**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

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** **

**FORM 10-Q**

 

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| **(Mark One)** |
|----------------|
|           |   |   |
| **x**          | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period ended September 30, 2007 or** |
| ** **     | ** ** | ** ** |
| **o**          | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934  For the transition period from                        to                      .** |

 

**Commissionfile number: 1-3368**

 

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

(Exact name ofregistrant as specified in its charter)

 

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

 

Registrant’stelephone number: **(417) 625-5100**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

 

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

As of November 1, 2007,30,546,570 shares of common stock were outstanding.

 

| ** ** |
|------------|

 

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** **

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

 

**INDEX**

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

 

2

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** **

**FORWARDLOOKING STATEMENTS**

 

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

 

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

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

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

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

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

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

•                  legislation;

•                  regulation, including environmentalregulation (such as NOx, SO2 and CO2 regulation);

•                  competition, including the implementation ofthe energy imbalance market;

•                  electric utility restructuring, includingongoing federal activities and potential state activities;

•                  the impact of electric deregulation onoff-system sales;

•                  changes in accounting requirements;

•                  other circumstances affecting anticipatedrates, revenues and costs;

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

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

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

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

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

 

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

 

We caution you that anyforward-looking statements are not guarantees of future performance and involveknown and unknown risk, uncertainties and other factors which may cause ouractual results, performance or achievements to differ materially from thefacts, results, performance or achievements we have anticipated in suchforward-looking statements.

 

3

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. ConsolidatedFinancial Statements**

 

**THE EMPIRE DISTRICT ELECTRICCOMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**

** **
| ** **                                                                                                      | ** ** | **Three Months Ended  September 30**           | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                      | ** ** | **2007**                                                      | ** **  | **2006** | ** ** |
| ** **                                                                                                      | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                        |       |                                                          |        |   |   |
| Electric                                                                                                        | ** ** | **$**                                                         | **135,459** |   | $ | 124,756 |   |
| Gas                                                                                                             | ** ** | **5,641**                                                     |        | 4,930 |   |
| Water                                                                                                           | ** ** | **521**                                                       |        | 553 |   |
| Non-regulated                                                                                                   | ** ** | **866**                                                       |        | 631 |   |
| ** **                                                                                                      |       | **142,487**                                                   |        | 130,870 |   |
| **Operating  revenue deductions:**                                                                              |       |                                                          |        |   |   |
| Fuel                                                                                                            | ** ** | **36,974**                                                    |        | 33,780 |   |
| Purchased power                                                                                                 | ** ** | **15,428**                                                    |        | 14,756 |   |
| Cost of natural  gas sold and transported                                                                       | ** ** | **2,607**                                                     |        | 2,222 |   |
| Regulated –  other                                                                                         | ** ** | **17,384**                                                    |        | 15,560 |   |
| Non-regulated –  other                                                                                     | ** ** | **357**                                                       |        | 355 |   |
| Maintenance and  repairs                                                                                        | ** ** | **6,669**                                                     |        | 5,846 |   |
| Depreciation and  amortization                                                                                  | ** ** | **13,368**                                                    |        | 9,829 |   |
| Provision for  income taxes                                                                                     | ** ** | **11,461**                                                    |        | 12,311 |   |
| Other taxes                                                                                                     | ** ** | **6,569**                                                     |        | 5,757 |   |
| ** **                                                                                                      |       | **110,817**                                                   |        | 100,416 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Operating  income**                                                                                           | ** ** | **31,670**                                                    |        | 30,454 |   |
| Other income and  (deductions):                                                                                 |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                            | ** ** | **736**                                                       |        | 44 |   |
| Interest income                                                                                                 | ** ** | **72**                                                        |        | 105 |   |
| Benefit/(provision)  for other income taxes                                                                     | ** ** | **1**                                                         |        | (134 | ) |
| Other -  non-operating expense                                                                                  | ** ** | **(200**                                                      | **)**       | (311 | ) |
| ** **                                                                                                      |       | **609**                                                       |        | (296 | ) |
| Interest  charges:                                                                                              |       |                                                          |        |   |   |
| Long-term debt                                                                                                  | ** ** | **8,059**                                                     |        | 6,879 |   |
| Note payable to  securitization trust                                                                           | ** ** | **1,063**                                                     |        | 1,063 |   |
| Short-term debt                                                                                                 | ** ** | **833**                                                       |        | 449 |   |
| Allowance for  borrowed funds used during construction                                                          | ** ** | **(1,117**                                                    | **)**       | (889 | ) |
| Other                                                                                                           | ** ** | **241**                                                       |        | 280 |   |
| ** **                                                                                                      |       | **9,079**                                                     |        | 7,782 |   |
| **Income  from continuing operations**                                                                          | ** ** | **23,200**                                                    |        | 22,376 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Earnings  (loss) from discontinued operations, net of tax**                                                   | ** ** | **111**                                                       |        | (24 | ) |
|                                                                                                            |       |                                                          |        |   |   |
| **Net  income**                                                                                                 | ** ** | **$**                                                         | **23,311**  |   | $ | 22,352 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - basic**                                               | ** ** | **30,481**                                                    |        | 30,120 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - diluted**                                             | ** ** | **30,504**                                                    |        | 30,141 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**    | ** ** | **$**                                                         | **0.76**    |   | $ | 0.74 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Earnings  from discontinued operations per weighted average share of common stock –  basic and diluted** | ** ** | **$**                                                         | **0.00**    |   | $ | 0.00 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                         | ** ** | **$**                                                         | **0.76**    |   | $ | 0.74 |   |
|                                                                                                            |       |                                                          |        |   |   |
| **Dividends  per share of common stock**                                                                        | ** ** | **$**                                                         | **0.32**    |   | $ | 0.32 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

4

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**THE EMPIRE DISTRICT ELECTRICCOMPANY**

**CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

** **
| ** **                                                                                                                       | ** ** | **Nine Months Ended  September 30,**           | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                                       | ** ** | **2007**                                                      | ** **  | **2006** | ** ** |
| ** **                                                                                                                       | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                                         |       |                                                          |        |   |   |
| Electric                                                                                                                         | ** ** | **$**                                                         | **329,900** |   | $ | 296,159 |   |
| Gas                                                                                                                              | ** ** | **41,670**                                                    |        | 6,557 |   |
| Water                                                                                                                            | ** ** | **1,425**                                                     |        | 1,407 |   |
| Non-regulated                                                                                                                    | ** ** | **2,391**                                                     |        | 1,819 |   |
| ** **                                                                                                                       |       | **375,386**                                                   |        | 305,942 |   |
| **Operating  revenue deductions:**                                                                                               |       |                                                          |        |   |   |
| Fuel                                                                                                                             | ** ** | **84,387**                                                    |        | 77,443 |   |
| Purchased power                                                                                                                  | ** ** | **55,348**                                                    |        | 48,888 |   |
| Cost of natural  gas sold and transported                                                                                        | ** ** | **26,051**                                                    |        | 2,958 |   |
| Regulated –  other                                                                                                          | ** ** | **52,958**                                                    |        | 42,982 |   |
| Non-regulated –  other                                                                                                      | ** ** | **1,192**                                                     |        | 971 |   |
| Maintenance and  repairs                                                                                                         | ** ** | **23,682**                                                    |        | 16,205 |   |
| Depreciation and  amortization                                                                                                   | ** ** | **39,147**                                                    |        | 28,469 |   |
| Provision for  income taxes                                                                                                      | ** ** | **15,893**                                                    |        | 17,505 |   |
| Other taxes                                                                                                                      | ** ** | **19,022**                                                    |        | 15,259 |   |
| ** **                                                                                                                       |       | **317,680**                                                   |        | 250,680 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Operating  income**                                                                                                            | ** ** | **57,706**                                                    |        | $ | 55,262 |   |
| Other income and  (deductions):                                                                                                  | ** ** | ** **                                                    | ** **  | ** ** | ** ** |
| Allowance for  equity funds used during construction                                                                             | ** ** | **2,294**                                                     |        | 166 |   |
| Interest income                                                                                                                  | ** ** | **254**                                                       |        | 298 |   |
| Benefit/(provision)  for other income taxes                                                                                      | ** ** | **22**                                                        |        | (82 | ) |
| Other -  non-operating expense                                                                                                   | ** ** | **(685**                                                      | **)**       | (752 | ) |
| ** **                                                                                                                       |       | **1,885**                                                     |        | (370 | ) |
| Interest charges:                                                                                                                |       |                                                          |        |   |   |
| Long-term debt                                                                                                                   | ** ** | **23,063**                                                    |        | 19,069 |   |
| Note payable to  securitization trust                                                                                            | ** ** | **3,188**                                                     |        | 3,188 |   |
| Short-term debt                                                                                                                  | ** ** | **2,175**                                                     |        | 1,701 |   |
| Allowance for  borrowed funds used during construction                                                                           | ** ** | **(3,237**                                                    | **)**       | (1,844 | ) |
| Other                                                                                                                            | ** ** | **819**                                                       |        | 801 |   |
| ** **                                                                                                                       |       | **26,008**                                                    |        | 22,915 |   |
| **Income  from continuing operations**                                                                                           | ** ** | **33,583**                                                    |        | 31,977 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Earnings  (loss) from discontinued operations, net of tax**                                                                    | ** ** | **63**                                                        |        | (896 | ) |
|                                                                                                                             |       |                                                          |        |   |   |
| **Net  income**                                                                                                                  | ** ** | **$**                                                         | **33,646**  |   | $ | 31,081 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - basic**                                                                | ** ** | **30,388**                                                    |        | 27,628 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - diluted**                                                              | ** ** | **30,409**                                                    |        | 27,645 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Earnings  from continuing operations per weighted average share of common stock– basic  and diluted**                     | ** ** | **$**                                                         | **1.11**    |   | $ | 1.15 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Earnings  (loss) from discontinued operations per weighted average share of common  stock – basic and diluted** | ** ** | **$**                                                         | **0.00**    |   | $ | (0.03 | ) |
|                                                                                                                             |       |                                                          |        |   |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                                          | ** ** | **$**                                                         | **1.11**    |   | $ | 1.12 |   |
|                                                                                                                             |       |                                                          |        |   |   |
| **Dividends  per share of common stock**                                                                                         | ** ** | **$**                                                         | **0.96**    |   | $ | 0.96 |   |
| ** **                                                                                                                       | ** ** | ** **                                                    | ** **  | ** ** | ** ** |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

5

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**THE EMPIRE DISTRICT ELECTRICCOMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                                                                                             | ** ** | **Twelve Months Ended**                             | ** **  |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                             | ** ** | **September 30,**                                        | ** **  |
| ** **                                                                                                             | ** ** | **2007**                                                      | ** **  | **2006** | ** ** |
| ** **                                                                                                             | ** ** | **(000’s except per share amounts)** | ** **  |
| **Operating  revenues:**                                                                                               |       |                                                          |        |   |   |
| Electric                                                                                                               | ** ** | **$**                                                         | **416,394** |   | $ | 381,714 |   |
| Gas                                                                                                                    | ** ** | **60,258**                                                    |        | 6,557 |   |
| Water                                                                                                                  | ** ** | **1,861**                                                     |        | 1,770 |   |
| Non-regulated                                                                                                          | ** ** | **3,102**                                                     |        | 2,376 |   |
| ** **                                                                                                             |       | **481,615**                                                   |        | 392,417 |   |
| **Operating  revenue deductions:**                                                                                     |       |                                                          |        |   |   |
| Fuel                                                                                                                   | ** ** | **100,899**                                                   |        | 105,606 |   |
| Purchased power                                                                                                        | ** ** | **72,799**                                                    |        | 65,571 |   |
| Cost of natural  gas sold and transported                                                                              | ** ** | **38,378**                                                    |        | 2,959 |   |
| Regulated –  other                                                                                                | ** ** | **70,068**                                                    |        | 55,925 |   |
| Non-regulated –  other                                                                                            | ** ** | **1,558**                                                     |        | 1,299 |   |
| Maintenance and  repairs                                                                                               | ** ** | **30,626**                                                    |        | 21,918 |   |
| Loss on plant  disallowance                                                                                            | ** ** | **828**                                                       |        | - |   |
| Depreciation and  amortization                                                                                         | ** ** | **49,070**                                                    |        | 37,552 |   |
| Provision for  income taxes                                                                                            | ** ** | **20,335**                                                    |        | 18,125 |   |
| Other taxes                                                                                                            | ** ** | **24,790**                                                    |        | 19,921 |   |
| ** **                                                                                                             |       | **409,351**                                                   |        | 328,876 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Operating  income**                                                                                                  | ** ** | **72,264**                                                    |        | 63,541 |   |
| Other income and  (deductions):                                                                                        |       |                                                          |        |   |   |
| Allowance for  equity funds used during construction                                                                   | ** ** | **3,533**                                                     |        | 361 |   |
| Interest income                                                                                                        | ** ** | **344**                                                       |        | 469 |   |
| Benefit/(provision)  for other income taxes                                                                            | ** ** | **120**                                                       |        | (102 | ) |
| Other –  non-operating expense                                                                                    | ** ** | **(894**                                                      | **)**       | (983 | ) |
| ** **                                                                                                             |       | **3,103**                                                     |        | (255 | ) |
| Interest  charges:                                                                                                     |       |                                                          |        |   |   |
| Long-term debt                                                                                                         | ** ** | **29,941**                                                    |        | 25,008 |   |
| Note payable to  securitization trust                                                                                  | ** ** | **4,250**                                                     |        | 4,250 |   |
| Short-term debt                                                                                                        | ** ** | **2,750**                                                     |        | 1,726 |   |
| Allowance for  borrowed funds used during construction                                                                 | ** ** | **(4,243**                                                    | **)**       | (1,949 | ) |
| Other                                                                                                                  | ** ** | **1,035**                                                     |        | 966 |   |
| ** **                                                                                                             |       | **33,733**                                                    |        | 30,001 |   |
| **Income  from continuing operations**                                                                                 | ** ** | **41,634**                                                    |        | 33,285 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Earnings  (loss) from discontinued operations, net of tax**                                                          | ** ** | **211**                                                       |        | (938 | ) |
|                                                                                                                   |       |                                                          |        |   |   |
| **Net  income**                                                                                                        | ** ** | **$**                                                         | **41,845**  |   | $ | 32,347 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - basic**                                                      | ** ** | **30,341**                                                    |        | 27,228 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Weighted  average number of common shares outstanding - diluted**                                                    | ** ** | **30,361**                                                    |        | 27,244 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Earnings  from continuing operations per weighted average share of common  stock– basic and diluted**           | ** ** | **$**                                                         | **1.37**    |   | $ | 1.22 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Earnings  (loss) from discontinued operations per weighted average share of common  stock – basic and diluted** | ** ** | **$**                                                         | **0.01**    |   | $ | (0.03 | ) |
|                                                                                                                   |       |                                                          |        |   |   |
| **Total  earnings per weighted average share of common stock – basic and diluted**                                | ** ** | **$**                                                         | **1.38**    |   | $ | 1.19 |   |
|                                                                                                                   |       |                                                          |        |   |   |
| **Dividends  per share of common stock**                                                                               | ** ** | **$**                                                         | **1.28**    |   | $ | 1.28 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

6

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**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**

 
| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**           | ** ** |
| ** **                                                                                                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**               | ** ** |
|                                                                                                             |       |                             |       |   |   |
| Net income                                                                                                       | ** ** | **$**                            | **23,311** |   | $ | 22,352 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability |       | **(1,202**                       | **)**      | (463 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **(7,071**                       | **)**      | (4,320 | ) |
| Income taxes                                                                                                     | ** ** | **3,152**                        | ** ** | 1,822 |   |
| Net change in  unrealized losses on derivative contracts                                                         | ** ** | **(5,121**                       | **)**      | (2,961 | ) |
|                                                                                                             |       |                             | ** ** |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                            | **18,190** | ** ** | $ | 19,391 |   |

 
| ** **                                                                                                       | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                       | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**              | ** ** |
|                                                                                                             |       |                            |       |   |   |
| Net income                                                                                                       | ** ** | **$**                           | **33,646** | ** ** | $ | 31,081 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability |       | **(1,254**                      | **)**      | (1,268 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **1,541**                       | ** ** | (12,693 | ) |
| Income taxes                                                                                                     | ** ** | **(109**                        | **)**      | 5,319 |   |
| Net change in  unrealized gain/(loss) on derivative contracts                                                    | ** ** | **178**                         | ** ** | (8,642 | ) |
|                                                                                                             |       |                            | ** ** |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                           | **33,824** | ** ** | $ | 22,439 |   |

 
| ** **                                                                                                       | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,**            | ** ** |
| ** **                                                                                                       | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| ** **                                                                                                       | ** ** | **($-000’s)**                | ** ** |
|                                                                                                             |       |                              |       |   |   |
| Net income                                                                                                       | ** ** | **$**                             | **41,845** |   | $ | 32,347 |   |
| Reclassification  adjustments for gains included in net income or reclassified to regulatory  asset or liability |       | **(1,306**                        | **)**      | (2,010 | ) |
| Net change in  fair market value of open derivative contracts for period                                         | ** ** | **629**                           | ** ** | (16,827 | ) |
| Income taxes                                                                                                     | ** ** | **258**                           | ** ** | 7,143 |   |
| Net change in  unrealized losses on derivative contracts                                                         | ** ** | **(419**                          | **)**      | (11,694 | ) |
|                                                                                                             |       |                              |       |   |   |
| **Comprehensive  income**                                                                                        | ** ** | **$**                             | **41,426** |   | $ | 20,653 |   |

 

*See accompanying Notes toConsolidated Financial Statements*

 

7

----

 

**THEEMPIRE DISTRICT ELECTRIC COMPANY**

**CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

 
| ** **                                            | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **($-000’s)**               | ** ** |
| **Assets**                                            |       |                             |       |                            |       |
| Plant and property, at original cost:                 |       |                             |       |                            |       |
| Electric                                              |       | $                                | 1,399,834  |                            | $          | 1,291,533 |   |
| Gas                                                   |       | 54,130                           |       | 51,936                          |       |
| Water                                                 |       | 10,052                           |       | 10,126                          |       |
| Non-regulated                                         |       | 23,239                           |       | 21,242                          |       |
| Construction work in progress                         |       | 139,631                          |       | 111,918                         |       |
|                                                  |       | 1,626,886                        |       | 1,486,755                       |       |
| Accumulated depreciation and amortization             |       | 489,818                          |       | 456,635                         |       |
|                                                  |       | 1,137,068                        |       | 1,030,120                       |       |
|                                                  |       |                             |       |                            |       |
| Current assets:                                       |       |                             |       |                            |       |
| Cash and cash equivalents                             |       | 6,312                            |       | 12,303                          |       |
| Accounts receivable – trade, net                 |       | 45,002                           |       | 33,477                          |       |
| Accrued unbilled revenues                             |       | 14,602                           |       | 14,866                          |       |
| Accounts receivable – other                      |       | 13,748                           |       | 13,217                          |       |
| Fuel, materials and supplies                          |       | 46,873                           |       | 46,613                          |       |
| Unrealized gain in fair value of derivative contracts |       | 3,131                            |       | 3,819                           |       |
| Prepaid expenses                                      |       | 4,129                            |       | 3,711                           |       |
| Discontinued operations                               |       | —                           |       | 94                              |       |
|                                                  |       | 133,797                          |       | 128,100                         |       |
| Noncurrent assets and deferred charges:               |       |                             |       |                            |       |
| Regulatory assets                                     |       | 91,935                           |       | 94,395                          |       |
| Goodwill                                              |       | 39,492                           |       | 39,323                          |       |
| Unamortized debt issuance costs                       |       | 6,778                            |       | 6,044                           |       |
| Unrealized gain in fair value of derivative contracts |       | 13,482                           |       | 11,812                          |       |
| Other                                                 |       | 4,353                            |       | 5,221                           |       |
| Discontinued operations                               |       | —                           |       | 873                             |       |
|                                                  |       | 156,040                          |       | 157,668                         |       |
| Total Assets                                          |       | $                                | 1,426,905  |                            | $          | 1,315,888 |   |

