Table of Contents

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| **x**      | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                              |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | **For the quarterly period ended  September 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 ELECTRICCOMPANY**

(Exact name of registrant as specified in its charter)

 

| **Kansas**                                  | ** ** | **44-0236370**                        |
|---------------------------------------------|------------|---------------------------------------|
| (State of  Incorporation)                   |       | (I.R.S. Employer  Identification No.) |
|                                        |       |                                  |
| **602 S.  Joplin Avenue, Joplin, Missouri** | ** ** | **64801**                             |
| (Address of  principal executive offices)   |       | (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 check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” 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 oNo x

 

As of November 1,2008, 33,945,173 shares of common stock were outstanding.

 

 

 

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Tableof 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 (Loss)                       | 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 | 31       |
|          |                                                                                        |     |
|          | Executive  Summary                                                                          | 31       |
|          |                                                                                        |     |
|          | Results  of Operations                                                                      | 35       |
|          |                                                                                        |     |
|          | Rate Matters                                                                                | 46       |
|          |                                                                                        |     |
|          | Competition                                                                                 | 50       |
|          |                                                                                        |     |
|          | Liquidity and Capital Resources                                                             | 52       |
|          |                                                                                        |     |
|          | Contractual  Obligations                                                                    | 55       |
|          |                                                                                        |     |
|          | Dividends                                                                                   | 55       |
|          |                                                                                        |     |
|          | Off-Balance Sheet Arrangements                                                              | 56       |
|          |                                                                                        |     |
|          | Critical  Accounting Policies                                                               | 56       |
|          |                                                                                        |     |
|          | Recently Issued Accounting Standards                                                        | 56       |
|          |                                                                                        |     |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 56       |
|          |                                                                                        |     |
| Item 4.       | Controls and  Procedures                                                                    | 58       |
|          |                                                                                        |     |
| Part II- | Other Information:                                                                          |     |
|          |                                                                                        |     |
| Item 1.       | Legal  Proceedings - (none)                                                                 |     |
|          |                                                                                        |     |
| Item 1A.      | Risk Factors                                                                                | 58       |
|          |                                                                                        |     |
| 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 - (none)                               |     |
|          |                                                                                        |     |
| Item 5.       | Other Information                                                                           | 59       |
|          |                                                                                        |     |
| Item 6.       | Exhibits                                                                                    | 59       |
|          |                                                                                        |     |
|          | Signatures                                                                                  | 60       |

 

2

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**FORWARD LOOKING STATEMENTS**

 

Certain matters discussed inthis quarterly report are “forward-looking statements” intended to qualify forthe safe harbor from liability established by the Private Securities LitigationReform Act of 1995. Such statements address or may address future plans,objectives, expectations and events or conditions concerning various matterssuch as capital expenditures, earnings, pension and other costs, competition,litigation, our construction program, our generation plans, our financingplans, potential acquisitions, rate and other regulatory matters, liquidity andcapital resources and accounting matters. Forward-looking statements maycontain words like “anticipate,” “believe,” “expect,” “project,” “objective” orsimilar expressions to identify them as forward-looking statements. Factorsthat could cause actual results to differ materially from those currentlyanticipated in such statements include:

 

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

·                  the cost andavailability of purchased power and fuel, and the results of our activities(such as hedging) to reduce the volatility of such costs;

·                  the results ofprudency and similar reviews by regulators of costs we incur;

·                  weather,business and economic conditions and other factors which may impact salesvolumes and customer growth;

·                  operation of ourelectric generation facilities and electric and gas transmission and distributionsystems;

·                  the costs andother impacts resulting from natural disasters, such as tornados and icestorms;

·                  the periodicrevision of our construction and capital expenditure plans and cost and timingestimates;

·                  legislation;

·                  regulation,including environmental regulation (such as NOx, SO2 and CO2 regulation);

·                  competition,including the energy imbalance market;

·                  electric utilityrestructuring, including ongoing federal activities and potential stateactivities;

·                  the impact ofelectric deregulation on off-system sales;

·                  changes inaccounting requirements;

·                  othercircumstances affecting anticipated rates, revenues and costs;

·                  the timing ofaccretion estimates, and integration costs relating to, completed andcontemplated acquisitions and the performance of acquired businesses;

·                  matters such asthe effect of changes in credit ratings on the availability and our cost offunds;

·                  volatility inthe credit, equity and other financial markets and the resulting impact on ourability or cost to issue commercial paper, debt or equity securities, orotherwise secure funds to meet our capital expenditure and liquidity needs;

·                  interruptions orchanges in our coal delivery, gas transportation or storage agreements orarrangements;

·                  the success ofefforts to invest in and develop new opportunities;

·                  costs andeffects of legal and administrative proceedings, settlements, investigationsand claims; and

·                  our exposure tothe credit risk of our hedging 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. Any forward-lookingstatement speaks only as of the date on which such statement is made, and we donot undertake any obligation to update any forward-looking statement to reflectevents or circumstances after the date on which such statement is made.

 

We caution you that any forward-looking statements are not guaranteesof future performance and involve known and unknown risk, uncertainties andother factors which may cause our actual results, performance or achievementsto differ materially from the facts, results, performance or achievements wehave 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  September 30** | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                                                                                      | ** ** | **2008**                                            | ** **  | **2007** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)**           | ** **  |
| **Operating  revenues:**                                                                                        |       |                                                |        |   |   |
| Electric                                                                                                        | ** ** | **$**                                               | **130,911** | ** ** | $ | 135,459 |   |
| Gas                                                                                                             | ** ** | **6,056**                                           | ** **  | 5,641 |   |
| Water                                                                                                           | ** ** | **484**                                             | ** **  | 521 |   |
| Other                                                                                                           | ** ** | **1,234**                                           | ** **  | 866 |   |
| ** **                                                                                                      |       | **138,685**                                         | ** **  | 142,487 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                | ** **  |   |   |
| Fuel and  purchased power                                                                                       | ** ** | **51,501**                                          | ** **  | 52,402 |   |
| Cost of natural  gas sold and transported                                                                       | ** ** | **3,414**                                           | ** **  | 2,607 |   |
| Regulated  operating expenses                                                                                   | ** ** | **18,404**                                          | ** **  | 17,384 |   |
| Other operating  expenses                                                                                       | ** ** | **481**                                             | ** **  | 357 |   |
| Maintenance and  repairs                                                                                        | ** ** | **7,051**                                           | ** **  | 6,669 |   |
| Depreciation and  amortization                                                                                  | ** ** | **13,393**                                          | ** **  | 13,368 |   |
| Provision for  income taxes                                                                                     | ** ** | **9,861**                                           | ** **  | 11,461 |   |
| Other taxes                                                                                                     | ** ** | **6,561**                                           | ** **  | 6,569 |   |
| ** **                                                                                                      |       | **110,666**                                         | ** **  | 110,817 |   |
| **Operating  income**                                                                                           | ** ** | **28,019**                                          | ** **  | 31,670 |   |
| Other income and  (deductions):                                                                                 |       |                                                | ** **  |   |   |
| Allowance for  equity funds used during construction                                                            | ** ** | **1,690**                                           | ** **  | 736 |   |
| Interest income                                                                                                 | ** ** | **366**                                             | ** **  | 72 |   |
| Benefit  (provision) for other income taxes                                                                     | ** ** | **(64**                                             | **)**       | 1 |   |
| Other - non-operating  expenses, net                                                                            | ** ** | **(327**                                            | **)**       | (200 | ) |
| ** **                                                                                                      |       | **1,665**                                           | ** **  | 609 |   |
| Interest  charges:                                                                                              |       |                                                | ** **  |   |   |
| Long-term debt                                                                                                  | ** ** | **9,565**                                           | ** **  | 8,059 |   |
| Note payable to  securitization trust                                                                           | ** ** | **1,063**                                           | ** **  | 1,063 |   |
| Short-term debt                                                                                                 | ** ** | **242**                                             | ** **  | 833 |   |
| Allowance for  borrowed funds used during construction                                                          | ** ** | **(1,689**                                          | **)**       | (1,117 | ) |
| Other                                                                                                           | ** ** | **323**                                             | ** **  | 241 |   |
| ** **                                                                                                      |       | **9,504**                                           | ** **  | 9,079 |   |
| **Income  from continuing operations**                                                                          | ** ** | **20,180**                                          | ** **  | 23,200 |   |
| **Earnings  from discontinued operations, net of tax**                                                          | ** ** | **—**                                          | ** **  | 111 |   |
| **Net  income**                                                                                                 | ** ** | **$**                                               | **20,180**  | ** ** | $ | 23,311 |   |
| **Weighted  average number of common shares outstanding - basic**                                               | ** ** | **33,895**                                          | ** **  | 30,481 |   |
| **Weighted  average number of common shares outstanding - diluted**                                             | ** ** | **33,930**                                          | ** **  | 30,504 |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic**                 | ** ** | **$**                                               | **0.60**    | ** ** | $ | 0.76 |   |
| **Earnings  from continuing operations per weighted average share of common stock–  diluted**              | ** ** | **$**                                               | **0.59**    | ** ** | $ | 0.76 |   |
| **Earnings  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**                                     | ** ** | **$**                                               | **0.60**    | ** ** | $ | 0.76 |   |
| **Total  earnings per weighted average share of common stock – diluted**                                   | ** ** | **$**                                               | **0.59**    | ** ** | $ | 0.76 |   |
| **Dividends  per share of common stock**                                                                        | ** ** | **$**                                               | **0.32**    | ** ** | $ | 0.32 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 
| ** **                                                                                                      | ** ** | **Nine Months Ended**                               | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                      | ** ** | **September 30,**                                        | ** **  |
| ** **                                                                                                      | ** ** | **2008**                                                      | ** **  | **2007** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                        |       |                                                          |        |   |   |
| Electric                                                                                                        | ** ** | **$**                                                         | **339,717** |   | $ | 329,900 |   |
| Gas                                                                                                             | ** ** | **42,480**                                                    |        | 41,670 |   |
| Water                                                                                                           | ** ** | **1,361**                                                     |        | 1,425 |   |
| Other                                                                                                           | ** ** | **3,352**                                                     |        | 2,391 |   |
| ** **                                                                                                      |       | **386,910**                                                   |        | 375,386 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                          |        |   |   |
| Fuel and  purchased power                                                                                       | ** ** | **155,385**                                                   |        | 139,735 |   |
| Cost of natural  gas sold and transported                                                                       | ** ** | **26,412**                                                    |        | 26,051 |   |
| Regulated  operating expenses                                                                                   | ** ** | **53,965**                                                    |        | 52,958 |   |
| Other operating  expenses                                                                                       | ** ** | **1,307**                                                     |        | 1,192 |   |
| Maintenance and  repairs                                                                                        | ** ** | **19,444**                                                    |        | 23,682 |   |
| Depreciation and  amortization                                                                                  | ** ** | **40,875**                                                    |        | 39,147 |   |
| Provision for  income taxes                                                                                     | ** ** | **14,951**                                                    |        | 15,893 |   |
| Other taxes                                                                                                     | ** ** | **19,667**                                                    |        | 19,022 |   |
| ** **                                                                                                      |       | **332,006**                                                   |        | 317,680 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Operating  income**                                                                                           | ** ** | **54,904**                                                    |        | 57,706 |   |
| Other income and  (deductions):                                                                                 |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                            | ** ** | **4,305**                                                     |        | 2,294 |   |
| Interest income                                                                                                 | ** ** | **989**                                                       | ** **  | 254 |   |
| Benefit  (provision) for other income taxes                                                                     | ** ** | **(334**                                                      | **)**       | 22 |   |
| Other -  non-operating expenses, net                                                                            | ** ** | **(789**                                                      | **)**       | (685 | ) |
| ** **                                                                                                      |       | **4,171**                                                     | ** **  | 1,885 |   |
| Interest  charges:                                                                                              |       |                                                          |        |   |   |
| Long-term debt                                                                                                  | ** ** | **26,476**                                                    |        | 23,063 |   |
| Note payable to  securitization trust                                                                           | ** ** | **3,188**                                                     |        | 3,188 |   |
| Short-term debt                                                                                                 | ** ** | **1,085**                                                     |        | 2,175 |   |
| Allowance for  borrowed funds used during construction                                                          | ** ** | **(4,552**                                                    | **)**       | (3,237 | ) |
| Other                                                                                                           | ** ** | **891**                                                       |        | 819 |   |
| ** **                                                                                                      |       | **27,088**                                                    |        | 26,008 |   |
| **Income  from continuing operations**                                                                          | ** ** | **31,987**                                                    |        | 33,583 |   |
| **Earnings  from discontinued operations, net of tax**                                                          | ** ** | **—**                                                    |        | 63 |   |
| **Net  income**                                                                                                 | ** ** | **$**                                                         | **31,987**  |   | $ | 33,646 |   |
| **Weighted  average number of common shares outstanding - basic**                                               | ** ** | **33,777**                                                    |        | 30,388 |   |
| **Weighted  average number of common shares outstanding - diluted**                                             | ** ** | **33,806**                                                    |        | 30,409 |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**    | ** ** | **$**                                                         | **0.95**    |   | $ | 1.11 |   |
| **Earnings  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**                         | ** ** | **$**                                                         | **0.95**    |   | $ | 1.11 |   |
| **Dividends  per share of common stock**                                                                        | ** ** | **$**                                                         | **0.96**    |   | $ | 0.96 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                                                                                      | ** ** | **Twelve Months Ended**                             | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                      | ** ** | **September 30,**                                        | ** **  |
| ** **                                                                                                      | ** ** | **2008**                                                      |        | **2007** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                        |       |                                                          |        |   |   |
| Electric                                                                                                        | ** ** | **$**                                                         | **434,978** |   | $ | 416,394 |   |
| Gas                                                                                                             | ** ** | **60,687**                                                    |        | 60,258 |   |
| Water                                                                                                           | ** ** | **1,814**                                                     |        | 1,861 |   |
| Other                                                                                                           | ** ** | **4,204**                                                     |        | 3,102 |   |
| ** **                                                                                                      |       | **501,683**                                                   |        | 481,615 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                          |        |   |   |
| Fuel and  purchased power                                                                                       | ** ** | **206,881**                                                   |        | 173,698 |   |
| Cost of natural  gas sold and transported                                                                       | ** ** | **37,986**                                                    |        | 38,378 |   |
| Regulated  operating expenses                                                                                   | ** ** | **72,374**                                                    |        | 70,068 |   |
| Other operating  expenses                                                                                       | ** ** | **1,725**                                                     |        | 1,558 |   |
| Maintenance and  repairs                                                                                        | ** ** | **27,821**                                                    |        | 30,626 |   |
| Loss on plant  disallowance                                                                                     | ** ** | **—**                                                    |        | 828 |   |
| Gain on sale of  assets                                                                                         | ** ** | **(1,241**                                                    | **)**       | — |   |
| Depreciation and  amortization                                                                                  | ** ** | **54,327**                                                    |        | 49,070 |   |
| Provision for  income taxes                                                                                     | ** ** | **13,474**                                                    |        | 20,335 |   |
| Other taxes                                                                                                     | ** ** | **25,573**                                                    |        | 24,790 |   |
| ** **                                                                                                      |       | **438,920**                                                   |        | 409,351 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Operating  income**                                                                                           | ** ** | **62,763**                                                    |        | 72,264 |   |
| Other income and  (deductions):                                                                                 |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                            | ** ** | **4,934**                                                     |        | 3,533 |   |
| Interest income                                                                                                 | ** ** | **1,062**                                                     |        | 344 |   |
| Benefit  (provision) for other income taxes                                                                     | ** ** | **(384**                                                      | **)**       | 120 |   |
| Other –  non-operating expenses, net                                                                       | ** ** | **(1,073**                                                    | **)**       | (894 | ) |
| ** **                                                                                                      |       | **4,539**                                                     |        | 3,103 |   |
| Interest  charges:                                                                                              |       |                                                          |        |   |   |
| Long-term debt                                                                                                  | ** ** | **34,533**                                                    |        | 29,941 |   |
| Note payable to  securitization trust                                                                           | ** ** | **4,250**                                                     |        | 4,250 |   |
| Short-term debt                                                                                                 | ** ** | **1,850**                                                     |        | 2,750 |   |
| Allowance for  borrowed funds used during construction                                                          | ** ** | **(6,056**                                                    | **)**       | (4,243 | ) |
| Other                                                                                                           | ** ** | **1,140**                                                     |        | 1,035 |   |
| ** **                                                                                                      |       | **35,717**                                                    |        | 33,733 |   |
| **Income  from continuing operations**                                                                          | ** ** | **31,585**                                                    |        | 41,634 |   |
| **Earnings  from discontinued operations, net of tax**                                                          | ** ** | **—**                                                    |        | 211 |   |
| **Net  income**                                                                                                 | ** ** | **$**                                                         | **31,585**  |   | $ | 41,845 |   |
| **Weighted  average number of common shares outstanding - basic**                                               | ** ** | **33,123**                                                    |        | 30,341 |   |
| **Weighted  average number of common shares outstanding - diluted**                                             | ** ** | **33,152**                                                    |        | 30,361 |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**    | ** ** | **$**                                                         | **0.95**    |   | $ | 1.37 |   |
| **Earnings  from discontinued operations per weighted average share of common stock –  basic and diluted** | ** ** | **$**                                                         | **—**  |   | $ | 0.01 |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                         | ** ** | **$**                                                         | **0.95**    |   | $ | 1.38 |   |
| **Dividends  per share of common stock**                                                                        | ** ** | **$**                                                         | **1.28**    |   | $ | 1.28 |   |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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**THE EMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS) (UNAUDITED)**

 
| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**           | ** ** |
| ** **                                                                                                       | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**               | ** ** |
|                                                                                                             |       |                             | ** ** |   |   |
| Net income                                                                                                       | ** ** | **$**                            | **20,180** | ** ** | $ | 23,311 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability | ** ** | **(3,678**                       | **)**      | (1,202 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **(34,111**                      | **)**      | (7,071 | ) |
| Income taxes                                                                                                     | ** ** | **14,398**                       | ** ** | 3,152 |   |
|                                                                                                             |       |                             | ** ** |   |   |
| **Comprehensive  (loss) income**                                                                                 | ** ** | **$**                            | **(3,211** | **)** | $ | 18,190 |   |

 
| ** **                                                                                                       | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                       | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                                                             |       | **($-000’s)**              |       |
|                                                                                                             |       |                            | ** ** |   |   |
| Net income                                                                                                       | ** ** | **$**                           | **31,987** | ** ** | $ | 33,646 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability | ** ** | **(6,251**                      | **)**      | (1,254 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **(282**                        | **)**      | 1,541 |   |
| Income taxes                                                                                                     | ** ** | **2,489**                       | ** ** | (109 | ) |
|                                                                                                             |       |                            | ** ** |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                           | **27,943** | ** ** | $ | 33,824 |   |

 
| ** **                                                                                                       | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**            | ** ** |
| ** **                                                                                                       | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**                | ** ** |
|                                                                                                             |       |                              |       |   |   |
| Net income                                                                                                       | ** ** | **$**                             | **31,585** | ** ** | $ | 41,845 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability | ** ** | **(6,606**                        | **)**      | (1,306 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **3,405**                         | ** ** | 629 |   |
| Income taxes                                                                                                     | ** ** | **1,220**                         | ** ** | 258 |   |
|                                                                                                             |       |                              | ** ** |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                             | **29,604** | ** ** | $ | 41,426 |   |

 

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

 

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**THE EMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                            | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **($-000’s)**               | ** ** |
| **Assets**                                            |       |                             |       |                            |       |
| Plant and property, at original cost:                 |       |                             |       |                            |       |
| Electric                                              |       | $                                | 1,480,293  |                            | $          | 1,409,217 |   |
| Natural gas                                           |       | 55,600                           |       | 54,715                          |       |
| Water                                                 |       | 10,536                           |       | 10,353                          |       |
| Other                                                 |       | 27,968                           |       | 26,355                          |       |
| Construction work in progress                         |       | 247,580                          |       | 167,049                         |       |
|                                                  |       | 1,821,977                        |       | 1,667,689                       |       |
| Accumulated depreciation and amortization             |       | 521,522                          |       | 488,816                         |       |
|                                                  |       | 1,300,455                        |       | 1,178,873                       |       |
|                                                  |       |                             |       |                            |       |
| Current assets:                                       |       |                             |       |                            |       |
| Cash and cash equivalents                             |       | 9,654                            |       | 4,043                           |       |
| Accounts receivable – trade, net                 |       | 42,944                           |       | 38,011                          |       |
| Accrued unbilled revenues                             |       | 12,365                           |       | 20,886                          |       |
| Accounts receivable – other                      |       | 11,539                           |       | 15,465                          |       |
| Fuel, materials and supplies                          |       | 58,961                           |       | 49,482                          |       |
| Unrealized gain in fair value of derivative contracts |       | 6,696                            |       | 2,499                           |       |
| Prepaid expenses                                      |       | 4,087                            |       | 3,308                           |       |
|                                                  |       | 146,246                          |       | 133,694                         |       |
|                                                  |       |                             |       |                            |       |
| Noncurrent assets and deferred charges:               |       |                             |       |                            |       |
| Regulatory assets                                     |       | 99,314                           |       | 92,785                          |       |
| Goodwill                                              |       | 39,492                           |       | 39,492                          |       |
| Unamortized debt issuance costs                       |       | 9,324                            |       | 6,662                           |       |
| Unrealized gain in fair value of derivative contracts |       | 12,470                           |       | 17,520                          |       |
| Other                                                 |       | 4,397                            |       | 4,048                           |       |
|                                                  |       | 164,997                          |       | 160,507                         |       |
| Total Assets                                          |       | $                                | 1,611,698  |                            | $          | 1,473,074 |   |

