $0.2 million in regulatory commissionexpense. These increases were partially offset by a decrease of $0.3 million inemployee health care costs.

 

Maintenance and repairs expense decreased approximately $1.7 million (6.0%)during the twelve months ended June 30, 2008, primarily due to a $2.7million decrease in distribution maintenance costs (primarily overhead linemaintenance expense partially offset by increased tree trimming efforts) ascompared to the year ago period when there was a January 2007 major icestorm. Also contributing to the decrease during the twelve months ended June 30,2008 was a $0.8 million decrease in maintenance and repairs expense at theIatan plant as compared to the same period in 2007 when there was a plannedmaintenance and turbine inspection at the Iatan plant in the first quarter of2007 and a $0.4 million decrease in maintenance and repairs expense at theState Line plant. These decreases were partially offset by increases of $0.8million in transmission maintenance expense, $0.5 million in maintenance andrepairs expense at the Asbury plant, $0.4 million in maintenance and repairsexpense at the Energy Center, $0.3 million in maintenance and repairs expenseat the Riverton plant related to the five-year maintenance outage and $0.2million in maintenance and repairs expense at the SLCC plant related to theextended 2008 spring maintenance outage.

 

Depreciation and amortization expense increased approximately $8.4million (19.6%) mainly due to $5.1 million regulatory amortization related tothe December 21, 2007 Missouri rate order that has been recorded asdepreciation expense as well as increased plant in service. Other taxesincreased approximately $1.1 million due to increased property taxes reflectingour additions to plant in service and increased municipal franchise taxes.

 

Total electric segmentoperating expenses were also reduced by approximately $2.0 million for the 12months ended June 30, 2008 as compared to the same period in 2007 due to a$1.2 million gain we recognized in the fourth quarter of 2007 from the sale ofour steel unit train set and a $0.8 million loss in the fourth quarter of 2006related to a plant disallowance required by rate order.

 

***Gas Segment***

 

**Gas Segment Operating Revenuesand Sales**

 

During the second quarter of2008, our total natural gas revenues were approximately $9.1 million ascompared to $8.4 million in the second quarter of 2007. An increase in sales inthe

 

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second quarter of 2008 as compared to the second quarter of 2007resulted in higher revenues despite an 8.28% overall decrease in our PurchasedGas Adjustment (PGA) Clause during the second quarter of 2008 as compared tothe same period in 2007.

 

For the six months ended June 30,2008, our total natural gas revenues were approximately $36.4 million ascompared to $36.0 million for the six months ended June 30, 2007. Thewinter months are high sales months for the natural gas business, whose heatingseason runs from November to March of each year.

 

For the twelve months ended June 30,2008, our total natural gas revenues were approximately $60.3 million as comparedto $59.5 million for the twelve months ended June 30, 2007.

 

Thefollowing tables detail our natural gas sales and revenues for the periodsended June 30:

 
| ** **                  | ** ** | **Total gas delivered to customers** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **bcf Sales**                        | ** ** | **bcf Sales** | ** ** | **bcf Sales** | ** ** |
| ** **                  | ** ** | **Second**                           | ** ** | **Second** | ** ** | ** ** | ** ** | **6 Months** | ** ** | **6 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Quarter**                          | ** ** | **Quarter** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| ** **                  | ** ** | **2008**                             | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential                 |       | 0.32                                 |       | 0.36 |   | (9.1 | )% | 1.85 |   | 1.72 |   | 7.5 | % | 2.96 |   | 2.77 |   | 6.9 | % |
| Commercial                  |       | 0.17                                 |       | 0.18 |   | (8.4 | ) | 0.84 |   | 0.76 |   | 10.1 |   | 1.38 |   | 1.28 |   | 7.7 |   |
| Industrial**                |       | 0.15                                 |       | 0.01 |   | 1,433.4 |   | 0.20 |   | 0.03 |   | 625.2 |   | 0.25 |   | 0.06 |   | 331.2 |   |
| Public  Authorities         |       | 0.00                                 |       | 0.00 |   | (14.0 | ) | 0.02 |   | 0.02 |   | 15.2 |   | 0.03 |   | 0.03 |   | 8.2 |   |
| Total retail  sales*        |       | 0.64                                 |       | 0.55 |   | 16.9 |   | 2.92 |   | 2.53 |   | 15.1 |   | 4.63 |   | 4.14 |   | 11.7 |   |
| Transportation  sales**     |       | 0.84                                 |       | 0.92 |   | (8.7 | ) | 2.20 |   | 2.27 |   | (3.1 | ) | 4.23 |   | 4.22 |   | 0.3 |   |
| Total gas  operating sales* |       | 1.49                                 |       | 1.47 |   | 0.9 |   | 5.12 |   | 4.80 |   | 6.5 |   | 8.86 |   | 8.36 |   | 5.9 |   |

 

 
| ** **                    | ** ** | **Operating  Revenues ($ in millions)** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **Second**                                   | ** ** | **Second** | ** ** | ** ** | ** ** | **6 Months** | ** ** | **6 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Quarter**                                  | ** ** | **Quarter** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential                   |       | $                                            | 5.0        |   | $ | 5.4 |   | (6.8 | )% | $ | 23.1 |   | $ | 24.0 |   | (3.7 | )% | $ | 38.3 |   | $ | 39.0 |   | (1.8 | )% |
| Commercial                    |       | 2.2                                          |       | 2.4 |   | (9.0 | ) | 9.6 |   | 9.9 |   | (2.6 | ) | 16.3 |   | 16.5 |   | (1.1 | ) |
| Industrial**                  |       | 1.4                                          |       | 0.1 |   | 1,236.4 |   | 1.8 |   | 0.3 |   | 509.2 |   | 2.2 |   | 0.6 |   | 257.1 |   |
| Public  Authorities           |       | 0.0                                          |       | 0.0 |   | (10.2 | ) | 0.3 |   | 0.2 |   | 2.3 |   | 0.4 |   | 0.4 |   | (3.2 | ) |
| Total retail  sales***        |       | $                                            | 8.6        |   | $ | 7.9 |   | 8.5 |   | $ | 34.8 |   | $ | 34.4 |   | 1.1 |   | $ | 57.3 |   | $ | 56.5 |   | 1.3 |   |
| Transportation  sales**       |       | 0.5                                          |       | 0.5 |   | 5.8 |   | 1.5 |   | 1.5 |   | 1.4 |   | 2.8 |   | 2.8 |   | (0.0 | ) |
| Total gas  operating sales*** |       | $                                            | 9.1        |   | $ | 8.4 |   | 8.4 |   | $ | 36.3 |   | $ | 35.9 |   | 1.1 |   | $ | 60.1 |   | $ | 59.3 |   | 1.2 |   |

 

----

**Differences could occur due to rounding.*

***Percentagechange reflects the transfer of a customer from transportation sales toindustrial.*

****Revenuesexclude forfeited discounts, reconnect fees, miscellaneous service revenues,etc.*

 

**GasSegment Operating Revenue Deductions**

 

During the second quarter of2008, EDG’s cost of natural gas sold and transported was approximately $5.3million as compared to $4.7 million during the second quarter of 2007. Anoverall increase in volume was offset by lower rates. Our PGA clause had an8.28% overall decrease in the second quarter of 2008 as compared to the secondquarter of 2007. However, in June 2008 we increased our PGA clause by 38%as compared to the previous PGA that had been in effect since November 2007.