 

(Continued)

 

*See accompanying Notes toConsolidated Financial Statements*

 

8

----

 
| ** **                                                                                         | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **($-000’s)**               | ** ** |
| **Capitalization and Liabilities**                                                                 |       |                             |       |                            |       |
| Common stock, $1 par value, 30,529,934 and 30,250,566 shares issued and  outstanding, respectively |       | $                                | 30,530     |                            | $          | 30,251 |   |
| Capital in excess of par value                                                                     |       | 412,540                          |       | 406,650                         |       |
| Retained earnings                                                                                  |       | 27,332                           |       | 22,916                          |       |
| Accumulated other comprehensive income, net of income tax                                          |       | 8,969                            |       | 8,792                           |       |
| Total common stockholders’ equity                                                             |       | 479,371                          |       | 468,609                         |       |
|                                                                                               |       |                             |       |                            |       |
| Long-term debt:                                                                                    |       |                             |       |                            |       |
| Note payable to securitization trust                                                               |       | 50,000                           |       | 50,000                          |       |
| Obligations under capital lease                                                                    |       | 390                              |       | 512                             |       |
| First mortgage bonds and secured debt                                                              |       | 242,949                          |       | 163,088                         |       |
| Unsecured debt                                                                                     |       | 248,593                          |       | 248,798                         |       |
| Total long-term debt                                                                               |       | 541,932                          |       | 462,398                         |       |
| Total long-term debt and common stockholders’ equity                                          |       | 1,021,303                        |       | 931,007                         |       |
|                                                                                               |       |                             |       |                            |       |
| Current liabilities:                                                                               |       |                             |       |                            |       |
| Accounts payable and accrued liabilities                                                           |       | 47,586                           |       | 51,712                          |       |
| Current maturities of long-term debt                                                               |       | 148                              |       | 141                             |       |
| Short-term debt                                                                                    |       | 67,745                           |       | 77,050                          |       |
| Customer deposits                                                                                  |       | 7,981                            |       | 7,239                           |       |
| Interest accrued                                                                                   |       | 10,706                           |       | 3,889                           |       |
| Unrealized loss in fair value of derivative contracts                                              |       | 1,761                            |       | 1,372                           |       |
| Taxes accrued                                                                                      |       | 13,498                           |       | 2,744                           |       |
| Other current liabilities                                                                          |       | 1,359                            |       | 1,790                           |       |
| Discontinued operations                                                                            |       | —                           |       | 174                             |       |
|                                                                                               |       | 150,784                          |       | 146,111                         |       |
| Commitments and contingencies (Note 8)                                                             |       |                             |       |                            |       |
| Noncurrent liabilities and deferred credits:                                                       |       |                             |       |                            |       |
| Regulatory liabilities                                                                             |       | 53,977                           |       | 49,822                          |       |
| Deferred income taxes                                                                              |       | 154,643                          |       | 140,838                         |       |
| Unamortized investment tax credits                                                                 |       | 3,502                            |       | 3,971                           |       |
| Pension and other postretirement benefit obligations                                               |       | 21,734                           |       | 26,458                          |       |
| Unrealized loss in fair value of derivative contracts                                              |       | 1,299                            |       | —                          |       |
| Other                                                                                              |       | 19,663                           |       | 17,496                          |       |
| Discontinued operations                                                                            |       | —                           |       | 185                             |       |
|                                                                                               |       | 254,818                          |       | 238,770                         |       |
| Total Capitalization and Liabilities                                                               |       | $                                | 1,426,905  |                            | $          | 1,315,888 |   |

 

*See accompanying Notes toConsolidated Financial Statements.*

 

9

----

 

**THE EMPIRE DISTRICT ELECTRICCOMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                    | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **($-000’s)**              | ** ** |
| **Operating  activities:**                                                    |       |                            |       |   |   |
| Net income                                                                    | ** ** | **$**                           | **33,646** |   | $ | 31,081 |   |
| Adjustments to  reconcile net income to cash flows from operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                | ** ** | **43,072**                      |       | 31,900 |   |
| Pension and  postretirement benefit costs                                     | ** ** | **7,027**                       |       | 4,108 |   |
| Deferred income  taxes and investment tax credit, net                         | ** ** | **9,636**                       |       | 547 |   |
| Allowance for  equity funds used during construction                          | ** ** | **(2,294**                      | **)**      | (166 | ) |
| Stock  compensation expense                                                   | ** ** | **1,922**                       | ** ** | 1,482 |   |
| Unrealized gain on  derivatives                                               | ** ** | **(942**                        | **)**      | (2,835 | ) |
| Gain on the sale  of non-regulated businesses                                 | ** ** | **(161**                        | **)**      | (272 | ) |
| Cash flows  impacted by changes in:                                           |       |                            | ** ** |   |   |
| Accounts  receivable and accrued unbilled revenues                            | ** ** | **(12,733**                     | **)**      | 7,049 |   |
| Fuel, materials  and supplies                                                 | ** ** | **(260**                        | **)**      | (6,359 | ) |
| Prepaid  expenses, other current assets and deferred charges                  | ** ** | **43**                          | ** ** | (5,260 | ) |
| Accounts payable  and accrued liabilities                                     | ** ** | **(3,915**                      | **)**      | (21,613 | ) |
| Interest, taxes  accrued and customer deposits,                               | ** ** | **18,225**                      | ** ** | 21,601 |   |
| Other  liabilities and other deferred credits                                 | ** ** | **(4,890**                      | **)**      | 1,127 |   |
|                                                                          |       |                            | ** ** |   |   |
| Net cash  provided by operating activities of continuing operations           | ** ** | **88,376**                      | ** ** | 62,390 |   |
| Net cash  provided by operating activities of discontinued operations         | ** ** | **208**                         | ** ** | 1,819 |   |
| **Net  cash provided by operating activities**                                | ** ** | **88,584**                      | ** ** | 64,209 |   |
|                                                                          |       |                            | ** ** |   |   |
| **Investing  activities:**                                                    |       |                            | ** ** |   |   |
| Capital  expenditures – regulated                                        | ** ** | **(138,681**                    | **)**      | (86,835 | ) |
| Acquisition of  gas operations                                                | ** ** | **—**                      | ** ** | (103,193 | ) |
| Capital  expenditures and other investments – non-regulated              | ** ** | **(3,223**                      | **)**      | (2,125 | ) |
| Proceeds from  the sale of non-regulated businesses                           | ** ** | **3,240**                       | ** ** | 1,095 |   |
|                                                                          |       |                            | ** ** |   |   |
| Net cash used in  investing activities of continuing operations               | ** ** | **(138,664**                    | **)**      | (191,058 | ) |
| Net cash used in  investing activities of discontinued operations             | ** ** | **(12**                         | **)**      | (377 | ) |
| **Net  cash used in investing activities**                                    | ** ** | **(138,676**                    | **)**      | (191,435 | ) |
|                                                                          |       |                            | ** ** |   |   |
| **Financing  activities:**                                                    |       |                            | ** ** |   |   |
| Proceeds from  first mortgage bonds - electric                                | ** ** | **79,831**                      | ** ** | **—** |   |
| Proceeds from  first mortgage bonds - gas                                     | ** ** | **—**                      | ** ** | 55,000 |   |
| Long-term debt  issuance costs                                                | ** ** | **(1,078**                      | **)**      | (748 | ) |
| Proceeds from  issuance of common stock net of issuance costs                 | ** ** | **4,272**                       | ** ** | 78,252 |   |
| Net short-term  (repayments) borrowings                                       | ** ** | **(9,305**                      | **)**      | 9,798 |   |
| Dividends                                                                     | ** ** | **(29,176**                     | **)**      | (26,394 | ) |
| Other                                                                         | ** ** | **(375**                        | **)**      | (377 | ) |
|                                                                          |       |                            | ** ** |   |   |
| Net cash  provided by financing activities of continuing operations           | ** ** | **44,169**                      | ** ** | 115,531 |   |
| Net cash used in  financing activities of discontinued operations             | ** ** | **(68**                         | **)**      | (374 | ) |
| **Net  cash provided by financing activities**                                | ** ** | **44,101**                      | ** ** | 115,157 |   |
|                                                                          |       |                            | ** ** |   |   |
| **Net  decrease in cash and cash equivalents**                                | ** ** | **(5,991**                      | **)**      | (12,069 | ) |
|                                                                          |       |                            | ** ** |   |   |
| **Cash  and cash equivalents at beginning of period**                         | ** ** | **12,303**                      | ** ** | 15,892 |   |
|                                                                          |       |                            | ** ** |   |   |
| **Cash  and cash equivalents at end of period**                               | ** ** | **$**                           | **6,312**  | ** ** | $ | 3,823 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements.*

 

10

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

We operate our businesses asthree segments:  electric, gas and other.The Empire District Electric Company (EDE), a Kansas corporation organized in1909, 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 gas distribution tocommunities in northwest, north central and west central Missouri. Our othersegment consists of our non-regulated businesses, primarily, a 100% interest inEmpire District Industries, Inc., a subsidiary for our fiber optics business.

 

Theaccompanying interim financial statements do not include all disclosuresincluded in the annual financial statements and therefore should be read inconjunction with the financial statements and notes thereto included in ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2006.

 

Theinformation furnished reflects all adjustments, consisting only of normalrecurring adjustments, which are in our opinion necessary to state fairly theresults for the interim periods as well as present these periods on aconsistent basis with the financial statements for the fiscal year endedDecember 31, 2006. Certain reclassifications have been made to prior yearinformation to conform to the current year presentation.

 

TheMissouri Public Service Commission (MPSC) issued an order pertaining to ourelectric segment on December 21, 2006 granting us an annual increase of $29.4million (including regulatory amortization), or 9.96%, with an effective dateof January 1, 2007. The accounting treatment in this order includes regulatoryamortization which provides us additional cash flow through rates to beginrecovery of costs associated with our current generation expansion. Thisregulatory amortization was $7.9 million for the first nine months of 2007 andhas been recorded as depreciation expense. Additionally, the MPSC adopted anagreement of the parties to continue to allow the recording of pension expenseabove or below the amount allowed in rates to a regulatory asset or liability,respectively. This mechanism, commonly referred to as a tracker, was alsoestablished for our other postretirement benefit expenses. Please see Notes 4and 9 for further discussion of pension and other postretirement benefitregulatory treatment.

 

OnFebruary 1, 2007, the Southwest Power Pool (SPP) regional transmissionorganization (RTO) launched its Energy Imbalance Services (EIS) market. The EISmarket is monitored by our Wholesale Energy group. Sales and purchasetransactions are netted on an hourly basis to determine if we are a net selleror a net purchaser. Net sales are recorded as off-system sales while netpurchases are recorded as purchased power.

 

Amajor ice storm struck virtually all areas of our electric service territoryJanuary 12-14, 2007 causing substantial damage. Approximately 85,000 (52%) ofour electric customers were without power at the height of the storm. Costsassociated with the restoration effort due to the ice storm were approximately$30.7 million, of which $19.2 million has been capitalized as additions to ourutility plant, approximately $4.6 million recorded as maintenance expense andapproximately $6.9 million was deferred as a regulatory asset as we believe itis probable that these costs will be recoverable in future electric rate cases.

 

**Note 2 - Recently IssuedAccounting Standards**

 

OnSeptember 15, 2006, the FASB issued FASB No. 157, “Fair Value Measurements”(FAS 157), which provides guidance for using fair value to measure assets andliabilities. FAS 157 also responds to investors’ requests for more informationabout (1) the extent to which companies measure assets and liabilities at fairvalue, (2) the information used to measure fair value and (3) the effect thatfair-value measurements have on earnings. FAS 157 will apply whenever another

 

11

----

 

standardrequires (or permits) assets or liabilities to be measured at fair value. Thisstandard does not expand the use of fair value to any new circumstances. FAS157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. We havenot yet completed our review regarding the impact of the adoption of thisstandard; however, we do not expect the adoption of this standard to have amaterial impact on our financial statements.

 

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

 

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

 

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

 

On July 13, 2006, the FASBissued FIN 48, which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes.” We file consolidated incometax returns in the U.S. federal and state jurisdictions. With few exceptions,we are no longer subject to U.S. federal, state and local, or non-U.S. incometax examinations by tax authorities for years before 2003. We adopted theprovisions of FIN 48**on January 1, 2007. As aresult of the implementation of FIN 48, we recognized approximately $54,000 ofadditional liability for unrecognized tax benefits, which was accounted for asa reduction to the January 1, 2007 balance of retained earnings. At January 1,2007 and September 30, 2007, our balance sheet included approximately $219,000and $314,000, respectively, of unrecognized tax benefits which would affect oureffective tax rate if recognized. We do not expect any material changes tounrecognized tax benefits within the next twelve months. We recognize interestaccrued and penalties related to unrecognized tax benefits in other expenses.

 

**Note 4–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, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Regulatory  Assets:**                                    |       |                             |       |                            |       |
| **Income  taxes**                                          |       | $                                | 29,475     |                            | $          | 27,893 |   |
| **Unamortized  loss on reacquired debt**                   |       | 15,144                           |       | 16,136                          |       |
| **Unamortized  loss on interest rate derivative**          |       | 2,798                            |       | 3,035                           |       |
| **Pension  and other postretirement benefits (1)**         |       | 31,939                           |       | 40,145                          |       |
| **Asset  retirement obligation**                           |       | 3,036                            |       | 3,022                           |       |
| **Unrecovered  purchased gas costs and Kansas fuel costs** |       | 1,740                            |       | 3,024                           |       |
| **Ice  storm costs**                                       |       | 6,907                            |       | —                          |       |
| **Other**                                                  |       | 896                              |       | 1,140                           |       |
| **Total**                                                  |       | $                                | 91,935     |                            | $          | 94,395 |   |

 

12

----

 
| **(In thousands)**                           | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Regulatory  Liabilities:**                      |       |                             |       |                            |       |
| **Income  taxes**                                 |       | $                                | 10,214     |                            | $          | 12,100 |   |
| **Unamortized  gain on interest rate derivative** |       | 4,434                            |       | 4,561                           |       |
| **Gain on  disposition of emission allowances**   |       | 363                              |       | 361                             |       |
| **Cost of  removal**                              |       | 34,415                           |       | 31,461                          |       |
| **Pensions  and other postretirement benefits**   |       | 4,159                            |       | 1,339                           |       |
| **Kansas  fuel costs**                            |       | 392                              |       | —                          |       |
| **Total**                                         |       | $                                | 53,977     |                            | $          | 49,822 |   |

----

(1) Primarily reflectsregulatory assets resulting from the adoption of FAS 158 (including a $5.6million decrease in our liability for Other Postretirement Benefits) andregulatory accounting for EDG acquisition costs.

 

Pensionand Other Postretirement Benefits:  As discussed in Note 1,effective January 1, 2007, the MPSC granted regulatory treatment for our otherpostretirement benefit costs similar to the treatment already in place for ourpension costs. We now recognize a regulatory asset or liability, along withcorresponding decreases or increases in expense, respectively, for actuarialcosts incurred that are more or less than those allowed in rates for theMissouri (EDE and EDG) and Kansas (EDE) portion of pension costs and theMissouri EDE portion of other postretirement benefit costs. Since January 1,2007, approximately $2.8 million in additional regulatory liabilities andcorresponding expense increases have been recognized.

 

Inaddition, approximately $0.4 million in pension and other postretirementbenefit costs have been recognized since January 1, 2007 to reflect theamortization of the regulatory assets that were recorded at the time of theacquisition of the Aquila, Inc. gas properties. These regulatory assets reflectthat the purchase accounting entries related to pension and otherpostretirement benefit costs were allowed to be ignored for ratemakingpurposes, as they will be recovered in future rates.

 

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

 

On September 21, 2005, we announced that we hadentered into an Asset Purchase Agreement with Aquila, Inc., pursuant to whichwe agreed to acquire the Missouri natural gas distribution operations ofAquila, Inc. This acquisition was completed by our wholly-owned subsidiary, TheEmpire District Gas Company (EDG), on June 1, 2006. This transaction wassubject to the approval of the MPSC, which was obtained, effective May 1, 2006.The total purchase price, including working capital and net plant adjustmentsbut excluding acquisition costs, was $102.5 million. We recorded $39.5 millionof goodwill as a result of the acquisition. All of this goodwill is expected tobe tax deductible.

 

**Thecomponents of the purchase price allocation for the Missouri Gas acquisitionare shown below. Assets and liabilities were valued at fair value. In the caseof property, plant and equipment, fair value was calculated in a mannerconsistent with the amount recoverable for regulatory treatment.**

** **
| **(In thousands)**            | ** ** | **Missouri Gas** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| **Purchase  Price:**               |       |                  |       |
| **Cash  paid**                     |       | $                     | 102,502    |   |
| **Acquisition  costs**             |       | 2,447                 |       |
| **Total**                          |       | $                     | 104,949    |   |
|                               |       |                  |       |
| **Allocation:**                    |       |                  |       |
| **Property,  plant and equipment** |       | $                     | 52,226     |   |
| **Current  assets**                |       | 15,292                |       |
| **Goodwill**                       |       | 39,492                |       |
| **Other  assets**                  |       | 11,082                |       |
| **Other  liabilities**             |       | (13,143               | )          |
| **Total**                          |       | $                     | 104,949    |   |

 

13

----

 

Thefollowing presents certain consolidated proforma financial information for thenine months and twelve months ended September 30, 2006, as if our acquisitionof Missouri Gas had been completed as of October 1, 2005. These estimates arebased on historical results of the Missouri Gas operations, provided to us byAquila, Inc., and are unaudited.

** **
| ** **                                                        | ** ** | **Nine Months Ended ** | ** ** | **Twelve Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| **($-000’s except per share amounts)**   | ** ** | **2006**                              | ** ** | **2006**                          | ** ** |
| Revenues                                                          |       | $                                     | 335,586    |                              | $          | 443,692 |   |
|                                                              |       |                                  |       |                              |       |
| Net income from  continuing operations                            |       | 33,535                                |       | 35,988                            |       |
|                                                              |       |                                  |       |                              |       |
| Earnings per  share from continuing operations -basic and diluted |       | $                                     | 1.15       |                              | $          | 1.21 |   |

 

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

 

*Electric*

 

We utilize derivatives tohelp manage our natural gas commodity market risk resulting from purchasingnatural gas, to be used as fuel, on the volatile spot market and to managecertain interest rate exposure.