 

(Continued)

 

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

 

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**THE EMPIRE DISTRICT ELECTRIC COMPANY**

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

** **
| ** **                                                                                         | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **($-000’s)**               | ** ** |
| **Capitalization and Liabilities**                                                                 |       |                             |       |                            |       |
| Common stock, $1 par value, 33,921,218 and 33,605,871 shares issued and  outstanding, respectively |       | $                                | 33,921     |                            | $          | 33,606 |   |
| Capital in excess of par value                                                                     |       | 482,159                          |       | 477,385                         |       |
| Retained earnings                                                                                  |       | 16,707                           |       | 17,153                          |       |
| Accumulated other comprehensive income, net of income tax                                          |       | 6,988                            |       | 11,032                          |       |
| Total common stockholders’ equity                                                             |       | 539,775                          |       | 539,176                         |       |
|                                                                                               |       |                             |       |                            |       |
| Long-term debt:                                                                                    |       |                             |       |                            |       |
| Note payable to securitization trust                                                               |       | 50,000                           |       | 50,000                          |       |
| Obligations under capital lease                                                                    |       | 219                              |       | 349                             |       |
| First mortgage bonds and secured debt                                                              |       | 332,942                          |       | 242,959                         |       |
| Unsecured debt                                                                                     |       | 248,493                          |       | 248,572                         |       |
| Total long-term debt                                                                               |       | 631,654                          |       | 541,880                         |       |
| Total long-term debt and common stockholders’ equity                                          |       | 1,171,429                        |       | 1,081,056                       |       |
|                                                                                               |       |                             |       |                            |       |
| Current liabilities:                                                                               |       |                             |       |                            |       |
| Accounts payable and accrued liabilities                                                           |       | 55,456                           |       | 79,229                          |       |
| Current maturities of long-term debt                                                               |       | 158                              |       | 150                             |       |
| Short-term debt                                                                                    |       | 55,400                           |       | 33,040                          |       |
| Customer deposits                                                                                  |       | 9,372                            |       | 8,414                           |       |
| Interest accrued                                                                                   |       | 12,749                           |       | 5,147                           |       |
| Unrealized loss in fair value of derivative contracts                                              |       | 10,646                           |       | 1,611                           |       |
| Taxes accrued                                                                                      |       | 18,316                           |       | 2,931                           |       |
| Current deferred income taxes                                                                      |       | 395                              |       | 381                             |       |
|                                                                                               |       | 162,492                          |       | 130,903                         |       |
| Commitments and contingencies (Note 6)                                                             |       |                             |       |                            |       |
| Noncurrent liabilities and deferred credits:                                                       |       |                             |       |                            |       |
| Regulatory liabilities                                                                             |       | 65,860                           |       | 58,107                          |       |
| Deferred income taxes                                                                              |       | 169,160                          |       | 165,989                         |       |
| Unamortized investment tax credits                                                                 |       | 3,030                            |       | 3,441                           |       |
| Pension and other postretirement benefit obligations                                               |       | 16,298                           |       | 14,115                          |       |
| Unrealized loss in fair value of derivative contracts                                              |       | 2,182                            |       | 698                             |       |
| Other                                                                                              |       | 21,247                           |       | 18,765                          |       |
|                                                                                               |       | 277,777                          |       | 261,115                         |       |
| Total Capitalization and Liabilities                                                               |       | $                                | 1,611,698  |                            | $          | 1,473,074 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

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

 
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                    | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **($-000’s)**              | ** ** |
| **Operating  activities:**                                                    |       |                            |       |   |   |
| Net income                                                                    |       | $                               | 31,987     |   | $ | 33,646 |   |
| Adjustments to  reconcile net income to cash flows from operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                |       | 44,347                          |       | 43,072 |   |
| Pension and  other postretirement benefit costs                               |       | 6,791                           |       | 7,027 |   |
| Deferred income  taxes and investment tax credit, net                         |       | 1,738                           |       | 9,636 |   |
| Allowance for  equity funds used during construction                          |       | (4,305                          | )          | (2,294 | ) |
| Stock  compensation expense                                                   |       | 2,095                           |       | 1,922 |   |
| Non-cash  (gain)/loss on derivatives                                          |       | (2,550                          | )          | (942 | ) |
| Gain on sale of  other segment business                                       |       | —                          |       | (161 | ) |
| Cash flows  impacted by changes in:                                           |       |                            |       |   |   |
| Accounts  receivable and accrued unbilled revenues                            |       | 9,930                           |       | (11,225 | ) |
| Fuel, materials  and supplies                                                 |       | (9,479                          | )          | (260 | ) |
| Prepaid  expenses, other current assets and deferred charges                  |       | (4,839                          | )          | 43 |   |
| Accounts payable  and accrued liabilities                                     |       | (15,970                         | )          | (13,542 | ) |
| Interest, taxes  accrued and customer deposits                                |       | 23,999                          |       | 18,225 |   |
| Other  liabilities and other deferred credits                                 |       | 3,062                           |       | (4,890 | ) |
|                                                                          |       |                            |       |   |   |
| Net cash  provided by operating activities of continuing operations           |       | 86,806                          |       | 80,257 |   |
| Net cash provided  by operating activities of discontinued operations         |       | —                          |       | 208 |   |
| **Net  cash provided by operating activities**                                |       | 86,806                          |       | 80,465 |   |
|                                                                          |       |                            |       |   |   |
| **Investing  activities:**                                                    |       |                            |       |   |   |
| Capital  expenditures – regulated                                        |       | (162,062                        | )          | (130,814 | ) |
| Capital  expenditures and other investments – other                      |       | (1,537                          | )          | (2,971 | ) |
| Proceeds from  the sale of property, plant and equipment                      |       | 1,538                           |       | — |   |
| Proceeds from  the sale of other segment business                             |       | —                          |       | 3,240 |   |
|                                                                          |       |                            |       |   |   |
| Net cash used in  investing activities of continuing operations               |       | (162,061                        | )          | (130,545 | ) |
| Net cash used in  investing activities of discontinued operations             |       | —                          |       | (12 | ) |
| **Net  cash used in investing activities**                                    |       | (162,061                        | )          | (130,557 | ) |
|                                                                          |       |                            |       |   |   |
| **Financing  activities:**                                                    |       |                            |       |   |   |
| Proceeds from  first mortgage bonds - electric                                |       | 89,950                          |       | 79,831 |   |
| Long-term debt  issuance costs                                                |       | (3,168                          | )          | (1,078 | ) |
| Proceeds from  issuance of common stock net of issuance costs                 |       | 4,413                           |       | 4,272 |   |
| Net short-term  debt borrowings (repayments)                                  |       | 22,360                          |       | (9,305 | ) |
| Dividends                                                                     |       | (32,433                         | )          | (29,176 | ) |
| Other                                                                         |       | (256                            | )          | (375 | ) |
|                                                                          |       |                            |       |   |   |
| Net cash  provided by financing activities of continuing operations           |       | 80,866                          |       | 44,169 |   |
| Net cash used in  financing activities of discontinued operations             |       | —                          |       | (68 | ) |
| **Net  cash provided by financing activities**                                |       | 80,866                          |       | 44,101 |   |
|                                                                          |       |                            |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                     |       | 5,611                           |       | (5,991 | ) |
|                                                                          |       |                            |       |   |   |
| **Cash  and cash equivalents at beginning of period**                         |       | 4,043                           |       | 12,303 |   |
|                                                                          |       |                            |       |   |   |
| **Cash  and cash equivalents at end of period**                               |       | $                               | 9,654      |   | $ | 6,312 |   |

 

*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 threesegments:  electric, gas and other. TheEmpire District Electric Company (EDE), a Kansas corporation organized in 1909,is an operating public utility engaged in the generation, purchase,transmission, distribution and sale of electricity in parts of Missouri,Kansas, Oklahoma and Arkansas. As part of our electric segment, we also providewater service to three towns in Missouri. The Empire District Gas Company (EDG)is our wholly-owned subsidiary formed to hold the Missouri Gas assets acquiredfrom Aquila, Inc. on June 1, 2006. It provides natural gasdistribution to communities in northwest, north central and west centralMissouri. Our other segment primarily consists of a 100% interest in EmpireDistrict Industries Inc., a subsidiary for our fiber optics business. Thisbusiness is held by our wholly-owned subsidiary, EDE Holdings, Inc. (EDEHoldings).

 

*RateCase – Accounting Impacts - *The Missouri Public Service Commission (MPSC)issued an order on July 30, 2008, granting an annual increase in revenuesfor our Missouri electric customers in the amount of $22.0 million, or 6.7%,based on a 10.8% return on equity. The new rates went into effect August 23,2008.

 

The order contains twocomponents. The first component provides an addition to base rates ofapproximately $27.7 million. This increase in base rates was partially offsetby a $5.7 million reduction to regulatory amortization, which is the secondcomponent. Regulatory amortization provides us additional cash through ratesduring the current construction cycle. This construction, which is part of ourlong-range plan to ensure reliability, includes the facilities at the RivertonPower Plant and Iatan 2 Power Plant, as well as environmental improvements atthe Asbury Power Plant and at Iatan 1. The regulatory amortization is nowapproximately $4.5 million annually and is recorded as depreciation expense.

 

The MPSC also authorized afuel adjustment clause for our Missouri customers effective September 1,2008. The MPSC established a base rate for the recovery of fuel and purchasedpower expenses used to supply energy. The clause permits the distribution tocustomers of 95% of the changes in fuel and purchased power costs above orbelow the base. Off-system sales margins are also part of the fuel adjustmentmechanism. As a result, the off-system sales margin flows back to the customer.Rates related to the fuel adjustment clause will be modified twice a yearsubject to the review and approval by the MPSC. In accordance with Statement of Financial Accounting Standards(SFAS) No. 71 – “Accounting for the Effects of Certain Types of Regulation”(FAS 71), 95% of the difference between the actual cost of fuel andpurchased power and the base cost of fuel and purchased power recovered fromour customers is recorded as an adjustment to fuel and purchased power expensewith a corresponding regulatory asset or a regulatory liability. If the actualfuel and purchased power costs are higher or lower than the base fuel andpurchased power costs billed to customers, 95% of these amounts will berecovered or refunded to our customers when the fuel adjustment clause ismodified.

 

The MPSC order approved a Stipulation and Agreement providing for therecovery of deferred expenses of approximately $14.2 million over a five yearperiod for the 2007 ice storms. In addition, the MPSC order required theimplementation of a two-way tracking mechanism for recovery of the costsrelating to the new MPSC rules on infrastructure inspection and vegetationmanagement. The mechanism authorized by the MPSC creates a regulatory liabilityin any year we spend less than the target amount, which has been set at $8.6million for our Missouri jurisdiction, and a regulatory asset if we spend morethan the target amount. Any regulatory asset and liability amounts createdusing the tracking mechanism will then be netted against each other and takeninto account in our next rate case. The MPSC also approved Stipulations andAgreements providing for the continuation of the pension and otherpost-retirement employee benefits tracking mechanism established in our 2006and 2007 Missouri rate orders.

 

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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,SFAS No. 157, “Fair Value Measurements,” (FAS 157) was issued. We adoptedthis statement on January 1, 2008. See Note 12 for the discussion of thisadoption and the effect of FASB Staff Position (FSP) 157-2 which amended FAS157 to delay the effective date for 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 exchange contracts”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 initially at fairvalue on the acquisition date, transactions and restructuring costs generallywill be expensed as incurred and in partial acquisitions, companies generallywill record 100 percent of the assets and liabilities at fair value, includinggoodwill. We do not expect these pronouncements to have an effect on ourfinancial statements unless we enter into future business combinations.

 

In April 2008, the FASBissued SFAS 161 “Disclosure About Derivative Instruments and HedgingActivities, an Amendment of FASB Statement No. 133” (FAS 161). FAS 161enhances the current disclosure framework in FAS 133, “Accounting forDerivative Instruments and Hedging Activities.” FAS 161 is effective forperiods beginning after November 15, 2008. We do not expect the adoptionof FAS 161 to have a material effect on our financial 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.

 

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**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)**                       | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Regulatory Assets:**                   | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Income taxes                                  |       | $                                | 33,810     |                            | $          | 30,947 |   |
| Unamortized loss  on reacquired debt          |       | 13,821                           |       | 14,813                          |       |
| Unamortized loss  on interest rate derivative |       | 2,484                            |       | 2,719                           |       |
| Asbury five-year  maintenance                 |       | 1,962                            |       | 2,054                           |       |
| Pension and  other postretirement benefits(1) |       | 19,404                           |       | 22,760                          |       |
| Ice storm costs                               |       | 15,619                           |       | 15,518                          |       |
| Unrecovered  purchased gas costs              |       | 7,054                            |       | —                          |       |
| Asset retirement  obligation                  |       | 3,081                            |       | 2,971                           |       |
| Other                                         |       | 2,079                            |       | 1,003                           |       |
| **Total**                                     |       | $                                | 99,314     |                            | $          | 92,785 |   |

 
| **(In thousands)**                        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Regulatory  Liabilities:**                   |       |                             |       |                            |       |
| Income taxes                                   |       | $                                | 10,606     |                            | $          | 11,214 |   |
| Unamortized gain  on interest rate derivative  |       | 4,264                            |       | 4,391                           |       |
| Cost of removal                                |       | 41,672                           |       | 35,724                          |       |
| Pensions and  other postretirement benefits(2) |       | 6,768                            |       | 5,126                           |       |
| Over recovered  fuel and purchased power costs |       | 2,257                            |       | —                          |       |
| Other                                          |       | 293                              |       | 1,652                           |       |
| **Total**                                      |       | $                                | 65,860     |                            | $          | 58,107 |   |

 

----

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

(2) Includesthe effect of costs incurred that are more or less than those allowed in ratesfor the Missouri (EDE and EDG) and Kansas (EDE) portion of pension costs andthe Missouri EDE portion of other postretirement benefit costs. Since January 1,2008, approximately $3.0 million in additional regulatory liabilities andcorresponding expense increases have been recognized.

 

**Note 4– Risk Management and Derivative 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 certain interestrate exposure.

 

As of September 30,2008 and December 31, 2007, we have recorded the following assets andliabilities representing the fair value of derivative financial instruments:

 

**AssetDerivatives**

 
| ** **                                                       | ** ** | ** **                              | ** ** | **September 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                          |       | $                      | 5,750      |                  | $          | 2,435 |   |
|                                                             |       | Non-current assets and deferred charges |       | 12,338                 |       | 17,520                |       |
| Derivatives not  designated as hedging instruments under FAS 133 |       |                                    |       |                   |       |                  |       |
| Natural gas  contracts, gas segment                              |       | Current assets                          |       | 946                    |       | 64                    |       |
|                                                             |       | Non-current assets and deferred charges |       | 132                    |       | —                |       |
| **Total  derivative assets**                                     | ** ** | ** **                              | ** ** | **$**                  | **19,166** | ** **            | **$**      | **20,019** | ** ** |

 

----

(1)** **Statementof Financial Accounting Standards (SFAS) **No. 133 “Accounting forDerivative Instruments and Hedging Activities” (FAS 133).**

 

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**LiabilityDerivatives**

 
| ** **                                                       | ** ** | ** **                                    | ** ** | **September 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                           |       | $                      | 5,116      |                  | $          | 1,154 |   |
|                                                             |       | Non-current  liabilities and deferred charges |       | 2,086                  |       | 698                   |       |
| Derivatives not  designated as hedging instruments under FAS 133 |       |                                          |       |                   |       |                  |       |
| Natural gas  contracts, gas segment                              |       | Current liabilities                           |       | 5,530                  |       | 457                   |       |
|                                                             |       | Non-current  liabilities and deferred charges |       | 96                     |       | —                |       |
| **Total  derivative liabilities**                                | ** ** | ** **                                    | ** ** | **$**                  | **12,828** | ** **            | **$**      | **2,309** | ** ** |

 

*Electric*

 

A $7.0 million net of tax,unrealized gain representing the fair market value of our electric segmentderivative contracts is recognized as Accumulated Other Comprehensive Income inthe capitalization section of the balance sheet as of September 30, 2008.The tax effect of $4.3 million on this gain is included in deferred taxes. Theseamounts will be adjusted cumulatively on a monthly basis during thedetermination periods, beginning October 1, 2008 and ending on September 30,2011. As of September 30, 2008, approximately $1.0 million of unrealizedgains are applicable to financial instruments which will settle within the nexttwelve months. Effective September 1, 2008, in conjunction with theimplementation of the Missouri fuel adjustment clause in the July 2008MPSC rate order, the unrealized losses or gains from new cash flow hedges willbe recorded in regulatory assets or liabilities. This is in accordance with FAS71, given that those regulatory assets and liabilities are probable of recoverythrough our fuel adjustment mechanism. Unrealized gains and losses from cashflow hedges existing at September 1, 2008 will continue to be recordedthrough other comprehensive income. Once settled, the realized gain or losswill be recorded as fuel expense and be subject to the fuel adjustment clause.

 

The following table setsforth the actual pre-tax gains/(losses) from the qualified portion of ourhedging activities for settled contracts for the electric segment for each ofthe periods ended September 30:

** **
| ** **                                                          | ** ** | **Income  Statement   Classification ** | ** ** | **Amount of Gain / (Loss) Reclassed from OCI into Income –   (Effective portion)  ** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivatives in FAS 133 Cash Flow ** | ** ** | **of Gain / (Loss)**               | ** ** | **Three Months Ended **                                                                                                                          | ** ** | **Nine Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **Hedging Relationships**                                      | ** ** | **on Derivative**                            | ** ** | **2008**                                                                                                                                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in thousands)**                                             |       |                                              |       |                                                                                                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commodity  contracts – electric segment                        |       | Fuel Expense                                      |       | $                                                                                                                                                               | 3,678      |   | $ | 1,202 |   | $ | 6,251 |   | $ | 1,254 |   | $ | 6,606 |   | $ | 1,306 |   |

 

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 September 30:

 
| ** **                                                          | ** ** | **Income   Statement   Classification of ** | ** ** | **Amount of Gain Recognized in Income on Derivative –   (Ineffective portion)** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivatives in FAS 133 Cash Flow ** | ** ** | **Gain on **                                          | ** ** | **Three Months Ended**                                                                                                       | ** ** | **Nine Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **Hedging Relationships**                                      | ** ** | **Derivative**                                                  | ** ** | **2008**                                                                                                                               | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in thousands)**                                             |       |                                                            |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Commodity  contracts – electric segment                        |       | Fuel Expense                                                    |       | $                                                                                                                                      | (3         | ) | $ | — |   | $ | (271 | ) | $ | — |   | $ | 10 |   | $ | — |   |
|                                                                     |            |                                                                 |            |                                                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 September 30:

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

 

----

(1)** **All of our gas hedging activities are related tostabilizing fuel costs as part of our fuel procurement program and are notspeculative activities. If conditions change, such as a planned unit outage, wemay need to re-designate and/or unwind some of our previous derivativesdesignated under FAS 133. In this instance, these derivatives would beclassified 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 October 17, 2008,100% 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 $6.99 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     |       |         | 73         | %              | 6,201,000  |              | $          | 6.620 |   |
| 2010     |       |         | 45         | %              | 4,200,000  |              | $          | 6.428 |   |
| 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 winterprogresses, gas is withdrawn from storage to serve our customers. As of October 17,2008, we had 1.9 million Dths in storage on the three pipelines that serve ourcustomers. This represents 93% 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 yearexpected gas usage by the beginning of the Actual Cost Adjustment (ACA) year at September 1. A Purchased GasAdjustment (PGA) clause is included in our rates for our gas segmentoperations, therefore, we mark to market any unrealized gains or losses and anyrealized gains or losses relating to financial derivative contracts to aregulatory asset or regulatory liability account on our balance sheet.

 

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The following table sets forth“mark-to-market” pre-tax gains / (losses) from financial hedging instrumentsfor the gas segment for each of the periods ended September 30. Thesegains and losses are recorded to a regulatory asset or liability account due toour commission approved natural gas cost recovery mechanism discussed above.

 
| ** **                              | ** ** | **Balance Sheet  Classification of** | ** ** | **Amount of Gain / (Loss) Recognized on Balance Sheet** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------|------------|
| **Derivatives Not Designated as**       | ** ** | **Gain or (Loss) on**                | ** ** | **Three Months Ended**                        | ** ** | **Nine Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **Hedging Instruments Under FAS  133**  | ** ** | **Derivative**                       | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in thousands)**                 |       |                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Commodity  contracts – gas segment |       | Regulatory assets                    |       | $                                                       | (5,535     | ) | $ | (595 | ) | $ | (5,606 | ) | $ | (906 | ) | $ | (6,203 | ) | $ | (1,204 | ) |
|                                         |            |                                      |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 5– Financing**

 

On May 16, 2008, weissued $90 million principal amount of first mortgage bonds. The net proceedsof approximately $89.4 million, less$0.4 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 March 26, 2007, we issued $80 million principalamount of first mortgage bonds. The net proceeds of approximately $79.1million, less $0.4 million of legal and other financing fees, 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 $23.0 million as of November 1, 2008. The unallocated credit facilityis used for working capital, general corporate purposes and to back-up our useof commercial paper. This facility requires our total indebtedness (which doesnot include our note payable to the securitization trust) to be less than 62.5%of our 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 September 30, 2008, we are in compliancewith these ratios. This credit facility is also subject to cross-default if wedefault on in excess of $10 million in the aggregate on our other indebtedness.This arrangement does not serve to legally restrict the use of our cash in thenormal course of operations. There were $37.0 million of outstanding borrowingsunder this agreement at September 30, 2008. In addition, $18.4 million ofthe availability thereunder was used at such date to back up our outstandingcommercial paper.