 

For the six months ended June 30,2008, EDG’s cost of natural gas sold and transported was approximately $23.0million as compared to $23.4 million for the same period in 2007.

 

For the twelve months ended June 30,2008, EDG’s cost of natural gas sold and transported was approximately $37.2million as compared to $38.0 million for the same period in 2007.

 

Our PGA clause allows us torecover from our customers, subject to routine regulatory review, the cost ofpurchased gas supplies, transportation and storage, including costs, cost

 

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reductions, and relatedcarrying costs associated with the use of financial instruments to hedge thepurchase price of natural gas.

 

Total other operatingexpenses were $2.6 million for both the second quarter of 2008 and the secondquarter of 2007. EDG had a net loss of $0.6 million for the second quarter of2008 as compared to a $0.7 million net loss for the second quarter of 2007.

 

For the six months ended June 30,2008, total other operating expenses were $5.1 million as compared to $5.5million for the same period in 2007. EDG had net income of $1.8 million for thesix months ended June 30, 2008 as compared to $0.9 million 2007.

 

For the twelve months ended June 30,2008, total other operating expenses were $9.9 million as compared to $10.5million for the same period in 2007. EDG had net income of $1.8 million for thetwelve months ended June 30, 2008 as compared to $0.3 million in 2007.Approximately $1.2 million in transition costs were paid to Aquila, Inc.in 2006 for billing and other transition services. These non-recurring costsended when all services were transitioned by November 1, 2006.

 

***Other Segment***

 

Our other segment includes leasing of fiberoptics cable and equipment (which we are also using in our own utilityoperations). The following table represents our results of continuing operationsfor our other segment for the applicable periods ended June 30:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|
| **(in millions)**                         | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008**                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                           |       |                   |       |                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                       |       | $                      | 1.3        |                 | $          | 0.9                     |       | $ | 2.4 |   | $ | 1.7 |   | $ | 4.3 |   | $ | 3.3 |   |
| Expenses                                       |       | 1.0                    |       | 0.9                  |       | 1.9                     |       | 1.7 |   | 3.5 |   | 3.4 |   |
| Net income  (loss) from continuing operations* |       | $                      | 0.3        |                 | $          | 0.0                     |       | $ | 0.5 |   | $ | 0.0 |   | $ | 0.9 |   | $ | (0.1 | ) |

 

----

**Differencescould occur due to rounding.*

 

***Consolidated Company***

 

**Income Taxes**

 

Our consolidated provision for income taxes decreased approximately$0.8 million during the second quarter of 2008 as compared to the same periodin 2007, primarily resulting from lower income. Our consolidated effectivefederal and state income tax rate for the second quarter of 2008 was 31.9% ascompared to 32.1% for the second quarter of 2007.

 

Our consolidated provision for income taxes increased approximately$0.7 million during the six months ended June 30, 2008 as compared to thesame period in 2007. This resulted primarily from increased income. Ourconsolidated effective federal and state income tax rate for the six monthsended June 30, 2008 was 31.2% as compared to 29.8% for the same period in2007. The effective tax rate for the six months ended June 30, 2008 variedin part as we recognized less tax-related Medicare Part D benefits in thefirst quarter of 2008 as compared to the same period in 2007.

 

Our consolidated provision for income taxes decreased approximately$6.1 million during the twelve months ended June 30, 2008 as compared tothe twelve months ended June 30, 2007, primarily resulting from lowerincome. Our effective federal and state income tax rate for the twelve monthsended June 30, 2008 was 30.8% as compared to 34.2% for the same period in2007. The effective tax rate for the 2008 twelve month period decreased as werecognized increased benefits from the equity component of AFUDC and expensesrelated to plant removal costs.

 

**Nonoperating Items**

** **

Total allowance for funds used during construction (AFUDC) increased$1.4 million in the second quarter of 2008 as compared to 2007. AFUDC increased$1.8 million during the six months ended June 30, 2008 and increased $2.6million during the twelve months ended June 30, 2008 as compared to thesame periods in the prior year due to higher levels of construction in eachperiod.

 

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AFUDCis comprised of the cost of borrowed funds and the cost of equity fundsapplicable to our construction program and are capitalized as a cost ofconstruction. This accounting practice offsets the effect on earnings of thecost of financing current construction, and treats such financing costs in thesame manner as construction charges for labor and materials.

 

Total interest charges onlong-term debt increased $0.8 million (9.7%) in the second quarter of 2008,$1.9 million (12.7%) for the six months ended June 30, 2008 and $4.3million (14.8%) for the twelve months ended June 30, 2008 as compared tothe prior year periods (offset by the increased AFUDC discussed above). Theincreases in all three periods reflect the interest on the $90 millionprincipal amount of first mortgage bonds we issued May 16, 2008, theproceeds of which were added to our general funds and used primarily to paydown short-term indebtedness incurred, in part, as a result of our on-goingconstruction program. The increases in both the six months ended and twelvemonths ended June 30, 2008 periods also reflect the interest on the $80million principal amount of first mortgage bonds we issued March 26, 2007,the proceeds of which were added to our general funds and used to pay downshort-term indebtedness incurred, in part, as a result of our on-goingconstruction program.

 

Short-term debt interest wasvirtually the same in the second quarter of 2008 as it was in the secondquarter of 2007, while decreasing $0.5 million for the six months ended June 30,2008, reflecting decreased usage of short-term debt in that period. Short-termdebt interest increased $0.1 million for the twelve months ended June 30,2008 as compared to the same period in 2007.

 

Earnings from discontinuedoperations were approximately $0.1 million in the twelve month period ended June 30,2008 and approximately $0.1 million in the twelve month period ended June 30,2007, which included operations and gains recognized from the sales of MAPP,Conversant and Fast Freedom.

 

**Other Comprehensive Income**

 

The change in the fair value of the effectiveportion of our open gas contracts designated as cash flow hedges for ourelectric business and our interest rate derivative contracts and the gains andlosses on contracts settled during the periods being reported, including thetax effect of these items, are reflected in our Consolidated Statement ofComprehensive Income. This net change is recorded as accumulated othercomprehensive income in the capitalization section of our balance sheet anddoes not affect net income or earnings per share. All of these contracts havebeen designated as cash flow hedges. The unrealized gains and lossesaccumulated in other comprehensive income are reclassified to fuel, or interestexpense, in the periods in which the hedged transaction is actually realized orno longer qualifies for hedge accounting. No interest rate derivative contractswere open or settled during the periods shown below.