 

A $9.0 million net of tax,unrealized gain representing the fair market value of derivative contractstreated as cash flow hedges is recognized as Accumulated Other ComprehensiveIncome in the capitalization section of the balance sheet as of September 30,2007. The tax effect of $5.5 million on this gain is included in deferredtaxes. These amounts will be adjusted cumulatively on a monthly basis duringthe determination periods, beginning October 1, 2007 and ending on September30, 2011. At the end of each determination period, or if cash flow hedgetreatment is discontinued, any gain or loss for that period related to theinstrument will be reclassified to fuel expense.

 

As of June 30, 2007, weelected to change our valuation of natural gas derivatives (financial hedges)for financial reporting purposes to a new methodology which is more closelyrelated to an independent market valuation. For accounting purposes, thischange is considered a change in estimate. To reflect the change, anapproximate $6 million increase was recorded to the fair value of derivativesand $3.7 million, net of tax, was recorded to other comprehensive income atJune 30, 2007. This change had no impact on the income statement.

 

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

 

The following table setsforth “mark-to-market” pre-tax gains/(losses) from the ineffective portion ofour hedging activities for electric generation and the actual pre-taxgains/(losses) from the qualified portion of our hedging activities for settledcontracts included in “Fuel” for each of the periods ended September 30:

 
| ** **               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** | **Twelve months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **(In thousands)**  | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Ineffective  Portion** |       | $                                | —     |                            | $          | —                            |       | $ | — |   | $ | (34 | ) | $ | — |   | $ | (223 | ) |
| ** **               |       |                             |       |                            |       |                              |       |   |   |   |   |   |   |
| **Qualified  Portion**   |       | $                                | 1,202      |                            | $          | 463                               |       | $ | 1,254 |   | $ | 1,268 |   | $ | 1,306 |   | $ | 2,010 |   |

 

Wealso enter into fixed-price forward physical contracts for the purchase ofnatural gas, coal and purchased power. These contracts are not subject to thefair value accounting of FAS 133 because they are considered to be normalpurchases. We have instituted a process to determine if any future executedcontracts that otherwise qualify for the normal purchases exception contain aprice adjustment feature and will account for these contracts accordingly.

 

14

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Asof October 26, 2007, 88% of our anticipated volume of natural gas usage for ourelectric operations for the remainder of year 2007 is hedged, either throughphysical or financial contracts, at an average price of $7.037 per Dekatherm(Dth). In addition, the following volumes and percentages of our anticipatedvolume of natural gas usage for our electric operations for the next six yearsare hedged at the following average prices per Dth:

 
| **Year** | ** ** | **% Hedged** | ** ** | **Dth Hedged** | ** ** | **Average Price** | ** ** |
|----------|------------|-------------------|------------|---------------------|------------|------------------------|------------|
| 2008     |       | 89                | %          | 7,676,000           |       | $                      | 6.849      |   |
| 2009     |       | 54                | %          | 4,696,000           |       | $                      | 6.060      |   |
| 2010     |       | 40                | %          | 3,696,000           |       | $                      | 5.422      |   |
| 2011     |       | 39                | %          | 3,696,000           |       | $                      | 5.422      |   |
| 2012     |       | 13                | %          | 1,200,000           |       | $                      | 7.295      |   |
| 2013     |       | 13                | %          | 1,200,000           |       | $                      | 7.295      |   |

 

*Gas*

 

We attempt to mitigate ournatural gas price risk for our gas segment by a combination of (1) injectingnatural gas into storage during the off-heating season months, (2) purchasingphysical forward contracts and (3) purchasing financial derivative contracts.As of October 26, 2007, we have 92% of our expected upcoming winter heatingseason usage (November 2007 through March 2008) hedged with physical storage,physical forward contracts and financial derivative contracts. The averageprice of these hedges is $5.405 per Dth. We target to have 95% of our storagecapacity full by November 1 for the upcoming winter heating season. As ofNovember 1, 2007, we had 1.8 million Dths in storage on the three pipelinesthat serve our customers, which was 0.08 million Dths below our 95% target. Ourlong-term hedge positions for gas purchased for resale are still in thedevelopment process. A purchased gas adjustment (PGA) clause is included in ourrates for our gas segment operations, therefore, we mark to market any unrealizedgains or losses and any realized gains or losses relating to financialderivative contracts to a regulatory asset or regulatory liability account onour balance sheet.

 

**Note 7–Financing**

 

OnMarch 26, 2007, EDE issued $80 million principal amount of First MortgageBonds, 5.875% Series due 2037. The net proceeds of $79.1 million, less $0.4million of legal and other financing fees, were added to our general funds andused to pay down short-term indebtedness incurred as a result of our on-goingconstruction program.

 

OnJuly 15, 2005, we entered into a $150 million unsecured revolving creditfacility until July 15, 2010. Borrowings (other than through commercial paper)are at the bank’s prime commercial rate or LIBOR plus 100 basis points based onour current credit ratings and the pricing schedule in the line of creditfacility. On March 14, 2006, we entered into the First Amended and RestatedUnsecured Credit Agreement which amends and restates the $150 million unsecuredrevolving credit facility. The principal amount of the credit facility wasincreased to $226 million, with the additional $76 million allocated to supporta letter of credit issued in connection with our participation in the PlumPoint Energy Station project. This extra $76 million of availability reducesover a four year period in line with the amount of construction expenditures weowe for Plum Point Unit 1 and was $47.5 million as of November 1, 2007. Theunallocated credit facility is used for working capital, general corporate purposesand to back-up our use of commercial paper. This facility requires our totalindebtedness (which does not include our note payable to the securitizationtrust) to be less than 62.5% of our total capitalization at the end of eachfiscal quarter and our EBITDA (defined as net income plus interest, taxes,depreciation and amortization) to be at least two times our interest charges(which includes interest on the note payable to the securitization trust) forthe trailing four fiscal quarters at the end of each fiscal quarter. Failure tomaintain these ratios will result in an event of default under the creditfacility and will prohibit us from borrowing funds thereunder. As of September30, 2007, we are in compliance with these ratios. This credit facility is alsosubject to cross-default if we default on in excess of $10

 

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millionin the aggregate on our other indebtedness. This arrangement does not serve tolegally restrict the use of our cash in the normal course of operations. Therewere no outstanding borrowings under this agreement at September 30, 2007,however, $67.7 million of the availability thereunder was used at such date toback up our outstanding commercial paper.

 

**Note 8–Commitments and Contingencies**

 

Weare a party to various claims and legal proceedings arising out of the normalcourse of our business. Management regularly analyzes this information, and hasprovided accruals for any liabilities, in accordance with the guidelines ofStatement of Financial Accounting Standards SFAS 5, “Accounting forContingencies” (FAS 5). In the opinion of management, it is not probable, giventhe company’s defenses, that the ultimate outcome of these claims and lawsuitswill have a material adverse affect upon our financial condition, or results ofoperations or cash flows.

 

**Coal,Natural Gas and Transportation Contracts**

 

Wehave entered into long and short-term agreements to purchase coal and naturalgas for our energy supply and natural gas operations. Under these contracts,the natural gas supplies are divided into firm physical commitments andderivatives that are used to hedge future purchases. The firm physical gas andtransportation commitments total $60.1 million for October 1, 2007 throughSeptember 30, 2008, $49.5 million for October 1, 2008 through September 30,2010, $46.1 million for October 1, 2010 through September 30, 2012 and $78.0million for October 1, 2012 and beyond. In the event that this gas cannot beused at our plants, the gas would be liquidated at market price.

 

Wehave coal supply agreements and transportation contracts in place to providefor the delivery of coal to the plants. These contracts are written with ForceMajeure clauses that enable us to reduce tonnages or cease shipments undercertain circumstances or events. These include mechanical or electricalmaintenance items, acts of God, war or insurrection, strikes, weather and otherdisrupting events. This reduces the risk we have for not taking the minimumrequirements of fuel under the contracts. The minimum requirements are $23.7million for October 1, 2007 through September 30, 2008, $33.2 million forOctober 1, 2008 through September 30, 2010 and $1.8 million for October 1, 2010through September 30, 2012.

 

**PurchasedPower**

 

Wecurrently supplement our on-system generating capacity with purchases ofcapacity and energy from other utilities in order to meet the demands of ourcustomers and the capacity margins applicable to us under current poolingagreements and National Electric Reliability Council (NERC) rules.

 

Wehave contracted with Westar Energy for the purchase of capacity and energythrough May 31, 2010. Commitments under this contract total approximately $43.2million through May 31, 2010.

 

Wealso have a long term agreement for the purchase of capacity from the PlumPoint Energy Station, a new 665-megawatt, coal-fired generating facility whichis being built near Osceola, Arkansas. Construction began in the spring of 2006with completion scheduled for 2010. We have the option to convert the 50megawatts covered by the purchased power agreement into an ownership interestin 2015. Commitments under this contract total approximately $48.0 millionthrough June 30, 2015.

 

Wehave entered into a 20-year purchased power agreement with Cloud CountyWindfarm, LLC, owned by Horizon Wind Energy, Houston, Texas to purchase theenergy generated at the approximately 100-megawatt Phase 1 Meridian Wind Farmto be located in Cloud County, Kansas and a 20-year contract with Elk River Windfarm,LLC, owned by PPM Energy, to purchase the energy generated at the 150-megawattElk River Windfarm located in Butler County, Kansas. Although these agreementsare considered operating leases under GAAP, payments for these

 

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

 

**NewConstruction**

 

OnMarch 14, 2006, we entered into contracts to purchase an undivided interest in50 megawatts of the Plum Point Energy Station’s new 665-megawatt, coal-firedgenerating facility which is being built near Osceola, Arkansas. The estimatedcost is approximately $103.0 million, including AFUDC. In addition, we enteredinto an agreement with Kansas City Power & Light (KCP&L) on June 13,2006 to purchase an undivided ownership interest in the coal-fired Iatan 2generating facility. We will own 12%, or approximately 100 megawatts, of the 850-megawattunit. Construction began in the spring of 2006 with completion scheduled for2010. We expect our share of the Iatan 2 construction costs will range fromapproximately $183.6 million to $200.5 million, excluding AFUDC.

 

**Leases**

 

OnJune 25, 2007, we entered into a 20-year purchased power agreement with CloudCounty 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 the energy at that time. Pursuant to the terms of the agreement, wewill purchase all of the output from the approximately 100-megawatt Phase 1Meridian Way Wind Farm to be located in Cloud County, Kansas. Wedo not own any portion of the windfarm. Annual payments arecontingent upon output of the facility and can range from zero to a maximum ofapproximately $14.6 million based on a 20-year average cost.

 

OnDecember 10, 2004, we entered into a 20-year contract with Elk River Windfarm,LLC to purchase the energy generated at the 150-megawatt Elk River Windfarmlocated in Butler County, Kansas. We have contracted to purchase approximately550,000 megawatt-hours of energy per year, or approximately 10% of our annualsupply under the contract, which was declared commercial on December 15, 2005.We do not own any portion of the windfarm. Payments for wind energy from theElk River Windfarm are contingent upon output of the facility. Annual paymentscan run from zero to a maximum of approximately $16.9 million based on a 20year average cost.

 

Paymentsfor these wind agreements are recorded as purchased power expenses, and,because of the contingent nature of these payments, are not included in theoperating lease 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 five 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)**                      | ** ** | **Capital Leases** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| 2007                                         |       | $                       | 288        |   |
| 2008                                         |       | 288                     |       |
| 2009                                         |       | 288                     |       |
| 2010                                         |       | 28                      |       |
| 2011                                         |       | —                  |       |
| Thereafter                                   |       | —                  |       |
| Total minimum  payments                      |       | $                       | 892        |   |
| Less amount  representing maintenance        |       | 298                     |       |
| Net minimum  lease payments                  |       | 594                     |       |
| Less amount  representing interest           |       | 56                      |       |
| Present value of  net minimum lease payments |       | $                       | 538        |   |

 

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| **(In thousands)** | ** ** | **Operating Leases** | ** ** |
|-------------------------|------------|---------------------------|------------|
| 2007                    |       | $                         | 1,524      |   |
| 2008                    |       | 931                       |       |
| 2009                    |       | 288                       |       |
| 2010                    |       | 269                       |       |
| 2011                    |       | 156                       |       |
| Thereafter              |       | 715                       |       |
| Total minimum  payments |       | $                         | 3,883      |   |

 

The accumulated amount of amortization for ourcapital leases was $0.2 million at September 30, 2007.

 

The following table represents our operating leaseexpense for the applicable periods ended September 30:

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating  lease expense** |       | $                                | 348        |                            | $          | 235                               |       | $ | 1,051 |   | $ | 655 |   | $ | 1,304 |   | $ | 845 |   |
|                              |            |                                  |            |                                 |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**EnvironmentalMatters**

 

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

 

**ElectricSegment**

 

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

 

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

 

OurAsbury, Riverton and Iatan plants burn a blend of low sulfur Western coal(Powder River Basin) and higher sulfur blend coal and petroleum coke, or burn100% low sulfur Western coal. In addition, tire-derived fuel (TDF) is used as asupplemental fuel at the Asbury Plant. The Riverton Plant can also burn naturalgas as its primary fuel. The State Line Plant, the Energy Center Units 3 and 4and the new Riverton Unit 12 are gas-fired facilities and do not receive SO2allowances. In the near term, annual allowance requirements for the State LinePlant, the Energy Center Units 3 and 4 and Riverton Unit 12, which are notexpected to exceed 20 allowances per year, will be transferred from ourinventoried bank of allowances. In 2006, the combined actual SO2 allowance needfor all affected plant facilities exceeded the number of allowances awarded tous by the EPA, therefore, as of December 31, 2006, we had 31,000 banked SO2allowances as compared to 41,000 at December 31, 2005. Based on current SO2allowance usage projections, 

 

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wewill need to construct a sulfur scrubber at Asbury, modify coal blends orpurchase additional SO2 allowances sometime around 2012.

 

OnJuly 14, 2004, we filed an application with the MPSC seeking an orderauthorizing us to implement a plan for the management, sale, exchange, transferor other disposition of our SO2 emission allowances issued by the EPA. On March1, 2005, the MPSC approved a Stipulation and Agreement granting us authority tomanage our SO2 allowance inventory in accordance with our SO2 AllowanceManagement Policy (SAMP). The SAMP allows us to swap banked allowances forfuture vintage allowances and/or monetary value and, in extreme marketconditions, to sell SO2 allowances outright for monetary value. The Stipulationand Agreement became effective March 11, 2005, although we have not yet swappedor sold any allowances.

 

SO2emissions will be further regulated as described in the Clean Air InterstateRule section below.

 

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

 

TheAsbury Plant received permission from the Missouri Department of NaturalResources (MDNR) to burn TDF at a maximum rate of 2% of total fuel input.During 2006, approximately 5,794 tons of TDF were burned. This is equivalent to579,400 discarded passenger car tires.

 

Underthe MDNR’s Missouri NOx Rule, our Iatan, Asbury, State Line and Energy Centerfacilities, like other facilities in Western Missouri, are generally subject toa maximum NOx emission rate of 0.35 lbs/MMBtu. However, facilities which burnat least 100,000 passenger tire equivalents of TDF per year, including ourAsbury Plant, are only subject to a higher NOx emission limit of 0.68lbs/MMBtu. All of our plants currently meet the required emission limits andadditional NOx controls are not required.

 

NOxis further regulated as described in the Clean Air Interstate Rule below.

 

Clean Air Interstate Rule (CAIR)

 

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

 

The CAIR is not directed to specificgeneration units, but instead, requires the states (including Missouri andArkansas) to develop State Implementation Plans (SIPs) to comply with specificNOx and SO2 state-wide annual budgets. Missouri and Arkansas finalized theirrespective regulations and submitted their SIPs to the EPA for approval. TheEPA has published their proposal to approve the Missouri and Arkansas SIPs inthe Federal Register. Until these SIPs are approved by the EPA, we cannotdefinitively determine the allowed emissions of NOx and SO2 for the Asbury,Energy Center, State Line and Iatan Plants in Missouri or the Plum Point EnergyStation in Arkansas. However, based on the submitted SIPs, it appears we willhave excess NOx allowances. SO2 allowances must be utilized at a 2:1 ratio forour Missouri units as compared to our non-CAIR Kansas units beginning in 2010.Based on current SO2 allowance usage projections, we will need to construct asulfur scrubber at our Asbury plant, modify coal blends or purchase additionalSO2 allowances sometime around 2012.

 

Inorder to help meet anticipated CAIR requirements and to meet air permitrequirements for Iatan Unit 2, we are installing pollution control equipment onIatan Unit 1 which will be completed around the end of 2008. This equipmentincludes a Selective Catalytic Reduction (SCR) system, a Flue GasDesulphurization (FGD) system and a baghouse, with our share of the capitalcost estimated at $46 million, excluding AFUDC. Of this amount, approximately$3.9 million was incurred in 2006. Approximately $14.0 million in 2007, $26.7million in 2008, $1.4 million in 2009 and $0.3 million in 2010 are included inour current capital expenditures budget. These projects were included as partof our Experimental Regulatory Plan approved by the MPSC.

 

Alsoto help meet anticipated CAIR requirements, we are constructing an SCR atAsbury. We expect the SCR to be in service by January of 2008. We have awardeda contract and the

 

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SCRis under construction and is currently being tied into the existing unit duringour major turbine inspection outage in progress at the Asbury plant. Our Asburyunits went off-line September 21, 2007 and are expected to be back on-lineduring the last week of November. As of September 30, 2007, we have spent $27.8million (including AFUDC) on the SCR at Asbury, which is also included in ourcurrent capital expenditures budget. This project was also included as part ofour Experimental Regulatory Plan approved by the MPSC.

 

Wealso expect that additional pollution control equipment to comply with CAIR maybecome economically justified at the Asbury Plant sometime prior to 2015 andmay include a FGD to control SO2 and a baghouse at an estimated capital cost of$100 million. At this time, we do not anticipate the installation of additionalpollution control equipment at the Riverton Plant.

 

CleanAir Mercury Rule (CAMR)

 

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

 

The CAMR is not directed to specificgeneration units, but instead, requires the states (including Missouri, Kansasand Arkansas) to develop SIPs to comply with specific mercury state-wide annualbudgets. Missouri, Kansas and Arkansas have finalized their respectiveregulations and submitted their SIPs to the EPA. Until their SIPs are approved,we cannot definitively determine the allowed emissions for mercury for theAsbury, Energy Center, State Line and Iatan Plants in Missouri, the Plum PointEnergy Station in Arkansas or the Riverton Plant in Kansas. The proposed SIPsfor all states include allowance trading programs for mercury that could allowcompliance without additional capital expenditures.

 

Based on initial testing and the submittedSIPs, we believe we will be granted enough mercury allowances on January 1,2010 in aggregate to meet our anticipated mercury emissions. We are addingmercury analyzers at Asbury during 2007 and at Riverton during 2008 in order toverify our mercury emissions and to meet the compliance date of January 1, 2009for mercury analyzers and the mercury emission compliance date of January 1,2010.