 

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**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 FinancialAccounting Standards (SFAS) No. 5, “Accounting for Contingencies” (FAS 5).In the opinion of management, it is not probable, given the company’s defenses,that the ultimate outcome of these claims and lawsuits will have a materialadverse affect upon our financial condition, or results of operations or cashflows.

 

**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. In the event that this gas cannot be used atour plants, the gas would remain in storage or be liquidated at market price.The firm physical gas and transportation commitments are as follows (in millions):

 
| **Firm physical gas and transportation contracts** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                  |       |       |       |
| October 1,  2008 through September 30, 2009                       |       | $          | 27.4       |   |
| October 1,  2009 through September 30, 2011                       |       | 43.6       |       |
| October 1,  2011 through September 30, 2013                       |       | 44.2       |       |
| October 1,  2013 and beyond                                            |       | 55.8       |       |
|                                                                             |            |            |            |  |

 

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 $28.0 million for October 1, 2008 through September 30,2009, $27.2 million for October 1, 2009 through September 30, 2011and $1.7 million for October 1, 2011 through September 30, 2013

 

**PurchasedPower**

 

We currently supplement ouron-system generating capacity with purchases of capacity and energy from otherentities in order to meet the demands of our customers and the capacity marginsapplicable 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 $27.0 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 (commencing with the commercial operationdate, which is expected to be about January 1, 2009) with Cloud CountyWindfarm, LLC, owned by Horizon Wind Energy, Houston, Texas to purchase theenergy generated at the approximately 105-megawatt Phase 1 Meridian Way WindFarm to be located in Cloud 

 

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County, Kansas and a 20-year contract withElk River Windfarm, LLC, owned by IBERDROLA RENEWABLES, Inc. (formerlyknown as PPM Energy), to purchase the energy generated at the 150-megawatt ElkRiver Windfarm located in Butler County, Kansas, which was declared commercialon December 15, 2005. Although these agreements are considered operatingleases under Generally Accepted Accounting Principles (GAAP), payments forthese wind agreements are recorded as purchased power expenses, and, because ofthe contingent nature of these payments, are not included in the operatinglease obligations discussed below.

 

**NewConstruction**

 

OnMarch 14, 2006, we entered into contracts to purchase an undividedinterest in 50 megawatts of the Plum Point Energy Station’s new 665-megawatt,coal-fired generating facility which is being built near Osceola, Arkansas. Theestimated cost is approximately $86.5 million for our portion, excludingallowance for funds used during construction (AFUDC).

 

OnJune 13, 2006, we announced we had entered into an agreement with KansasCity Power & Light (KCP&L) to purchase an undivided ownershipinterest in the coal-fired Iatan 2 generating facility. We will own 12%, orapproximately 100 megawatts, of the 850-megawatt unit. Construction began inthe spring of 2006 with completion scheduled for 2010. On May 7, 2008,KCP&L announced an update of their estimated construction figures for theconstruction of the Iatan 2 plant and for the environmental upgrades at theIatan 1 plant. Our share of the Iatan 2 construction costs will increase from arange of approximately $183.6 million to $200.5 million to a range ofapproximately $218 million to $230 million. All of these estimated constructionexpenditures exclude AFUDC. The updated estimate of our share of the cost forenvironmental upgrades at the Iatan 1 plant is a range of approximately $56million to $60 million, representing an increase of 22%-30% compared to theprevious estimate of approximately $46 million. The in-service date for theIatan No. 1 project is expected to be February 2009.

 

Anew combustion turbine previously scheduled to be installed by the summer of2011 will be delayed until 2014 as our generation regulation needs for ourpurchased power agreements are being met through a combination of our existingunits and the SPP energy imbalance market.

 

**Leases**

 

OnJune 25, 2007, we entered into a 20-year purchased power agreement withCloud County Windfarm, LLC, owned by Horizon Wind Energy, Houston, Texas. Theagreement provides for a 20-year term commencing with the commercial operationdate, which is expected to be about January 1, 2009. We will begin takingdelivery of test energy during the fourth quarter of 2008. Pursuant to theterms of the agreement, we will purchase all of the output from theapproximately 105-megawatt Phase 1 Meridian Way Wind Farm to be located inCloud County, Kansas. We do not own any portion of the windfarm. Annual paymentsare contingent upon output of the facility and can range from zero to a maximumof approximately $14.6 million based on a 20-year average cost.

 

OnDecember 10, 2004, we entered into a 20-year contract with Elk RiverWindfarm, LLC to purchase the energy generated at the 150-megawatt Elk RiverWindfarm located in Butler County, Kansas, which was declared commercial on December 15,2005. We have contracted to purchase approximately 550,000 megawatt-hours ofenergy per year under the contract. We do not own any portion of the windfarm.Payments for energy under the Elk River Windfarm, LLC contract are contingentupon output of the facility. Annual payments can run from zero to a maximum ofapproximately $16.9 million based on a 20-year average cost.

 

Paymentsfor these agreements are recorded as purchased power expenses, and, because ofthe contingent nature of these payments, are not included in the operatinglease obligations shown below.

 

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

 

Our lease obligations over the next five years areas follows (in thousands):

 

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**CapitalLeases**

 
| 2008                                             |       | $       | 288        |       |
|--------------------------------------------------|------------|---------|------------|------------|
| 2009                                             |       | 288     |       |
| 2010                                             |       | 28      |       |
| 2011                                             |       | —  |       |
| Thereafter                                       |       | —  |       |
| **Total  minimum payments**                      | ** ** | **$**   | **604**    | ** ** |
| Less amount  representing maintenance            |       | 201     |       |
| **Net  minimum lease payments**                  | ** ** | **403** | ** ** |
| Less amount  representing interest               |       | 26      |       |
| **Present  value of net minimum lease payments** | ** ** | **$**   | **377**    | ** ** |

 

**Operating Leases**

 
| 2008                        |       | $     | 1,137     |       |
|-----------------------------|------------|-------|-----------|------------|
| 2009                        |       | 437   |      |
| 2010                        |       | 414   |      |
| 2011                        |       | 291   |      |
| 2012                        |       | 213   |      |
| Thereafter                  |       | 534   |      |
| **Total  minimum payments** | ** ** | **$** | **3,026** | ** ** |

 

Thegross amount of assets recorded under capital leases totaled $1.3 million at September 30,2008. The accumulated amount of amortization for our capital leases was $0.3million at September 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,as well as other environmental matters. We believe that our operations are incompliance with present laws and regulations.

 

**ElectricSegment**

 

*Air.* The 1990 Amendments to the Clean Air Act,referred to as the 1990 Amendments, affect the Asbury, Riverton, State Line andIatan Power Plants and Units 3 and 4 (the FT8 peaking units) at the EmpireEnergy Center. The 1990 Amendments require affected plants to meet certainemission standards, including maximum emission levels for sulfur dioxide (SO2)and nitrogen oxides (NOx).

 

SO2Emissions.  Under the 1990 Amendments, the amount of SO2an affected 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 emission allowancesexists on the Chicago Board of Trade. The Environmental Protection Agency (EPA)withholds annually a percentage of the emission allowances allocated to eachaffected unit and sells those emission allowances through a direct auction. Wereceive compensation from the EPA for the sale of these withheld allowances. Inthe first nine months of 2008, we received less than $0.1 million from the EPAauction. Per our agreement with the MPSC, these revenues are deferred until ournext rate case. They are then recognized in income over a period of two years.Beginning September 1, 2008, with the implementation of the Missouri fueladjustment clause, the net of SO2 

 

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allowance costs and revenues will be includedin the total fuel and purchased power costs and be subject to the fueladjustment clause.

 

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 Riverton Plant can also burn natural gas as itsprimary fuel. The State Line Plant, the Energy Center Units 3 and 4 andRiverton Unit 12 are gas-fired facilities and do not receive SO2 allowances. Inthe near term, annual allowance requirements for the State Line Plant, theEnergy Center Units 3 and 4 and Riverton Unit 12, which are not expected toexceed 20 allowances per year, will be transferred from our inventoried bank ofallowances. In 2007, the combined actual SO2 allowance need for all affectedplant facilities exceeded the number of allowances allocated to us by the EPA.Based on our March 1, 2008 EPA reconciliation, we had approximately 24,000banked SO2 allowances at December 31, 2007 as compared to 31,000 at December 31,2006. We project that our 2008 emissions will again exceed the number ofallowances allocated by the EPA by an amount approximately equal to thedifference 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. TheAsbury, Iatan, State Line, Energy Center and Riverton Plants are each in compliancewith the NOx limits applicable to them under the 1990 Amendments as currentlyoperated.

 

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.

 

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 several counties in southwest Missouri will be classified asnon-attainment or non-classified by the EPA in 2010 or later. We anticipatethat the EPA will classify the Kansas City area, where Iatan 1 is located, asnon-attainment in 2010. At this time we do not foresee the need for additionalpollution controls due to the reduction in the ozone standard. In addition, ourunits do not emit appreciable VOCs. We do not anticipate that southeast Kansaswill be classified as non-attainment under the new ozone NAAQS.

 

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Clean Air Interstate Rule (CAIR)

 

TheEPA issued its final CAIR on March 10, 2005. CAIR governed NOx and SO2emissions from fossil fueled units greater than 25 megawatts in 28 states,including Missouri, where our Asbury, Energy Center, State Line and IatanPlants are located and Arkansas where the Plum Point Energy Station is beingconstructed. Kansas was not included in CAIR and our Riverton Plant was notaffected. The CAIR was not directed to specific generation units, but instead,required the states (including Missouri and Arkansas) to develop specific StateImplementation Plans (SIPS) to comply with specific NOx and SO2 state-wideannual budgets.

 

OnJuly 11, 2008, the U.S. Court of Appeals for the District of ColumbiaCircuit vacated the CAIR Rule and remanded it back to the EPA. It is notknown at this time how the remand will affect us until CAIR has been finallyadjudicated.

 

OnSeptember 24, 2008, the EPA filed a petition for rehearing with the UnitedStates Court of Appeals. The court vacated CAIR based on its interpretationthat the Clean Air Act did not provide the EPA with the authority needed forCAIR implementation. As a result, Congress has considered several versions ofproposed Congressional CAIR authorizations. Missouri and Arkansas submittedCAIR SIPS to the EPA. These SIPS were approved and remain in effect until theEPA provides guidance to the states regarding the U.S. Court of Appeals ruling.No guidance has yet been issued by the EPA or the states of Missouri andArkansas.

 

Ifthe CAIR rulemaking is ultimately revoked by the EPA, and, subsequently, thestates rescind their SIPS, the Clean Air Visibility Rule which includesBest Available Retrofit Technology (BART) requirement re-emerges under currentlaw. Missouri had adopted CAIR as the mechanism to comply with BART.

 

Kansashas adopted a specific BART plan, but Riverton is not considered a BARTfacility 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 $30.7 million in 2008 and $12.6 million in 2009. This project wasalso included as part of our Experimental Regulatory Plan approved by the MPSC.

 

Alsoto help meet previously anticipated CAIR requirements and the existing MissouriNOx Rule, we constructed an SCR at Asbury that was completed in November 2007and placed in service in February 2008 at a total cost of approximately$31.0 million (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 and its cost isnow in base rates in Missouri.

 

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 vacated the EPA’s CAMRregulations. The EPA is required to reconsider the regulation of mercury under Section 112of the 1990 Amendments. On October 17, 2008, the Department of Justice, onbehalf of the EPA, petitioned the Supreme Court for a writ of certiorari toreview the judgment of the D.C. Circuit Court of Appeals.

 

The EPA has not yet issuedguidance to the states regarding the vacated regulation nor 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 

 

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toverify our mercury emissions and to meet the compliance date of January 1,2009 for mercury analyzers and the Phase 1 mercury emission compliance date of January 1,2010. We will complete the installation of the mercury analyzers at Riverton inaccordance with Kansas Department of Health and Environment (KDHE) guidance.

 

If the CAMR rulemaking isultimately revoked by the EPA after final adjudication, Maximum AchievableControl Technology (MACT) will re-emerge under current law. No specific MACTrulemakings have yet been adopted in Missouri or Kansas.

 

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. The impact on us of any futuregreenhouse gas regulation will depend in large part on the details of therequirements and the timetable for mandatory compliance. We would expect thecost of complying with any such regulations to be fully recoverable in ourrates.

 

*Water.* Weoperate under the Kansas and Missouri Water Pollution Plans that wereimplemented in response to the Federal Water Pollution Control Act Amendmentsof 1972. The Asbury, Iatan, Riverton, Energy Center and State Line plants arein compliance with applicable regulations and have received discharge permitsand subsequent renewals as required. The State Line permit was renewed in May 2007.The Energy Center permit was renewed in September 2005 and the AsburyPlant permit was renewed in December 2005.

 

TheRiverton Plant is affected by final regulations for Cooling Water IntakeStructures issued under the Clean Water Act (CWA) Section 316(b) PhaseII. The regulations became final on February 16, 2004 and required thesubmission of a Sampling Report and Comprehensive Demonstration Study with thepermit renewal in 2008. A Proposal for Information Collection (PIC) wasapproved by the KDHE. Aquatic sampling commenced in April 2006 inaccordance with the PIC and was completed in August 2007. Analysis of thesampling and summary reports was completed during the first quarter of 2008 andsubmitted to the KDHE. These reports indicate that the effect of the coolingwater intake structure on Empire Lake’s aquatic life is insignificant. The needfor a further Demonstration Study is not expected. On January 25, 2007,the United States Court of Appeals for the Second Circuit remanded key sectionsof the EPA’s February 16, 2004 regulations. On July 9, 2007, the EPA suspended the regulation and is expected torevise and re-propose the regulation by December 2008. We will monitor theEPA revision process and comment appropriately. In addition, on April 14,2008 certiorari was granted by the United States Supreme Court limited to thereview as to whether Section 316(b) of the CWA authorized the EPA tocompare costs with benefits in determining the best technology available forminimizing adverse environmental impacts at cooling water intakestructures.  The Supreme Court hasscheduled oral arguments for December 2, 2008. The permit renewalapplication was prepared and submitted in June 2008. Under the initial 316(b) regulations,we did not expect costs associated with compliance to be material. We willreassess costs after the Supreme Court issues its ruling and the revised rules arecomplete.

 

OnNovember 4, 2008, Missouri voters approved the Clean Energy Initiative.This initiative requires investor-owned utilities in Missouri (such as Empire)to generate or purchase electricity from renewable energy sources, such assolar, wind, biomass and hydro power, at the rate of at least 2% in retailsales by 2011, increasing to at least 15% by 2021. At least 25 other stateshave adopted renewable portfolio standard (RPS) programs that mandate some formof renewable generation. Some of these RPS programs incorporate a tradingsystem in which utilities are allowed 

 

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to buy and sell renewable energy certificates(RECs) in order to meet compliance. Additionally, RECs are utilized by manycompanies in “green” marketing efforts. REC prices are driven by various marketforces. We have been selling RECs and plan to continue to sell all or a portionof the RECs associated with our contracts with Elk River Windfarm, LLC andCloud County Windfarm, LLC. With respect to the energy underlying the RECs thatwe sell, we may not claim that we are purchasing renewable energy for anypurpose, including for purposes of complying with the new Missourirequirements. Over time, we expect to retain some of the renewable attributesassociated with these contracts in order to meet the new Missouri requirements.For the quarter and nine months ended September 30, 2008, we generatedrevenues of $0.5 million and $1.6 million, respectively, from REC sales.

 

*Other.*UnderTitle V of the 1990 Amendments, we must obtain site operating permits for eachof our plants from the authorities in the state in which the plant is located.These permits, which are valid for five years, regulate the plant site’s totalair emissions; 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. We submitted the renewal application for the RivertonTitle V permit in June 2008. A CAM plan will also be required by therenewed permit for Riverton. No additional capital costs are anticipated. It isexpected that the KDHE will issue the renewal permit for Riverton in December 2008.

 

Anew air permit was issued for the Iatan Generating Station on January 31,2006. The new permit covers the entire Iatan Generating Station and includesthe existing Unit No. 1 and Iatan Unit No. 2 currently under construction.The new permit limits Unit No. 1 to a maximum of 6,600 MMBtu per hour ofheat input. The 6,600 MMBtu per hour heat input limit is in effect until thenew SCR, scrubber, and baghouse are completed, currently estimated to be in February of2009.

 

**GasSegment**

 

The acquisition of Missouri Gas involved theproperty transfer of two former manufactured gas plant (MGP) sites previouslyowned by Aquila, Inc. and its predecessors. Site #1 is listed in the MDNRRegistry of Confirmed Abandoned or Uncontrolled Hazardous Waste Disposal Sitesin Missouri. Site #2 has received a letter of no further action from the MDNR.A Change of Use request and work plan was approved by the MDNR allowing us toexpand our existing service center at Site #1 in Chillicothe, Missouri. Thisproject, which was completed in October 2007, included the removal of allexcavated soil and the addition of a new concrete surface replacing theexisting gravel at a cost of approximately $0.1 million. We estimate furtherremediation costs at these two sites to be no more than approximately $0.2million, based on our best estimate at this time. This estimated liability isrecorded under noncurrent liabilities and deferred credits. In our agreementwith the MPSC approving the acquisition of Missouri Gas, it was agreed that wecould reflect a liability and offsetting regulatory asset not to exceed$260,000 for the acquired sites. The MPSC agreed that up to $260,000 of costsrelated to the clean up of these MGP sites would be allowed for future rate recovery.Accordingly, we concluded that rate recovery was probable and at theacquisition date, a regulatory asset of $260,000 was recorded as part of thepurchase price allocation based on our agreement with the MPSC, and inaccordance with 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):

 

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| ** **                                | ** ** | **Three months ended September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **Pension Benefits**                 | ** ** | **SERP** | ** ** | **Other Postretirement Benefits** | ** ** |
| ** **                                | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                              |       | $                                    | 952        |   | $ | 869 |   | $ | 19 |   | $ | 13 | ** ** | $ | 424 |   | $ | 228 |   |
| Interest cost                             |       | 2,295                                |       | 2,036 |   | 39 |   | 29 |   | 892 |   | 612 |   |
| Expected return  on plan assets           |       | (2,688                               | )          | (2,554 | ) | — |   | — |   | (937 | ) | (683 | ) |
| Amortization of  prior service   cost (1) |       | 186                                  |       | 157 |   | (2 | ) | (3 | ) | (253 | ) | (508 | ) |
| Amortization of  net actuarial   loss (1) |       | 462                                  |       | 651 |   | 38 |   | 37 |   | 105 |   | 264 |   |
| **Net  periodic benefit cost**            | ** ** | **$**                                | **1,207**  | ** ** | **$** | **1,159** | ** ** | **$** | **94** | ** ** | **$** | **76** | ** ** | **$** | **231** | ** ** | **$** | **(87** | **)** |

 
| ** **                                | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **Pension Benefits**                | ** ** | **SERP** | ** ** | **Other Postretirement Benefits** | ** ** |
| ** **                                | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                              |       | $                                   | 2,676      |   | $ | 2,619 |   | $ | 43 |   | $ | 37 |   | $ | 1,238 |   | $ | 1,278 |   |
| Interest cost                             |       | 6,786                               |       | 6,124 |   | 102 |   | 88 |   | 2,712 |   | 2,562 |   |
| Expected return  on plan assets           |       | (8,047                              | )          | (7,729 | ) | — |   | — |   | (2,813 | ) | (2,333 | ) |
| Amortization of  prior service   cost (1) |       | 558                                 |       | 344 |   | (6 | ) | (8 | ) | (758 | ) | (758 | ) |
| Amortization of  net actuarial   loss (1) |       | 1,270                               |       | 1,951 |   | 99 |   | 110 |   | 384 |   | 864 |   |
| **Net  periodic benefit cost**            | ** ** | **$**                               | **3,243**  | ** ** | **$** | **3,309** | ** ** | **$** | **238** | ** ** | **$** | **227** | ** ** | **$** | **763** | ** ** | **$** | **1,613** | ** ** |

 
| ** **                                | ** ** | **Twelve months ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **Pension Benefits**                  | ** ** | **SERP** | ** ** | **Other Postretirement Benefits** | ** ** |
| ** **                                | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                              |       | $                                     | 3,549      |   | $ | 3,470 |   | $ | 55 |   | $ | 50 |   | $ | 1,664 |   | $ | 1,782 |   |
| Interest cost                             |       | 8,900                                 |       | 8,047 |   | 132 |   | 114 |   | 3,567 |   | 3,503 |   |
| Expected return  on plan assets           |       | (10,617                               | )          | (10,256 | ) | — |   | — |   | (3,877 | ) | (3,035 | ) |
| Amortization of  prior service   cost (1) |       | 801                                   |       | 457 |   | (9 | ) | (8 | ) | (1,011 | ) | (873 | ) |
| Amortization of  net actuarial   loss (1) |       | 1,920                                 |       | 2,786 |   | 136 |   | 146 |   | 671 |   | 1,462 |   |
| **Net  periodic benefit cost**            | ** ** | **$**                                 | **4,553**  | ** ** | **$** | **4,504** | ** ** | **$** | **314** | ** ** | **$** | **302** | ** ** | **$** | **1,014** | ** ** | **$** | **2,839** | ** ** |

 

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

 

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 minimumamounts with respect to 2007 or 2008.