The following table sets forth the pre-taxgains/(losses) of our natural gas contracts for our electric segment that havesettled and been reclassified, the pre-tax change in the fair market value(FMV) of our open contracts and the tax effect in Other Comprehensive Incomefor the presented periods ended June 30:

 

 

 
| ** **                                       | ** ** | **Change  in Other Comprehensive Income** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **Three Months Ended**                    | ** ** | **Six Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **(in millions)**                           | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Natural gas contracts settled***(1)*             |       | $                                         | (1.7       | ) | $ | (0.2 | ) | $ | (2.6 | ) | $ | — |   | $ | (4.1 | ) | $ | (0.6 | ) |
| Change in FMV of  open contracts for natural gas |       | $                                         | 22.8       |   | $ | 5.7 |   | $ | 33.8 |   | $ | 8.6 |   | $ | 30.4 |   | $ | 3.4 |   |
| Taxes                                            |       | $                                         | (8.0       | ) | $ | (2.1 | ) | $ | (11.9 | ) | $ | (3.3 | ) | $ | (10.0 | ) | $ | (1.1 | ) |
| Total change in  OCI – net of tax           |       | $                                         | 13.1       |   | $ | 3.4 |   | $ | 19.3 |   | $ | 5.3 |   | $ | 16.3 |   | $ | 1.7 |   |

 

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*(1) Reflected in fuel expense*

 

Our average cost for our open financialnatural gas hedges increased from $5.527/Dth at March 31, 2008 to$5.864/Dth at June 30, 2008.

 

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**RATEMATTERS**

 

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, 2006:

 
| ** **           | ** ** | ** **            | ** ** | **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 -  Electric |       | October 1, 2007  |       | $            | 22,040,395 |         | 6.70       | %             | Pending*             |   |

 

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*We anticipate the rates will become effective by September 1,2008.

 

*Missouri*

 

*2006 Rate Case*

 

On February 1, 2006, wefiled a request with the MPSC for an annual increase in base rates for ourMissouri electric customers in the amount of $29.5 million, or 9.63%. We alsorequested transition from the IEC from an earlier case to Missouri’s new fueladjustment 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 $29.4 million, or 9.96%, with aneffective date of January 1, 2007 and eliminating the IEC. Pursuant tothis order, the collected IEC was not refunded. The increase included anauthorized return on equity of 10.9% and included our fuel and energy costs asa component of base electric rates. This order also allowed deferral of anyother postretirement benefits that are different from those allowed recovery inthis rate case. This treatment is similar to treatment afforded pension costsin our March 2005 rate case. This order also approved regulatory treatmentof additional liabilities arising from the adoption of FAS 158. We also agreedto write off $1 million of the cost of our Energy Center 2 construction project.The Missouri jurisdictional portion of this agreement resulted in a pre taxwrite off of $0.8 million in the fourth quarter of 2006.

 

The $29.4 million authorizedincrease in annual revenues includes $19.4 million resulting from an increasein base rates and $10.4 million resulting from “regulatory amortization.” Theregulatory amortization, which is treated as additional book depreciation forrate-making purposes and is so reflected in the financial statements, wasgranted to provide additional cash flow to enhance the financial support forour current generation expansion plan. This regulatory amortization is relatedto our investment in Iatan 2 and also includes our Riverton V84-3A2 combustionturbine (Unit 12) and the environmental improvements and upgrades at Asbury andIatan 1, all of which are part of the Experimental Regulatory Plan approved bythe MPSC subject to subsequent prudency review of actual expenditures. Amountsgranted as regulatory amortization will reduce our rate base used in determiningour base rates in subsequent rate cases.

 

OnMarch 19, 2007, the OPC filed a Petition for Writ of Mandamus with theMissouri Supreme Court seeking an order requiring the MPSC to vacate andrescind its December 29, 2006 order approving tariffs and directing theMPSC to provide an effective date for any subsequent tariff approval order thatallows at least ten days to prepare and file an application for rehearing. On October 30,2007, the Supreme Court issued an opinion directing the MPSC to vacate its December 29order approving tariffs and allow the OPC a reasonable time to prepare and filean application for rehearing. The Court did not examine the lawfulness orreasonableness of the substance of the MPSC’s December 29, 2006 orderapproving tariffs, and considered only the timing of the issuance 

 

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of the order. The Court also did not consider theunderlying tariffed rates which continue in force and in effect.

 

Actingupon the opinion of the Missouri Supreme Court, the MPSC issued an order on December 4,2007, effective December 14, 2007, vacating the December 29, 2006order and re-approving the tariffs and the same resulting increase in rates.The OPC and intervenors Praxair, Inc. and Explorer Pipeline Company, filedapplications for rehearing with the MPSC regarding this order, raising variousissues referred to below. These applications for rehearing remain pendingbefore the MPSC.

 

OnMarch 26, 2008, the MPSC issued its Order Granting Reconsideration ofReport and Order, to be effective April 5, 2008, and its Report and OrderUpon Reconsideration, to be effective April 5, 2008, in which the MPSCmade additional findings and reaffirmed the rate increase originally authorizedin December of 2006. In this order, the MPSC made two adjustments. Anincrease in the return on rate base was offset by a decrease in the regulatoryamortization from $10.4 million to $10.2 million. The OPC and intervenorsPraxair and Explorer Pipeline filed applications for rehearing regarding thisReport and Order Upon Reconsideration, raising objections to many of the issuesaddressed in the order, including but not limited to issues relating to returnon equity, fuel and purchased power expense and, in the case of theintervenors, the propriety of regulatory amortization under Missouri publicutility law. These applications for rehearing remain pending before the MPSC.

 

OnMarch 18, 2008, the OPC filed a Petition for Writ of Mandamus with theMissouri Supreme Court, purportedly to force the MPSC to comply with theMissouri Supreme Court’s opinion and order of October 30, 2007. The OPC,the MPSC, the intervenors and Empire filed written briefs. OPC and theintervenors claim, among other things, that the MPSC did not comply with theCourt’s order to vacate its rate order of December 29, 2006. We and theMPSC believe that the MPSC fully complied with the Court’s order. Oralarguments were made before the Missouri Supreme Court on May 13, 2008.

 

*2007 Rate Case*

 

On October 1, 2007, wefiled a request with the MPSC for an annual increase in base rates for ourMissouri electric customers in the amount of $34.7 million, or 10.11%. Werequested recovery of our investment in the new 150-megawatt combustionturbine, Unit 12, at our Riverton plant, capital expenditures associated withthe construction of a selective catalytic reduction system at our Asbury Plant,capital expenditures and expenses related to the January and December 2007ice storms and other changes in our underlying costs. We also requestedimplementation of a fuel adjustment clause in Missouri which would permit thedistribution to Missouri customers of changes in fuel and purchased powercosts.