 

CO2Emissions

 

Ourcoal and gas plants emit carbon dioxide (CO2), a greenhouse gas. Although notcurrently regulated, increasing public concern and political pressure fromlocal, regional, national and international bodies may result in the passage ofnew laws mandating limits on greenhouse gas emissions such as CO2. Severalbills addressing climate change have been introduced in the U.S. Congress and,in April 2007, the U.S. Supreme Court issued a decision ruling the EPAimproperly declined to address CO2 impacts in a rule-making related to newmotor vehicle emissions. While this decision is not directly applicable topower plant emissions, the reasoning of the decision could affect otherregulatory programs. Various proposals in the U.S. Congress could require us topurchase offsets or allowances for some or all of our CO2 emissions, orotherwise affect us based on the amount of CO2 we generate. The impact on us ofany future greenhouse gas regulation will depend in large part on the detailsof the requirements and the timetable for mandatory compliance. We continue toassess the financial and operational risks posed by possible future legislativechanges pertaining to greenhouse gas emissions, but because these proposals arein the formative stages, we are unable to predict any future impacts on ourfinancial conditions and operations.

 

*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 May2007. The Energy Center permit was renewed in September 2005 and the AsburyPlant permit was renewed in December 2005.

 

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TheRiverton Plant is affected by final regulations for Cooling Water IntakeStructures issued under the Clean Water Act Section 316(b) Phase II. Theregulations became final on February 16, 2004 and require the submission of aComprehensive Demonstration Study with the permit renewal in 2008. A Proposalfor Information Collection (PIC) has been approved by the Kansas Department ofHealth and Environment (KDHE). Aquatic sampling commenced in April 2006 inaccordance with the PIC and was completed in August 2007. Analysis of thesampling and a summary report will be completed by December 2007. On January25, 2007, the United States Court of Appeals for the Second Circuit remandedkey sections of the EPA’s February 16, 2004 regulations. On July 9, 2007, the EPAsuspended the regulation and is expected to revise and re-propose theregulation in 2008. If this occurs, we will monitor the EPA revision processand comment appropriately. Data collection and analysis will continue under thePIC and will be expanded as needed to limit increased costs, if any, due to theEPA’s suspension and revision of the regulation. The permit renewal applicationwill be prepared and submitted as scheduled following KDHE guidance. Under theinitial 316(b) regulations, we did not expect costs associated with complianceto be material. We will assess costs under revised rules when they arecomplete.

 

*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 is required by the renewed permit for Asbury.We estimate that the capital costs associated with the CAM plan will not exceed$2 million.

 

Anew air permit was issued for the Iatan Generating Station on January 31, 2006.The new permit covers the entire Iatan Generating Station and includes theexisting Unit No. 1 and the to-be-constructed Iatan Unit No. 2. The new permitlimits Unit No. 1 to a maximum of 6,600 MMBtu per hour of heat input. The 6,600MMBtu per hour heat input limit is in effect until the new SCR, scrubber, andbaghouse are completed, currently estimated to be late in the fourth quarter of2008.

 

**GasSegment**

 

Theacquisition of Missouri Gas involved the property transfer of two formermanufactured gas plant (MGP) sites previously owned by Aquila, Inc. and itspredecessors. Site #1 is listed in the MDNR Registry of Confirmed Abandoned orUncontrolled Hazardous Waste Disposal Sites in Missouri (the MDNR Registry).Site #2 has received a letter of no further action from the MDNR. A Change ofUse request and work plan was approved by the MDNR allowing us to expand ourexisting service center at Site #1 in Chillicothe, Missouri. This project,which was completed in October 2007, included the removal of all excavated soiland the addition of a new concrete surface replacing the existing gravel at acost of approximately $0.1 million.

 

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

 

Thecomponents of our net periodic cost of pension (expensed and capitalized) andother postretirement benefits are summarized below:

 

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| ** **                              | ** ** | **Pension Benefits**                                | ** ** | **Other Postretirement Benefits** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **Three months ended September 30,** | ** ** |
| **(in thousands)**                 | ** ** | **2007**                                                 | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                            |       | $                                                        | 869        |                                        | $          | 785 |   | $ | 228 |   | $ | 360 |   |
| Interest cost                           |       | 2,036                                                    |       | 1,980                                       |       | 612 |   | 824 |   |
| Expected return  on plan assets         |       | (2,554                                                   | )          | (2,507                                      | )          | (683 | ) | (725 | ) |
| Amortization of  prior service cost (1) |       | 157                                                      |       | 135                                         |       | (508 | ) | (147 | ) |
| Amortization of  net actuarial loss (1) |       | 651                                                      |       | 834                                         |       | 264 |   | 600 |   |
| Net periodic  benefit cost              |       | $                                                        | 1,159      |                                        | $          | 1,227 |   | $ | (87 | ) | $ | 912 |   |
| Regulatory  adjustments (2)             |       | 518                                                      |       | 175                                         |       | 901 |   | 32 |   |
| Adjusted pension  and OPEB cost         |       | $                                                        | 1,677      |                                        | $          | 1,402 |   | $ | 814 |   | $ | 944 |   |

 
| ** **                              | ** ** | **Pension Benefits**                               | ** ** | **Other Postretirement Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **Nine months ended September 30,** | ** ** |
| **(in thousands)**                 | ** ** | **2007**                                                | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                            |       | $                                                       | 2,619      |                                        | $          | 2,552 |   | $ | 1,278 |   | $ | 1,362 |   |
| Interest cost                           |       | 6,124                                                   |       | 5,549                                       |       | 2,562 |   | 2,485 |   |
| Expected return on  plan assets         |       | (7,729                                                  | )          | (6,986                                      | )          | (2,333 | ) | (2,080 | ) |
| Amortization of  prior service cost (1) |       | 344                                                     |       | 335                                         |       | (758 | ) | (347 | ) |
| Amortization of  net actuarial loss (1) |       | 1,951                                                   |       | 2,485                                       |       | 864 |   | 1,800 |   |
| Net periodic  benefit cost              |       | 3,309                                                   |       | 3,935                                       |       | 1,613 |   | 3,220 |   |
| Regulatory  adjustments (2)             |       | 1,926                                                   |       | (279                                        | )          | 1,651 |   | 60 |   |
| Adjusted pension  and OPEB cost         |       | $                                                       | 5,235      |                                        | $          | 3,656 |   | $ | 3,264 |   | $ | 3,280 |   |
|                                         |            |                                                         |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                              | ** ** | **Pension Benefits**                                 | ** ** | **Other Postretirement Benefits** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **Twelve months ended September 30,** | ** ** |
| **(in thousands)**                 | ** ** | **2007**                                                  | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                            |       | $                                                         | 3,470      |                                        | $          | 3,569 |   | $ | 1,782 |   | $ | 1,828 |   |
| Interest cost                           |       | 8,047                                                     |       | 7,427                                       |       | 3,503 |   | 3,231 |   |
| Expected return  on plan assets         |       | (10,256                                                   | )          | (9,274                                      | )          | (3,035 | ) | (2,613 | ) |
| Amortization of  prior service cost (1) |       | 457                                                       |       | 479                                         |       | (873 | ) | (484 | ) |
| Amortization of  transition obligation  |       | —                                                    |       | —                                      |       | — |   | 244 |   |
| Amortization of  net actuarial loss (1) |       | 2,786                                                     |       | 3,311                                       |       | 1,462 |   | 2,232 |   |
| Net periodic  benefit cost              |       | $                                                         | 4,504      |                                        | $          | 5,512 |   | $ | 2,839 |   | $ | 4,438 |   |
| Regulatory  adjustments (2)             |       | 2,361                                                     |       | (675                                        | )          | 1,791 |   | 60 |   |
| Adjusted pension  and OPEB cost         |       | $                                                         | 6,865      |                                        | $          | 4,837 |   | $ | 4,630 |   | $ | 4,498 |   |

 

----

(1)2007 amounts are amortized from our regulatory asset recorded upon adoption ofFAS 158.

 

(2)Reflects the effect of regulatory accounting as discussed in Note 4.

 

Basedon the performance of our pension plan assets through January 1, 2006 and 2007,we were not required under the Employee Retirement Income Security Act of 1974(ERISA) to fund any additional minimum ERISA amounts with respect to 2006 or2007.

 

Wehave made other postretirement benefit contributions of $3.0 million in 2007,which satisfies all of our 2007 funding requirements.

 

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

 

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

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**     | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Compensation  Expense**   |       | $                                | 400        |                            | $          | 361                               |       | $ | 1,666 |   | $ | 1,299 |   | $ | 2,037 |   | $ | 1,606 |   |
| **Tax  Benefit Recognized** |       | 143                              |       | 129                             |       | 608                               |       | 467 |   | 740 |   | 575 |   |
|                             |            |                                  |            |                                 |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Activityfor our various stock plans for the nine months ended September 30, 2007 issummarized below:

 

22

----

 

**Performance-Based Restricted Stock Awards**

 

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

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

 

Non-vested restricted stockawards (based on target number) as of September 30, 2007 and 2006 and changesduring the nine months ended September 30, 2007 and 2006 were as follows:

 
| ** **                      | ** ** | **YTD 2007**          | ** ** | **YTD 2006**                                     | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **Number of  shares** | ** ** | **Weighted Average  Grant Date Price** | ** ** | **Number of  shares** | ** ** | **Weighted Average  Grant Date Price** | ** ** |
|                            |       |                       |       |                                                  |       |   |   |   |   |
| **Nonvested  at January 1,**    |       | 38,800                     |       | $                                                     | 22.25      |   | 40,300 |   | $ | 20.76 |   |
| **Granted**                     |       | 17,700                     |       | $                                                     | 23.81      |   | 13,600 |   | $ | 22.23 |   |
| **Awarded**                     |       | (7,598                     | )          | $                                                     | 21.79      |   | (7,954 | ) | $ | 18.25 |   |
| **Not  Awarded**                |       | (5,502                     | )          |                                                  |       | (7,146 | ) |   |   |
|                            |       |                       |       |                                                  |       |   |   |   |   |
| **Nonvested  at September 30,** |       | 43,400                     |       | $                                                     | 23.02      |   | 38,800 |   | $ | 22.25 |   |

 

At September 30, 2007, therewas $0.5 million of total unrecognized compensation cost related to estimatedoutstanding awards. This cost will be recognized over the outstanding yearsremaining in the vesting period.

 

**StockOptions**

 

Asummary of option activity under the plan during the nine months endedSeptember 30, 2007 and 2006 is presented below:

 
| ** **                            | ** ** | ** **  | ** ** | **Weighted  Average** | ** ** | ** **  | ** ** | **Weighted  Average** | ** ** |
|---------------------------------------|------------|-------------|------------|-----------------------|------------|-------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**    | ** ** | **Exercise**          | ** ** | **2006**    | ** ** | **Exercise**          | ** ** |
| ** **                            | ** ** | **Options** | ** ** | **Price**             | ** ** | **Options** | ** ** | **Price**             | ** ** |
| **Outstanding  at January 1,**        |       | 135,000     |       | $                     | 22.21      |        | 142,500    |                  | $          | 20.84 |   |
| **Granted**                           |       | 64,200      |       | $                     | 23.81      |        | 41,700     |                  | $          | 22.23 |   |
| **Exercised**                         |       | 50,000      |       | $                     | 21.79      |        | 49,200     |                  | $          | 18.25 |   |
| **Outstanding  at September 30, (1)** |       | 149,200     |       | $                     | 23.04      |        | 135,000    |                  | $          | 22.21 |   |

 

----

(1) 2007 includes 4,200shares at weighted average price of $21.79, which are vested and exercisable.All others are non-vested.

 

23

----

 

Theaggregate intrinsic value at September 30, 2007 and 2006 was less than $0.1million. The intrinsic value of the unexercised options is the differencebetween Empire’s closing stock price on the last day of the quarter and theexercise price multiplied by the number of in the money options had all optionholders exercised their option on the last day of the quarter.

 

Therange of exercise prices for the options outstanding at September 30, 2007 was$21.79 to $23.81. The weighted-average remaining contractual life ofoutstanding options at September 30, 2007 and 2006 was 7.8 years and 8.3 years,respectively. As of September 30, 2007, there was $0.4 million of totalunrecognized compensation expense related to the non-vested options grantedunder the plan. That cost will be recognized over a period of 1 to 3 years.

 
| ** **                                 | ** ** | **Stock Options** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                       |       |                   |       |   |   |
| **Weighted  average fair value of grants** |       | $                      | 2.38       |   | $ | 1.65 |   |
| **Risk-free  interest rate**               |       | 4.68                   | %          | 3.27 | % |
| **Dividend  yield**                        |       | 5.33                   | %          | 6.16 | % |
| **Expected  volatility**                   |       | 16.13                  | %          | 18.14 | % |
| **Expected  life in months**               |       | 60                     |       | 60 |   |
| **Grant  Date**                            |       | 1/31/07                |       | 2/1/06 |   |
|                                            |            |                        |            |  |  |  |  |

 

**EmployeeStock Purchase Plan**

 

OurEmployee Stock Purchase Plan (ESPP) permits the grant of options to purchasecommon stock to eligible employees at 90% of the lower of market value at dateof grant or at date of exercise. The lookback feature of this plan isultimately valued at 90% of the lookback feature valued under the Black-Scholesmethodology plus 10% of the maximum subscription price. As of September 30,2007, there were 480,812 shares available for issuance in this plan. Thefollowing table has been updated through the third quarter.

 
| ** **                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| **Subscriptions  outstanding at September 30** |       | 41,112   |       | 39,986   |       |
| **Maximum  subscription price**                |       | $        | 21.23      | (1)      | $          | 20.05 |   |
| **Shares  of stock issued**                    |       | 37,686   |       | 39,322   |       |
| **Stock  issuance price**                      |       | $        | 20.05      |     | $          | 19.62 |   |

 

----

(1)Stock will be issued on the closing date of the purchase period, which runsfrom June 1, 2007 to May 31, 2008.

 

Assumptionsfor valuation of these shares using the Black-Scholes methodology are shown inthe table below.

 
| ** **                                 | ** ** | **ESSP**                        | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Nine months ended** | ** ** |
| ** **                                 | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                       |       |                            |       |   |   |
| **Weighted  average fair value of grants** |       | $                               | 3.40       |   | $ | 3.19 |   |
| **Risk-free  interest rate**               |       | 4.98                            | %          | 5.02 | % |
| **Dividend  yield**                        |       | 5.43                            | %          | 5.75 | % |
| **Expected  volatility**                   |       | 18.01                           | %          | 18.30 | % |
| **Expected  life in months**               |       | 12                              |       | 12 |   |
| **Grant  Date**                            |       | 6/1/07                          |       | 6/1/06 |   |
|                                            |            |                                 |            |  |  |  |  |

 

24

----

 

**Note 11– Regulated Other Operating Expense**

 

Thefollowing table sets forth the major components comprising “Regulated – other”under “Operating Revenue Deductions” on our consolidated statements of operationsfor all periods presented ended September 30:

 
| **(in thousands)**                            | ** ** | **Three  Months  Ended  2007** | ** ** | **Three  Months  Ended  2006** | ** ** | **Nine  months  Ended  2007** | ** ** | **Nine  months  Ended  2006** | ** ** | **Twelve  Months  Ended  2007** | ** ** | **Twelve  Months  Ended  2006** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------------|------------|-------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Electric  transmission and distribution expense    |       | $                              | 2,545      |                           | $          | 2,052                         |       | $                             | 6,924      |                            | $          | 6,040                           |       | $ | 9,248 |   | $ | 8,036 |   |
| Natural gas  transmission and distribution expense |       | 419                            |       | 416                            |       | 1,287                         |       | 539                           |       | 1,791                           |       | 539                             |       |
| Power operation  expense (other than fuel)         |       | 2,704                          |       | 2,513                          |       | 7,689                         |       | 7,122                         |       | 10,167                          |       | 9,775                           |       |
| Customer  accounts and assistance expense          |       | 2,416                          |       | 2,184                          |       | 6,756                         |       | 5,869                         |       | 9,165                           |       | 7,639                           |       |
| Employee pension  expense (1)                      |       | 1,603                          |       | 1,196                          |       | 4,993                         |       | 2,990                         |       | 6,197                           |       | 3,260                           |       |
| Employee  healthcare plan (1)                      |       | 1,875                          |       | 1,780                          |       | 6,079                         |       | 5,449                         |       | 8,294                           |       | 7,285                           |       |
| General office  supplies and expense               |       | 2,521                          |       | 2,073                          |       | 7,690                         |       | 5,790                         |       | 9,854                           |       | 7,672                           |       |
| Administrative  and general expense                |       | 2,739                          |       | 2,996                          |       | 8,218                         |       | 7,926                         |       | 11,153                          |       | 9,952                           |       |
| Allowance for  uncollectible accounts              |       | 525                            |       | 304                            |       | 3,191                         |       | 1,173                         |       | 4,015                           |       | 1,643                           |       |
| Miscellaneous  expense                             |       | 37                             |       | 46                             |       | 131                           |       | 84                            |       | 184                             |       | 124                             |       |
| Total                                              |       | $                              | 17,384     |                           | $          | 15,560                        |       | $                             | 52,958     |                            | $          | 42,982                          |       | $ | 70,068 |   | $ | 55,925 |   |

 

----

(1) Includes effects ofregulatory treatment for pension and other postretirement benefits but does notinclude capitalized portion.

 

**Note 12– Segment Information**

 

We operate our business asthree segments: electric, gas and other. As part of our electric segment, wealso provide water service to three towns in Missouri. EDG is our wholly ownedsubsidiary formed to hold the Missouri Gas assets acquired from Aquila, Inc. onJune 1, 2006. The other segment consists of our non-regulated businesses,primarily, a 100% interest in Empire District Industries, Inc., a subsidiaryfor our fiber optics business.

 

We sold our controlling 52%interest in Mid-America Precision Products (MAPP) on August 31, 2006, a companythat specializes in close-tolerance custom manufacturing for the aerospace,electronics, telecommunications and machinery industries. In December 2006, wesold our interest in Conversant, Inc., a software company that markets CustomerWatch, an Internet-based customer information system software. On September 28,2007, we sold our 100% interest in Fast Freedom, Inc., an Internet serviceprovider. For financial reporting purposes, these businesses, all of which wereformerly within our other segment, have been classified as a discontinuedoperation and are not included in our segment information.