 

We have made other postretirement benefit contributions of $1.0 millionin 2008, which satisfies all of our 2008 funding requirements.

 

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

 

Asof September 30, 2008, our performance based restricted stock awards,stock options and their related dividend equivalents have been revalued inaccordance with fair value guidelines for liability awards. We allow employeesto elect to have taxes in excess of the minimum statutory requirement withheldfrom their awards and, therefore, the awards are classified as liabilityinstruments under FAS 123(R) “Share Based Payment”****(paragraph 35). Awards treated as liabilityinstruments must be revalued each period until settled, and cost is accruedover the requisite service period. The following disclosures reflect the effectof this change, which was not material to our financial statements.

 

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

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|-------------------------|------------|
| **(in thousands)**     | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2008**                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                  |       |                   |       |                  |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Compensation  Expense**   |       | $                      | 429        |                  | $          | 400                     |       | $ | 1,806 |   | $ | 1,666 |   | $ | 2,262 |   | $ | 2,037 |   |
| **Tax  Benefit Recognized** |       | 152                    |       | 143                   |       | 657                     |       | 608 |   | 822 |   | 740 |   |

 

Activityfor our various stock plans for the nine months ended September 30, 2008is summarized below:

 

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**Performance-Based Restricted Stock Awards**

 

As noted above, allperformance-based restricted stock awards are classified now as liabilityinstruments, which must be revalued each period until settled. The fair valueof the outstanding restricted stock awards was estimated as of September 30,2008 using a Monte Carlo option valuation model. The 2008 valuation representsthe estimated September 30, 2008 fair value for all awards granted inprevious years, but not yet awarded. The 2007 grant value reflects theassumptions used for the fair value as of the grant date for awardsoutstanding. The assumptions used in the model for each grant year are noted inthe following table:

 
| ** **                                   | ** ** | **Fair Value of Grants Outstanding at September 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| **Risk-free  interest rate**                 |       | 1.50% to 2.09%                                        |       | 4.54% to 5.09% |   |
| **Expected  volatility of Empire stock**     |       | 21.50%                                                |       | 15.2% to 16.6% |   |
| **Expected  volatility of peer group stock** |       | 23.10% to 23.20%                                      |       | 18.9% to 19.8% |   |
| **Expected  dividend yield on Empire stock** |       | 5.90%                                                 |       | 5.55% to 5.80% |   |
| **Expected  forfeiture rates**               |       | 3%                                                    |       | 3% |   |
| **Plan  cycle**                              |       | 3 years                                               |       | 3 years |   |
| **Fair  value percentage**                   |       | 122.0% to 150.0%                                      |       | 107.73% to 108.13% |   |
| **Weighted  average fair value per share**   |       | $29.01                                                |       | $23.02 |   |

 

Non-vested restricted stock awards (based on targetnumber) as of September 30, 2008 and 2007 and changes during the ninemonths ended September 30, 2008 and 2007 were as follows:

 
| ** **                           | ** ** | **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 September 30,** |       | 52,300                           |       | $                                                           | 22.64      |   | 43,400 |   | $ | 23.02 |   |

 

At September 30, 2008,there was $0.7 million of total unrecognized compensation cost related toestimated outstanding awards. This cost will be recognized over the outstandingyears remaining in the vesting period.

 

**StockOptions**

 

Asnoted above, all outstanding stock option awards are now classified asliability instruments, which must be revalued each period until settled. Stockoption grants vest upon satisfaction of service conditions. The cost of theawards is generally recognized over the requisite (explicit) service period.The fair value of the outstanding options was estimated as of September 30,2008, under a Black-Scholes methodology. The assumptions used in the valuationsare shown below:

 
| ** **                                  | ** ** | **Fair Value of Grants Outstanding at September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| **Risk-free  interest rate**                |       | 2.19% to 3.28%                                        |       | 3.27% to 4.68% |   |
| **Dividend  yield**                         |       | 5.90%                                                 |       | 5.33% to 6.16% |   |
| **Expected  volatility**                    |       | 21.00%                                                |       | 15.51% to 18.14% |   |
| **Expected  life in months**                |       | 78                                                    |       | 60 |   |
| **Market  value**                           |       | $ 21.35                                          |       | n/a |   |
| **Weighted  average fair value per option** |       | $   1.75                               |       | $ 2.71 |   |

 

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

 
| ** **                             | ** ** | **2008**    | ** ** | **2007**             | ** ** |
|----------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                             | ** ** | ** **  | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | **Weighted 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 September 30,** |       | 205,600     |       | $                    | 22.73      |   | 149,200 |   | $ | 23.04 |   |
| **Exercisable  at September 30,** |       | 43,300      |       | $                    | 22.67      |   | 4,200 |   | $ | 21.79 |   |

 

Theaggregate intrinsic value at September 30, 2008 was $0. The aggregateintrinsic value at September 30, 2007 was less than $0.1 million. Theintrinsic value of the unexercised options is the difference between Empire’sclosing stock price on the last day of the quarter and the exercise pricemultiplied by the number of in the money options had all option holdersexercised their option on the last day of the quarter. The intrinsic value iszero if such closing price is less than the exercise price.

 

Therange of exercise prices for the options outstanding at September 30, 2008was $21.79 to $23.81. The weighted-average remaining contractual life ofoutstanding options at September 30, 2008 and 2007 was 7.3 years and 7.8years, respectively. As of September 30, 2008, there was $0.4 million oftotal unrecognized compensation expense related to the non-vested optionsgranted under the plan. That cost will be recognized over a period of 1 to 3years.

 

**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 September 30, 2008, there were 442,009 shares available forissuance in this plan. The revaluation in accordance with fair value guidelinesfor liability awards did not change the valuation of the options granted underthis plan.

 
| ** **                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| **Subscriptions  outstanding at September 30** |       | 49,696   |       | 41,112   |       |
| **Maximum  subscription price**                     |       | $        | 18.57      | (1)      | $          | 21.23 |   |
| **Shares  of stock issued**                         |       | 38,803   |       | 37,686   |       |
| **Stock  issuance price**                           |       | $        | 18.61      |     | $          | 20.05 |   |

 

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

 

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 |   |
|                                            |            |          |            |  |  |  |  |

 

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**Note 9 – Regulated OperatingExpense**

 

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 September 30:

 
| ** **                                         | ** ** | **Three   Months   Ended** | ** ** | **Three   Months   Ended** | ** ** | **Nine   Months   Ended** | ** ** | **Nine   Months   Ended** | ** ** | **Twelve   Months   Ended** | ** ** | **Twelve   Months   Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2008**                             | ** ** | **2007**                             | ** ** | **2008**                            | ** ** | **2007**                            | ** ** | **2008**                              | ** ** | **2007**                              | ** ** |
| Electric  transmission and distribution expense    |       | $                                    | 2,829      |                                 | $          | 2,545                               |       | $                                   | 8,172      |                                  | $          | 6,924                                 |       | $ | 10,715 |   | $ | 9,248 |   |
| Natural gas  transmission and distribution expense |       | 490                                  |       | 419                                  |       | 1,440                               |       | 1,287                               |       | 1,908                                 |       | 1,791                                 |       |
| Power operation  expense (other than fuel)         |       | 2,987                                |       | 2,704                                |       | 8,415                               |       | 7,689                               |       | 11,143                                |       | 10,167                                |       |
| Customer  accounts and assistance expense          |       | 2,532                                |       | 2,416                                |       | 7,519                               |       | 6,756                               |       | 9,961                                 |       | 9,165                                 |       |
| Employee pension  expense (1)                      |       | 1,449                                |       | 1,603                                |       | 4,571                               |       | 4,993                               |       | 6,131                                 |       | 6,197                                 |       |
| Employee healthcare  plan (1)                      |       | 1,730                                |       | 1,875                                |       | 5,616                               |       | 6,079                               |       | 7,436                                 |       | 8,294                                 |       |
| General office  supplies and expense               |       | 2,504                                |       | 2,521                                |       | 7,346                               |       | 7,690                               |       | 9,950                                 |       | 9,854                                 |       |
| Administrative  and general expense                |       | 2,664                                |       | 2,739                                |       | 8,152                               |       | 8,218                               |       | 10,797                                |       | 11,153                                |       |
| Allowance for uncollectible  accounts              |       | 1,172                                |       | 525                                  |       | 2,623                               |       | 3,191                               |       | 4,104                                 |       | 4,015                                 |       |
| Miscellaneous  expense                             |       | 47                                   |       | 37                                   |       | 111                                 |       | 131                                 |       | 229                                   |       | 184                                   |       |
| Total                                              |       | $                                    | 18,404     |                                 | $          | 17,384                              |       | $                                   | 53,965     |                                  | $          | 52,958                                |       | $ | 72,374 |   | $ | 70,068 |   |

 

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(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 December 2006, we sold our 100% interest inConversant, Inc., a software company that marketed Customer Watch, anInternet-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, Conversant and Fast Freedom, eachof 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.

 
| ** **                                | ** ** | **For the quarter ended September 30, 2008** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                               | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                          | 131,395    |   | $ | 6,056 |   | $ | 1,366 |   | $ | (132 | ) | $ | 138,685 |   |
| Depreciation and  amortization            |       | 12,578                                                                     |       | 482 |   | 333 |   | — |   | 13,393 |   |
| Federal and  state income taxes           |       | 10,491                                                                     |       | (754 | ) | 188 |   | — |   | 9,925 |   |
| Operating income                          |       | 27,960                                                                     |       | (293 | ) | 352 |   | — |   | 28,019 |   |
| Interest income                           |       | 402                                                                        |       | 93 |   | — |   | (129 | ) | 366 |   |
| Interest expense                          |       | 10,286                                                                     |       | 990 |   | 46 |   | (129 | ) | 11,193 |   |
| Income from  AFUDC (debt and equity)      |       | 3,378                                                                      |       | 1 |   | — |   | — |   | 3,379 |   |
| Income (loss)  from continuing operations |       | 21,108                                                                     |       | (1,234 | ) | 306 |   | — |   | 20,180 |   |
|                                      |       |                                                                       |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                          | 47,302     |   | $ | 734 |   | $ | 400 |   |   |   | $ | 48,436 |   |
|                                           |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                | ** ** | **For the quarter ended September 30, 2007** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                               | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                          | 135,980    |   | $ | 5,642 |   | $ | 986 |   | $ | (121 | ) | $ | 142,487 |   |
| Depreciation and  amortization            |       | 12,605                                                                     |       | 474 |   | 289 |   | — |   | 13,368 |   |
| Federal and  state income taxes           |       | 11,994                                                                     |       | (582 | ) | 48 |   | — |   | 11,460 |   |
| Operating income  (loss)                  |       | 31,427                                                                     |       | (39 | ) | 282 |   |   |   | 31,670 |   |
| Interest income                           |       | 257                                                                        |       | 112 |   | — |   | (297 | ) | 72 |   |
| Interest expense                          |       | 9,321                                                                      |       | 982 |   | 190 |   | (297 | ) | 10,196 |   |
| Income from  AFUDC (debt and equity)      |       | 1,849                                                                      |       | 4 |   | — |   | — |   | 1,853 |   |
| Income (loss)  from continuing operations |       | 24,015                                                                     |       | (907 | ) | 92 |   |   |   | 23,200 |   |
|                                      |       |                                                                       |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                          | 49,067     |   | $ | 825 |   | $ | 1,412 |   |   |   | $ | 51,304 |   |
|                                           |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **For the nine months ended September 30, 2008** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                                        | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                                   | 341,078    |   | $ | 42,480 |   | $ | 3,748 |   | $ | (396 | ) | $ | 386,910 |   |
| Depreciation and  amortization            |       | 38,451                                                                              |       | 1,443 |   | 981 |   | — |   | 40,875 |   |
| Federal and  state income taxes           |       | 14,447                                                                              |       | 352 |   | 486 |   | — |   | 15,285 |   |
| Operating income                          |       | 50,618                                                                              |       | 3,347 |   | 939 |   |   |   | 54,904 |   |
| Interest income                           |       | 1,057                                                                               |       | 356 |   | — |   | (424 | ) | 989 |   |
| Interest expense                          |       | 28,944                                                                              |       | 2,971 |   | 149 |   | (424 | ) | 31,640 |   |
| Income from  AFUDC (debt and equity)      |       | 8,854                                                                               |       | 3 |   | — |   | — |   | 8,857 |   |
| Income (loss)  from continuing operations |       | 30,624                                                                              |       | 573 |   | 790 |   | — |   | 31,987 |   |
|                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                                   | 150,061    |   | $ | 1,624 |   | $ | 1,478 |   |   |   | $ | 153,163 |   |
|                                           |            |                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **For the nine months ended September 30, 2007** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                                        | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                                   | 331,325    |   | $ | 41,670 |   | $ | 2,705 |   | $ | (314 | ) | $ | 375,386 |   |
| Depreciation and  amortization            |       | 36,969                                                                              |       | 1,412 |   | 766 |   | — |   | 39,147 |   |
| Federal and  state income taxes           |       | 15,801                                                                              |       | 1 |   | 69 |   | — |   | 15,871 |   |
| Operating income  (loss)                  |       | 54,403                                                                              |       | 2,663 |   | 640 |   |   |   | 57,706 |   |
| Interest income                           |       | 779                                                                                 |       | 298 |   | — |   | (823 | ) | 254 |   |
| Interest expense                          |       | 26,595                                                                              |       | 2,945 |   | 528 |   | (823 | ) | 29,245 |   |
| Income from  AFUDC (debt and equity)      |       | 5,514                                                                               |       | 17 |   | — |   | — |   | 5,531 |   |
| Income (loss) from  continuing operations |       | 33,451                                                                              |       | 20 |   | 112 |   |   |   | 33,583 |   |
|                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                                   | 137,122    |   | $ | 1,559 |   | $ | 3,223 |   |   |   | $ | 141,904 |   |
|                                           |            |                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                | ** ** | **For the twelve months ended September 30, 2008** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                                          | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                                     | 436,792    |   | $ | 60,687 |   | $ | 4,723 |   | $ | (519 | ) | $ | 501,683 |   |
| Depreciation and  amortization            |       | 51,120                                                                                |       | 1,920 |   | 1,287 |   | — |   | 54,327 |   |
| Federal and  state income taxes           |       | 12,236                                                                                |       | 923 |   | 699 |   | — |   | 13,858 |   |
| Operating income                          |       | 56,437                                                                                |       | 5,372 |   | 954 |   |   |   | 62,763 |   |
| Interest income                           |       | 840                                                                                   |       | 434 |   | — |   | (212 | ) | 1,062 |   |
| Interest expense                          |       | 38,131                                                                                |       | 3,982 |   | (128 | ) | (212 | ) | 41,773 |   |
| Income from  AFUDC (debt and equity)      |       | 10,988                                                                                |       | 2 |   | — |   | — |   | 10,990 |   |
| Income (loss)  from continuing operations |       | 29,009                                                                                |       | 1,522 |   | 1,054 |   | — |   | 31,585 |   |
|                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                                     | 201,484    |   | $ | 2,089 |   | $ | 3,255 |   |   | ** ** | $ | 206,828 | ** ** |
|                                           |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **For the twelve months ended September 30, 2007** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **($-000’s)**                        | ** ** | **Electric**                                                                          | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                                     | 418,255    |   | $ | 60,258 |   | $ | 3,513 |   | $ | (411 | ) | $ | 481,615 |   |
| Depreciation and  amortization            |       | 46,207                                                                                |       | 1,869 |   | 994 |   | — |   | 49,070 |   |
| Federal and  state income taxes           |       | 19,926                                                                                |       | 302 |   | (13 | ) | — |   | 20,215 |   |
| Operating income  (loss)                  |       | 67,203                                                                                |       | 4,136 |   | 925 |   |   |   | 72,264 |   |
| Interest income                           |       | 1,375                                                                                 |       | 327 |   | — |   | (1,358 | ) | 344 |   |
| Interest expense                          |       | 34,375                                                                                |       | 3,965 |   | 994 |   | (1,358 | ) | 37,976 |   |
| Income from  AFUDC (debt and equity)      |       | 7,721                                                                                 |       | 55 |   | — |   | — |   | 7,776 |   |
| Income (loss)  from continuing operations |       | 41,161                                                                                |       | 542 |   | (69 | ) |   |   | 41,634 |   |
|                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                                     | 168,461    |   | $ | 962 |   | $ | 3,726 |   |   | ** ** | $ | 173,149 | ** ** |
|                                           |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **As of September 30, 2008** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| **($-000’s)**             | ** ** | **Electric**                                     | ** ** | **Gas(1)** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                                             |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                                                | 1,531,396  |   | $ | 127,338 |   | $ | 22,599 |   | $ | (69,635 | ) | $ | 1,611,698 |   |
|                                |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includes goodwill of $39,492.

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

 

----

(1) Includes goodwill of $39,492.

 

**Note 11– Discontinued Operations**

 

In December 2006, we sold our 100% interest inConversant, Inc., a software company that markets Customer Watch, anInternet-based customer information system software. On September 28,2007, we sold our 100% interest in Fast Freedom, Inc., an Internet serviceprovider. We have

 

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reported Conversant and Fast Freedom’s results as discontinuedoperations. A summary of the components of gains or losses from discontinuedoperations for all periods reported as of September 30, 2007 follows:

 
| ** **                                               | ** ** | **For the three months ended September 30, 2007** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                       | ** ** | **Fast Freedom**                             | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                 | 282        |   | $ | 282 |   |
| Expenses                                                 |       | 363                                               |       | 363 |   |
| Losses from  discontinued operations before income taxes |       | (81                                               | )          | (81 | ) |
| Gain on disposal                                         |       | 161                                               |       | 161 |   |
| Income tax                                               |       | 31                                                |       | 31 |   |
| Minority  interest                                       |       | —                                            |       | — |   |
| Income tax –  minority interest                     |       | —                                            |       | — |   |
| **Gain  from discontinued operations**                   | ** ** | **$**                                             | **111**    | ** ** | **$** | **111** | ** ** |

 
| ** **                                               | ** ** | **For the nine months ended September 30, 2007** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                       | ** ** | **Fast Freedom**                            | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                | 905        |   | $ | 905 |   |
| Expenses                                                 |       | 1,063                                            |       | 1,063 |   |
| Losses from  discontinued operations before income taxes |       | (158                                             | )          | (158 | ) |
| Gain on disposal                                         |       | 161                                              |       | 161 |   |
| Income tax                                               |       | 60                                               |       | 60 |   |
| Minority  interest                                       |       | —                                           |       | — |   |
| Income tax –  minority interest                     |       | —                                           |       | — |   |
| **Gain  from discontinued operations**                   | ** ** | **$**                                            | **63**     | ** ** | **$** | **63** | ** ** |

 
| ** **                                               | ** ** | **For the twelve months ended September 30, 2007** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**                                       | ** ** | **Conversant**                                     | ** ** | **Fast Freedom** | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                  | 308        |   | $ | 1,251 |   | 1,559 |   |
| Expenses                                                 |       | 904                                                |       | 1,473 |   | 2,376 |   |
| Losses from  discontinued operations before income taxes |       | (595                                               | )          | (222 | ) | (817 | ) |
| Gain on disposal                                         |       | 555                                                |       | 161 |   | 717 |   |
| Income tax                                               |       | 227                                                |       | 84 |   | 311 |   |
| Minority  interest                                       |       | —                                             |       | — |   | — |   |
| Income tax –  minority interest                     |       | —                                             |       | — |   | — |   |
| **Gain  from discontinued operations**                   | ** ** | **$**                                              | **187**    | ** ** | **$** | **24** | ** ** | **$** | **211** | ** ** |
|                                                          |            |                                                    |            |  |  |  |  |  |  |  |

 

*Differencescould occur due to rounding.*

 

**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 

 

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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. Our Level 2 fair value measurements consist ofboth quoted price inputs and inputs provided by a third party that are derivedprincipally from or corroborated by observable market data by correlation.

 

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

 
| ** **                                         | ** ** | ** **                    | ** ** | **Fair Value Measurements at Reporting Date Using**                   | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **($ in 000’s)   Description** | ** ** | **As of   9/30/08** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs   (Level 3)** | ** ** |
| Net derivative assets/(liabilities)*               |       | $                             | 6,338      |                                                                                                | $          | (7,031 | ) | $ | 13,369 |   | — |   |
| Cash and cash  equivalents                         |       | 7,045                         |       | 7,045                                                                                               |       | — |   | — |   |
|                                                    |            |                               |            |                                                                                                     |            |  |  |  |  |  |  |  |

 

----

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

 

We did not have any gains orlosses for valuation using significant unobservable inputs.