 

The MPSC issued an order on July 30, 2008, effective August 9,2008, granting an annual increase in base rates for Missouri electric customersin the amount of $22.0 million, or 6.7%, based on a 10.8% return on equity. Weanticipate that the new rates will go into effect by September 1, 2008.The order contains two components. The first component provides an addition tobase rates of approximately $27.7 million. This increase in base rates waspartially offset by a $5.7 million downward adjustment to regulatoryamortization, which is the second component. Regulatory amortization providesus additional cash through rates during the current construction cycle. Thisconstruction, which is part of our long-range plan to ensure reliability,includes the facilities at the Riverton Power Plant and Iatan 2 Power Plant, aswell as environmental improvements at the Asbury Power Plant and at Iatan 1.The regulatory amortization is now approximately $4.5 million. The MPSC alsoauthorized a fuel adjustment clause for our Missouri customers. The MPSCestablished a base rate for the recovery of fuel and purchased power expensesused to supply energy and the clause permits the distribution to customers of95% of the changes in fuel and purchased power costs above or below the base.Rates related to the fuel adjustment clause will be modified twice a year subjectto the review and approval by the MPSC. The MPSC also approved the Stipulationsand Agreements providing for the recovery of deferred expenses for the 2007 icestorms and continuation of the pension and other post-retirement employeebenefits trackers established in our 2006 Missouri rate case. The MPSC orderalso established a two-way tracker, which allows us to 

 

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defer the amount over and under the cost of compliance to a regulatoryasset or liability, for the cost of compliance with the vegetation andinfrastructure reliability rules adopted by the MPSC which had aneffective date of July 2008.

 

*Kansas*

 

In accordance with our lastKansas rate case, we were to seek approval of an explicit hedging program in aseparate docket filed with the Kansas Corporation Commission (KCC) by March 1,2006. We requested and received an extension until April 1, 2006 and madethis filing on March 30, 2006. On February 4, 2008, the KCC issued anorder denying the request for the approval of our existing natural gas hedgingprogram. All gains or losses related to the financial instruments used to fixthe future price of natural gas will be excluded from the Energy CostAdjustment clause implemented in the last Kansas rate case and future baseelectric rates in Kansas.

 

*IceStorm Recovery*

 

Wefiled applications for Accounting Authority Orders in Oklahoma and Kansas andfiled a request for storm recovery in Arkansas respecting costs incurred due tothe two major ice storms in 2007. On May 23, 2008, the Arkansas PublicService Commission issued an Order allowing us to defer approximately $0.4million of extraordinary incremental expenses incurred as a result of the 2007ice storms as a regulatory asset and amortize such costs over a 5 year periodbeginning with the first full month following the storms. On June 24,2008, the State Corporation Commission of the State of Kansas issued an Orderapproving our application for an accounting order to accumulate and defer forrecovery in future rate case proceedings, approximately $1.1 million of 2007ice storm costs as a regulatory asset to be amortized over a 10 year period. OnJune 25, 2008, the Corporation Commission of Oklahoma issued a Final Orderapproving a Joint Stipulation and Settlement Agreement giving us permission todefer and record approximately $0.5 million of 2007 ice storm costs as aregulatory asset and authorizing recovery of the regulatory asset over a fiveyear period, via a rider effective July 1, 2008. We were granted raterecovery of the Missouri ice storm costs as part of the order issued by the MPSC on July 30, 2008 as discussed above.

 

***Gas Segment***

 

On June 1, 2006, TheEmpire District Gas Company acquired the Missouri natural gas distributionoperations of Aquila, Inc. (Missouri Gas). The Missouri Gas propertiesconsist of 44 Missouri communities in northwest, north central and west centralMissouri. The rates, excluding the cost of gas, are the same as had been ineffect at Aquila, Inc. We agreed in the unanimous stipulation andagreement filed with the MPSC on March 1, 2006 and approved on April 18,2006, to not file a rate increase request for non-gas costs for a period of 36months following the closing date of the acquisition. We have also agreed touse Aquila Inc.’s current depreciation rates and were allowed to adopt thepension cost recovery methodology approved in our electric Missouri Rate Caseeffective March 27, 2005.

 

A PGA clause is included inour 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 allowsus to make rate changes periodically (up to four times) throughout the year inresponse to weather conditions, natural gas prices and supply demands, ratherthan in one possibly extreme change per year. The Actual Cost Adjustment (ACA)is a scheduled 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 October 24, 2007. Our lastPGA filing was effective June 6, 2008.

 

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**COMPETITION**

 

**Electric Segment**

 

*SPP-RTO*

 

OnFebruary 1, 2007, the SPP regional transmission organization (RTO) launchedits energy imbalance services market (EIS). With the implementation of the SPPRTO EIS market and transmission expansion plans of the SPP RTO, we anticipatethat our continued participation in the SPP will provide long-term benefits toour customers and other stakeholders. Our experience to date in the EIS marketindicates that we have received benefits through our participation.

 

Ingeneral, the SPP RTO EIS market is providing real time energy for mostparticipating members within the SPP regional footprint. Imbalance energyprices are based on market bids and status/availability of dispatchablegeneration and transmission within the SPP market footprint. In addition toenergy imbalance service, the SPP RTO performs a real time security-constrainedeconomic dispatch of all generation voluntarily offered into the EIS market tothe 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 and value of EIS marketparticipation.

 

OnFebruary 16, 2007, the FERC issued a Final Order No. 890, whichinstituted numerous reforms to its Order 888 open access transmission pro formatariff (OATT) which was issued in April 1996. The purpose of the Order was(i) to strengthen the OATT to ensure that it better achieves its originalpurpose of remedying undue discrimination for the provision of transmissionservice, (ii) to provide greater specificity in the OATT to reduceopportunities for the exercise of undue discrimination, make unduediscrimination easier to detect, and facilitate the FERC’s enforcement, and (iii) toincrease transparency in the rules applicable to planning and use of thetransmission system. The FERC’s actions required modifications to the SPP andour OATTs as well as regional and local transmission planning processes. We andSPP submitted our respective Order 890 compliance filings of our OATTs on October 11,2007. Compliance modifications to our OATT filing were not material and weanticipate them being accepted. The SPP proposed modifications to its regionaland local area transmission planning processes, pursuant to Order 890, in its December 7,2007 FERC filing. An issuance from the FERC on our and SPP’s filings is pending.In December 2007, the FERC issued Order 890A, reconfirming its February Order890.

 

*FERC Market Power Order*

 

InApril and July 2004, the FERC issued orders regarding new testingstandards for assessing market power by entities that have wholesale market-basedrate tariffs filed with the FERC. The parameters included in the tests are suchthat most investor owned electric utilities fail the test within their owncontrol area and are subject to a rebuttable presumption of market power.Entities with wholesale market based rates tariffs are subject to a triennialfiling to test for market power and are required to apply the new testingcriteria. FERC determination of market power would result in the inability fora utility to continue to charge such market-based rates. In September 2004,we submitted amended and updated market power analyses filings.