 

Thetables below present information about the revenues, operating income, incomefrom continuing operations, capital expenditures and total assets of ourbusiness segments.

 
| ** **                                | ** ** | **For the quarter ended September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                         | ** ** |
| **($-000’s)**                        | ** ** | **Electric**                                                     | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                             |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                | 135,980    |   | $ | 5,641 |   | $ | 987 |   | $ | (121 | ) | $ | 142,487 |   |
| Operating income  (loss)                  |       | 31,427                                                           |       | (39 | ) | 282 |   |   |   | 31,670 |   |
| Income (loss)  from continuing operations |       | 24,015                                                           |       | (907 | ) | 92 |   |   |   | 23,200 |   |
|                                      |       |                                                             |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                | 49,067     |   | $ | 825 |   | $ | 1,412 |   |   |   |   | $ | 51,304 |   |
|                                           |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

25

----

 
| ** **                                | ** ** | **For the quarter ended September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                         | ** ** |
| **($-000’s)**                        | ** ** | **Electric**                                                     | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                             |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                | 125,309    |   | $ | 4,930 |   | $ | 728 |   | $ | (97 | ) | $ | 130,870 |   |
| Operating income  (loss)                  |       | 30,494                                                           |       | (139 | ) | 99 |   |   |   | 30,454 |   |
| Income (loss)  from continuing operations |       | 23,418                                                           |       | (1,113 | ) | 71 |   |   |   | 22,376 |   |
|                                      |       |                                                             |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | 33,418                                                           |       | 1,205 |   | 553 |   |   | ** ** | 35,176 | ** ** |
|                                           |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **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 |   |
| Operating income                     |       | 54,403                                                                    |       | 2,663 |   | 640 |   |   |   | 57,706 |   |
| Income from  continuing operations   |       | 33,451                                                                    |       | 20 |   | 112 |   |   |   | 33,583 |   |
|                                 |       |                                                                      |       |   |   |   |   |   |   |   |   |
| **Capital Expenditures**             |       | $                                                                         | 137,122    |   | $ | 1,559 |   | $ | 3,223 |   |   |   | $ | 141,904 |   |
|                                      |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **For the nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                                  | ** ** |
| **($-000’s)**                        | ** ** | **Electric**                                                              | ** ** | **Gas(2)** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                         | 297,566    |   | $ | 6,557 |   | $ | 2,113 |   | $ | (294 | ) | $ | 305,942 |   |
| Operating income  (loss)                  |       | 55,130                                                                    |       | (187 | ) | 319 |   |   |   | 55,262 |   |
| Income (loss)  from continuing operations |       | 33,221                                                                    |       | (1,482 | ) | 238 |   |   |   | 31,977 |   |
|                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures**                 |       | $                                                                         | 85,240     |   | $ | 1,593 | (1) | $ | 2,127 |   |   | ** ** | $ | 88,960 | ** ** |
|                                           |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Does not include the acquisition of Missourigas operation.

(2)          Represents the months of June throughSeptember 2006.

 
| ** **                                | ** ** | **For the twelve months ended September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                                    | ** ** |
| **($-000’s)**                        | ** ** | **Electric**                                                                | ** ** | **Gas(2)** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                           | 418,255    |   | $ | 60,258 |   | $ | 3,513 |   | $ | (411 | ) | $ | 481,615 |   |
| Operating income                          |       | 67,203                                                                      |       | 4,136 |   | 925 |   |   |   | 72,264 |   |
| Income (loss)  from continuing operations |       | 41,161                                                                      |       | 542 |   | (69 | ) |   |   | 41,634 |   |
|                                      |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures(1)**              |       | $                                                                           | 168,461    |   | $ | 962 | (1) | $ | 3,726 |   |   | ** ** | $ | 173,149 | ** ** |
|                                           |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Does not include the acquisition of Missourigas operation.

 

26

----

 
| ** **                                | ** ** | **For the twelve months ended September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                                    | ** ** |
| **($-000’s)**                        | ** ** | **Electric**                                                                | ** ** | **Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Statement  of Income Information**      |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Revenues                                  |       | $                                                                           | 383,484    |   | $ | 6,557 |   | $ | 2,759 |   | $ | (383 | ) | $ | 392,417 |   |
| Operating income  (loss)                  |       | 63,339                                                                      |       | (187 | ) | 389 |   |   |   | 63,541 |   |
| Income (loss)  from continuing operations |       | 34,484                                                                      |       | (1,482 | ) | 283 |   |   |   | 33,285 |   |
|                                      |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Capital  Expenditures(1)**              |       | $                                                                           | 98,772     |   | $ | 1,593 | (1) | $ | 2,770 |   |   |   | $ | 103,135 |   |
|                                           |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Does not include the acquisition of Missourigas operation.

(2)          Represents the months of June throughSeptember 2006.

 
| ** **                     | ** ** | **As of September 30, 2007** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| ** **                     | ** ** | **Electric**                                     | ** ** | **Gas(1)** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                                             |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                                                | 1,370,604  |   | $ | 118,621 |   | $ | 20,621 |   | $ | (82,941 | ) | $ | 1,426,905 |   |
|                                |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includes goodwill of $39,492

 
| ** **                     | ** ** | **As of December 31, 2006** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **Electric**                                    | ** ** | **Gas(1)** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Balance  Sheet Information** |       |                                            |       |   |   |   |   |   |   |   |   |
| Total assets                   |       | $                                               | 1,248,591  |   | $ | 126,296 |   | $ | 21,659 |   | $ | (80,658 | ) | $ | 1,315,888 |   |
|                                |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includes goodwill of $39,323.

 

**Note 13– Discontinued Operations**

 

In August 2006, we sold ourcontrolling 52% interest in MAPP, a company that specializes in close-tolerancecustom manufacturing for the aerospace, electronics, telecommunications andmachinery industries*.* In December2006, we sold our 100% interest in Conversant, Inc., a software company thatmarkets Customer Watch, an Internet-based customer information system software.On September 28, 2007, we sold our 100% interest in Fast Freedom, Inc., anInternet service provider. We have reported MAPP, Conversant and Fast Freedom’sresults as discontinued operations. A summary of the components of gains orlosses from discontinued operations for all periods reported as of September30, follows:

 
| ** **                                               | ** ** | **For the three months ended September 30, 2006** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **MAPP**                                                                             | ** ** | **Conversant** | ** ** | **Fast Freedom** | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                                                    | 1,904      |   | $ | 575 |   | $ | 333 |   | $ | 2,812 |   |
| Expenses                                                 |       | 2,040                                                                                |       | 911 |   | 404 |   | 3,355 |   |
| Losses from  discontinued operations before income taxes |       | (136                                                                                 | )          | (336 | ) | (71 | ) | (543 | ) |
| Gain on disposal                                         |       | 272                                                                                  |       | — |   | — |   | 272 |   |
| Income tax                                               |       | 52                                                                                   |       | 128 |   | 27 |   | 207 |   |
| Minority  interest                                       |       | 65                                                                                   |       | — |   | — |   | 65 |   |
| Income tax –  minority interest                     |       | (25                                                                                  | )          | — |   | — |   | (25 | ) |
| **Gain  (loss) from discontinued operations**            | ** ** | **$**                                                                                | **228**    | ** ** | **$** | **(208** | **)** | **$** | **(44** | **)** | **$** | **(24** | **)** |

 

27

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| ** **                                               | ** ** | **For the nine months ended September 30, 2006** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **MAPP**                                                                            | ** ** | **Conversant** | ** ** | **Fast Freedom** | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                                                   | 8,926      |   | $ | 1,513 |   | $ | 1,017 |   | $ | 11,456 |   |
| Expenses                                                 |       | 9,295                                                                               |       | 3,004 |   | 1,221 |   | 13,520 |   |
| Losses from  discontinued operations before income taxes |       | (369                                                                                | )          | (1,491 | ) | (204 | ) | (2,064 | ) |
| Gain on disposal                                         |       | 272                                                                                 |       | — |   | — |   | 272 |   |
| Income tax                                               |       | 140                                                                                 |       | 568 |   | 78 |   | 786 |   |
| Minority  interest                                       |       | 177                                                                                 |       | — |   | — |   | 177 |   |
| Income tax –  minority interest                     |       | (67                                                                                 | )          | — |   | — |   | (67 | ) |
| **Gain  (loss) from discontinued operations**            | ** ** | **$**                                                                               | **153**    | ** ** | **$** | **(923** | **)** | **$** | **(126** | **)** | **$** | **(896** | **)** |

 
| ** **                                               | ** ** | **For the twelve months ended September 30, 2006** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **MAPP**                                                                              | ** ** | **Conversant** | ** ** | **Fast Freedom** | ** ** | **Total** | ** ** |
| Revenues                                                 |       | $                                                                                     | 15,209     |   | $ | 2,335 |   | $ | 1,334 |   | $ | 18,878 |   |
| Expenses                                                 |       | 15,245                                                                                |       | 3,973 |   | 1,631 |   | 20,849 |   |
| Losses from  discontinued operations before income taxes |       | (36                                                                                   | )          | (1,638 | ) | (297 | ) | (1,971 | ) |
| Gain on disposal                                         |       | 272                                                                                   |       | — |   | — |   | 272 |   |
| Income tax                                               |       | 14                                                                                    |       | 624 |   | 113 |   | 751 |   |
| Minority  interest                                       |       | 17                                                                                    |       | — |   | — |   | 17 |   |
| Income tax –  minority interest                     |       | (7                                                                                    | )          | — |   | — |   | (7 | ) |
| **Gain  (loss) from discontinued operations**            | ** ** | **$**                                                                                 | **260**    | ** ** | **$** | **(1,014** | **)** | **$** | **(184** | **)** | **$** | **(938** | **)** |

 
| ** **                                               | ** ** | **For the three months ended September 30, 2007** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **MAPP**                                                                             | ** ** | **Conversant** | ** ** | **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  (loss) from discontinued operations**            | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | **$** | **111** | ** ** | **$** | **111** | ** ** |

 
| ** **                                               | ** ** | **For the nine months ended September 30, 2007** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **MAPP**                                                                            | ** ** | **Conversant** | ** ** | **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  (loss) from discontinued operations**            | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | **$** | **63** | ** ** | **$** | **63** | ** ** |

 

28

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| ** **                                               | ** ** | **For the twelve months ended September 30, 2007** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **MAPP**                                                                              | ** ** | **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  (loss) from discontinued operations**            | ** ** | **$**                                                                                 | ** ** | ** ** | **$** | **187** | ** ** | **$** | **24** | ** ** | **$** | **211** | ** ** |

 

*Differencescould occur due to rounding.*

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**EXECUTIVE SUMMARY**

 

Weoperate our businesses as three segments: electric, gas and other. The****Empire District Electric Company (EDE) is an operatingpublic utility engaged in the generation, purchase, transmission, distributionand sale of electricity in parts of Missouri, Kansas, Oklahoma and Arkansas. Aspart of our electric segment, we also provide water service to three towns inMissouri. The Empire District Gas Company (EDG) is our wholly owned subsidiaryformed to hold the Missouri Gas assets acquired from Aquila, Inc. on June 1,2006. It provides natural gas distribution to customers in 44 communities innorthwest, north central and west central Missouri. Our other segment consistsof our non-regulated businesses, primarily, a 100% interest in Empire DistrictIndustries, Inc., a subsidiary for our fiber optics business. During the twelvemonths ended September 30, 2007, 86.9% of our gross operating revenues wereprovided from sales from our electric segment (including 0.4% from the sale ofwater), 12.5% from the sale of gas and 0.6% from our non-regulated businesses.

 

InAugust 2006, we sold our controlling 52% interest in Mid-America PrecisionProducts (MAPP), which specializes in close-tolerance custom manufacturing. InDecember 2006, we sold our 100% interest in Conversant, Inc., a softwarecompany that markets Customer Watch, an Internet-based customer informationsystem software. On September 28, 2007, we sold our 100% interest in FastFreedom, Inc., an Internet service provider. For financial reporting purposes, MAPP, Conversant and Fast Freedom, allof which were formerly within our other segment, have been classified asdiscontinued operations and are not included in our segment information.

 

***Electric Segment***

 

Theprimary drivers of our electric operating revenues in any period are: (1) rateswe can charge our customers, (2) weather, (3) customer growth and (4) generaleconomic conditions. The utility commissions in the states in which we operate,as well as the Federal Energy Regulatory Commission (FERC), set the rates whichwe can charge our customers. In order to offset expenses, we depend on ourability to receive adequate and timely recovery of our costs (primarily fueland purchased power) and/or rate relief. We assess the need for rate relief inall of the jurisdictions we serve and file for such relief when necessary.Weather affects the demand for electricity. Very hot summers and very coldwinters increase electric demand, while mild weather reduces demand.Residential and commercial sales are impacted more by weather than industrialsales, which are mostly affected by business needs for electricity and bygeneral economic conditions. Customer growth, which is the growth in the numberof customers, contributes to the demand for electricity. We expect our annualelectric customer growth to range from approximately 1.4% to 1.7% over the nextseveral years. Our electric customer growth for the

 

29

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twelvemonths ended September 30, 2007 was 1.2%. We define electric sales growth to begrowth in kWh sales excluding the impact of weather. The primary drivers ofelectric sales growth are customer growth and general economic conditions.

 

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

 

***Gas Segment***

 

Theprimary drivers of our gas operating revenues in any period are: (1) rates wecan charge our customers, (2) weather, (3) customer growth, (4) the cost ofnatural gas and interstate pipeline transportation charges and (5) generaleconomic conditions. The MPSC sets the rates which we can charge our customers.In order to offset expenses, we depend on our ability to receive adequate andtimely recovery of our costs (primarily commodity natural gas) and/or raterelief. We assess the need for rate relief and file for such relief whennecessary. However, as part of the unanimous stipulation and agreement filedwith the MPSC on March 1, 2006 and approved on April 18, 2006, we have agreedto not file a rate increase request for non-gas costs prior to June 1, 2009. APGA clause is included in our gas rates, which allows us to recover our actualcost of natural gas from customers through rate changes, which are madeperiodically (up to four times) throughout the year in response to weatherconditions, natural gas costs and supply demands. Weather affects the demandfor natural gas. Very cold winters increase demand for gas, while mild weatherreduces demand. Due to the seasonal nature of the gas business, revenues andearnings are typically concentrated in the November through March period, whichgenerally corresponds with the heating season. Customer growth, which is thegrowth in the number of customers, contributes to the demand for gas. Our gassegment customer growth for the twelve months ended September 30, 2007 was(2.0)%, which we believe was due to higher gas prices and general economicconditions. We expect our annual gas customer growth to be up to 1% over thenext several years. We define gas sales growth to be growth in mcf salesexcluding the impact of weather. The primary drivers of gas sales growth arecustomer growth and general economic conditions.

 

The primary driver of ourgas operating expense in any period is the price of natural gas. However,because gas purchase costs for our gas utility operations are normallyrecovered from our customers, any change in gas prices does not have acorresponding impact on income unless such costs are deemed imprudent or causescustomers to reduce usage.

 

***Earnings***

 

During the third quarter of2007, basic and diluted earnings per weighted average share of common stockwere $0.76 as compared to $0.74 in the third quarter of 2006. For the ninemonths ended September 30, 2007, basic and diluted earnings per weightedaverage share of common stock were $1.11 as compared to $1.12 for the ninemonths ended September 30, 2006.For the twelve months endedSeptember 30, 2007, basic and diluted earnings per weighted average share ofcommon stock were $1.38 as compared to $1.19 for the twelve months endedSeptember 30, 2006. As reflected in the table below, the primary positivedrivers for all periods presented were increased electric and gas revenueswhile negative drivers for all periods presented included increased purchasedpower costs, natural gas sold and transported costs, regulated electricexpenses, regulated gas expenses (excluding third quarter 2007), depreciation,maintenance and repairs expense (including the effect of the January 2007 icestorm costs during the nine months ended and twelve months ended periods),other taxes and interest charges. Contributing to

 

30

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increased earnings for the twelve months ended September 30, 2007 was adecrease in electric fuel costs. However, increases in electric fuel costsnegatively impacted earnings for the three and nine months ended September 30,2007.

 

The following reconciliationof basic earnings per share between the three months, nine months and twelvemonths ended September 30, 2006 versus September 30, 2007 is a non-GAAPpresentation. We believe this information is useful in understanding thefluctuation in earnings per share between the prior and current years. The reconciliationpresents the after tax impact of significant items and components of thestatement of operations on a per share basis before the impact of additionalstock issuances which is presented separately. Earnings per share for the threemonths, nine months and twelve months ended September 30, 2006 and 2007 shownin the reconciliation are presented on a GAAP basis and are the same as theamounts included in the statements of operations. This reconciliation may notbe comparable to other companies or more useful than the GAAP presentationincluded in the statements of operations.

 
| ** **                                                | ** ** | **Three Months  Ended** | ** ** | **Nine months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Earnings  Per Share – 2006***                      | ** ** | **$**                        | **0.74**   | ** **                  | **$**      | **1.12**                      | ** ** | **$** | **1.19** | ** ** |
|                                                      |       |                         |       |                        |       |                          |       |
| **Revenues**                                              |       |                         |       |                        |       |                          |       |
| Electric  on-system                                       |       | $                            | 0.13       |                        | $          | 0.62                          |       | $ | 0.69 |   |
| Electric off –  system and other                     |       | 0.10                         |       | 0.15                        |       | 0.12                          |       |
| Gas**                                                     |       | 0.02                         |       | 0.81                        |       | 1.26                          |       |
| Water                                                     |       | 0.00                         |       | 0.00                        |       | 0.00                          |       |
| Non – Regulated                                      |       | 0.00                         |       | 0.01                        |       | 0.02                          |       |
| **Expenses**                                              | ** ** | ** **                   | ** ** | ** **                  | ** ** | ** **                    | ** ** |
| Electric fuel                                             |       | (0.07                        | )          | (0.16                       | )          | 0.11                          |       |
| Purchased power                                           |       | (0.01                        | )          | (0.15                       | )          | (0.17                         | )          |
| Cost of natural  gas**                                    |       | (0.01                        | )          | (0.53                       | )          | (0.83                         | )          |
| Regulated –  electric                                |       | (0.05                        | )          | (0.13                       | )          | (0.17                         | )          |
| Regulated –gas                                       |       | 0.01                         |       | (0.10                       | )          | (0.17                         | )          |
| Non-regulated                                             |       | 0.00                         |       | 0.00                        |       | (0.01                         | )          |
| Maintenance and  repairs                                  |       | (0.02                        | )          | (0.17                       | )          | (0.20                         | )          |
| Depreciation and  amortization                            |       | (0.08                        | )          | (0.25                       | )          | (0.27                         | )          |
| Other taxes                                               |       | (0.02                        | )          | (0.09                       | )          | (0.11                         | )          |
| Loss on plant  allowance                                  |       | 0.00                         |       | 0.00                        |       | (0.02                         | )          |
| Change in  effective income tax rates                     |       | 0.03                         |       | 0.06                        |       | 0.06                          |       |
| Interest charges                                          |       | (0.03                        | )          | (0.10                       | )          | (0.14                         | )          |
| AFUDC                                                     |       | 0.02                         |       | 0.08                        |       | 0.13                          |       |
| Discontinued  operations                                  |       | 0.00                         |       | 0.03                        |       | 0.04                          |       |
| Other income and  deductions                              |       | 0.00                         |       | 0.00                        |       | (0.01                         | )          |
| Dilutive effect  of additional shares issued in July 2006 |       | 0.00                         |       | (0.09                       | )          | (0.14                         | )          |
| **Earnings  Per Share – 2007***                      | ** ** | **$**                        | **0.76**   | ** **                  | **$**      | **1.11**                      | ** ** | **$** | **1.38** | ** ** |

 

----

** The effects of discontinued operations for 2007were de minimus gains for both the three months ended and the nine months endedand a gain of $0.01 for the twelve months ended September 30, 2007. The effectfor 2006 was a de minimus loss for the three months ended and losses of $0.03for both the nine months ended and twelve months ended September 30, 2006.*

*** Gas segment revenues and expenses began June 1,2006.*

 

***Recent Activities***

 

**Non-RegulatedBusinesses**

 

OnSeptember 28, 2007, we sold our 100% interest in Fast Freedom, Inc., anInternet service provider. For financial reporting purposes, this business hasbeen classified as a discontinued operation and is not included in our segmentinformation. Our gain on the disposal of Fast Freedom was $0.2 million.