 

**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 by an immaterial amountduring the quarter ended March 31, 2008 as a review of certain amendedreturns by the Joint Committee on Taxation was completed. The Joint Committeeaccepted our tax position which led us to recognize certain tax benefitspreviously unrecognized. We do not expect any significant changes to ourunrecognized tax benefits over the next twelve months. The reserve balancerelated to unrecognized tax benefits as of September 30, 2008 and December 31,2007 was $0.2 million and $0.3 million, 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 operating publicutility engaged in the generation, purchase, transmission, distribution andsale 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 consistsof our non-regulated businesses, primarily, a 100% interest in Empire DistrictIndustries, Inc., a subsidiary for our fiber optics business. During thetwelve months ended September 30, 2008, 87.1% of our gross operatingrevenues were provided from our electric segment (including 0.4% from the saleof water), 12.1% from our gas segment and 0.8% from our other segment.

 

InDecember 2006, we sold our 100% interest in Conversant, Inc., asoftware company that markets Customer Watch, an Internet-based customerinformation system software. On September 

 

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28, 2007, we sold our 100%interest in Fast Freedom, Inc., an Internet service provider. Forfinancial reporting purposes, Conversant and Fast Freedom, all of which wereformerly within our other segment, have been classified as discontinuedoperations and are not included in our segment information.

 

***Earnings***

 

Our basic earnings per sharefor the three, nine and twelve months ended September 30, 2008 were $0.60,$0.95 and $0.95, respectively, which compared to $0.76, $1.11 and $1.38 for thethree, nine and twelve months ended September 30, 2007. For the thirdquarter of 2008, earnings were lower primarily as a result of much coolerweather than in the third quarter of 2007, which had a negative impact on ourrevenues, and the dilutive effect of additional shares issued in December 2007.For the nine months and twelve months ended September 30, 2008, earningswere lower primarily as a result of increased electric fuel and purchased powercosts, in each case, partially offset by increased electric revenues during theperiods.

 

The following reconciliation of basicearnings per share between the three months, nine months and twelve monthsended September 30, 2007 versus September 30, 2008 is a non-GAAPpresentation. We believe this information is useful in understanding thefluctuation in earnings per share between the prior and current years. Thereconciliation presents the after-tax impact of significant items andcomponents of the statement of operations on a per share basis before theimpact of additional stock issuances which is presented separately. Earningsper share for the three months, nine months and twelve months ended September 30,2007 and 2008 shown in the reconciliation are presented on a GAAP basis and arethe same as 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** | ** ** | **Nine months   Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| **Earnings  Per Share – 2007 (Basic)**                        | ** ** | **$**                              | **0.76**   | ** **                        | **$**      | **1.11**                      | ** ** | **$** | **1.38** | ** ** |
|                                                               |       |                               |       |                              |       |                          |       |
| **Revenues**                                                       |       |                               |       |                              |       |                          |       |
| Electric  on-system                                                |       | $                                  | (0.10      | )                                 | $          | 0.04                          |       | $ | 0.19 |   |
| Electric off –  system and other                              |       | —                             |       | 0.17                              |       | 0.22                          |       |
| Gas                                                                |       | 0.01                               |       | 0.02                              |       | 0.01                          |       |
| Water                                                              |       | —                             |       | —                            |       | —                        |       |
| Other                                                              |       | 0.01                               |       | 0.02                              |       | 0.02                          |       |
| **Expenses**                                                       | ** ** | ** **                         | ** ** | ** **                        | ** ** | ** **                    | ** ** |
| Electric fuel and  purchased power                                 |       | 0.02                               |       | (0.35                             | )          | (0.73                         | )          |
| Cost of natural  gas sold and transported                          |       | (0.02                              | )          | (0.01                             | )          | 0.01                          |       |
| Regulated –  electric segment                                 |       | (0.01                              | )          | (0.02                             | )          | (0.05                         | )          |
| Regulated –gas  segment                                       |       | (0.01                              | )          | —                            |       | —                        |       |
| Maintenance and  repairs                                           |       | (0.01                              | )          | 0.09                              |       | 0.06                          |       |
| Depreciation and  amortization                                     |       | —                             |       | (0.04                             | )          | (0.12                         | )          |
| Other taxes                                                        |       | —                             |       | (0.01                             | )          | (0.02                         | )          |
| Loss on plant  allowance                                           |       | —                             |       | —                            |       | 0.02                          |       |
| Change in  effective income tax rates                              |       | —                             |       | —                            |       | 0.03                          |       |
| Interest charges                                                   |       | (0.02                              | )          | (0.05                             | )          | (0.09                         | )          |
| AFUDC                                                              |       | 0.03                               |       | 0.06                              |       | 0.07                          |       |
| Gain on sale of  assets                                            |       | —                             |       | —                            |       | 0.03                          |       |
| Other income and  deductions                                       |       | —                             |       | 0.01                              |       | 0.01                          |       |
| Discontinued  operations                                           |       | —                             |       | —                            |       | (0.01                         | )          |
| Dilutive effect  of additional shares issued in December 2007 |       | (0.06                              | )          | (0.09                             | )          | (0.08                         | )          |
| **Earnings  Per Share – 2008 (Basic)**                        | ** ** | **$**                              | **0.60**   | ** **                        | **$**      | **0.95**                      | ** ** | **$** | **0.95** | ** ** |

 

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***Recent Activities***

 

***Recent Market Events***

 

We have monitored recentmarket events that could have potential business and accounting issuesassociated with our operations.

 

We evaluated our creditexposure with trading counterparties and we do not at this time believe thatcounterparty default is likely, however, according to published reports,certain of our counterparties continue to be adversely impacted by the currentcredit crisis. In the event we were to conclude that the counterparties to ourhedging arrangements were no longer probable of performance, we would berequired to discontinue the use of cash flow hedge treatment for thesecontracts. However, the fuel adjustment clause authorized****in therecent Missouri rate case allows us to record any gains or losses associatedwith our hedging arrangements as a regulatory asset or liability. Accordingly,we believe any counterparty defaults we may experience should not substantiallyimpact our earnings.

 

Similarto many companies, we are****exposedto the risk of credit rating downgrades from rating agencies**;**however, we****have not received any****downgrades of our securities duringthe recent market turmoil.

 

Over the last few weeks, wehave been constrained in our ability to issue commercial paper. As a result, wehave had to borrow under our unsecured revolving credit facility to meetshort-term cash flow needs. These borrowings have been at a higher cost thanour historical commercial paper rates.

 

The general market declinehas negatively impacted the performance of our pension assets through October 31,2008. It is possible that we will be required to fund additional amounts in2009, and such amounts may be significant. We cannot make any determination atthis time, however, as to the amount, if any, of such required fundingobligations. Such determination will only be made based on the performance ofour pension plan assets through December 31, 2008 and our valuation electionsat such time.

 

***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, granting an annual increase in revenues for our Missouri electriccustomers in the amount of $22.0 million, or 6.7%, based on a 10.8% return onequity. The new rates went into effect August 23, 2008.

 

The order contains twocomponents. The first component provides an addition to base rates ofapproximately $27.7 million. This increase in base rates was partially offsetby a $5.7 million reduction to regulatory amortization, which is the secondcomponent. Regulatory amortization provides us additional cash through ratesduring the current construction cycle. This construction, which is part of ourlong-range plan to ensure reliability, includes the facilities at the RivertonPower Plant and Iatan 2 Power Plant, as well as environmental improvements atthe Asbury Power Plant and at Iatan 1. The regulatory amortization is nowapproximately $4.5 million annually and is recorded as depreciation expense.

 

The MPSC also authorized afuel adjustment clause for our Missouri customers effective September 1,2008. The MPSC established a base rate for the recovery of fuel and purchasedpower expenses used to supply energy. The clause permits the distribution tocustomers of 95% of the changes in fuel and purchased power costs above orbelow the base. Off-system sales margins

 

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are also part of the fuel adjustmentmechanism. As a result, the off-system sales margin flows back to the customer.Rates related to the fuel adjustment clause will be modified twice a yearsubject to the review and approval by the MPSC. In accordance with SFAS No. 71 – “Accounting for theEffects of Certain Types of Regulation” (FAS 71), 95% of the differencebetween the actual cost of fuel and purchased power and the base cost of fueland purchased power recovered from our customers is recorded as an adjustmentto fuel and purchased power expense with a corresponding regulatory asset or aregulatory liability. If the actual fuel and purchased power costs are higheror lower than the base fuel costs billed to customers, 95% of these amountswill be recovered or refunded to our customers when the fuel adjustment clauseis modified.

 

The MPSC order approved a Stipulation and Agreement providing for therecovery of deferred expenses of approximately $14.2 million over a five yearperiod for the 2007 ice storms. In addition, the MPSC order required theimplementation of a two-way tracking mechanism for recovery of the costsrelating to the new MPSC rules on infrastructure inspection and vegetationmanagement. The mechanism authorized by the MPSC creates a regulatory liabilityin any year we spend less than the target amount, which has been set at $8.6million for our Missouri jurisdiction, and a regulatory asset if we spend morethan the target amount. Any regulatory asset and liability amounts createdusing the tracking mechanism will then be netted against each other and takeninto account in our next rate case. The MPSC also approved Stipulations andAgreements providing for the continuation of the pension and otherpost-retirement employee benefits tracking mechanism established in our 2006and 2007 Missouri rate orders.

 

TheOffice of Public Counsel (OPC) and intervenors Praxair, Inc. and ExplorerPipeline Company filed applications for rehearing with the MPSC regarding thisorder. The MPSC subsequently denied those applications. On October 6,2008, the OPC and intervenors Praxair, Inc. and Explorer Pipeline Company,filed appeals with the Cole County Circuit Court.

 

Foradditional information, see “Rate Matters” below.

 

***Financing***

 

On May 16, 2008, weissued $90 million principal amount of first mortgage bonds. The net proceedsof approximately $89.4 million, less$0.4 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 consents fromholders of 94.46% in aggregate principal amount of the outstanding bonds andpaid 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 (excludingAFUDC), of which $28.1 million was expended through December 31, 2007 withthe remainder expended in 2008. Thisproject was also included as part of our Experimental Regulatory Plan approvedby the MPSC and its cost is now in base rates in Missouri. 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

 

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require the unit to remain on outage an additional 60 days. The unitwas returned to service on February 10, 2008. We had to replace the energy that would have been generated by ourcoal-fired units at the Asbury plant with energy generated at our gas plantsand with purchased power. After assessing the actual cost of the incrementalpurchased power and gas-fired generation, we estimate the original plannedoutage added incremental expenses of approximately $8.7 million for the fourthquarter of 2007. We estimate the extended outage increased expenses anadditional $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).

 

**RESULTS OF OPERATIONS**

 

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

 

The following table represents our results of operations by operatingsegment for the applicable periods ended September 30:

 
| ** **                           | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** | **Twelve  Months Ended** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|--------------------------|------------|
| **(in millions)**               | ** ** | **2008**                | ** ** | **2007**               | ** ** | **2008**                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                    |       |                   |       |                     |       |   |   |   |   |   |   |
| Income from  continuing operations   |       |                    |       |                   |       |                     |       |   |   |   |   |   |   |
| Electric                             |       | $                       | 21.1       |                   | $          | 24.0                     |       | $ | 30.6 |   | $ | 33.5 |   | $ | 29.0 |   | $ | 41.2 |   |
| Gas                                  |       | (1.2                    | )          | (0.9                   | )          | 0.6                      |       | 0.0 |   | 1.5 |   | 0.5 |   |
| Other                                |       | 0.3                     |       | 0.1                    |       | 0.8                      |       | 0.1 |   | 1.1 |   | (0.1 | ) |
| Income from  continuing operations   |       | $                       | 20.2       |                   | $          | 23.2                     |       | $ | 32.0 |   | $ | 33.6 |   | $ | 31.6 |   | $ | 41.6 |   |
| Income from  discontinued operations |       | 0.0                     |       | 0.1                    |       | 0.0                      |       | 0.1 |   | 0.0 |   | 0.2 |   |
| Net income                           |       | $                       | 20.2       |                   | $          | 23.3                     |       | $ | 32.0 |   | $ | 33.6 |   | $ | 31.6 |   | $ | 41.8 |   |

 

*Differencescould occur due to rounding.*

 

***Electric Segment***

 

**Overview**

 

Our electric segment income from continuing operations for the thirdquarter of 2008 was $21.1 million as compared to $24.0 million for the thirdquarter of 2007.

 

Electric segment operating revenues comprised approximately 94.7% ofour total operating revenues during the third quarter of 2008. Of our totalelectric operating revenues during the third quarter of 2008, approximately39.0% were from residential customers, 31.3% from commercial customers, 15.7%from industrial customers, 4.2% from wholesale on-system customers, 6.0% fromwholesale off-system transactions, 2.4% from miscellaneous sources, primarily publicauthorities, and 1.4% from other electric revenues. The breakdown of ourcustomer classes has not significantly changed from the third quarter of 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 September 30, were asfollows:

 
| ** **           | ** ** | **kWh Sales ****(in millions)** | ** ** | **kWh Sales ****(in millions)** | ** ** | **kWh Sales ****(in millions)** | ** ** |
|----------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **           | ** ** | **3 Months**                              | ** ** | **3 Months**                              | ** ** | ** **                                     | ** ** | **9 Months** | ** ** | **9 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Ended**                                      | ** ** | **Ended**                                      | ** ** | **%**                                          | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| ** **           | ** ** | **2008**                                       | ** ** | **2007**                                       | ** ** | **Change***                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential          |       | 503.6                                          |       | 567.9                                          |       | (11.3                                          | )%         | 1,478.7 |   | 1,491.8 |   | (0.9 | )% | 1,917.4 |   | 1,934.7 |   | (0.9 | )% |
| Commercial           |       | 446.4                                          |       | 459.4                                          |       | (2.8                                           | )          | 1,217.9 |   | 1,215.5 |   | 0.2 |   | 1,613.2 |   | 1,589.8 |   | 1.5 |   |
| Industrial           |       | 289.3                                          |       | 298.3                                          |       | (3.0                                           | )          | 820.9 |   | 843.1 |   | (2.6 | ) | 1,088.1 |   | 1,119.1 |   | 2.8 |   |
| Wholesale  On-System |       | 94.3                                           |       | 98.2                                           |       | (4.0                                           | )          | 263.4 |   | 260.9 |   | 0.9 |   | 344.8 |   | 340.3 |   | 1.3 |   |
| Other**              |       | 32.1                                           |       | 30.7                                           |       | 4.4                                            |       | 94.1 |   | 86.4 |   | 9.0 |   | 124.5 |   | 114.5 |   | 8.7 |   |
| Total On-System      |       | 1,365.7                                        |       | 1,454.5                                        |       | (6.1                                           | )          | 3,875.0 |   | 3,897.7 |   | (0.6 | ) | 5,087.9 |   | 5,098.4 |   | (0.2 | ) |

 

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| ** **           | ** ** | **Operating Revenues**   | ** ** | **Operating Revenues**   | ** ** | **Operating Revenues**   | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** |
| ** **           | ** ** | **3 Months**             | ** ** | **3 Months**             | ** ** | ** **                    | ** ** | **9 Months** | ** ** | **9 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Ended**                     | ** ** | **Ended**                     | ** ** | **%**                         | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| ** **           | ** ** | **2008**                      | ** ** | **2007**                      | ** ** | **Change***                   | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential          |       | $                             | 51.1       |                          | $          | 55.9                          |       | (8.6 | )% | $ | 136.1 |   | $ | 136.8 |   | (0.6 | )% | $ | 173.8 |   | $ | 172.5 |   | 0.8 | % |
| Commercial           |       | 41.0                          |       | 41.2                          |       | (0.6                          | )          | 100.5 |   | 99.5 |   | 1.0 |   | 130.0 |   | 126.1 |   | 3.1 |   |
| Industrial           |       | 20.5                          |       | 20.5                          |       | (0.3                          | )          | 51.9 |   | 52.5 |   | (1.0 | ) | 67.2 |   | 67.0 |   | 0.2 |   |
| Wholesale  On-System |       | 5.5                           |       | 5.2                           |       | 5.2                           |       | 15.0 |   | 13.8 |   | 8.8 |   | 19.7 |   | 17.6 |   | 11.8 |   |
| Other**              |       | 3.2                           |       | 3.0                           |       | 7.8                           |       | 8.4 |   | 7.5 |   | 11.1 |   | 10.9 |   | 9.7 |   | 12.1 |   |
| Total On-System      |       | $                             | 121.2      |                          | $          | 125.8                         |       | (3.7 | ) | $ | 311.9 |   | $ | 310.1 |   | 0.6 |   | $ | 401.6 |   | $ | 392.9 |   | 2.2 |   |

 

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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 September 30, 2008 Compared toQuarter Ended September 30, 2007***

 

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

 

KWh sales for our on-system customers decreased 6.1% during the thirdquarter of 2008 as compared to the third quarter of 2007. Revenues for ouron-system customers decreased approximately $4.6 million, or 3.7%. Weather andother related factors decreased revenues by an estimated $8.7 million comparedto last year’s third quarter. Total cooling degree days (the cumulative numberof degrees that the average temperature for each day during that period wasabove 65*°* F) for the third quarter of 2008 were 21.7%less than the same period last year and 8.5% less than the 30-year average.Partially offsetting these factors were rate changes, primarily the 2008Missouri rate increase, which contributed an estimated $2.8 million during thethird quarter of 2008, and sales growth which contributed an estimated $1.3million. We expect our annual electric customer growth to range fromapproximately 1.1% to 1.6% over the next several years. Our electric customergrowth for the twelve months ended September 30, 2008 was 0.5%.

 

The decrease in residential and commercial kWh sales and revenuesduring the third quarter of 2008 as compared to the same period in 2007 wasprimarily due to milder weather in the third quarter of 2008 as compared to2007, more than offsetting the effect of the 2008 Missouri rate increase thatwent into effect on August 23, 2008.

 

The decrease in industrial kWh sales and revenues during the thirdquarter of 2008 as compared to the same period in 2007 was mainly due tooverall economic conditions.

 

On-system wholesale kWh sales decreased during the third quarter of2008 reflecting the milder weather and overall economic conditions. Revenuesassociated with these Federal Energy Regulatory Commission (FERC)-regulatedsales, however, increased as a result of the fuel adjustment clause applicableto such sales. This clause permits the distribution to customers of changes infuel 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 (including through the Southwest Power Pool (SPP) energy imbalanceservices (EIS) market). See “— Competition” below. The majority of ouroff-system sales margins are now included as a component of the fuel adjustmentclause in our Missouri, Kansas and Oklahoma jurisdictions. The following tablesets forth information regarding these sales and related expenses for theapplicable periods ended September 30:

 

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| ** **                 | ** ** | **2008**                         | ** ** | **2007**                         | ** ** |
|----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(in millions)**          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| EIS revenues               |       | $                                | 3.4        |                             | $          | 3.2 |   |
| Other revenues             |       | 5.0                              |       | 5.6                              |       |
| Total off-system  revenues |       | 8.4                              |       | 8.8                              |       |
|                       |       |                             |       |                             |       |
| EIS expenses               |       | 2.5                              |       | 2.2                              |       |
| Other expenses             |       | 3.5                              |       | 3.9                              |       |
| Total off-system  expenses |       | 6.0                              |       | 6.1                              |       |
|                       |       |                             |       |                             |       |
| Net*                       |       | $                                | 2.4        |                             | $          | 2.8 |   |

 

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**Differencescould occur due to rounding.*

 

Revenues decreased during the third quarter of 2008 as compared to thethird quarter of 2007, primarily due to less market demand for power due to themilder weather in the third quarter of 2008. Total purchased power relatedexpenses are included in our discussion of fuel and purchased power costs below.

 

**Other Electric Revenues**

 

Our other electric revenues consist of transmission revenues, renewableenergy credit sales, late payment fees, rent from electric property andmiscellaneous electric revenues. These revenues totaled $1.8 million in thethird quarter of 2008 (comprised mainly of $0.6 million in transmissionrevenues and $0.5 million in renewable energy credit sales) as compared to $1.4million in the third quarter of 2007 (comprised mainly of $0.6 million intransmission revenues and $0.2 million in renewable energy credit sales).

 

**Operating Revenue Deductions**

 

During the third quarter of 2008, total electric segment operatingexpenses decreased approximately $1.1 million (1.1%) compared with the sameperiod last year. Total fuel and purchased power expense decreasedapproximately $0.9 million (1.7%) during the third quarter of 2008 as comparedto the same period in 2007. Total fuel costs decreased primarily due todecreased generation by our gas-fired units (an estimated $8.8 million) as aresult of less demand because of milder weather. Lower prices for both thehedged and unhedged natural gas that we burned in our gas-fired units in thethird quarter of 2008 (an estimated $0.6 million) also helped decrease fuelcosts. These decreases were partially offset by increased coal costs (anestimated $1.4 million) and increased coal generation (an estimated $0.6million) in the third quarter of 2008 as compared to the third quarter of 2007.Increased purchased power costs resulted from higher prices (an estimated $3.8million) and increased purchases (an estimated $0.7 million).