 

OnMarch 3, 2005, the FERC issued an order commencing an investigation todetermine if we had market power within our control area based on our failureto meet one of the FERC’s wholesale market share screens. We filed responses tothat order in May and June 2005 and in early January 2006. On August 15,2006, the FERC issued its order accepting Empire’s proposed mitigation tobecome effective May 16, 2005, subject to a further compliance filing asdirected in the order. Relying on a series of orders issued since March 17,2006 in other proceedings, the FERC rejected our tariff language and directedus to file revisions to our market-based tariff to provide that service underthe tariff applies only to sales outside our control area. The FERC directed usto make refunds, with interest, by September 15, 2006, which we initiallyestimated to be approximately $0.6 million (excluding interest) covering over athousand hourly energy sales since May 16, 2005 to numerous counterpartiesexternal to our system for wholesale sales made at market prices above 

 

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thecost based prices permitted under the mitigation proposal accepted by the FERC.The refund obligation applied to certain wholesale power sales made “inside”our service area at market based rates, even though consumption of the energyoccurred outside our service area. In response to the order, we filed a MotionFor Extension of time and expedited treatment regarding the refund andrequested that such refund be delayed until 15 days after the FERC’s order onour rehearing request. On September 5, 2006, the FERC granted the MotionFor Extension, as requested.

 

OnSeptember 14, 2006, we filed a Request For Rehearing of the FERC’s August 15,2006 order regarding the refund and market power mitigation we had proposed. Werequested a rehearing and a waiver of the refund requirement in its entirety.On April 25, 2008, the FERC issued an Order that rejected our Request ForRehearing, required a Compliance Filing of our market based rate tariff andordered refunds with interest. We made our Compliance Filing and issued refundstotaling $340,608, including interest, on May 27, 2008. We were alsorequired to file an informational refund report with the FERC on June 26,2008.

 

Asa result of the FERC’s requirement for us to issue the aforementioned refundsand our belief that the FERC erred in its orders, on June 30, 2008 weinitiated a Petition For Review of the FERC’s orders on our market based raterefunds in the United States Court of Appeals – District of Columbia Circuit(DC Circuit). We have requested a consolidation of our Petition with thesimilar petitions of Westar Energy and Mid American Energy Company. A decisionon consolidation is pending before the DC Circuit. If a decision is reached inour favor, the DC Circuit will likely remand the FERC’s orders back to the FERCfor reconsideration. It is expected that the judicial review of the Petitionswill take several months.

 

*Other FERC Rulemaking*

 

OnJune 21, 2007, the FERC issued an Advance Notice of Proposed Rulemaking(ANOPR) on potential reforms to improve operations in organized wholesale powermarkets, such as the SPP RTO in which we participate. The FERC is seekingcomment in the following areas: (i) the role of demand response in theorganized markets, (ii) increasing opportunities for long-term powercontracts, (iii) strengthening market monitoring and (iv) theresponsiveness of RTOs and ISOs to customers and stakeholders.

 

On January 28, 2008, we made a filing at the FERC related tocertain non-rate and ministerial revisions to our currently effective wholesaleOpen Access Transmission Tariff (OATT), which included the elimination ofcertain tariff sections that have become moot in light of our membership in theSPP, as well as correction of the formatting of our OATT for consistency withOrder No. 614.

 

On April 2, 2008, FERC accepted our revised OATT, as filed, withan effective date of January 29, 2008.

 

Gas Segment

 

Non-residential gas customers whose annual usageexceeds certain amounts may purchase natural gas from a source other than EDG.EDG does not have a non-regulated energy marketing service that sells naturalgas in competition with outside sources. EDG continues to receive non-gasrelated revenues for distribution and other services if natural gas is purchasedfrom another source by our eligible customers.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

Weused approximately $114.1 million of cash for regulated capital expendituresduring the six months ended June 30, 2008. Our primary sources of cashflow for these expenditures during the six months ended June 30, 2008 were$66.1 million in internally generated funds fromcontinuing operations and $90.0 million in gross proceeds from first mortgagebonds.

 

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**CashProvided by Operating Activities**

 

Ournet cash flows provided by continuing operating activities were $66.1 millionduring the six months ended June 30, 2008 as compared to $38.1 million forthe six months ended June 30, 2007. Net income increased $1.5 million.Changes in balance sheet items, primarily accounts receivable, accounts payableand accrued liabilities positively impacted cash flow this year compared tolast year.

 

**CapitalRequirements and Investing Activities**

 

Our capital expenditures totaled approximately $53.6 million during thesecond quarter of 2008 compared to approximately $41.7 million for the sameperiod in 2007. Our capital expenditures totaled approximately $115.0 millionduring the six months ended June 30, 2008 compared to approximately $85.5million for the same period in 2007. These capital expenditures include AFUDC,capital expenditures to retire assets and benefits from salvage.

 

Ournet cash flows used in investing activities increased $31.3 million during thesix months ended June 30, 2008 as compared to the same period in 2007,primarily reflecting construction expenditures for Plum Point Unit 1 and Iatan2, as well as the payments for the capitalized portion of the December 2007ice storm which were accrued but not paid as of December 31, 2007.

 

A breakdown of the capital expenditures for the quarter and six monthsended June 30, 2008 is as follows:

 
| ** **                                                                                       | ** ** | **Capital Expenditures** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                       | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| **(in millions)**                                                                           | ** ** | **June 30, 2008**   | ** ** | **June 30, 2008** | ** ** |
| Distribution and  transmission system additions                                                  |       | $                             | 10.2       |   | $ | 22.8 |   |
| New Generation –  Plum Point Energy Station                                                 |       | 9.4                           |       | 18.3 |   |
| New Generation –  Iatan 2                                                                   |       | 21.1                          |       | 41.2 |   |
| Storms(1)                                                                                        |       | 2.6                           |       | 3.8 |   |
| Additions and  replacements – Asbury                                                        |       | 0.4                           |       | 3.9 |   |
| Additions and  replacements – Iatan 1                                                       |       | 6.9                           |       | 14.3 |   |
| Additions and  replacements - State Line Unit 1, SLLC, Riverton, Energy Center, and Ozark  Beach |       | 0.3                           |       | 0.6 |   |
| Gas segment  additions and replacements                                                          |       | 0.3                           |       | 0.7 |   |
| Transportation                                                                                   |       | 0.1                           |       | 0.2 |   |
| Other (including  retirements and salvage -net)                                                  |       | 0.3                           |       | 1.6 |   |
| **Subtotal**                                                                                     |       | 51.6                          |       | 107.4 |   |
| Other capital  expenditures (primarily fiber optics)                                             |       | 0.7                           |       | 1.1 |   |
| **Subtotal capital expenditures incurred (2)**                                                   |       | 52.3                          |       | 108.5 |   |
| Change in capital  expenditures accrual (3)                                                      |       | 2.8                           |       | 9.1 |   |
| Less AFUDC  equity capitalized                                                                   |       | (1.5                          | )          | (2.6 | ) |
| **Total  cash outlay**                                                                           |       | $                             | 53.6       |   | $ | 115.0 |   |

 

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(1) For the six months ended June 30, 2008,storm costs of $0.1 million are specifically related to capital expenditures inthe first quarter of 2008 associated with the December 2007 ice storm and$2.4 million are specifically related to capital expenditures in the secondquarter of 2008 associated with tornadoes in May 2008.