 

31

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*** ***

***Regulatory Matters***

*** ***

OnOctober 1, 2007, we filed a request with the MPSC for an annual increase inbase rates for our Missouri electric customers in the amount of $34.7 million,or 10.11%. This request is to allow us to recover our investment in the new 150-megawattcombustion turbine, Unit 12, at our Riverton Plant, capital expendituresassociated with the construction of a selective catalytic reduction system atour Asbury Plant, capital expenditures and expenses related to the January 2007ice storm and other changes in our underlying costs. We are also requestingimplementation of a fuel adjustment clause in Missouri which would permit thedistribution to Missouri customers of changes in fuel and purchased powercosts.

 

OnDecember 29, 2006, the Office of Public Counsel (OPC) and intervenors Praxair,Inc. and Explorer Pipeline Company, filed an application with the MPSCrequesting the MPSC grant a rehearing on most of the issues addressed in theDecember 2006 Missouri rate case order and many of the procedural issues. OnDecember 29, 2006, we also filed an application with the MPSC requesting arehearing on return on equity, capital structure and energy cost recovery. Adecision by the MPSC is pending.

 

Praxairand Explorer Pipeline filed a Petition for Writ of Review with the Cole CountyCircuit Court on January 31, 2007. The Circuit Court issued a Writ, but theMPSC has moved to have the Writ set aside and the case dismissed. The MPSC’smotion to set aside the Writ is still pending. On March 20, 2007, Praxair andExplorer filed a motion in the Circuit Court writ proceeding requesting animmediate stay of the effectiveness of our December 2006 Missouri rate caseorder and the tariffs filed pursuant thereto. The stay motion remains pendingbefore the Circuit Court.

 

OnJanuary 4, 2007, the OPC filed a Petition for Writ of Mandamus with theMissouri Court of Appeals, Western District, seeking to have the orderapproving tariffs issued by the MPSC on December 29, 2006, set aside. On March12, 2007, the Court of Appeals issued an order denying the OPC’s petition.

 

OnMarch 19, 2007, the OPC filed a Petition for Writ of Mandamus with the MissouriSupreme Court seeking an order requiring the MPSC to vacate and rescind itsDecember 29, 2006 order approving tariffs and directing the MPSC to provide aneffective date for any subsequent tariff approval order that allows at leastten days to prepare and file an application for rehearing. On May 1, 2007, theMissouri Supreme Court issued a preliminary writ directing the MPSC to respondto the OPC’s petition. Following briefs and oral argument, on October 30, 2007,the Supreme Court made its preliminary writ peremptory and issued an opiniondirecting the MPSC to vacate its December 29 order approving tariffs and allowthe Public Counsel a reasonable time to prepare and file an application forrehearing. The Court did not examine the lawfulness or reasonableness of thesubstance of the MPSC’s December 29, 2006 order approving tariffs, andconsidered only the timing of the issuance of the order. The Court also did notconsider the underlying tariffed rates which continue in force and in effect.

 

Motionsfor rehearing may be filed with the Missouri Supreme Court within 15 days ofthe issuance of the opinion. In the absence of a rehearing, a mandate will beissued by the Missouri Supreme Court in mid-November, and the MPSC shouldthereafter take action in compliance with the writ and opinion.

 

Foradditional information, see “Rate Matters” below.

 

***Energy Supply***

*** ***

OnJune 25, 2007, we entered into a 20-year purchased power agreement with CloudCounty 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 the energy at that time. Pursuant to the terms of the agreement, wewill purchase all of the output from the approximately 100-megawatt Phase 1Meridian Way Wind Farm located in Cloud County, Kansas and owned by CloudCounty Windfarm, LLC. We do not own any portion of the windfarm. Annualpayments are contingent

 

32

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uponoutput of the facility and can range from zero to a maximum of approximately$14.6 million based on a 20-year average cost.

 

Asof April 10, 2007, our new Siemens V84.3A2 combustion turbine, Unit 12 at ourRiverton plant, began commercial operation. Riverton Unit 12 has a summer ratedcapacity of 150 megawatts, increasing our Riverton Plant’s total generatingcapacity to 286 megawatts.

 

***New Union Agreement***

*** ***

At April 30, 2007, we had 702 full-time employees,including 54 employees of EDG, who joined us in conjunction with the gasacquisition in June 2006. 326 of the EDE employees are members of Local 1474 ofThe International Brotherhood of Electrical Workers (IBEW), while 26 of the EDGemployees are members of Local 814 of the IBEW and 9 are members of Local 695of the IBEW. On May 9, 2007, the Local 1474 IBEW voted to ratifya new five-year agreement effective retroactively to November 1, 2006, theexpiration date of the last contract.

*** ***

***Financing***

*** ***

On March 26, 2007, EDEissued $80 million principal amount of First Mortgage Bonds, 5.875% Series due2037. The net proceeds of $79.1 million, less $0.4 million of legal and otherfinancing fees, were added to our general funds and used to pay down short-termindebtedness incurred as a result of our on-going construction program.

*** ***

***BPU Contract***

*** ***

In May 2007, we entered intoa contract with Kansas City Kansas Board of Public Utilities (BPU) for the saleof energy and capacity for June through September of 2007 and 2008. Capacityrevenue will total approximately $1.3 million each year with the energy portiondependent upon the number of hours the contract is utilized by BPU.

*** ***

***2007 Ice Storm***

*** ***

Amajor ice storm struck virtually all areas of our electric service territoryJanuary 12-14, 2007 causing substantial damage. Approximately 85,000 (52%) ofour electric customers were without power at the height of the storm. Costsassociated with the restoration effort due to the ice storm were approximately$30.7 million, of which $19.2 million has been capitalized as additions to ourutility plant, approximately $4.6 million recorded as maintenance expense andapproximately $6.9 million was deferred as a regulatory asset as we believe itis probable that these costs will be recoverable in future electric rate cases.

 

***Asbury SCR***

*** ***

In order to help meetanticipated CAIR requirements, we are constructing an SCR at Asbury. We expectthe SCR to be in service by January of 2008. We have awarded a contract and theSCR is under construction and is currently being tied into the existing unitduring our major turbine inspection outage in progress at the Asbury plant. OurAsbury units went off-line September 21, 2007 and are expected to be backon-line during the last week of November. As of September 30, 2007, we havespent $27.8 million (including AFUDC) on the SCR at Asbury, which is alsoincluded in our current capital expenditures budget. This project was alsoincluded as part of our Experimental Regulatory Plan approved by the MPSC. Inaddition, as a result of the extended outage at Asbury during the fourthquarter of 2007, we expect that our earnings for the fourth quarter will benegatively impacted compared to earnings in the fourth quarter of 2006. We willhave to replace the energy generated by Asbury with energy generated at our gasplants or by buying purchased power. We estimate that this will increase ourexpenses approximately $7-9 million in the fourth quarter compared to thefourth quarter of 2006.

 

33

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**RESULTS OF OPERATIONS**

** **

Thefollowing discussion analyzes significant changes in the results of operationsfor the three-month, nine-month and twelve-month periods ended September 30,2007, compared to the same periods ended September 30, 2006.

 

The following tablerepresents our results of operations by operating segment for the applicableperiods ended September 30:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|-------------------------|------------|
| **(in millions)**                      | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007**                | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from  continuing operations Electric |       | $                      | 24.0       |                  | $          | 23.4                    |       | $ | 33.5 |   | $ | 33.2 |   | $ | 41.2 |   | $ | 34.5 |   |
| Gas                                         |       | (0.9                   | )          | (1.1                  | )          | 0.0                     |       | (1.4 | ) | 0.5 |   | (1.5 | ) |
| Other                                       |       | 0.1                    |       | 0.1                   |       | 0.1                     |       | 0.2 |   | (0.1 | ) | 0.3 |   |
| Income from  continuing operations          |       | $                      | 23.2       |                  | $          | 22.4                    |       | $ | 33.6 |   | $ | 32.0 |   | $ | 41.6 |   | $ | 33.3 |   |
| Income/(loss)  from discontinued operations |       | 0.1                    |       | 0.0                   |       | 0.1                     |       | (0.9 | ) | 0.2 |   | (0.9 | ) |
| Net income                                  |       | $                      | 23.3       |                  | $          | 22.4                    |       | $ | 33.6 |   | $ | 31.1 |   | $ | 41.8 |   | $ | 32.3 |   |

* *

*Differencescould occur due to rounding.*

* *

***Electric Segment***

*** ***

**Overview**

** **

Ourelectric segment income from continuing operations for the third quarter of2007 was $24.0 million as compared to $23.4 million for the third quarter of2006.

 

Electricsegment operating revenues comprised approximately 95.4% of our total operatingrevenues during the third quarter of 2007. Of our total electric operatingrevenues during the third quarter of 2007, approximately 41.2% were fromresidential customers, 30.4% from commercial customers, 15.2% from industrialcustomers, 3.9% from wholesale on-system customers, 6.1% from wholesaleoff-system transactions and 3.2% from miscellaneous sources, primarily publicauthorities. The breakdown of our customer classes has not significantlychanged from the third quarter of 2006.

 

Theamounts and percentage changes from the prior periods in kilowatt-hour (“kWh”)sales and operating revenues by major customer class for on-system sales forthe applicable periods ended September 30, were as follows:

 

**kWh Sales (in millions)**

** **
| ** **           | ** ** | **3 Months  Ended** | ** ** | **3 Months  Ended** | ** ** | **%**       | ** ** | **9 Months  Ended** | ** ** | **9 Months  Ended** | ** ** | **%**       | ** ** | **12 Months  Ended** | ** ** | **12 Months  Ended** | ** ** | **%**       | ** ** |
|----------------------|------------|--------------------------|------------|--------------------------|------------|-------------|------------|--------------------------|------------|--------------------------|------------|-------------|------------|---------------------------|------------|---------------------------|------------|-------------|------------|
| ** **           | ** ** | **2007**                 | ** ** | **2006**                 | ** ** | **Change*** | ** ** | **2007**                 | ** ** | **2006**                 | ** ** | **Change*** | ** ** | **2007**                  | ** ** | **2006**                  | ** ** | **Change*** | ** ** |
| Residential          |       | 567.9                    |       | 589.6                    |       | (3.7        | )%         | 1,491.8                  |       | 1,456.0                  |       | 2.5         | %          | 1,934.7                   |       | 1,897.4                   |       | 2.0         | %          |
| Commercial           |       | 459.4                    |       | 470.5                    |       | (2.4        | )          | 1,215.5                  |       | 1,172.8                  |       | 3.6         |       | 1,589.8                   |       | 1,541.2                   |       | 3.2         |       |
| Industrial           |       | 298.3                    |       | 314.7                    |       | (5.2        | )          | 843.1                    |       | 869.6                    |       | (3.0        | )          | 1,119.1                   |       | 1,147.0                   |       | (2.4        | )          |
| Wholesale  On-System |       | 98.2                     |       | 96.9                     |       | 1.3         |       | 260.9                    |       | 258.3                    |       | 1.0         |       | 340.3                     |       | 336.6                     |       | 1.1         |       |
| Other**              |       | 30.7                     |       | 31.5                     |       | (2.4        | )          | 86.4                     |       | 84.5                     |       | 2.1         |       | 114.5                     |       | 113.6                     |       | 0.8         |       |
| Total On-System      |       | 1,454.5                  |       | 1,503.2                  |       | (3.2        | )          | 3,897.7                  |       | 3,841.2                  |       | 1.5         |       | 5,098.4                   |       | 5,035.8                   |       | 1.2         |       |

** **

**Operating Revenues ($ in millions**)

 
| ** **           | ** ** | **3 Months** | ** ** | **3 Months** | ** ** | ** **  | ** ** | **9 Months** | ** ** | **9 Months** | ** ** | ** **  | ** ** | **12 Months** | ** ** | **12 Months** | ** ** | ** **  | ** ** |
|----------------------|------------|-------------------|------------|-------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|-------------|------------|--------------------|------------|--------------------|------------|-------------|------------|
| ** **           | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **%**       | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **%**       | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **%**       | ** ** |
| ** **           | ** ** | **2007**          | ** ** | **2006**          | ** ** | **Change*** | ** ** | **2007**          | ** ** | **2006**          | ** ** | **Change*** | ** ** | **2007**           | ** ** | **2006**           | ** ** | **Change*** | ** ** |
| Residential          |       | $                 | 55.9       |              | $          | 52.9        |       | 5.7               | %          | $                 | 136.8      |        | $          | 123.7              |       | 10.6               | %          | $           | 172.5      |   | $ | 158.1 |   | 9.1 | % |
| Commercial           |       | 41.2              |       | 38.9              |       | 6.2         |       | 99.5              |       | 88.5              |       | 12.5        |       | 126.1              |       | 113.9              |       | 10.7        |       |
| Industrial           |       | 20.5              |       | 20.0              |       | 2.5         |       | 52.5              |       | 50.2              |       | 4.4         |       | 67.0               |       | 64.6               |       | 3.9         |       |
| Wholesale  On-System |       | 5.2               |       | 5.2               |       | 0.8         |       | 13.8              |       | 13.8              |       | 0.2         |       | 17.6               |       | 18.0               |       | (2.6        | )          |
| Other**              |       | 3.0               |       | 2.7               |       | 9.0         |       | 7.5               |       | 6.8               |       | 10.7        |       | 9.7                |       | 9.0                |       | 8.1         |       |
| Total On-System      |       | $                 | 125.8      |              | $          | 119.7       |       | 5.2               |       | $                 | 310.1      |        | $          | 283.0              |       | 9.6                |       | $           | 392.9      |   | $ | 363.6 |   | 8.1 |   |

 

----

**Percentage changes are based onactual kWh sales and revenues and may not agree to the rounded amounts shownabove.*

* *

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

 

34

----

 

***Quarter Ended September 30, 2007 Compared to Quarter Ended September30, 2006***

*** ***

**OperatingRevenues and Kilowatt-Hour Sales**

** **

KWhsales for our on-system customers decreased during the third quarter of 2007 ascompared to the third quarter of 2006 when we had a one time revision to ourestimate of unbilled revenues and corresponding KWhs. Revenues for ouron-system customers increased approximately $6.2 million, or 5.2%. The January2007 Missouri rate increase (discussed below) contributed an estimated $9.9million to revenues while continued sales growth contributed an estimated $2.2million during the third quarter of 2007, partially offset by the $5.9 millionrevision to our estimate of unbilled revenues in the third quarter of 2006.Weather and other related factors had a negligible effect. Weexpect our annual electric customer growth to range from approximately 1.4% to1.7% over the next several years. Our electric customer growth for the twelvemonths ended September 30, 2007 was 1.2%.

 

Thedecrease in residential, commercial and industrial kWh sales during the thirdquarter of 2007 as compared to the same period in 2006 was primarily due to therevision to our estimate of unbilled revenues and corresponding KWhs in thethird quarter of 2006. Revenues were positively affected by the January 2007Missouri rate increase.

 

On-systemwholesale kWh sales increased during the third quarter of 2007 reflectingcontinued sales growth. Revenues associated with these FERC-regulated salesincreased only slightly, 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-SystemElectric Transactions**

** **

Inaddition to sales to our own customers, we also sell power to other utilitiesas available and provide transmission service through our system fortransactions between other energy suppliers. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended September 30:

 
| ** **             | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **             | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
| **(in millions)** | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| Revenues               |       | $                     | 8.8        |                  | $          | 4.4 |   |
| Expenses               |       | 6.1                   |       | 3.2                   |       |
| Net*                   |       | $                     | 2.8        |                  | $          | 1.2 |   |

 

----

**Differences could occur due torounding.*

 

Revenuesless expenses increased during the third quarter of 2007 as compared to thethird quarter of 2006 primarily due to sales facilitated by the SPP EnergyImbalance Services (EIS) market that began on February 1, 2007. Sales from thismarket contributed $3.2 million to our off-system electric revenues during thethird quarter of 2007 with $2.2 million of related expense while sales from theBPU contract contributed approximately $1.8 million to revenues. Total purchasepower related expenses are included in our discussion of purchased power costsbelow.

 

**OperatingRevenue Deductions**

** **

Duringthe third quarter of 2007, total electric segment operating expenses increasedapproximately $9.7 million (10.3%) compared with the same period last year.Total fuel costs increased approximately $3.2 million (9.5%) while purchasedpower costs increased approximately 

 

35

----

 

$0.7million (4.6%) during the third quarter of 2007. The increase in fuel costs wasprimarily due to increased generation by our gas fired units (an estimated $5.1million) partially offset by lower prices for both the hedged and unhedgednatural gas that we burned in our gas-fired units in the third quarter of 2007(an estimated $1.2 million). Decreased coal costs reduced fuel costsapproximately $0.3 million in the third quarter of 2007 while decreased coalgeneration reduced fuel costs approximately $0.2 million. The net increase infuel and purchased power during the third quarter of 2007 as compared to thesame period last year was $3.9 million (8.0%).

 

Regulated– other operating expenses for our electric segment increased approximately$2.1 million (15.6%) during the third quarter of 2007 as compared to the sameperiod in 2006 primarily due to a $0.5 million increase in transmission anddistribution expense, $0.4 million increase in employee pension expense, a $0.4million increase in professional services, a $0.2 million increase inuncollectible accounts, a $0.2 million increase in customer accounts expense, a$0.1 million increase in labor and other costs, a $0.1 million increase ininjuries and damages expense, a $0.1 million increase in regulatory commissionexpense and a $0.1 million increase in employee health care expense. Theincrease in pension costs is primarily due to the effects of regulatoryaccounting. We defer or record pension and other postretirement benefit costs(other than EDG other postretirement benefit costs) if they are more or less,respectively, than those allowed in rates for the Missouri and Kansas portionof pension costs. The increase in employee health care costs resulted fromhigher active employee costs.

 

Maintenanceand repairs expense increased approximately $0.9 million (16.2%) as compared tothe third quarter of 2006 primarily due to a $1.0 million increase in transmissionand distribution maintenance costs and a $0.3 million increase at the EnergyCenter plant due to a bearing failure in Unit #3 in the second quarter of 2007that was repaired in the third quarter of 2007. These increases were partiallyoffset by a $0.2 million decrease in maintenance and repairs expense at theState Line Combined Cycle (SLCC) plant and a $0.1 million decrease inmaintenance and repairs expense at the State Line plant as compared to thethird quarter of 2006.

 

Depreciationand amortization expense increased approximately $3.5 million (37.7%) duringthe quarter mainly due to $2.6 million of regulatory amortization related tothe January 2007 Missouri rate order that has been recorded as depreciationexpense. Other taxes increased approximately $0.4 million during the thirdquarter of 2007 due to increased property tax reflecting our additions to plantin service and increased municipal franchise taxes.