 

In our latest Missouri ratecase order issued July 30, 2008, the MPSC authorized a fuel adjustmentclause for our Missouri customers effective September 1, 2008. The MPSCestablished a base rate for the recovery of fuel and purchased power expensesused to supply energy. The clause permits the distribution to customers of 95%of the changes in fuel and purchased power costs above or below the base. Ratesrelated to the fuel adjustment clause will be modified twice a year subject tothe review and approval by the MPSC. In accordance with FAS 71, 95% of thedifference between the actual costs of fuel and purchased power and the cost offuel and purchased power recovered from our customers is recorded as anadjustment to fuel and purchased power expense with a corresponding regulatoryasset or a regulatory liability. If the actual costs are higher or lower thanthe base costs billed to customers, 95% of these amounts will be recovered fromor refunded to our customers when the fuel adjustment clause is modified. Thetable below is a reconciliation of our actual fuel and purchased power cost(netted with the regulatory adjustment) to the fuel and purchased power expenseshown on our income statement for the quarter ended September 30, 2008.The regulatory adjustments shown below added $1.8 million to fuel and purchasedpower expense.

 

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| ** **                                                   | ** ** | **2008**                         | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                                       | ** ** | **Three Months Ended** | ** ** |
| Actual fuel and  purchased power cost                        |       | $                                | 49.7       |   |
| Kansas regulatory adjustments*                               |       | (0.2                             | )          |
| Missouri  regulatory adjustments*                            |       | 2.0                              |       |
| Total fuel and  purchased power expense per income statement |       | $                                | 51.5       |   |

 

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* A negativeamount indicates costs have been under recovered from customers and a positive amountindicates costs have been over recovered from customers.

 

Regulated operating expenses for our electric segment increasedapproximately $0.6 million (3.9%) during the third quarter of 2008 as comparedto the same period in 2007 primarily due to increases of $0.4 million inuncollectible accounts expense, $0.3 million in transmission and distributionexpense, $0.3 million in injuries and damages expense and $0.2 million in otherpower supply expenses. These increases were partially offset by decreases of$0.6 million in professional services and $0.2 million in employee health careexpense.

 

Maintenance and repairs expense increased approximately $0.6 million(9.4%) in the third quarter of 2008 as compared to 2007 primarily due to $0.4million of ice storm related amortization, increases of $0.4 million indistribution maintenance expense, $0.3 million in maintenance and repairsexpense at the Riverton plant and $0.2 million in maintenance and repairsexpense at the SLCC plant. These increases were partially offset by a $0.4million decrease in maintenance expense at the Energy Center plant compared tothe third quarter of 2007 when a bearing failure in Unit #3 in the secondquarter of 2007 was repaired in the third quarter of 2007.

 

Depreciation and amortization expense was virtually the same in thethird quarter of 2008 as in the third quarter of 2007. Reduced regulatoryamortization resulting from the 2008 Missouri rate case was offset by increasedplant in service. Other taxes increased approximately $0.2 million during thethird quarter of 2008 due to increased property tax reflecting our additions toplant in service and municipal franchise taxes.

 

***Nine Months Ended September 30, 2008 Comparedto Nine Months Ended September 30, 2007***

 

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

 

KWh sales for our on-system customers decreased slightly during thenine months ended September 30, 2008 as compared to the nine months ended September 30,2007 primarily due to overall economic conditions, as well as the milderweather in the third quarter of 2008. Revenues for our on-system customersincreased approximately $1.8 million, or 0.6%. Rate changes contributed anestimated $3.7 million during the nine months ended September 30, 2008while sales growth contributed an estimated $3.3 million. Weather and otherrelated factors decreased revenues by an estimated $5.2 million compared to thenine months ended September 30, 2007.

 

The decrease in residential kWh sales and revenues during the ninemonths ended September 30, 2008 as compared to the same period in 2007 wasprimarily due to the milder weather in the third quarter of 2008.

 

The increase in commercial kWh sales and revenues during the ninemonths ended September 30, 2008 as compared to the same period in 2007 wasprimarily due to continued sales growth and the new Missouri electric ratesthat went into effect August 23, 2008.

 

Industrial kWh sales decreased during the nine months ended September 30,2008 as compared to the same period in 2007 mainly due to a slowdown created byeconomic uncertainty while the related revenues increased, reflecting the newMissouri electric rates.

 

On-system wholesale kWh sales increased slightly during the nine monthsended September 30, 2008 while the revenues associated with theseFERC-regulated sales increased more as a result of the fuel adjustment clauseapplicable to such sales.

 

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**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 (including through the EIS market). The majority of our off-systemsales margins are now included as a component of the fuel adjustment clause inour Missouri, Kansas and Oklahoma jurisdictions. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended September 30:

 
| ** **                 | ** ** | **2008**                        | ** ** | **2007**                        | ** ** |
|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(in millions)**          | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| EIS revenues               |       | $                               | 10.7       |                            | $          | 6.5 |   |
| Other revenues             |       | 13.7                            |       | 10.9                            |       |
| Total off-system  revenues |       | 24.4                            |       | 17.4                            |       |
|                       |       |                            |       |                            |       |
| EIS expenses               |       | 7.5                             |       | 4.4                             |       |
| Other expenses             |       | 10.3                            |       | 7.7                             |       |
| Total off-system  expenses |       | 17.8                            |       | 12.1                            |       |
|                       |       |                            |       |                            |       |
| Net*                       |       | $                               | 6.6        |                            | $          | 5.3 |   |

 

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**Differencescould occur due to rounding.*

 

Revenues increased during the nine months ended September 30, 2008as compared to the nine months ended September 30, 2007 primarily due tosales facilitated by the EIS market that began on February 1, 2007. Totalpurchased power related expenses are included in our discussion of fuel andpurchased power costs below.

 

**Other Electric Revenues**

 

Our other electric revenues consist of transmission revenues, renewableenergy credit sales, late payment fees, rent from electric property andmiscellaneous electric revenues. These revenues totaled $5.2 million during thenine months ended September 30, 2008 (comprised mainly of $1.8 million intransmission revenues and $1.6 million in renewable energy credit sales) ascompared to $4.2 million in the same period of 2007 (comprised mainly of $1.8million in transmission revenues and $0.7 million in renewable energy creditsales).

 

**Operating Revenue Deductions**

 

During the nine months ended September 30, 2008, total electricsegment operating expenses increased approximately $13.5 million (4.9%)compared with the same period last year. Total fuel and purchased power expenseincreased approximately $15.7 million (11.2%) during the nine months ended September 30,2008 as compared to the same period in 2007. This increase included the effectof increased costs for off-system sales of $5.7 million and the effect ofreplacement power for the Asbury and Riverton 8 outages. The increase inpurchased power costs primarily reflected higher prices for the power purchased(an estimated $10.6 million) as well as increased purchases on the spot marketfor replacement energy (an estimated $3.0 million) mainly in the first quarterof 2008 due to the extended Asbury outage as well as the extended SLCC outagein the second quarter of 2008. Afterassessing the actual cost of the incremental purchased power and gas-firedgeneration, we estimate the extended outage at Asbury increased expenses anadditional $5.8 million in the first quarter of 2008 (January 1-February 10,2008). The increase in fuel costs was mainly due to higher costs for thenatural gas we burned in our gas-fired units (an estimated $5.3 million),partially offset by decreased generation by our gas fired units (an estimated$4.3 million) primarily in the third quarter of 2008 resulting from milderweather conditions. The increase in fuel costs was partially offset as a resultof 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 (an estimated $1.9 million) and increased coalgeneration

 

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(approximately $0.5 million) added to the increase in fuel costs duringthe nine months ended September 30, 2008.

 

The table below is areconciliation of our actual fuel and purchased power cost (netted with theregulatory adjustment) to the fuel and purchased expense shown on our incomestatement for the nine months ended September 30, 2008. The regulatoryadjustments shown below added $1.3 million to fuel and purchased power expense.

 
| ** **                                                   | ** ** | **2008**                        | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|
| **(in millions)**                                       | ** ** | **Nine Months Ended** | ** ** |
| Actual fuel and  purchased power cost                        |       | $                               | 154.1      |   |
| Kansas  regulatory adjustments*                              |       | (0.7                            | )          |
| Missouri  regulatory adjustments*                            |       | 2.0                             |       |
| Total fuel and  purchased power expense per income statement |       | $                               | 155.4      |   |

 

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*A negative amountindicates costs have been under recovered from customers and a positive amountindicates costs have been over recovered from customers.

 

Regulated operating expenses for our electric segment increasedapproximately $1.0 million (2.2%) during the nine months ended September 30,2008 as compared to the same period in 2007 primarily due to increases of $1.2million in transmission and distribution expense, $0.3 million in other steampower expense, $0.3 million in general labor costs, $0.3 million in other powerexpense, and $0.2 million in injuries and damages expense. These increases werepartially offset by decreases of $0.6 million in professional services, $0.4million in employee pension expense, $0.4 million in employee health careexpense, and $0.2 million in uncollectible accounts expense.

 

Maintenance and repairs expense decreased approximately $3.7 million(16.3%) during the nine months ended September 30, 2008 primarily due to a$4.2 million decrease in distribution maintenance costs, as compared to the ninemonths ended September 30, 2007 when there were $4.6 million ofincremental costs (and $1.2 million non-incremental tree trimming and laborcosts in the first quarter of 2007) related to the January 2007 ice storm.Also contributing to the decrease during the nine months ended September 30,2008 was a $0.7 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 in the first quarter at the Iatan plant, a$0.4 million decrease in maintenance expense at the Energy Center plantcompared to the third quarter of 2007 when a bearing failure in Unit #3 in thesecond quarter of 2007 was repaired in the third quarter of 2007, and a $0.2million decrease in maintenance and repairs expense at the Asbury plant. Thesedecreases were partially offset by a $0.9million increase in maintenance and repairs expense at the SLCC plantdue to the extended spring maintenance outage in the second quarter of 2008, a $0.6 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, $0.4 million of ice storm relatedamortization and a $0.3 million increase in transmission expense**.**

 

Depreciation and amortization expense increased approximately $1.5million (4.0%) during the nine months ended September 30, 2008 mainly dueto increased plant in service. Other taxes increased approximately $0.7 millionduring the nine months ended September 30, 2008 due to increased propertytaxes reflecting our additions to plant in service and increased municipalfranchise taxes.

 

***Twelve Months Ended September 30, 2008Compared to Twelve Months Ended September 30, 2007***

 

**Operating Revenues and Kilowatt-Hour Sales**

 

For the twelve months ended September 30, 2008, kWh sales to ouron-system customers decreased slightly (0.2%) with the associated revenuesincreasing approximately $8.7 million (2.2%). Rate changes, primarily the January 2007Missouri rate increase and August 2008 Missouri rate increase, contributedan estimated $13.7 million to revenues while continued sales growth contributedan estimated $4.6 million. Weather and other related factors decreased revenuesan

 

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estimated $7.4 million. Also contributing to the decrease in revenueswas $2.2 million of Interim Energy Charge (IEC) collected in the fourth quarterof 2006, which did not reoccur in 2007.

 

Residential kWh sales decreased reflecting the milder weather in thethird quarter of 2008 while associated revenues increased primarily due to theMissouri rate increases. Commercial and industrial kWh sales and associatedrevenues increased for the twelve months ended September 30, 2008,reflecting sales growth and the Missouri rate increases. On-system wholesalekWh sales increased reflecting the continued sales growth discussed above.Revenues associated with these FERC-regulated sales increased more than the kWhsales as a 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 (including through the EIS market). The majority of our off-systemsales margins are now included as a component of the fuel adjustment clause inour Missouri, Kansas and Oklahoma jurisdictions. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended September 30:

 
| ** **                 | ** ** | **2008**                          | ** ** | **2007**                          | ** ** |
|----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **(in millions)**          | ** ** | **Twelve Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| EIS revenues               |       | $                                 | 13.1       |                              | $          | 6.5 |   |
| Other revenues             |       | 16.1                              |       | 14.0                              |       |
| Total off-system  revenues |       | 29.2                              |       | 20.5                              |       |
|                       |       |                              |       |                              |       |
| EIS expenses               |       | 9.3                               |       | 4.4                               |       |
| Other expenses             |       | 12.2                              |       | 10.0                              |       |
| Total off-system  expenses |       | 21.5                              |       | 14.4                              |       |
|                       |       |                              |       |                              |       |
| Net*                       |       | $                                 | 8.0        |                              | $          | 6.0 |   |

 

----

**Differencescould occur due to rounding.*

 

Revenues increased during the twelve months ended September 30,2008 as compared to the same period in 2007 primarily due to sales facilitatedby the EIS market that began on February 1, 2007. Total purchased powerrelated expenses are included in our discussion of fuel and purchased powercosts below.

 

**Other Electric Revenues**

 

Our other electric revenues consist of transmission revenues, renewableenergy credit sales, late payment fees, rent from electric property andmiscellaneous electric revenues. These revenues totaled $6.7 million during thetwelve months ended September 30, 2008 (comprised mainly of $2.4 millionin transmission revenues and $1.8 million in renewable energy credit sales) ascompared to $5.4 million in the same period of 2007 (comprised mainly of $2.3million in transmission revenues and $0.7 million in renewable energy creditsales).

 

**Operating Revenue Deductions**

 

During the twelve months ended September 30, 2008, total electricsegment operating expenses increased approximately $29.3 million (8.4%)compared to the year ago period. Total fuel and purchased power expenseincreased approximately $33.2 million (19.1%) during the twelve months ended September 30,2008 as compared to the same period last year. This increase included theeffect of increased costs for off-system sales of $7.1 million and the effectof replacement power for the Asbury and Riverton 8 outages. The increase inpurchased power costs primarily reflected higher prices for the power purchased(an estimated $13.3 million) as well as increased purchases on the spot marketfor replacement energy (an estimated $5.3 million) mainly

 

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in the first quarter of 2008 and fourth quarter of 2007 due to theextended Asbury outage as well as the extended SLCC outage in the secondquarter of 2008. After assessing theactual cost of the incremental purchased power and gas-fired generation, weestimate the extended outage at Asbury increased expenses an additional $5.8million in the first quarter of 2008 (January 1-February 10, 2008)and $3.5 million in the fourth quarter of 2007 (December 8-December 31,2007). The increase in fuelcosts was mainly due to increased generation by our gas fired units (anestimated $13.9 million) primarily in the first quarter of 2008 and fourthquarter of 2007 due to the extended outage at the Asbury plant and to theincrease in off-system sales. Also adding to the increase were higher costs forthe natural gas we burned in our gas-fired units (an estimated $4.8 million).These increased costs were partially offset as a result of the unwinding offuture physical natural gas positions in February 2008 that reduced fuelexpense by approximately $2.1 million in the first quarter of 2008. Decreasedcoal generation, mainly due to the Asbury outage, decreased fuel costs an estimated$5.0 million, partially offset by increased coal costs (approximately $2.4million) during the twelve months ended September 30, 2008.

 

The table below is areconciliation of our actual fuel and purchased power cost (netted with theregulatory adjustment) to the fuel and purchased power expense shown on ourincome statement for the twelve months ended September 30, 2008. Theregulatory adjustments shown below added $1.4 million to fuel and purchasedpower expense.

 
| ** **                                                   | ** ** | **2008**                          | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|
| **(in millions)**                                       | ** ** | **Twelve Months Ended** | ** ** |
| Actual fuel and  purchased power cost                        |       | $                                 | 205.5      |   |
| Kansas  regulatory adjustments*                              |       | (0.6                              | )          |
| Missouri  regulatory adjustments*                            |       | 2.0                               |       |
| Total fuel and  purchased power expense per income statement |       | $                                 | 206.9      |   |

 

----

*A negative amountindicates costs have been under recovered from customers and a positive amountindicates costs have been over recovered from customers.

 

Regulated operating expenses increased approximately $2.3 million(3.9%) during the twelve months ended September 30, 2008 as compared to thesame period last year primarily due to increases of $1.5 million intransmission and distribution expense, $0.4 million in other power expense,$0.3 million in other steam power expense, $0.3 million in general labor costs,$0.3 million in uncollectible accounts expense, and $0.2 million in injuriesand damages expense. These increases were partially offset by decreases of $1.1million in professional services, and $0.6 million in employee health careexpense.

 

Maintenance and repairs expense decreased approximately $2.0 million(6.8%) during the twelve months ended September 30, 2008 primarily due todecreases of approximately $3.1 million in distribution maintenance costs, ascompared to the twelve months ended September 30, 2007 when there were$4.6 million of incremental costs (and $1.2 million non-incremental treetrimming and labor costs in the first quarter of 2007) related to the January 2007ice storm. Also contributing to the decrease during the twelve months ended September 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 in the first quarter at the Iatan plant, a$0.3 million decrease in maintenance expense at the Energy Center plantcompared to the third quarter of 2007 when a bearing failure in Unit #3 in thesecond quarter of 2007 was repaired in the third quarter of 2007, and a $0.3million decrease in maintenance and repairs expense at the State Line plant.These decreases were partially offset by a $0.7 million increase intransmission expense, a $0.6 millionincrease in maintenance and repairs expense at the SLCC plant due to theextended spring maintenance outage in the second quarter of 2008, a $0.6 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, a $0.5million increase in maintenance and repairs expense at the Asbury plantand $0.4 million of ice storm related amortization.

 

Depreciation and amortization expense increased approximately $4.9million (10.6%) mainly due to $1.9 million of regulatory amortization relatedto the December 21, 2007 Missouri rate order

 

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that has been recorded as depreciation expense as well as increasedplant in service. Other taxes increased approximately $0.8 million due toincreased property taxes reflecting our additions to plant in service andincreased municipal franchise taxes.

 

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

 

***Gas Segment***

 

**Gas Segment Operating Revenuesand Sales**

 

During the third quarter of2008, our total gas segment revenues were approximately $6.1 million ascompared to $5.6 million in the third quarter of 2007, as a result of anincrease in our PGA rates and an increase in interruptible sales as compared to2007.

 

Residential and commercialsales decreased during the third quarter of 2008 as compared to the thirdquarter of 2007 due to decreases in customers. Industrial sales were up for allperiods due to the transfer of two large volume interruptible customers fromtransportation to sales service and the addition of a new large volumeinterruptible customer. During the third quarter of 2008, our PGA revenue(which represents the excess of our total gas segment revenues over therevenues we receive in our base rates) was approximately $3.4 million ascompared to $2.6 million in the third quarter of 2007, an increase ofapproximately $0.8 million. This increase was largely driven by the increase ininterruptible sales.

 

For the nine months ended September 30,2008, our total gas segment revenues were approximately $42.5 million ascompared to $41.7 million for the nine months ended September 30, 2007 astotal gas operating sales increased 5.0%, primarily due to colder weather. 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 September 30,2008, our total gas segment revenues were approximately $60.7 million ascompared to $60.3 million for the twelve months ended September 30, 2007as total gas operating sales increased 5.0%, primarily due to colder weather.The increase in sales was partially offset by a decrease of 12.66% in our PGArates.

 

Ourgas segment customer contraction for the twelve months ended September 30,2008 was 2.7%, which we believe was due to higher gas prices and generaleconomic conditions. We expect our annual gas customer growth to be up to 1%over the next several years.

 

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

 
| ** **                  | ** ** | **Total gas delivered to customers** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **bcf Sales**                                       | ** ** | **bcf Sales** | ** ** | **bcf Sales** | ** ** |
| ** **                  | ** ** | **Third**                                                | ** ** | **Third** | ** ** | ** ** | ** ** | **9 Months** | ** ** | **9 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Quarter**                                              | ** ** | **Quarter** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| ** **                  | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential                 |       | 0.11                                                     |       | 0.14 |   | (25.4 | )% | 1.96 |   | 1.87 |   | 5.0 | % | 2.93 |   | 2.77 |   | 5.7 | % |
| Commercial                  |       | 0.10                                                     |       | 0.12 |   | (18.5 | ) | 0.94 |   | 0.89 |   | 6.1 |   | 1.36 |   | 1.28 |   | 6.3 |   |
| Industrial**                |       | 0.13                                                     |       | 0.00 |   | 1,910.3 |   | 0.33 |   | 0.03 |   | 872.6 |   | 0.38 |   | 0.06 |   | 515.6 |   |
| Public  Authorities         |       | 0.00                                                     |       | 0.00 |   | 3.1 |   | 0.02 |   | 0.02 |   | 14.5 |   | 0.03 |   | 0.03 |   | 12.2 |   |
| Total retail  sales*        |       | 0.34                                                     |       | 0.27 |   | 24.5 |   | 3.26 |   | 2.81 |   | 16.1 |   | 4.70 |   | 4.14 |   | 13.5 |   |
| Transportation  sales**     |       | 0.77                                                     |       | 0.86 |   | (10.1 | ) | 3.00 |   | 3.13 |   | (5.1 | ) | 4.14 |   | 4.28 |   | (3.3 | ) |
| Total gas  operating sales* |       | 1.12                                                     |       | 1.13 |   | (1.7 | ) | 6.24 |   | 5.94 |   | 4.9 |   | 8.84 |   | 8.42 |   | 4.9 |   |

 

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| ** **                    | ** ** | **Operating  Revenues ($ in millions)** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **Third**                                    | ** ** | **Third** | ** ** | ** ** | ** ** | **9 Months** | ** ** | **9 Months** | ** ** | ** ** | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Quarter**                                  | ** ** | **Quarter** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change*** | ** ** |
| Residential                   |       | $                                            | 2.6        |   | $ | 3.2 |   | (17.5 | )% | $ | 25.7 |   | $ | 27.2 |   | (5.3 | )% | $ | 37.8 |   | $ | 39.5 |   | (4.4 | )% |
| Commercial                    |       | 1.7                                          |       | 1.8 |   | (7.3 | ) | 11.3 |   | 11.7 |   | (3.3 | ) | 16.2 |   | 16.7 |   | (2.9 | ) |
| Industrial**                  |       | 1.2                                          |       | 0.1 |   | 1,495.0 |   | 3.0 |   | 0.4 |   | 713.4 |   | 3.4 |   | 0.7 |   | 407.8 |   |
| Public  Authorities           |       | 0.0                                          |       | 0.0 |   | 8.4 |   | 0.3 |   | 0.2 |   | 2.8 |   | 0.4 |   | 0.3 |   | 0.9 |   |
| Total retail  sales***        |       | $                                            | 5.5        |   | $ | 5.1 |   | 9.0 |   | 40.3 |   | 39.5 |   | 2.1 |   | $ | 57.7 |   | $ | 57.2 |   | 0.9 |   |
| Transportation  sales**       |       | 0.5                                          |       | 0.5 |   | (8.1 | ) | 2.0 |   | 2.0 |   | (1.0 | ) | 2.7 |   | 2.8 |   | (2.6 | ) |
| Total gas  operating sales*** |       | $                                            | 6.0        |   | $ | 5.6 |   | 7.3 |   | $ | 42.3 |   | $ | 41.5 |   | 1.9 |   | $ | 60.5 |   | $ | 60.0 |   | 0.7 |   |

 

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

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

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

 

**OperatingRevenue Deductions**

 

During the third quarter of2008, EDG’s cost of natural gas sold and transported was approximately $3.4million as compared to $2.6 million in the third quarter of 2007. The increasedcosts of natural gas sold was mainly due to higher volumes of industrial salesdue to the transfer of two large volume interruptible customers fromtransportation to sales service and the addition of a new large volumeinterruptible customer. In addition, in June 2008, we increased our PGArates by 38% as compared to the previous PGA rates that had been in effectsince November 2007.