(2) Expenditures incurred represent the total cost for workcompleted for the projects during the periods ending June 30, 2008.Discussion of capital expenditures throughout this 10-Q is presented on thisbasis.

(3) Adjustment to reflect actual cash flow related to capitalexpenditures. These are the net of expenditures unpaid at the end of thereporting period and expenditures paid in the reporting period, but incurredprior to the reporting period.

 

Approximately44% of our cash requirements for capital expenditures during the second quarterof 2008 were satisfied internally from operations (funds provided by operatingactivities less dividends paid). The remaining amounts of such requirementswere satisfied from short-term borrowings and proceeds from our sales of commonstock and debt securities discussed below

 

Wecurrently expect that internally generated funds will provide approximately 52%of the funds required for the remainder of our budgeted 2008 capitalexpenditures. We intend to utilize a combination of short-term debt, theproceeds of sales of long-term debt and/or common stock (including common stocksold under our Employee Stock Purchase Plan, our Dividend Reinvestment andStock Purchase Plan, and our 401(k) Plan and ESOP) to finance additional 

 

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amountsneeded 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 5 of “Notes to Consolidated Financial Statements (Unaudited).”

 

Wehad estimated our capital expenditures for our share of Iatan 2 to beapproximately $72.4 million, $43.8 million and $33.1 million in 2008, 2009 and2010, respectively. As a result of KCP&L’s updated forecast, however, wenow estimate these expenditures to be approximately $72.0 million, $67.5million and $36.1 million in 2008, 2009 and 2010, respectively. We hadestimated our capital expenditures for our share of the Iatan 1 environmentalupgrades to be approximately $26.7 million, $1.4 million and $0.3 million in2008, 2009 and 2010, respectively, but now estimate these expenditures to beapproximately $25.7 million in 2008 and $17.5 million in 2009 with anin-service date of February 2009. We had estimated our capitalexpenditures for the construction of a combustion turbine previously scheduledto be installed by the summer of 2011 to be approximately $0.2 million, $4.8million and $17.0 million in 2008, 2009 and 2010, respectively. As a result ofour delaying the combustion turbine at least one year, however, we now estimatethese expenditures to be approximately $0.2 million, $0.0 million, $4.8 millionand $17.0 million in 2008, 2009, 2010 and 2011, respectively.

 

**FinancingActivities**

 

Ournet cash flows received from financing activities were $47.4 million in 2008compared to $34.7 million in 2007.

 

On May 16, 2008, weissued $90 million principal amount of first mortgage bonds. The net proceedsof approximately $89.4 million, less$0.3 million of legal and other financing fees, were added to ourgeneral funds and used primarily to pay down short-term indebtedness incurred,in part, as a result of our on-going construction program.

 

On December 12,2007, we sold 3,000,000 shares of our common stock in an underwritten publicoffering for $23.00 per share. The sale resulted in net proceeds ofapproximately $65.7 million ($69.0 million less issuance costs of $3.3 million).The proceeds were added to our general funds and used to pay downshort-term indebtedness incurred, in part, as a result of our on-goingconstruction program.

 

OnMarch 26, 2007, we issued $80 million principal amount of first mortgagebonds. The net proceeds of approximately $79.1 million, less $0.4 million of legal and other financing fees,were added to our general funds and used to pay down short-term indebtednessincurred, in part, as a result of our on-going construction program.

 

Wehave filed a $400 million shelf registration statement with the SEC coveringour common stock, unsecured debt securities, preference stock, first mortgagebonds and trust preferred securities. We plan to use a portion of the proceedsfrom issuances under this shelf, once it becomes effective, to fund a portionof the capital expenditures for our new generation projects.

 

OnJuly 15, 2005, we entered into a $150 million unsecured revolving creditfacility 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 $27.5 million asof August 1, 2008. The unallocated credit facility is used for workingcapital, general corporate purposes and to back-up our use of commercial paper.This facility 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 

 

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fiscalquarters at the end of each fiscal quarter. Failure to maintain these ratioswill result in an event of default under the credit facility and will prohibitus from borrowing funds thereunder. As of June 30, 2008, we are incompliance with these ratios. This credit facility is also subject to cross-defaultif we default on in excess of $10 million in the aggregate on our otherindebtedness. This arrangement does not serve to legally restrict the use ofour cash in the normal course of operations. There were no outstandingborrowings under this agreement at June 30, 2008, however, $12.0 millionof the availability thereunder was used at such date to back up our outstandingcommercial paper.

 

Theprincipal amount of all series of first mortgage bonds outstanding at any onetime under the EDE Mortgage is limited by terms of the mortgage to $1 billion.Substantially all of the property, plant and equipment of The Empire DistrictElectric Company (but not its subsidiaries) is subject to the lien of the EDEMortgage.****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 June 30,2008 would permit us to issue approximately $177.8 million of new firstmortgage bonds based on this test with an assumed interest rate of 6.5%. Inaddition to the interest coverage requirement, the EDE Mortgage provides thatnew bonds must be issued against, among other things, retired bonds or 60% ofnet property additions. At June 30, 2008, we had retired bonds and netproperty additions which would enable the issuance of at least $562.0 millionprincipal amount of bonds if the annual interest requirements are met. As of June 30,2008, we are in compliance with all restrictive covenants of the EDE Mortgage.

 

Substantiallyall of the property, plant and equipment of The Empire District Gas Company issubject to the lien of the EDG Mortgage. The EDG Mortgage contains a requirementthat for new first mortgage bonds to be issued, the amount of such new firstmortgage bonds shall not exceed 75% of the cost of property additions acquiredafter the date of the Missouri Gas acquisition. At June 30, 2008, we hadproperty additions of $3.1 million, which would enable the issuance of at least$2.3 million principal amount of bonds if the annual interest requirements aremet. 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 June 30, 2008, this test wouldallow us to issue new first mortgage bonds.

 

Currently,our corporate credit ratings and the ratings for our securities are 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(1) |       | AAA       |       | Aaa              |       | AAA                                      |       |
| Senior Unsecured  Notes                             |       | BBB       |       | Baa2             |       | BB+                                      |       |
| Trust Preferred  Securities                         |       | BBB-      |       | Baa3             |       | BB                                       |       |
| Commercial Paper                                    |       | F2        |       | P-2              |       | A-3                                      |       |
| Outlook                                             |       | Negative  |       | Negative         |       | Stable                                   |       |

 

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**(1)** Insured by a third party insurer.

 

OnSeptember 22, 2005, Standard & Poor’s (S&P), reflecting ourannouncement of our proposed acquisition of Aquila, Inc.’s Missourinatural gas properties, placed our corporate credit rating on credit watch withnegative implications. S&P stated that the acquisition comes in addition toour embarking 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 

 

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creditwatch, but placed us on negative outlook. S&P also reduced the rating onour commercial paper from A-2 to A-3 on February 21, 2006. This reductionmade it more difficult for us to issue commercial paper and, as a result, ourshort-term debt during the period from February 21, 2006 to June 30,2006, was in the form of borrowings under our revolving credit facility.However, beginning on June 30, 2006, we were able to again issuecommercial paper at the current rating under a new agreement with Wells FargoBank. On May 17, 2006, S&P lowered our long-term corporate creditrating to BBB- from BBB, senior secured debt to BBB+ from A-, senior unsecureddebt rating 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. S&P affirmed ourratings on June 8, 2007 and again on June 12, 2008 with a stableoutlook.