 

***Nine months Ended September 30, 2007 Compared to Nine months EndedSeptember 30, 2006***

*** ***

**OperatingRevenues and Kilowatt-Hour Sales**

** **

KWhsales for our on-system customers increased during the nine months endedSeptember 30, 2007 as compared to the nine months ended September 30, 2006primarily due to continued sales growth and colder weather in the first quarterof 2007 as compared to 2006. Revenues for our on-system customers increasedapproximately $27.1 million, or 9.6%. The January 2007 Missouri rate increase(discussed below) contributed an estimated $22.1 million to revenues whilecontinued sales growth contributed an estimated $7.5 million during the ninemonths ended September 30, 2007. Weather and other related factors increasedrevenues by approximately $3.5 million compared to the nine months endedSeptember 30, 2006. These increases were partially offset by the $5.9 millionrevision to our estimate of unbilled revenues in the third quarter of 2006.

 

Theincrease in residential and commercial kWh sales during the nine months endedSeptember 30, 2007 was primarily due to continued sales growth and the colderweather conditions in the first quarter as compared with 2006. Revenues wereprimarily affected by the January 2007 Missouri rate increase, as well as thecontinued sales growth and colder weather.

 

IndustrialkWh sales decreased for the nine months ended September 30, 2007 as compared tothe same period in 2006 primarily due to a pipeline customer running at minimumoutput during the first quarter of 2007 as well as the revision to our estimateof unbilled revenues

 

36

----

 

inthe third quarter of 2006. Industrial revenues increased during this period,reflecting the Missouri rate increase.

 

On-systemwholesale kWh sales increased during the nine months ended September 30, 2007reflecting the continued sales growth discussed above. Revenues associated withthese FERC-regulated sales increased only slightly, as a result of the fueladjustment clause applicable to such sales.

 

**Off-SystemElectric Transactions**

** **

Inaddition to sales to our own customers, we also sell power to other utilitiesas available and provide transmission service through our system fortransactions between other energy suppliers. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended September 30:

 
| ** **             | ** ** | **2007**             | ** ** | **2006**             | ** ** |
|------------------------|------------|----------------------|------------|----------------------|------------|
| ** **             | ** ** | **Nine months** | ** ** | **Nine months** | ** ** |
| **(in millions)** | ** ** | **Ended**            | ** ** | **Ended**            | ** ** |
| Revenues               |       | $                    | 17.4       |                 | $          | 11.4 |   |
| Expenses               |       | 12.1                 |       | 8.1                  |       |
| Net*                   |       | $                    | 5.3        |                 | $          | 3.3 |   |

 

----

**Differences could occur due torounding.*

 

Revenuesless expenses increased during the nine months ended September 30, 2007 ascompared to the nine months ended September 30, 2006 primarily due to salesfacilitated by the EIS market that began on February 1, 2007. Sales from thismarket contributed $6.5 million to our off-system electric revenues in the ninemonths ended September 30, 2007 with $4.4 million of related expense whilesales from the BPU contract contributed approximately $2.1 million to revenues.Total purchase power related expenses are included in our discussion ofpurchased power costs below.

 

**OperatingRevenue Deductions**

** **

Duringthe nine months ended September 30, 2007, total electric segment operatingexpenses increased approximately $34.5 million (14.2%) compared with the sameperiod last year. Total fuel costs increased approximately $6.9 million (9.0%)while purchased power costs increased approximately $6.5 million (13.2%) duringthe nine months ended September 30, 2007. The increase in purchased power costsprimarily reflected increased purchases on the spot market for replacementenergy due to an unscheduled outage at the Iatan plant in May 2007. Theincrease in fuel costs was primarily due to increased generation by our gasfired units during the nine months ended September 30, 2007 (an estimated $9.7million) partially offset by lower prices for both the hedged and unhedgednatural gas that we burned in our gas-fired units (an estimated $2.2 million).Increased coal costs contributed approximately $1.2 million to total fuel costsduring the nine months ended September 30, 2007 offset by decreased coalgeneration (approximately $2.0 million). The net increase in fuel and purchasedpower during the nine months ended September 30, 2007 as compared to the sameperiod last year was $13.4 million (10.6%).

 

Regulated– other operating expenses for our electric segment increased approximately$5.6 million (14.1%) during the nine months ended September 30, 2007 ascompared to the same period in 2006 primarily due to a $1.7 million increase inemployee pension expense, a $0.9 million increase in transmission anddistribution expense, a $0.8 million increase in uncollectible accounts, a $0.5million increase in labor and other costs, a $0.4 million increase in injuriesand damages expense, a $0.4 million increase in customer accounts expense, a$0.3 million increase in professional services, a $0.3 million increase inregulatory commission expense and a $0.2 million increase in employee healthcare expense. We defer or record pension and other postretirement

 

37

----

 

benefitcosts (other than EDG other postretirement benefit costs) if they are more orless, respectively, than those allowed in rates for the Missouri and Kansasportion of pension costs.

 

Maintenanceand repairs expense increased approximately $6.8 million (43.6%) as compared tothe nine months ended September 30, 2006 primarily due to a $7.0 millionincrease in transmission and distribution maintenance costs, a $0.6 millionincrease in maintenance and repairs expense at the Iatan plant related to the2007 first quarter planned maintenance and turbine inspection and a $0.4million increase in maintenance and repairs expense at the Energy Center plantrelated to the Unit #3 bearing repair in the third quarter of 2007. Theincrease in distribution costs reflects $4.6 million related to the January2007 ice storm. Another $1.2 million of non-incremental tree trimming and labormaintenance cost was incurred in the first quarter of 2007 due to the ice stormthat otherwise would have been spent on other projects. These increases werepartially offset by a $0.6 million decrease in maintenance and repairs expenseat the Asbury plant as compared to 2006 when the Asbury plant had anunscheduled outage in the first quarter due to a blade failure and a $0.5million decrease in maintenance and repairs expense for our SLCC plant.

 

Depreciationand amortization expense increased approximately $9.8 million (35.8%) duringthe nine months ended September 30, 2007 mainly due to $7.9 million ofregulatory amortization related to the January 2007 Missouri rate order thathas been recorded as depreciation expense. Other taxes increased approximately$1.3 million during the nine months ended September 30, 2007 due to increasedproperty tax reflecting our additions to plant in service and increasedmunicipal franchise taxes.

 

***Twelve Months Ended September 30, 2007 Compared to Twelve Months EndedSeptember 30, 2006***

*** ***

**OperatingRevenues and Kilowatt-Hour Sales**

** **

Forthe twelve months ended September 30, 2007, kWh sales to our on-systemcustomers increased 1.2% with the associated revenues increasing approximately$29.3 million (8.1%). The January 2007 Missouri rate increase and January 2006Kansas rate increase contributed an estimated $22.6 million to revenues whilecontinued sales growth contributed an estimated $10.1 million. Weather andother related factors contributed an estimated $2.6 million. These increaseswere partially offset by the $5.9 million revision to our estimate of unbilled revenuesin the third quarter of 2006.

 

Residentialand commercial kWh sales and associated revenues increased primarily due tosales growth while the associated revenues also increased due to the Missouriand Kansas rate increases. Industrial kWh sales decreased for the twelve monthsended September 30, 2007 as compared to the same period in 2006 primarily dueto a pipeline customer running at minimum output during the first quarter of2007 as well as the revision to our estimate of unbilled revenues in the thirdquarter of 2006. Industrial revenues increased during this period, reflectingthe aforementioned rate increases.

 

On-systemwholesale kWh sales increased, reflecting the sales growth discussed above,while revenues associated with these FERC-regulated sales decreased as a resultof the fuel adjustment clause applicable to such sales.

 

**Off-SystemElectric Transactions**

** **

Inaddition to sales to our own customers, we also sell power to other utilitiesas available and provide transmission service through our system fortransactions between other energy suppliers. The following table sets forthinformation regarding these sales and related expenses for the applicableperiods ended September 30:

 

38

----

 
| ** **        | ** ** | **2007**               | ** ** | **2006**               | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|
| ** **        | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| **(in millions)** | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| Revenues          |       | $                      | 20.5       |                   | $          | 15.7 |   |
| Expenses          |       | 14.4                   |       | 11.4                   |       |
| Net*              |       | $                      | 6.0        |                   | $          | 4.3 |   |

 

----

**Differences could occur due torounding.*

 

Revenuesless expenses increased during the twelve months ended September 30, 2007 ascompared to the same period in 2006 primarily due to sales facilitated by theEIS market that began on February 1, 2007. Sales from this market contributed$6.5 million to our off-system electric revenues for the twelve months ended September30, 2007 with $4.4 million of related expense while sales from the BPU contractcontributed approximately $2.1 million to revenues. Total purchase powerrelated expenses are included in our discussion of purchased power costs below.

 

**OperatingRevenue Deductions**

** **

Duringthe twelve months ended September 30, 2007, total electric segment operatingexpenses increased approximately $30.9 million (9.7%) compared to the year agoperiod. Total fuel costs decreased approximately $4.7 million (4.5%) during thetwelve months ended September 30, 2007 while purchased power costs increased$7.2 million (11.0%) during the same period. The increase in purchased powercosts primarily reflected increased purchases on the spot market forreplacement energy due to an unscheduled outage at the Iatan plant in May 2007and increased purchases from the Elk River Windfarm, LLC. The decrease in fuelcosts was primarily due to lower prices for both the hedged and unhedgednatural gas that we burned in our gas-fired units (an estimated $6.9 million)partially offset by increased generation by our gas-fired units (an estimated$1.7 million). Decreased coal generation of approximately $1.5 million alsocontributed to the decrease in fuel costs, offset by increased coal costs of approximately$1.8 million. The net increase in fuel and purchased power during the twelvemonths ended September 30, 2007 as compared to the same period last year was$2.5 million (1.5%).

 

Regulated– other operating expenses increased approximately $7.1 million (13.4%) duringthe twelve months ended September 30, 2007 as compared to the same period lastyear primarily due to a $2.4 million increase in employee pension expense, a$1.2 million increase in transmission and distribution expense, a $0.9 millionincrease in uncollectible accounts, a $0.7 million increase in labor and othercosts, a $0.7 million increase in customer accounts expense, a $0.6 millionincrease in professional services, a $0.4 million increase in injuries anddamages expense, a $0.3 million increase in regulatory commission expense and a$0.2 million increase in employee health care expense.

 

Maintenanceand repairs expense increased approximately $7.5 million (35.2%) during thetwelve months ended September 30, 2007, compared to the year ago periodreflecting increases of approximately $7.7 million in distribution maintenancecosts, including $4.6 million of incremental costs (and the $1.2 millionnon-incremental tree trimming and labor costs in the first quarter of 2007)related to the January 2007 ice storm, a $0.6 million increase in maintenanceand repairs expense at the Iatan plant related to the 2007 first quarterinspection, a $0.4 million increase in maintenance and repairs expense at theEnergy Center plant related to the Unit #3 bearing repair in the third quarterof 2007 and a $0.2 million increase in maintenance and repairs at our StateLine Unit 1 plant, which had its first major inspection from September 7, 2006until December 20, 2006. These increases were partially offset by a $0.9million decrease in maintenance and repairs expense at the Asbury plant duringthe twelve months ended September 30, 2007 as compared to the same period in2006 when the Asbury plant had an unscheduled outage due to a blade failure anda $0.6 million decrease in maintenance and repairs expense at our Rivertonplant.

 

39

----

 

Depreciationand amortization expense increased approximately $10.1 million (28.0%) mainlydue to $7.9 million of regulatory amortization related to the January 2007Missouri rate order that has been recorded as depreciation expense as well asincreased plant in service. Other taxes increased approximately $1.6 milliondue to increased property taxes reflecting our additions to plant in serviceand increased municipal franchise taxes.

 

***Gas Segment***

*** ***

**Operating Revenues and Sales**

** **

During the third quarter of2007, our total natural gas revenues were $5.6 million as compared to $4.9million in the third quarter of 2006. Our total natural gas revenues for thenine months and twelve months ended September 30, 2007 were approximately $41.7million and $60.3 million, respectively. The winter months are high salesmonths for the natural gas business, whose heating season runs from November toMarch of each year.

 

The following table details our natural gas sales and revenues for theperiods ended September 30:

 

**Total gas delivered to customers - bcf Sales***

 
| ** **                  | ** ** | **2007**                         | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| Residential                 |       | 0.14                             |       | 1.87 |   | 2.77 |   |
| Commercial                  |       | 0.12                             |       | 0.89 |   | 1.28 |   |
| Industrial                  |       | 0.00                             |       | 0.03 |   | 0.06 |   |
| Public  authorities         |       | 0.00                             |       | 0.02 |   | 0.03 |   |
| Total retail  sales*        |       | 0.27                             |       | 2.81 |   | 4.14 |   |
| Transportation  sales       |       | .86                              |       | 3.13 |   | 4.28 |   |
| Total gas  operating sales* |       | 1.13                             |       | 5.94 |   | 8.42 |   |

* *

----

**Differences could occur due torounding.*

* *
| ** **                  | ** ** | **2006**                         | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine months Ended**** | ** ** | **Twelve Months Ended**** | ** ** |
| Residential                 |       | 0.15                             |       | 0.20 |   | 0.20 |   |
| Commercial                  |       | 0.13                             |       | 0.17 |   | 0.17 |   |
| Industrial                  |       | 0.00                             |       | 0.00 |   | 0.00 |   |
| Public  authorities         |       | 0.00                             |       | 0.00 |   | 0.00 |   |
| Total retail  sales*        |       | 0.28                             |       | 0.37 |   | 0.37 |   |
| Transportation  sales       |       | .80                              |       | 1.08 |   | 1.08 |   |
| Total gas  operating sales* |       | 1.08                             |       | 1.45 |   | 1.45 |   |

* *

----

**Differences could occur due torounding.*

 

***2006 nine months ended andtwelve months ended sales represent the months of June through September 2006.*

* *

**Operating Revenues ($ in millions)***

 
| ** **                    | ** ** | **2007**                         | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
| Residential                   |       | $                                | 3.2        |   | $ | 27.2 |   | $ | 39.5 |   |
| Commercial                    |       | 1.8                              |       | 11.7 |   | 16.7 |   |
| Industrial                    |       | 0.1                              |       | 0.4 |   | 0.7 |   |
| Public  authorities           |       | 0.0                              |       | 0.2 |   | 0.3 |   |
| Total retail  sales revenues  |       | $                                | 5.1        |   | $ | 39.5 |   | $ | 57.2 |   |
| Transportation  revenues      |       | 0.5                              |       | 2.0 |   | 2.8 |   |
| Total gas  operating revenues |       | $                                | 5.6        |   | $ | 41.5 |   | $ | 60.0 |   |
|                               |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

* *

----

**Revenues exclude forfeiteddiscounts, reconnect fees, miscellaneous service revenues, etc.*

 

40

----

 

**Operating Revenues ($ in millions)***

 
| ** **                    | ** ** | **2006**                         | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine months Ended**** | ** ** | **Twelve Months Ended**** | ** ** |
| Residential                   |       | $                                | 2.7        |   | $ | 3.6 |   | $ | 3.6 |   |
| Commercial                    |       | 1.7                              |       | 2.2 |   | 2.2 |   |
| Industrial                    |       | 0.0                              |       | 0.1 |   | 0.1 |   |
| Public  authorities           |       | 0.0                              |       | 0.0 |   | 0.0 |   |
| Total retail  sales revenues  |       | $                                | 4.4        |   | $ | 5.9 |   | $ | 5.9 |   |
| Transportation  revenues      |       | 0.5                              |       | 0.6 |   | 0.6 |   |
| Total gas  operating revenues |       | $                                | 4.9        |   | $ | 6.5 |   | $ | 6.5 |   |

* *

----

**Revenues exclude forfeiteddiscounts, reconnect fees, miscellaneous service revenues, etc.*

 

***2006 nine months ended andtwelve months ended revenues represent the months of June through September2006.*

 

**OperatingRevenue Deductions**

 

During the third quarter of2007, EDG’s cost of natural gas sold and transported was approximately $2.6million as compared to $2.2 million in the third quarter of 2006. EDG’s cost ofnatural gas sold and transported for the nine months and twelve months endedSeptember 30, 2007 were approximately $26.1 million and $38.4 million,respectively. The cost of natural gas tends to vary with changing salesrequirements and unit cost of natural gas purchases. However, due to purchasednatural gas cost recovery mechanisms for retail customers, fluctuations in thecost of natural gas have little effect on income. Our Purchased Gas Adjustment(PGA) Clause allows us to recover from our customers, subject to routineregulatory review, the cost of purchased gas supplies, including costs, costreductions, and related carrying costs associated with the use of financialinstruments to hedge the purchase price of natural gas.

 

Total other operatingexpenses were $2.1 million for the third quarter of 2007 as compared to $2.4million in the third quarter of 2006. Total other operating expenses were $7.6million for the nine months ended September 30, 2007 and $10.3 million for thetwelve months ended September 30, 2007. EDG had a net loss of $0.9 million forthe third quarter of 2007 as compared to a net loss of $1.1 million in thethird quarter of 2006. EDG had net income of $0.02 million for the nine monthsended and $0.5 million for the twelve months ended periods. Approximately $1.2million in transition costs were paid to Aquila, Inc. in 2006 for billing andother transition services. These Aquila, Inc. services ended when they weretransitioned to Empire by November 1, 2006.

 

***Other Segment***

 

Our other segment includesleasing of fiber optics cable and equipment (which we are also using in our ownutility operations). The following table represents our results of continuingoperations for our remaining non-regulated businesses for the applicableperiods ended September 30,:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **(in millions)**                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                       |       | $                                | 1.0        |                            | $          | 0.7                               |       | $ | 2.7 |   | $ | 2.1 |   | $ | 3.5 |   | $ | 2.8 |   |
| Expenses                                       |       | 0.9                              |       | 0.7                             |       | 2.6                               |       | 1.9 |   | 3.6 |   | 2.5 |   |
| Net income  (loss) from continuing operations* |       | $                                | 0.1        |                            | $          | 0.1                               |       | $ | 0.1 |   | $ | 0.2 |   | $ | (0.1 | ) | $ | 0.3 |   |

* *

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**Differences could occur due torounding.*

 

***Consolidated Company***

 

**IncomeTaxes**

 

Ourconsolidated provision for income taxes decreased approximately $0.8 millionduring the third quarter of 2007 as compared to the same period in 2006 despitehigher income, primarily resulting from a lower effective tax rate. Ourconsolidated effective federal and state income tax rate for the third quarterof 2007 was 33.1% as compared to 35.7% for the third quarter of 2006. 

 

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Anincrease in equity AFUDC, a non-taxable benefit, primarily caused the reductionto our effective tax rate for the third quarter of 2007.

 

Ourconsolidated provision for income taxes decreased approximately $1.6 millionduring the nine months ended September 30, 2007 as compared to the same periodin 2006 as a result of our reduced effective tax rate despite higher income forthe 2007 period. Our consolidated effective federal and state income tax ratefor the nine months ended September 30, 2007 was 32.1% as compared to 35.5% forthe same period in 2006. The reduced effective rate was primarily caused by anincrease in equity AFUDC and Medicare Part D tax benefits.