 

For the nine months ended September 30,2008, EDG’s cost of natural gas sold and transported was approximately $26.4million as compared to $26.1 million for the same period in 2007.

 

For the twelve months ended September 30,2008, EDG’s cost of natural gas sold and transported was approximately $38.0million as compared to $38.4 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 associatedwith the use of financial instruments to hedge the purchase price of naturalgas.

 

Total other operatingexpenses were $2.6 million for the third quarter of 2008 as compared to $2.1million for the same period in 2007. EDG had a net loss of $1.2 million for thethird quarter of 2008 as compared to a $0.9 million net loss for the thirdquarter of 2007.

 

For the nine months ended September 30,2008, total other operating expenses were $7.7 million as compared to $7.6million for the same period in 2007. EDG had net income of $0.6 million for thenine months ended September 30, 2008 as compared to $0.0 million in 2007.

 

For the twelve months ended September 30,2008, total other operating expenses were $10.3 million as compared to $10.3million for the same period in 2007. EDG had net income of $1.5 million for thetwelve months ended September 30, 2008 as compared to $0.5 million in2007.

 

***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 continuingoperations for our other segment for the applicable periods ended September 30,:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **(in millions)**                         | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                           |       |                             |       |                            |       |                              |       |   |   |   |   |   |   |
| Revenues                                       |       | $                                | 1.4        |                            | $          | 1.0                               |       | $ | 3.8 |   | $ | 2.7 |   | $ | 4.7 |   | $ | 3.5 |   |
| Expenses                                       |       | 1.1                              |       | 0.9                             |       | 3.0                               |       | 2.6 |   | 3.6 |   | 3.6 |   |
| Net income (loss)  from continuing operations* |       | $                                | 0.3        |                            | $          | 0.1                               |       | $ | 0.8 |   | $ | 0.1 |   | $ | 1.1 |   | $ | (0.1 | ) |

 

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**Differencescould occur due to rounding.*

 

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***ConsolidatedCompany***

 

**Income Taxes**

 

Ourconsolidated provision for income taxes decreased approximately $1.6 millionduring the third quarter of 2008 as compared to the same period in 2007,primarily resulting from lower income. Our consolidated effective federal andstate income tax rate for the third quarter of 2008 was 33.0% as compared to33.1% for the third quarter of 2007.

 

Ourconsolidated provision for income taxes decreased approximately $0.9 millionduring the nine months ended September 30, 2008 as compared to the sameperiod in 2007 primarily resulting from lower income. Our consolidatedeffective federal and state income tax rate for the nine months ended September 30,2008 was 32.3% as compared to 32.1% for the same period in 2007.

 

Ourconsolidated provision for income taxes decreased approximately $6.9 millionduring the twelve months ended September 30, 2008 as compared to twelvemonths ended September 30, 2007, primarily resulting from lower income.Our effective federal and state income tax rate for the twelve months ended September 30,2008 was 30.5% as compared to 32.7% for the same period in 2007. The effectivetax rate for the 2008 twelve month period decreased as we recognized increasedbenefits from the equity component of AFUDC and expenses related to plantremoval costs.

 

**Nonoperating Items**

 

Total allowance for funds used during construction(AFUDC) increased $1.5 million in the third quarter of 2008 as compared to2007. AFUDC increased $3.3 million during the nine months ended September 30, 2008 andincreased $3.2 million during the twelve months ended September 30,2008 as compared to the same periods in 2007 due to higher levels of constructionin each period. AFUDC is comprised of the cost of borrowed funds andthe cost of equity funds applicable to our construction program and arecapitalized as a cost of construction. This accounting practice offsets theeffect on earnings of the cost of financing current construction, and treatssuch financing costs in the same manner as construction charges for labor andmaterials.

 

Total interest charges on long-term debt increased$1.5 million (18.7%) in the third quarter of 2008, $3.4 million (14.8%) for thenine months ended September 30, 2008 and $4.6 million (15.3%) for thetwelve months ended September 30, 2008 as compared to the prior yearperiods (offset by the increased AFUDC discussed above). The increases in allthree periods reflect the interest on the $90 million principal amount of firstmortgage bonds we issued on May 16, 2008, the proceeds of which were addedto our general funds and used primarily to pay down short-term indebtednessincurred, in part, as a result of our on-going construction program. Theincreases in both the nine months ended and twelve months ended September 30,2008 periods also reflect the interest on the $80 million principal amount offirst mortgage bonds we issued on March 26, 2007, the proceeds of whichwere added to our general funds and used to pay down short-term indebtednessincurred, in part, as a result of our on-going construction program.

 

Short-term debt interest decreased $0.6million in the third quarterof 2008, $1.1million for thenine months ended September 30, 2008 and $0.9million for the twelve months ended September 30,2008 as compared to the prior year periods, reflecting decreased usage ofshort-term debt.

 

Earningsfrom discontinued operations were zero for all periods presented ending September 30,2008 as compared to approximately $0.1 million in the third quarter of 2007,$0.1 million in the nine month period ended September 30, 2007 and $0.2million in the twelve month period ended September 30, 2007, whichincluded operations and gains recognized from the sale of Fast Freedom and, inthe case of the twelve month period, Conversant.

 

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**OtherComprehensive Income (Loss)**

 

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. The fair value of open electric segment derivativecontracts decreased $34.1 million in the third quarter of 2008, reflectingfalling natural gas prices. On a year to date basis, the change in the fairmarket value of open contracts is $(0.2) million. This net change is recordedas accumulated other comprehensive income in the capitalization section of ourbalance sheet and does not affect net income or earnings per share. All ofthese contracts have been designated as cash flow hedges. The unrealized gainsand losses accumulated in other comprehensive income are reclassified to fueland purchased power, or interest expense, in the periods in which the hedgedtransaction is actually realized or no longer qualifies for hedge accounting.Effective September 1, 2008, in conjunction with the implementation of theMissouri fuel adjustment clause in the July 2008 MPSC rate order, theunrealized losses or gains from new cash flow hedges for our electric businesswill be recorded in regulatory assets or liabilities. This is in accordancewith FAS 71, given that those regulatory assets and liabilities are probable ofrecovery through our fuel adjustment mechanism. Unrealized gains and lossesfrom cash flow hedges existing at September 1, 2008 will continue to berecorded through other comprehensive income. Once settled, the realized gain orloss will be recorded as fuel expense and be subject to the fuel adjustmentclause. No interest rate derivative contracts were open or settled during theperiods shown below.

 

The following table setsforth the pre-tax gains/(losses) of our natural gas contracts for our electricsegment that have settled and been reclassified, the pre-tax change in the fairmarket value (FMV) of our open contracts and the tax effect in OtherComprehensive Income for the presented periods ended September 30:

 
| ** **                                       | ** ** | **Change in Other Comprehensive Income** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **Three Months Ended**         | ** ** | **Nine Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| **(in millions)**                           | ** ** | **2008**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Natural gas  contracts settled *(1)*             |       | $                                        | (3.7       | ) | $ | (1.2 | ) | $ | (6.3 | ) | $ | (1.2 | ) | $ | (6.6 | ) | $ | (1.3 | ) |
| Change in FMV of  open contracts for natural gas |       | $                                        | (34.1      | ) | $ | (7.1 | ) | $ | (0.2 | ) | $ | 1.5 |   | $ | 3.4 |   | $ | 0.7 |   |
| Taxes                                            |       | $                                        | 14.4       |   | $ | 3.2 |   | $ | 2.5 |   | $ | (0.1 | ) | $ | 1.2 |   | $ | 0.2 |   |
| Total change in  OCI – net of tax           |       | $                                        | (23.4      | ) | $ | (5.1 | ) | $ | (4.0 | ) | $ | 0.2 |   | $ | (2.0 | ) | $ | (0.4 | ) |

 

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*(1) Reflected in fuel expense*

 

Our average cost for ouropen financial natural gas hedges increased from $5.864/Dth at June 30,2008 to $6.162/Dth at September 30, 2008. The significant decrease in OCIoffsets last quarter’s significant increase. As a result, the year-to-datebasis is immaterial.

 

**RATE MATTERS**

 

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

 

***Electric Segment***

 

The following table sets forth informationregarding electric and water rate increases since January 1, 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       | %             | August 23, 2008 |   |

 

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*Missouri*

 

*2006 Rate Case*

 

On February 1, 2006, we filed a request withthe MPSC for an annual increase in base rates for our Missouri electriccustomers in the amount of $29.5 million, or 9.63%. We also requestedtransition from the IEC from an earlier case to Missouri’s new fuel adjustmentmechanism. The MPSC issued an order May 2, 2006, however, ruling that wemay have the option of requesting that the IEC be terminated, but we may notrequest the implementation of an energy cost recovery mechanism while thecurrent IEC is effective. The MPSC issued an order on December 21, 2006granting us an annual increase of $29.4 million, or 9.96%, with an effectivedate of January 1, 2007 and eliminating the IEC. Pursuant to this order,the collected IEC was not refunded. The increase included an authorized returnon equity of 10.9% and included our fuel and energy costs as a component ofbase electric rates. This order also allowed deferral of any otherpostretirement benefits that are different from those allowed recovery in thisrate case. This treatment is similar to treatment afforded pension costs in ourMarch 2005 rate case. This order also approved regulatory treatment ofadditional liabilities arising from the adoption of FAS 158. We also agreed towrite 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 authorized increase in annualrevenues includes $19.4 million resulting from an increase in base rates and$10.4 million resulting from “regulatory amortization.” The regulatoryamortization, which is treated as additional book depreciation for rate-makingpurposes and is so reflected in the financial statements, was granted toprovide additional cash flow to enhance the financial support for our currentgeneration expansion plan. This regulatory amortization is related to ourinvestment in Iatan 2 and also includes our Riverton V84-3A2 combustion turbine(Unit 12) and the environmental improvements and upgrades at Asbury and Iatan1, all of which are part of the Experimental Regulatory Plan approved by theMPSC subject to subsequent prudency review of actual expenditures. Amountsgranted as regulatory amortization will reduce our rate base used indetermining our base rates in subsequent rate cases.

 

On March 19, 2007,the OPC filed a Petition for Writ of Mandamus with the Missouri Supreme Courtseeking an order requiring the 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, theSupreme 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 of the order.The Court also did not consider the underlying tariffed rates which continue inforce and in effect.

 

Acting upon the opinion ofthe Missouri Supreme Court, the MPSC issued an order on December 4, 2007,effective December 14, 2007, vacating the December 29, 2006 order andre-approving the tariffs and the same resulting increase in rates. The OPC andintervenors 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.

 

On March 26, 2008,the MPSC issued its Order Granting Reconsideration of Report and Order, to beeffective April 5, 2008, and its Report and Order Upon Reconsideration, tobe effective April 5, 2008, in which the MPSC made additional findings andreaffirmed the rate increase originally authorized in December of 2006. Inthis order, the MPSC made two adjustments. An increase in the return on ratebase was offset by a decrease in the regulatory amortization from $10.4 millionto $10.2 million. The OPC and intervenors Praxair and Explorer Pipeline filedapplications for rehearing regarding this Report and Order UponReconsideration, raising objections to many of the issues addressed in theorder, including but not limited to issues relating to return on equity, fueland purchased power expense and, in the case of the intervenors, the proprietyof regulatory 

 

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amortization under Missouri public utility law.These applications for rehearing remain pending before the MPSC.

 

On March 18, 2008,the OPC filed a Petition for Writ of Mandamus with the Missouri Supreme Court,purportedly to force the MPSC to comply with the Missouri Supreme Court’sopinion and order of October 30, 2007. On October 14, 2008, theMissouri Supreme Court issued a ruling directing the MPSC to comply with theCourt’s previous mandate and opinion. The Court took no position on the effectsuch action has on any tariffs the MPSC has approved. It is our position thatthe opinion and mandate do not impact the monies collected under the filedtariffs.

 

*2007 Rate Case*

 

On October 1, 2007, we filed a request with theMPSC for an annual increase in base rates for our Missouri electric customersin the amount of $34.7 million, or 10.11%. We requested recovery of ourinvestment in the new 150-megawatt combustion turbine, Unit 12, at our Rivertonplant, capital expenditures associated with the construction of a selectivecatalytic reduction system at our Asbury Plant, capital expenditures andexpenses related to the January and December 2007 ice storms andother changes in our underlying costs. We also requested implementation of afuel adjustment clause in Missouri which would permit the distribution toMissouri customers of changes in fuel and purchased power costs.

 

The MPSC issued an order on July 30, 2008,granting an annual increase in revenues for our Missouri electric customers inthe amount of $22.0 million, or 6.7%, based on a 10.8% return on equity. Thenew rates went into effect August 23, 2008.

 

The order contains twocomponents. The first component provides an addition to base rates ofapproximately $27.7 million. This increase in base rates was partially offsetby a $5.7 million reduction to regulatory amortization, which is the secondcomponent. Regulatory amortization provides us additional cash through ratesduring the current construction cycle. This construction, which is part of ourlong-range plan to ensure reliability, includes the facilities at the RivertonPower Plant and Iatan 2 Power Plant, as well as environmental improvements atthe Asbury Power Plant and at Iatan 1. The regulatory amortization is nowapproximately $4.5 million annually and is recorded as depreciation expense.

 

The MPSC also authorized afuel adjustment clause for our Missouri customers effective September 1,2008. The MPSC established a base rate for the recovery of fuel and purchasedpower expenses used to supply energy. The clause permits the distribution tocustomers of 95% of the changes in fuel and purchased power costs above orbelow the base. Off-system sales margins are also part of the fuel adjustmentmechanism. As a result, the off-system sales margin flows back to the customer.Rates related to the fuel adjustment clause will be modified twice a yearsubject to the review and approval by the MPSC. In accordance with FAS 71, 95%of the difference between the actual cost of fuel and purchased power and thebase cost of fuel and purchased power recovered from our customers is recordedas an adjustment to fuel and purchased power expense with a correspondingregulatory asset or a regulatory liability. If the actual fuel and purchasedpower costs are higher or lower than the base fuel and purchased power costsbilled to customers, 95% of these amounts will be recovered or refunded to ourcustomers when the fuel adjustment clause is modified.

 

The MPSC order approved aStipulation and Agreement providing for the recovery of deferred expenses ofapproximately $14.2 million over a five year period for the 2007 ice storms. Inaddition, the MPSC order required the implementation of a two-way trackingmechanism for recovery of the costs relating to the new MPSC rules oninfrastructure inspection and vegetation management. The mechanism authorizedby the MPSC creates a regulatory liability in any year we spend less than thetarget amount, which has been set at $8.6 million for our Missourijurisdiction, and a regulatory asset if we spend more than the target amount.Any regulatory asset and liability amounts created using the tracking mechanismwill then be netted against each other and taken into account in our next ratecase. The MPSC also approved Stipulations and Agreements providing for thecontinuation of the pension and other post-retirement employee benefitstracking mechanism established in our 2006 and 2007 Missouri rate orders.

 

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The OPC and intervenorsPraxair, Inc. and Explorer Pipeline Company filed applications forrehearing with the MPSC regarding this order. The MPSC subsequently deniedthose applications. On October 6, 2008, the OPC and intervenors Praxair, Inc.and Explorer Pipeline Company, filed appeals with the Cole County CircuitCourt.

 

*Kansas*

 

In accordance with our last Kansas rate case, wewere to seek approval of an explicit hedging program in a separate docket filedwith the Kansas Corporation Commission (KCC) by March 1, 2006. Werequested and received an extension until April 1, 2006 and made thisfiling 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 Cost Adjustmentclause implemented in the last Kansas rate case and future base electric ratesin Kansas.

 

*IceStorm Recovery*

 

We filed applications forAccounting Authority Orders in Oklahoma and Kansas and filed a request forstorm recovery in Arkansas respecting costs incurred due to the two major icestorms in 2007. On May 23, 2008, the Arkansas Public Service Commissionissued an Order allowing us to defer approximately $0.4 million ofextraordinary incremental expenses incurred as a result of the 2007 ice stormsas a regulatory asset and amortize such costs over a 5 year period beginningwith the first full month following the storms. On June 24, 2008, theState Corporation Commission of the State of Kansas issued an Order approvingour application for an accounting order to accumulate and defer for recovery infuture rate case proceedings, approximately $1.1 million of 2007 ice stormcosts as a regulatory asset to be amortized over a 10 year period. On June 25,2008, the Corporation Commission of Oklahoma issued a Final Order approving aJoint Stipulation and Settlement Agreement giving us permission to defer andrecord approximately $0.5 million of 2007 ice storm costs as a regulatory assetand authorizing recovery of the regulatory asset over a five year period, via arider effective July 1, 2008. We were granted rate recovery of theMissouri 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, The Empire District GasCompany acquired the Missouri natural gas distribution operations of Aquila, Inc.(Missouri Gas). The Missouri Gas properties consist of 44 Missouri communitiesin northwest, north central and west central Missouri. The rates, excluding thecost of gas, are the same as had been in effect at Aquila, Inc. We agreedin the unanimous stipulation and agreement filed with the MPSC on March 1,2006 and approved on April 18, 2006, to not file a rate increase requestfor non-gas costs for a period of 36 months following the closing date of theacquisition. We have also agreed to use Aquila Inc.’s current depreciationrates and were allowed to adopt the pension cost recovery methodology approvedin our electric Missouri Rate Case effective March 27, 2005.

 

A PGA clause is included in our gas rates whichallows for the over recovery or under recovery of actual gas costs compared tothe cost of gas in the PGA rate. This PGA clause allows us to make rate changesperiodically (up to four times) throughout the year in response to weather conditions,natural gas prices and supply demands, rather than in one possibly extremechange per year. The Actual Cost Adjustment (ACA) is a scheduled yearly filingwith the MPSC filed between October 15 and November 4 each year. Thisfiling establishes the amount to be recovered from customers for the over/underrecovered yearly amounts. A PGA is included in the ACA filing. An optional PGAfiling without the ACA can be filed up to three times each year, provided afiling does not occur within 60 days of a previous filing. Our current PGAfiling was effective June 6, 2008. On October 28, 2008, we filed anew ACA and PGA with the MPSC to be effective November 12, 2008.

 

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**COMPETITION**

 

**Electric Segment**

 

*SPP-RTO*

 

On February 1, 2007, the Southwest Power Pool(SPP) regional transmission organization (RTO) launched its energy imbalanceservices market (EIS). With the implementation of the SPP RTO EIS market andtransmission expansion plans of the SPP RTO, we anticipate that our continuedparticipation in the SPP will provide long-term benefits to our customers andother stakeholders. Our experience to date in the EIS market indicates that wehave received benefits through our participation.

 

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

 

We will continue to actively engage with the SPPRTO, other members of the SPP and staffs of our state commissions to evaluatethe impact and value of EIS market participation.