 

Moody’saffirmed our ratings on May 13, 2005 and revised their rating outlook onus from negative to stable. On January 24, 2007, Moody’s again affirmedour ratings but changed their rating outlook on us back to negative. The changeto a negative rating outlook reflects Moody’s view on the longer-term prospectsfor our ratings given the sizable capital spending program we have committed tothrough 2010 and the potential for further weakness in our credit metrics thatcould develop during this time. On February 14, 2008, Moody’s placed allof our ratings on review for possible downgrade. Moody’s announced that thereview would consider the cumulative impact that certain negative events,including severe weather and operational disruptions in 2007 and 2008, have hadon our cash flow and overall financial flexibility at the current rating levelas well as consider the potential for elevated costs related to our capitalspending plan in 2008. On May 12, 2008, Moody’s affirmed our ratings witha negative outlook.

 

OnDecember 19, 2005, Fitch Ratings initiated coverage and assigned ratings(see table above) with a stable rating outlook. Fitch announced that theirratings reflect our low business risk position as a regulated electric utility,a stable service territory and a seemingly improving regulatory environment inMissouri where we receive approximately 89% of our electric revenues. On January 25,2008, Fitch affirmed our ratings but revised their rating outlook to negative.The change to a negative rating outlook reflects uncertainty surrounding theoutcome of our current rate filing and weakness in our projected financialmeasures relative to Fitch guidelines for the rating category. Recent eventsleading to the revision were storm damage in December 2007 and theextended outage of the Asbury baseload coal plant following a failed generatorinspection.

 

**CONTRACTUAL OBLIGATIONS**

 

Our contractual obligations have notsignificantly changed at June 30, 2008, compared to December 31, 2007other than $90 million principal amount of first mortgage bonds issued May 16,2008 and due 2018.

 

**DIVIDENDS**

 

Holdersof our common stock are entitled to dividends if, as, and when declared by theBoard of Directors, out of funds legally available therefore, subject to theprior rights of holders of any outstanding cumulative preferred stock andpreference stock. Payment of dividends is determined by our Board of Directorsafter considering all relevant factors, including the amount of our retainedearnings (which is essentially our accumulated net income less dividend payouts).As of June 30, 2008 our retained earnings balance was $7.4 million,compared to $13.8 million as of June 30, 2007, after paying out $10.8million in dividends during the second quarter of 2008. A reduction of ourdividend per share, partially or in whole, could have an adverse effect on ourcommon stock price.

 

Our diluted earnings per sharewere $0.35 for the six months ended June 30, 2008 and were $1.09 and $1.39for the years ended December 31, 2007 and 2006, respectively. Dividendspaid per share were $0.64 for the six months ended June 30, 2008 and $1.28for each of the years ended December 31, 2007 and 2006.

 

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Inaddition, the EDE Mortgage and our Restated Articles contain certain dividendrestrictions. The most restrictive of these is contained in the EDE Mortgage,which provides that we may not declare or pay any dividends (other thandividends payable in shares of our common stock) or make any other distributionon, or purchase (other than with the proceeds of additional common stock financing)any shares of, our common stock if the cumulative aggregate amount thereofafter August 31, 1944 (exclusive of the first quarterly dividend of$98,000 paid after said date) would exceed the sum of $10.75 million and theearned surplus (as defined in the EDE Mortgage) accumulated subsequent to August 31,1944, or the date of succession in the event that another corporation succeedsto our rights and liabilities by a merger or consolidation. On March 11,2008, we amended the EDE Mortgage in order to provide us with more flexibilityto pay dividends to our shareholders by increasing the basket available to paydividends by $10.75 million, as described above. As of June 30, 2008, thisrestriction did not prevent us from issuing dividends.

 

Inaddition, under certain circumstances, our Junior Subordinated Debentures,8-1/2% Series due 2031, reflected as a note payable to securitizationtrust on our balance sheet, held by Empire District Electric Trust I, anunconsolidated securitization trust subsidiary, may also restrict our abilityto pay dividends on our common stock. These restrictions apply if: (1) wehave knowledge that an event has occurred that would constitute an event ofdefault under the indenture governing these junior subordinated debentures andwe have not taken reasonable steps to cure the event, (2) we are indefault with respect to payment of any obligations under our guarantee relatingto the underlying preferred securities, or (3) we have deferred interestpayments on the Junior Subordinated Debentures, 8-1/2% Series due 2031 orgiven notice of a deferral of interest payments. As of June 30, 2008,there were no such restrictions on our ability to pay dividends.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

Wehave no off-balance sheet arrangements that have or are reasonably likely tohave a current or future effect on our financial condition, changes infinancial 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 Financial Condition andResults of Operations” in our Annual Report Form 10-K for the year ended December 31,2007 for a discussion of our critical accounting policies. There were nochanges in these policies in the quarter ended June 30, 2008.

 

**RECENTLY ISSUED ACCOUNTING STANDARDS**

 

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

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

Market risk is the exposure to a change in the value of a physicalasset or financial instrument, derivative or non-derivative, caused byfluctuations in market variables such as interest rates or commodity prices. We**handle our commodity market risk in accordance with ourestablished Energy Risk Management Policy, which typically includes enteringinto various derivative transactions. We utilize derivatives to manage our gascommodity market risk and to help manage our exposure resulting from purchasingmost of our natural gas on the volatile spot market for the generation of powerfor our native-load customers. See Note 5 of “Notes to Consolidated FinancialStatements (Unaudited)” for further information.

 

*Interest Rate Risk**.*We are exposed to changes ininterest rates as a result of financing through our issuance of commercialpaper and other short-term debt. We manage our interest rate exposure bylimiting our variable-rate exposure (applicable to commercial paper andborrowings under our unsecured credit agreement) to a certain percentage oftotal capitalization, as set by policy, and by monitoring the effects of marketchanges in interest rates.

 

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If market interest rates average 1% more in 2008 than in 2007, ourinterest expense would increase, and income before taxes would decrease by lessthan $0.4 million. This amount has been determined by considering the impact ofthe hypothetical interest rates on our highest month-end commercial paperbalance for 2007. These analyses do not consider the effects of the reducedlevel of overall economic activity that could exist in such an environment. Inthe event of a significant change in interest rates, management would likelytake actions to further mitigate its exposure to the change. However, due tothe uncertainty of the specific actions that would be taken and their possibleeffects, the sensitivity analysis assumes no changes in our financialstructure.

* *

*Commodity Price Risk*. We are exposed to theimpact of market fluctuations in the price and transportation costs of coal,natural gas, and electricity and employ established policies and procedures tomanage the risks associated with these market fluctuations, including utilizingderivatives.

 

We satisfied 58.6% of our2007 generation fuel supply need through coal. Approximately 86% of our 2007coal supply was Western coal. We have contracts to supply fuel for our coalplants through 2010. These contracts and current inventory satisfyapproximately 100% of our anticipated fuel requirements for 2008, 67% for 2009and 48% for our 2010 requirements for our Asbury and Riverton coal plants. Inorder to manage our exposure to fuel prices, future coal supplies will beacquired using a combination of short-term and long-term contracts.

 

Weare exposed to changes in market prices for natural gas we must purchase to runour combustion turbine generators. Our natural gas procurement program isdesigned to minimize our risk from volatile natural gas prices. We enter intophysical forward and financial derivative contracts with counterpartiesrelating to our future natural gas requirements that lock in prices (with respectto predetermined percentages of our expected future natural gas needs) in anattempt to lessen the volatility in our fuel expense and improvepredictability. We expect that increases in gas prices will be partially offsetby realized gains under financial derivative transactions. As of July 18,2008, 94%, or 3.4 million Dths’s, of our anticipated volume of natural gasusage for our electric operations for the remainder of 2008 is hedged.

 

Basedon our expected natural gas purchases for our electric operations for the nexttwelve months, if average natural gas prices should increase 10% more than theprice at June 30, 2008, our natural gas expense would increase, and incomebefore taxes would decrease by approximately $1.2 million based on our June 30,2008 total hedged positions for the next twelve months.

 

Weattempt to mitigate a portion of our natural gas price risk associated with ourgas segment using physical forward purchase agreements, storage and derivativecontracts. As of July 17, 2008, we have 0.7 million Dths in storage on thethree pipelines that serve our customers. This represents 36% of our storagecapacity. Our long-term hedge strategyis to mitigate price volatility for our customers by hedging a minimum of 50%of current year, up to 50% of second year and up to 20% of third year expectedgas usage by the beginning of the ACA year at September 1. However, due to purchased natural gascost recovery mechanisms for our retail customers, fluctuations in the cost ofnatural gas have little effect on income.

* *

*Credit Risk*. Credit risk is the risk of financial lossto the Company if counterparties fail to perform their contractual obligations.In order to minimize overall credit risk, we maintain credit policies,including the evaluation of counterparty financial condition and the use ofstandardized agreements that facilitate the netting of cash flows associatedwith a single counterparty. In addition, certain counterparties make availablecollateral in the form of cash held as margin deposits as a result of exceedingagreed-upon credit exposure thresholds or may be required to prepay thetransaction. Amounts reported as margin deposit liabilities represent funds wehold that result from various trading counterparties exceeding agreed-uponcredit exposure thresholds. Amounts reported as margin deposit assets representfunds held on deposit by various trading counterparties that resulted from usexceeding agreed-upon credit limits established by the counterparties.

 

Thefollowing table depicts our margin deposit assets and margin depositliabilities at June 30, 2008 and December 31, 2007:

 

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| **(in millions)**           | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                  |       |                        |       |                            |       |
| Margin deposit  assets      |       | $                           | 2.5        |                            | $          | 6.3 |   |
| Margin deposit  liabilities |       | $                           | 17.8       |                            | $          | — |   |

 

Inaddition, we held a letter of credit from a counterparty in our favor for $6.5million as of June 30, 2008.

 

Wesell electricity and gas and provide distribution and transmission services toa diverse group of customers, including residential, commercial and industrialcustomers. Credit risk associated with trade accounts receivable from energycustomers is limited due to the large number of customers. In addition, weenter into contracts with various companies in the energy industry forpurchases of energy-related commodities, including natural gas in our fuelprocurement process.

 

Ourexposure to credit risk is concentrated primarily within our fuel procurementprocess, as we transact with a smaller, less diverse group of counterpartiesand transactions may involve large notional volumes and potentially volatilecommodity prices. At July 18, 2008, gross credit exposure related to thesetransactions totaled $50.5 million ($19.8 million in physical contracts and$30.7 million in financial contracts), reflecting the unrealized gains forcontracts carried at fair value.

 

**Item 4.   Controls andProcedures**

 

Asof the end of the period covered by this report, an evaluation was carried out,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures (as suchterm is defined in Rule 13a-15(e) of the Securities Exchange Act of1934). Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof June 30, 2008.

 

There have been no changes in our internal control over financialreporting that occurred during the second quarter of 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

 

**PART II. OTHER INFORMATION**

 

**Item 1A.  Risk Factors.**

 

There have been no material changes to the factors disclosed in Part I,Item 1-A. Risk Factors in our Annual Report on Form 10-K for the yearended December 31, 2007.

 

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

 

(a)           The Annual Meeting ofStockholders was held on April 24, 2008.

 

(b)           The followingpersons were re-elected Directors of Empire to serve until the 2011 AnnualMeeting of Stockholders:

 

William L. Gipson (26,323,753 votes for; 599,628 withheld authority).

 

Kenneth R. Allen (26,424,206 votes for; 499,175 withheld authority).

 

Bill D. Helton (26,374,762 votes for; 548,620 withheld authority).

 

The term of office as Director of the following other Directors continuedafter the meeting:   Ross C. Hartley, D.Randy Laney, Julio S. Leon, Myron W. McKinney, B. Thomas Mueller, Mary M.Posner and Allan T. Thoms,

 

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(c)           Commonstockholders voted to approve ratification of the appointment ofPricewaterhouseCoopers LLP as Empire’s independent registered public accountingfirm for the fiscal year ending December 31, 2008. Passage of the proposalrequired the affirmative vote of a majority of the votes cast. The proposalreceived 26,531,610 votes for and 247,390 votes against.

 

(d)           Commonstockholders were also asked to vote upon a non-binding advisory proposal todeclassify our Board of Directors. The proposal received 12,036,642 votes for,1,009,369 votes against, 1,157,832 abstentions and 12,719,539 broker non-votes.

 

 

**Item5.  Other Information.**

 

Forthe twelve months ended June 30, 2008, our ratio of earnings to fixedcharges was 2.09x.  See Exhibit (12)hereto.

 

 

**Item 6.  Exhibits.**

 

(a)           Exhibits.

 

(10) Thirty-ThirdSupplemental Indenture, dated as of May 16, 2008, to the Indenture of      Mortgage and Deed of Trust dated as of September 1,1944, as amended and  supplemented, amongthe Company, The Bank of New York Trust Company, N.A. and UMB Bank &Trust, N.A. (Incorporated by reference to Exhibit 4.1 to the CurrentReport Form 8-K            dated May 16,2008 and filed May 16, 2008, File No. 1-3368).

 

(12) Computation of Ratio ofEarnings to Fixed Charges.

 

(31)(a) Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

(31)(b) Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

(32)(a) Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

(32)(b) Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-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 ExchangeAct of 1934, as amended.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned 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 |

 

August 7, 2008

 

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