 

On August 15, 2008 the SPP filed proposedrevisions to its Order 888 open access transmission pro forma tariff (OATT) toestablish a process for including a “balanced portfolio” of economictransmission upgrades in the annual SPP Transmission Expansion Plan. The cost ofsuch upgrades will be recovered through a regional rate allocated to SPPmembers based on their load ratio share within SPP’s market area of thebalanced portfolio’s cost. On October 16, 2008, the FERC accepted thebalanced portfolio approach, which sets forth the selection process of a groupof projects and regional cost allocation rules based on projected benefitsand allocated costs over a ten year period. The plan will be balanced if theportfolio is cost beneficial for each zone, including ours, within the SPP. Abalanced portfolio could include projects below the 345 kv level (which is thebright line voltage level for projects to be included in the portfolio) toincrease benefits to a particular zone to achieve balance of benefits and costsover the ten year study period. We are involved in the discussions regardingthe proposed projects, estimated benefits, and costs within the first balancedportfolio. However, we are uncertain, at this time, what the benefits and costsof the first balanced portfolio will be for us. It is anticipated that the SPPBoard of Directors will approve the first SPP RTO balanced portfolio ofeconomic transmission projects sometime in 2009.

 

*FERC Market Power Order*

 

In April and July 2004, the FERC issuedorders regarding new testing standards for assessing market power by entitiesthat have wholesale market-based rate tariffs filed with the FERC. Theparameters included in the tests are such that most investor owned electricutilities fail the test within their own control area and are subject to arebuttable presumption of market power. Entities with wholesale market basedrates tariffs are subject to a triennial filing to test for market power andare required to apply the new testing criteria. The FERC determination of marketpower would result in the inability for a utility to continue to charge suchmarket-based rates. In September 2004, we submitted amended and updatedmarket power analyses filings.

 

On March 3, 2005, the FERC issued an ordercommencing an investigation to determine if we had market power within ourcontrol area based on our failure to meet one of the FERC’s wholesale marketshare screens. We filed responses to that order in May and June 2005and in early January 2006. On August 15, 2006, the FERC issued itsorder accepting Empire’s proposed mitigation to become effective May 16,2005, subject to a further compliance filing as directed in the order. Relyingon a series of orders issued since March 17, 2006 in other proceedings,the FERC rejected our tariff language and directed us to file revisions to ourmarket-based tariff to provide that service under the tariff applies only tosales outside our control area. The FERC directed us to make refunds, withinterest, by September 15, 2006, which we initially estimated to beapproximately 

 

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$0.6million (excluding interest) covering over a thousand hourly energy sales sinceMay 16, 2005 to numerous counterparties external to our system forwholesale sales made at market prices above the cost based prices permittedunder the mitigation proposal accepted by the FERC. The refund obligationapplied to certain wholesale power sales made “inside” our service area atmarket based rates, even though consumption of the energy occurred outside ourservice area. In response to the order, we filed a Motion For Extension of timeand expedited treatment regarding the refund and requested that such refund bedelayed until 15 days after the FERC’s order on our rehearing request. On September 5,2006, the FERC granted the Motion For Extension, as requested.

 

On September 14, 2006, we filed a Request ForRehearing of the FERC’s August 15, 2006 order regarding the refund andmarket power mitigation we had proposed. We requested a rehearing and a waiverof the refund requirement in its entirety. On April 25, 2008, the FERCissued an Order that rejected our Request For Rehearing, required a ComplianceFiling of our market based rate tariff and ordered refunds with interest. Wemade our Compliance Filing and issued refunds totaling $340,608, includinginterest, on May 27, 2008. We were also required to file an informationalrefund report with the FERC on June 26, 2008.

 

As a result of the FERC’s requirement for us toissue the aforementioned refunds and our belief that the FERC erred in itsorders, on June 30, 2008 we initiated a Petition For Review of the FERC’sorders on our market based rate refunds in the United States Court of Appeals –District of Columbia Circuit (DC Circuit). We requested and received approvalfor a consolidation of our Petition with the similar petition of Westar Energy.If a decision is reached in our favor, the DC Circuit will likely remand theFERC’s orders back to the FERC for reconsideration. It is expected that thejudicial review of the Petitions will take several months.

 

*Other FERC Rulemaking*

 

On June 21, 2007, the FERC issued an AdvanceNotice of Proposed Rulemaking (ANOPR) on potential reforms to improveoperations in organized wholesale power markets, such as the SPP RTO in whichwe participate. On October 16, 2008, the FERC issued its Final Order onWholesale Competition in Regions with Organized Electric Markets. The FinalOrder will affect us as it directly affects the SPP RTO. The Final Orderaddresses four key areas for amending its regulations in Wholesale Competitionfor RTOs and Independent System Operators (ISOs): (1) demand response andmarket pricing during periods of operating reserve shortage; (2) long-termpower contracting; (3) market monitoring policies; and (4) theresponsiveness of RTOs and ISOs to stakeholders and customers. We will beinvolved in the SPP RTOs discussions on compliance of these new rules.

 

OnJanuary 28, 2008, we made a filing at the FERC related to certain non-rateand ministerial revisions to our currently effective wholesale Open AccessTransmission Tariff (OATT), which included the elimination of certain tariffsections that have become moot in light of our membership in the SPP, as wellas correction of the formatting of our OATT for consistency with a previousFERC order, Order No. 614.

 

OnApril 2, 2008, the FERC accepted our revised OATT, as filed, with aneffective date of January 29, 2008.

 

Gas Segment

 

Non-residential gascustomers whose annual usage exceeds certain amounts may purchase natural gasfrom a source other than EDG. EDG does not have a non-regulated energymarketing service that sells natural gas in competition with outside sources.EDG continues to receive non-gas related revenues for distribution and otherservices if natural gas is purchased from another source by our eligiblecustomers.

 

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**LIQUIDITY AND CAPITALRESOURCES**

 

Weused approximately $162.1 million of cash for regulated capital expendituresduring the nine months ended September 30. 2008. Our primary sources ofcash flow for these expenditures during the nine months ended September 30,2008 were $86.8 million in internally generated funds from continuingoperations and $90.0 million in gross proceeds from first mortgage bonds.

 

**CashProvided by Operating Activities**

 

Ournet cash flows provided by continuing operating activities were $86.8 millionduring the nine months ended September 30, 2008 compared to $80.3 millionfor the same period in 2007. Net income decreased $1.7 million. Changes inbalance sheet items, primarily accounts receivable, positively impacted cashflow this year compared to last year.

 

**CapitalRequirements and Investing Activities**

 

Our capital expenditures totaled approximately $48.5 million during thethird quarter of 2008 compared to approximately $48.3 million for the sameperiod in 2007. Our capital expenditures totaled approximately $163.6 millionduring the nine months ended September 30, 2008 compared to approximately$133.8 million for the same period in 2007. These capital expenditures includeAFUDC, capital expenditures to retire assets and benefits from salvage.

 

Ournet cash flows used in investing activities increased $31.5 million during thenine months ended September 30, 2008 as compared to the same period in2007, primarily reflecting construction expenditures for Plum Point Unit 1 andIatan 2, 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 nine monthsended September 30, 2008 is as follows:

 
| ** **                                                                                          | ** ** | **Capital Expenditures**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **Quarter Ended**           | ** ** | **Nine months Ended** | ** ** |
| **(in millions)**                                                                              | ** ** | **September 30, 2008** | ** ** | **September 30, 2008** | ** ** |
| Distribution and  transmission system additions                                                     |       | $                                | 12.7       |   | $ | 35.6 |   |
| New Generation –  Plum Point Energy Station                                                    |       | 7.4                              |       | 25.7 |   |
| New Generation –  Iatan 2                                                                      |       | 19.9                             |       | 61.1 |   |
| Storms(1)                                                                                           |       | 0.4                              |       | 4.2 |   |
| Additions and  replacements – Asbury                                                           |       | 0.1                              |       | 4.0 |   |
| Additions and  replacements – Iatan 1                                                          |       | 6.6                              |       | 21.0 |   |
| Additions and replacements  – State Line Unit 1, SLCC, Riverton, Energy Center and Ozark Beach |       | 0.9                              |       | 1.5 |   |
| Gas segment  additions and replacements                                                             |       | 0.6                              |       | 1.4 |   |
| Transportation                                                                                      |       | 0.9                              |       | 1.1 |   |
| Other (including  retirements and salvage -net)                                                     |       | 0.4                              |       | 1.8 |   |
| **Subtotal**                                                                                        |       | 49.9                             |       | 157.3 |   |
| Other capital  expenditures (primarily fiber optics)                                                |       | 0.5                              |       | 1.6 |   |
| **Subtotal  capital expenditures incurred(2)**                                                      |       | $                                | 50.4       |   | $ | 158.9 |   |
| Change in  capital expenditures accrual(3)                                                          |       | (0.2                             | )          | 8.9 |   |
| Less AFUDC  equity capitalized                                                                      |       | (1.7                             | )          | (4.3 | ) |
| **Total  cash outlay**                                                                              |       | $                                | 48.5       |   | $ | 163.6 |   |

 

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(1) Forthe nine months ended September 30, 2008, storm costs of $0.1 million arespecifically related to capital expenditures in the first quarter of 2008associated with the December 2007 ice storm and $2.4 million arespecifically related to capital expenditures in the second quarter of 2008associated with tornadoes in May 2008.

(2) Expenditures incurred represent the totalcost for work completed for the projects during the periods ending September 30,2008. Discussion of capital expenditures throughout this 10-Q is presented onthis basis.

(3) Adjustment to reflect actual cash flowrelated to capital expenditures. These are the net of expenditures unpaid atthe end of the reporting period and expenditures paid in the reporting period,but incurred prior to the reporting period.

 

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Approximately20% of our cash requirements for capital expenditures during the third 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 20%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 additionalamounts needed beyond those provided by operating activities for such capitalexpenditures. We will continue to utilize short-term debt as needed to supportnormal operations or other temporary requirements. For further information seeNote 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 an updated forecast from KCP&L in thesecond quarter of 2008, we updated these estimated expenditures to beapproximately $72.0 million, $67.5 million and $36.1 million in 2008, 2009 and2010, respectively. We had originally estimated our capital expenditures forour share of the Iatan 1 environmental upgrades to be approximately $26.7million, $1.4 million and $0.3 million in 2008, 2009 and 2010, respectively,but now estimate these expenditures to be approximately $25.7 million in 2008and $17.5 million in 2009 with an in-service date of February 2009.

 

Ouroriginal 2008 capital budget totaled approximately $189.3 and we believe thisto still be an appropriate estimate. We have recorded approximately $4 millionin significant unplanned storm expense in 2008. However, delays until 2009 toone of our transmission projects is likely to offset the storm expenses by theend of the year. We have also updated our 2009 estimates for Iatan 2 (based onthe second quarter updated forecast from KCP&L) and Plum Point based onrevisions to our internal costs for these projects. In addition, our 2009capital budget includes $7.4 million for upgrades needed to a turbine and twogenerators at our SLCC plant. The other significant increase in our 2009budgeted capital expenditures is due to the 2008 transmission project delaynoted above that is moving dollars into 2009. Further evaluation of ourresource plans delayed installation of a combustion turbine from 2011 to 2014.Our total capital expenditures (excluding AFUDC and expenditures to retireassets) for the next three years as estimated for planning purposes are $174.8million in 2009, $117.5 million in 2010 and $79.5 million in 2011.

 

**FinancingActivities**

 

Ournet cash flows received from financing activities were $80.9 million in the ninemonths ended September 30, 2008 compared to $44.2 million in 2007.

 

OnMay 16, 2008, we issued $90 million principal amount of first mortgagebonds. The net proceeds of approximately $89.4 million, less $0.4 million of legal and other financing fees,were added to our general funds and used primarily to pay down short-termindebtedness incurred, in part, as a result of our on-going constructionprogram.

 

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 $3.3million). The proceeds were added to our general funds and used to paydown short-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 a $400 million shelf registration statement with the SEC, which becameeffective on August 15, 2008, covering our common stock, unsecured debtsecurities, preference stock, first mortgage bonds (subject to likely receiptof state regulatory approvals) and trust preferred 

 

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securities.We plan to use a portion of the proceeds from issuances under this shelf tofund a portion of 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 of constructionexpenditures we owe for Plum Point Unit 1 and was $23.0 million as of November 1,2008. The unallocated credit facility is used for working capital, generalcorporate purposes and to back-up our use of commercial paper. This facilityrequires our total indebtedness (which does not include our note payable to thesecuritization trust) to be less than 62.5% of our total capitalization at theend of each fiscal quarter and our EBITDA (defined as net income plus interest,taxes, depreciation and amortization) to be at least two times our interestcharges (which includes interest on the note payable to the securitizationtrust) for the trailing four fiscal quarters at the end of each fiscal quarter.Failure to maintain these ratios will result in an event of default under thecredit facility and will prohibit us from borrowing funds thereunder. As of September 30,2008, we are in compliance with these ratios. This credit facility is alsosubject to cross-default if we default on in excess of $10 million in theaggregate on our other indebtedness. This arrangement does not serve to legallyrestrict the use of our cash in the normal course of operations. There were$37.0 million of outstanding borrowings under this agreement at September 30,2008. In addition, $18.4 million of the availability thereunder was used atsuch date to back up our outstanding commercial 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 inthe EDE mortgage bond indenture could affect our liquidity. The EDE Mortgagecontains a requirement that for new first mortgage bonds to be issued, our netearnings (as defined in the EDE Mortgage) for any twelve consecutive monthswithin the fifteen months preceding issuance must be two times the annualinterest requirements (as defined in the EDE Mortgage) on all first mortgagebonds then outstanding and on the prospective issue of new first mortgagebonds. Our earnings for the twelve months ended September 30, 2008 wouldpermit us to issue approximately $156.7 million of new first mortgage bondsbased on this test with an assumed interest rate of 6.5%. In addition to theinterest coverage requirement, the EDE Mortgage provides that new bonds must beissued against, among other things, retired bonds or 60% of net propertyadditions. At September 30, 2008, we had retired bonds and net propertyadditions which would enable the issuance of at least $586.6 million principalamount of bonds if the annual interest requirements are met. As of September 30,2008, we are in compliance with all restrictive covenants of the EDE Mortgage.

 

Theprincipal amount of all series of first mortgage bonds outstanding at any onetime under the EDG Mortgage is limited by terms of the mortgage to $300million. Substantially all of the property, plant and equipment of The EmpireDistrict Gas Company is subject to the lien of the EDG Mortgage. The EDGMortgage contains a requirement that for new first mortgage bonds to be issued,the amount of such new first mortgage bonds shall not exceed 75% of the cost ofproperty additions acquired after the date of the Missouri Gas acquisition. Themortgage also contains a limitation on the issuance by EDG of debt (includingfirst mortgage bonds, but excluding short-term debt incurred in the ordinarycourse under working capital facilities) unless, after giving effect to suchissuance, EDG’s ratio of EBITDA (defined as net income plus interest, taxes,depreciation, amortization and certain other non-cash charges) to interestcharges for the most recent four fiscal quarters is at least 2.0 to 1.****As of September 30,2008, this test would allow us to issue new first mortgage bonds ofapproximately $2.8 million based on $3.7 million of property additions.

 

Currently,our corporate credit ratings and the ratings for our securities are as follows:

 

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| ** **                                          | ** ** | **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 athird party insurer.

 

OnMay 17, 2006, S&P lowered our long-term corporate credit rating toBBB- from BBB, senior secured debt to BBB+ from A-, senior unsecured debtrating to BB+ from BBB- and affirmed our short-term rating of A-3. S&P’sdowngrade reflected their view that our financial measures will be constrainedover the next several years by fuel and power costs that continue to exceed thelevel recoverable in rates, and by our higher-than-historical level of capitalspending, including the acquisition of Missouri Gas. S&P affirmed ourratings on June 8, 2007 and again on June 12, 2008 with a stableoutlook.

 

OnJanuary 24, 2007, Moody’s affirmed our ratings but changed their rating outlookon us from stable to negative. The change to a negative rating outlook reflectsMoody’s view on the longer-term prospects for our ratings given the sizablecapital spending program we have committed to through 2010 and the potentialfor further weakness in our credit metrics that could develop during this time.On February 14, 2008, Moody’s placed all of our ratings on review forpossible downgrade. Moody’s announced that the review would consider thecumulative impact that certain negative events, including severe weather andoperational disruptions in 2007 and 2008, have had on our cash flow and overallfinancial flexibility at the current rating level as well as consider thepotential for elevated costs related to our capital spending plan in 2008. On May 12,2008, Moody’s affirmed our ratings with a 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.At the time of the change, the negative rating outlook reflected uncertaintysurrounding the outcome of our Missouri rate filing and weakness in ourprojected financial measures relative to Fitch guidelines. Events leading tothe revision were storm damage incurred in December 2007 and the extendedAsbury coal plant outage we experienced last winter.

 

**CONTRACTUAL OBLIGATIONS**

 

Our contractual obligationshave not significantly changed at September 30, 2008, compared to December 31,2007 other 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 September 30, 2008 our retained earnings balance was $16.7 million,compared to $27.3 million as of September 30, 2007, after paying out $32.4million in dividends during the first nine months of 

 

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2008.A reduction of our dividend per share, partially or in whole, could have anadverse effect on our common stock price.

 

Our diluted earnings pershare were $0.95 for the nine months ended September 30, 2008 and were$1.09 and $1.39 for the years ended December 31, 2007 and 2006, respectively.Dividends paid per share were $0.96 for the nine months ended September 30,2008 and $1.28 for each of the years ended December 31, 2007 and 2006.

 

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 September 30, 2008,this restriction 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 September 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 September 30, 2008.

 

**RECENTLY ISSUED ACCOUNTING STANDARDS**

 

See Note 2 of “Notes to Consolidated FinancialStatements (Unaudited)”.

 

**Item 3.  Quantitativeand Qualitative Disclosures about 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 our 

 

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establishedEnergy Risk Management Policy, which typically includes entering into variousderivative transactions. We utilize derivatives to manage our gas commoditymarket risk and to help manage our exposure resulting from purchasing most ofour natural gas on the volatile spot market for the generation of power for ournative-load customers. See Note 4 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.

 

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 85% of our 2007coal supply was Western coal. We have contracts to supply fuel for our coalplants through 2011. These contracts and current inventory satisfyapproximately 100% of our anticipated fuel requirements for 2008, 95% for 2009,76% for 2010 and 28% for our 2011 requirements for our Asbury and Riverton coalplants. In order to manage our exposure to fuel prices, future coal supplieswill be acquired 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. The fueladjustment clause authorized in the recent Missouri rate case reduces the riskof fuel expense volatility. We also seek to mitigate price volatility for ourcustomers. We enter into physical forward and financial derivative contractswith counterparties relating to our future natural gas requirements that lockin prices (with respect to predetermined percentages of our expected futurenatural gas needs) in an attempt to lessen the volatility in our fuel expensefor customers and improve predictability of our fuel costs. We expect thatincreases in gas prices will be partially offset by realized gains under financialderivative transactions. As of October 17, 2008, 100%, or 1.3 million Dthsof our anticipated volume of natural gas usage for our electric operations forthe 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 September 30, 2008, our natural gas expense would increase, andincome before taxes would decrease by approximately $1.3 million based on our September 30,2008 total hedged positions for the next twelve months. However, this isprobable of recovery through the fuel adjustment clause.

 

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 October 17, 2008, we have 1.9 million Dths in storage onthe three pipelines that serve our customers. This represents 93% of ourstorage 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 yearexpected gas 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 isthe risk of financial loss to the Company if counterparties fail to performtheir contractual obligations. In order to minimize overall credit risk, wemaintain credit 

 

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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 September 30, 2008 and December 31, 2007:

 
| **(in millions)**           | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Margin deposit  assets      |       | $                                | 8.6        |                            | $          | 6.3 |   |
| Margin deposit  liabilities |       | $                                | 7.7        |                            | $          | — |   |

 

OnSeptember 30, 2008, we converted a $6.5 million letter of credit from acounterparty to cash that is included in the margin deposit liabilities amountabove of $7.7 million.

 

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 October 24, 2008, gross credit exposure related tothese transactions totaled ($9.6) million, consisting of ($2.8) million inphysical contracts losses and ($6.8) million in financial contracts losses,reflecting the unrealized gains/(losses) for contracts 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 September 30, 2008.

 

There have been no changes in our internal control over financialreporting that occurred during the third 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.**

 

Except for the new risk factor set forth below, there have been nomaterial changes to the factors disclosed in Part I, Item 1-A. RiskFactors in our Annual Report on Form 10-K for the year ended December 31,2007.

 

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**The cost and schedule of construction projects may materiallychange.**

 

Wehave entered into contracts to purchase an undivided interest in 50 megawattsof the Plum Point Energy Station’s new 665-megawatt, coal-fired generatingfacility which is being built near Osceola, Arkansas. We have also entered intoan agreement with KCP&L to purchase an undivided ownership interest in thecoal-fired Iatan 2 generating facility. We will own 12%, or approximately 100megawatts, of the 850-megawatt unit.

 

Thereare risks that actual costs may exceed budget estimates, delays may occur in obtainingpermits and materials, suppliers and contractors may not perform as requiredunder their contracts, there may be inadequate availability or increased costof qualified craft labor, the scope and timing of projects may change, andother events beyond our control may occur that may materially affect theschedule, budget and performance of these projects.

 

**Item5.  Other Information.**

 

Forthe twelve months ended September 30, 2008, our ratio of earnings to fixedcharges was 1.97x.  See Exhibit (12)hereto.

 

**Item 6.  Exhibits.**

 

(a)           Exhibits.

 

(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   |
|                   |                                                      |
| November 6,  2008 |                                                      |
|                        |                                                           |  |  |  |

 

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