 

Ourconsolidated provision for income taxes increased approximately $2.2 millionduring the twelve months ended September 30, 2007 as compared to twelve monthsended September 30, 2006 due to higher income, partially offset by lower taxrates. Our effective federal and state income tax rate for the twelve monthsended September 30, 2007 was 32.7% as compared to 35.4% for the same period in2006 also primarily due to the increase in equity AFUDC and Medicare Part Dbenefits.

 

**NonoperatingItems**

 

Total allowance for funds used during construction(AFUDC) for both equity and borrowed funds, increased $0.9 million in the thirdquarter of 2007 as compared to 2006. AFUDC increased $3.5 million during thenine months ended September 30, 2007 and increased $5.5 million during thetwelve months ended September 30, 2007 as compared to the same periods in 2006due to higher levels of construction in each period.

 

Total interest charges on long-term debt increased$1.2 million (17.2%) in the third quarter of 2007, $4.0 million (20.9%) for thenine months ended September 30, 2007 and $4.9 million ($19.7%) for the twelvemonths ended September 30, 2007 as compared to the prior year periods (offsetby the increased AFUDC discussed above). These increases reflect interest onthe $80 million principal amount of first mortgage bonds issued March 26, 2007by EDE, the proceeds of which were added to our general funds and used to paydown short-term indebtedness incurred as a result of our on-going constructionprogram. The increased interest for the nine month ended and twelve month endedperiods also reflect interest on the first mortgage bonds issued June 1, 2006by EDG to fund a portion of our acquisition of the Missouri natural gasdistribution operations from Aquila, Inc.

 

Short-termdebt interest increased $0.4million in the third quarter of 2007, $0.5 million for the nine months ended September30, 2007 and $1.0 million for the twelve months ended September 30, 2007 ascompared to the prior year periods, reflecting increased usage of short-termdebt in each of those periods.

 

Earningsfrom discontinued operations, which included operations and gains recognizedfrom the sales of MAPP, Conversant and Fast Freedom, were approximately $0.1million for the quarter ended September 30, 2007, $0.1 million for the ninemonths ended September 30, 2007 and $0.2 million for the twelve months endedSeptember 30, 2007, compared to losses of $0.02 million for the quarter endedSeptember 30, 2006, $0.9 million for the nine months ended September 30, 2006and $0.9 million for the twelve months ended September 30, 2006.

 

**OtherComprehensive Income**

 

The change in the fair valueof the effective portion of our open gas contracts for our electric businessand the gains and losses on contracts settled during the periods beingreported, including the tax effect of these items, are reflected in ourConsolidated Statement of Comprehensive Income. This net change is recorded asaccumulated 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 fuel,or interest expense, in the periods in which the hedged transaction is actuallyrealized or no longer qualifies for hedge accounting.

 

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The following table setsforth the pre-tax activity 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:

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **(in millions)**                           | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Natural gas  contracts settled *(1)*             |       | $                                | (1.2       | )                               | $          | (0.5                              | )          | $ | (1.2 | ) | $ | (1.3 | ) | $ | (1.3 | ) | $ | (2.0 | ) |
| Total contracts  settled                         |       | $                                | (1.2       | )                               | $          | (0.5                              | )          | $ | (1.2 | ) | $ | (1.3 | ) | $ | (1.3 | ) | $ | (2.0 | ) |
| Change in FMV of  open contracts for natural gas |       | $                                | (7.1       | )                               | $          | (4.3                              | )          | $ | 1.5 |   | $ | (12.6 | ) | $ | 0.7 |   | $ | (16.8 | ) |
| Total change in  FMV of open contracts           |       | $                                | (7.1       | )                               | $          | (4.3                              | )          | $ | 1.5 |   | $ | (12.6 | ) | $ | 0.7 |   | $ | (16.8 | ) |
| Taxes                                            |       | $                                | 3.2        |                            | $          | 1.8                               |       | $ | (0.1 | ) | $ | 5.3 |   | $ | 0.2 |   | $ | 7.1 |   |
| Total change in  OCI – net of tax           |       | $                                | (5.1       | )                               | $          | (3.0                              | )          | $ | 0.2 |   | $ | (8.6 | ) | $ | (0.4 | ) | $ | (11.7 | ) |

 

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*(1)Reflected in fuel expense*

 

Our average cost for ouropen financial natural gas hedges increased from $5.399/Dth at June 30, 2007 to$5.494/Dth at September 30, 2007.

 

Asof June 30, 2007, we elected to change our valuation of natural gas derivatives(financial hedges) for financial reporting purposes to a new methodology whichis more closely related to an independent market valuation. For accountingpurposes, this change is considered a change in estimate. To reflect thechange, an increase of approximately $6 million was recorded to the fair valueof derivatives and $3.7 million, net of tax, was recorded to othercomprehensive income at June 30, 2007. This change had no impact on the incomestatement.

 

**RATE MATTERS**

 

We continually assess theneed for rate relief in all of the jurisdictions we serve and file for suchrelief when necessary.

 

***Electric Segment***

 

The following table setsforth information regarding electric and water rate increases since October 1,2005:

 
| ** **          | ** ** | ** **       | ** ** | **Annual**   | ** ** | **Percent**  | ** ** | ** **       |
|---------------------|------------|------------------|------------|--------------|------------|--------------|------------|------------------|
| ** **          | ** ** | **Date**         | ** ** | **Increase** | ** ** | **Increase** | ** ** | **Date**         |
| **Jurisdiction**    | ** ** | **Requested**    | ** ** | **Granted**  | ** ** | **Granted**  | ** ** | **Effective**    |
| Missouri - Electric |       | February 1, 2006 |       | $29,369,397  |       | 9.96%        |       | January 1, 2007  |
| Missouri - Water    |       | June 24, 2005    |       | 469,000      |       | 35.90%       |       | February 4, 2006 |
| Kansas - Electric   |       | April 29, 2005   |       | 2,150,000    |       | 12.67%       |       | January 4, 2006  |

 

*Missouri*

 

OnFebruary 1, 2006, we filed a request with the MPSC for an annual increase inbase rates for our Missouri electric customers in the amount of $29,513,713, or9.63%. We also requested transition from the Interim Energy Charge (IEC) froman earlier case to Missouri’s new fuel adjustment mechanism. The MPSC issued anorder May 2, 2006, however, ruling that we may have the option of requestingthat the IEC be terminated, but we may not request the implementation of anenergy cost recovery mechanism while the current IEC is effective. The MPSCissued an order on December 21, 2006 granting us an annual increase of$29,369,397 (including regulatory amortization), or 9.96%, with an effectivedate of January 1, 2007 and eliminating the IEC. Pursuant to this order, thecollected IEC will not be refunded. The increase included an authorized returnon equity of 10.9% and included our fuel and energy costs as a component ofbase electric rates. Of the increase, approximately $19 million was granted inthe

 

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formof base rates, with the remainder of approximately $10.4 million granted asregulatory amortization to provide additional cash flow to enhance thefinancial support for our current generation expansion plan. This regulatoryamortization is related to our investment in Iatan 2 and also includes ourRiverton V84.3A2 combustion turbine (Unit 12) and the environmentalimprovements and upgrades at Asbury and Iatan 1. This order also alloweddeferral of any other postretirement benefits that are different from thoseallowed recovery in this rate case. This treatment is similar to treatmentafforded pension costs in our March 2005 rate case. This order also approvedregulatory treatment of additional liabilities arising from the adoption of FAS158. We also agreed to write off $1 million of the cost of our Energy Center 2construction project. The Missouri jurisdictional portion of this agreementresulted in a pre tax write off of $0.8 million in the fourth quarter of 2006.

 

OnDecember 29, 2006, the Office of Public Counsel (OPC) and intervenors Praxair,Inc. and Explorer Pipeline Company, filed an application with the MPSCrequesting the MPSC grant a rehearing on most of the issues addressed in theDecember 2006 Missouri rate case order and many of the procedural issues. OnDecember 29, 2006, we also filed an application with the MPSC requesting arehearing on return on equity, capital structure and energy cost recovery. Adecision by the MPSC is pending.

 

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

 

OnJanuary 4, 2007, the OPC filed a Petition for Writ of Mandamus with theMissouri Court of Appeals, Western District, seeking to have the orderapproving tariffs issued by the MPSC on December 29, 2006, set aside. On March12, 2007, the Court of Appeals issued an order denying the OPC’s petition.

 

OnMarch 19, 2007, the OPC filed a Petition for Writ of Mandamus with the MissouriSupreme Court seeking an order requiring the MPSC to vacate and rescind itsDecember 29, 2006 order approving tariffs and directing the MPSC to provide aneffective date for any subsequent tariff approval order that allows at leastten days to prepare and file an application for rehearing. On May 1, 2007, theMissouri Supreme Court issued a preliminary writ directing the MPSC to respondto the OPC’s petition. Following briefs and oral argument, on October 30, 2007,the Supreme Court made its preliminary writ peremptory and issued an opiniondirecting the MPSC to vacate its December 29 order approving tariffs and allowthe Public Counsel a reasonable time to prepare and file an application forrehearing. The Court did not examine the lawfulness or reasonableness of thesubstance of the MPSC’s December 29, 2006 order approving tariffs, andconsidered only the timing of the issuance of the order. The Court also did notconsider the underlying tariffed rates which continue in force and in effect.

 

Motionsfor rehearing may be filed with the Missouri Supreme Court within 15 days ofthe issuance of the opinion. In the absence of a rehearing, a mandate will beissued by the Missouri Supreme Court in mid-November, and the MPSC shouldthereafter take action in compliance with the writ and opinion.

 

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%. Thisrequest is to allow us to recover our investment in the new 150-megawattcombustion turbine, Unit 12, at our Riverton Plant, capital expendituresassociated with the construction of a selective catalytic reduction system atour Asbury Plant, capital expenditures and expenses related to the January 2007ice storm and other changes in our underlying costs. We are also requestingimplementation of a fuel adjustment clause in Missouri which would permit thedistribution to Missouri customers of changes in fuel and purchased powercosts.

 

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*Kansas*

 

On April 29, 2005, we fileda request with the Kansas Corporation Commission (KCC) for an increase in baserates for our Kansas electric customers in the amount of $4,181,078, or 24.64%.On October 4, 2005, we and the KCC Staff filed a Motion to Approve JointStipulated Settlement Agreement (Agreement) with the KCC. The Agreement calledfor an annual increase in base rates (which includes historical fuel costs) forour Kansas electric customers of approximately $2,150,000, or 12.67%, theimplementation of an Energy Cost Adjustment Clause (ECA), a fuel rider thatwill collect or refund fuel costs in the future that are above or below thefuel costs included in the base rates and the adoption of the same depreciationrates approved by the MPSC in our 2005 Missouri rate case. In addition, we willbe allowed to change our recognition of pension costs, deferring the Kansasportion of any costs above or below the amount included in this rate case as aregulatory asset or liability. The KCC approved the Agreement on December 9,2005 with an effective date of January 4, 2006. Pursuant to the Agreement, wewere to seek KCC approval of an explicit hedging program in a separate docketby March 1, 2006. However, we requested and received an extension until April1, 2006. We made this filing on March 30, 2006 and are awaiting a response fromthe KCC.

 

***Gas Segment***

 

On June 1, 2006, The EmpireDistrict Gas Company (EDG) acquired the Missouri natural gas distributionoperations of Aquila, Inc. (Missouri Gas). The Missouri Gas properties consistof 44 Missouri communities in northwest, north central and west centralMissouri. The rates, excluding the cost of gas, are the same as had been ineffect at Aquila, Inc. We agreed in the unanimous stipulation and agreementfiled with the MPSC on March 1, 2006 and approved on April 18, 2006, to notfile a rate increase request for non-gas costs for a period of 36 monthsfollowing the closing date of the acquisition. We have also agreed to useAquila Inc.’s current depreciation rates and were allowed to adopt the pensioncost recovery methodology approved in our electric Missouri Rate Case effectiveMarch 27, 2005.

 

A PGA clause is included inour gas rates which allows for the over recovery or under recovery of actualgas costs compared to the cost of gas in the PGA rate. This PGA clause allowsus to make rate changes periodically (up to four times) throughout the year inresponse to weather conditions, natural gas prices and supply demands, ratherthan in one possibly extreme change per year. The Actual Cost Adjustment (ACA)is a scheduled yearly filing with the MPSC filed between October 15 and November4 each year. This filing establishes the amount to be recovered from customersfor the over/under recovered yearly amounts. A PGA is included in the ACAfiling. An optional PGA filing without the ACA can be filed up to three timeseach year, provided a filing does not occur within 60 days of a previousfiling. Our last ACA filing was completed on October 24, 2007.

 

**COMPETITION**

 

**ElectricSegment**

 

*SPP-RTO*

 

On February 1, 2007, theSPP 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. Although our experience to date in the EIS market islimited, it appears that we have realized some modest savings to date. However,we are still unable to quantify the impact of such EIS participation on ourfuture financial position, results of operation or cash flows at this time.

 

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

 

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

 

OnFebruary 16, 2007, FERC issued a Final Order No. 890, which instituted numerousreforms to its Order 888 open access transmission pro forma tariff (OATT) whichwas issued in April 1996. The purpose of the Order was (i) to strengthen theOATT to ensure that it better achieves its original purpose of remedying unduediscrimination for the provision of transmission service, (ii) to providegreater specificity in the OATT to reduce opportunities for the exercise ofundue discrimination, make undue discrimination easier to detect, andfacilitate FERC’s enforcement, and (iii) to increase transparency in the rulesapplicable to planning and use of the transmission system. FERC’s actionsrequired modifications to the SPP and our OATTs as well as regional and localtransmission planning processes. We and SPP submitted our respective Order 890compliance filings of our OATTs on October 11, 2007. Compliance modificationsto our OATT filing were not material and we anticipate them being accepted. TheSPP is finalizing its modifications to its transmission planning processes,pursuant to Order 890. SPP plans to make such filing to FERC on December 7,2007.

 

*FERCMarket Power Order*

 

InApril and July 2004, FERC issued orders regarding new testing standards forassessing market power by entities that have wholesale market-based ratetariffs filed with the FERC. The parameters included in the tests are such thatmost investor owned electric utilities fail the test within their own controlarea and are subject to a rebuttable presumption of market power. Entities withwholesale market based rates tariffs are subject to a triennial filing to testfor market power and are required to apply the new testing criteria. FERCdetermination of market power would result in the inability for a utility tocontinue to charge such market-based rates. In September 2004, we submittedamended and updated market power analyses filings.

 

OnMarch 3, 2005, the FERC issued an order commencing an investigation todetermine if we had market power within our control area based on our failureto meet one of FERC’s wholesale market share screens. We filed responses tothat order in May and June 2005 and in early January 2006. On August 15, 2006,the FERC issued its order accepting Empire’s proposed mitigation to becomeeffective May 16, 2005, subject to a further compliance filing as directed inthe order. Relying on a series of orders issued since March 17, 2006 in otherproceedings, the FERC rejected our tariff language and directed us to filerevisions to our market-based tariff to provide that service under the tariffapplies only to sales outside our control area. The FERC directed us to makerefunds, with interest, by September 15, 2006, which could amount toapproximately $0.6 million (excluding interest) covering over a thousand hourlyenergy sales over the past 18 months to numerous counterparties external to oursystem. In response to the order, we filed a Motion For Extension of time andexpedited treatment regarding the refund and requested that such refund bedelayed until 15 days after the FERC’s order on our rehearing request. OnSeptember 5, 2006, the FERC granted the Motion For Extension, as requested.

 

OnSeptember 14, 2006, we filed a Request For Rehearing of FERC’s August 15 orderregarding the refund and market power mitigation we had proposed. We requesteda rehearing and a waiver of the refund requirement in its entirety.

 

OnJune 21, 2007, FERC issued a Final Rule related to Market-Based Rates forWholesales of Electric Energy, Capacity, and Ancillary Services by PublicUtilities which directly affects our market power assessment within our servicearea and Request For Rehearing related to the aforementioned pending potentialrefund. In reaction to the Final Rule, we were required to modify our MarketBased Rate Tariff in the form of a compliance filing to FERC, which was made

 

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onSeptember 17, 2007. The FERC’s ruling on our compliance filing, as well as ourRequest For Rehearing on the refund, are pending. We are evaluating andimplementing revisions to our wholesale power sales business practices inaccordance with the Final Rule.

 

*OtherFERC Rulemaking*

 

Alsoon June 21, 2007, FERC issued an Advance Notice of Proposed Rulemaking (ANOPR)on potential reforms to improve operations in organized wholesale powermarkets, such as the SPP RTO in which we participate. FERC is seeking commentin the following areas: (i) the role of demand response in the organized markets,(ii) increasing opportunities for long-term power contracts, (iii)strengthening market monitoring and (iv) the responsiveness of RTOs and ISOs tocustomers and stakeholders.

 

**GasSegment**

 

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Weused approximately $138.7 million of cash for regulated capital expendituresduring the nine months ended September 30. 2007. Our primary sources of cashflow for these expenditures during the nine months ended September 30, 2007were $88.4 million in internally generated funds from continuing operations and$79.8 million in gross proceeds from first mortgage bonds.

 

**CashProvided by Operating Activities**

 

Ournet cash flows provided by continuing operating activities were $88.4 millionfor the first nine months of 2007 compared to $62.4 million for the same periodin 2006. Net income increased $2.6 million, with another $23.5 million ofpositive impact from the effect of adjustments to net income to reconcile tocash flows (primarily the effect of increased depreciation and deferred taxes).A decrease in changes in accounts payable and accrued liabilities had a $17.7million positive cash flow effect this year compared to 2006. During the ninemonths ended September 30, 2006, approximately $9.0 million in fuel accountspayable balances were paid. In 2007, an additional $8.2 million is owed onconstruction invoices over 2006. Cash flows were also positively impacted bychanges in fuel, material and supplies and prepaid expenses, other currentassets and deferred charges. The negative cash flow impact of $6.9 million incash expenditures for the ice storm that have been deferred as a regulatoryasset were almost totally offset by the effect of changes to our regulatoryasset accounts. Cash flows were negatively impacted in 2007 by an increase inchanges in accounts receivable. This resulted from a $5.2 million tax refundreceived in 2006, as well as an increased trade accounts receivable balance of$8.4 million for electric and $2.7 million for gas, all of which decreased cashflows in 2007 as compared to 2006. Cash flows were also negatively impacted bydecreases in changes in interest and taxes accrued, as well as otherliabilities and deferred assets.

 

**CapitalRequirements and Investing Activities**

 

Ournet cash flows used in investing activities of continuing operations increased$52.4 million during the nine months ended September 30,  2007 as compared to the nine months ended

 

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September30, 2006 (excluding the effect of the 2006 gas operations acquisition),primarily reflecting the ice storm and construction expenditures for Plum PointUnit 1 and Iatan 2.

 

Ourcapital expenditures totaled approximately $51.3 million during the thirdquarter of 2007 compared to approximately $35.7 million for the same period in2006. Our capital expenditures totaled approximately $141.9 million during thenine months ended September 30, 2007 compared to approximately $89.1 millionfor the same period in 2006 (excluding the effect of the 2006 gas operationsacquisition). These capital expenditures include AFUDC, capital expenditures toretire assets and benefits from salvage.

 

Abreakdown of the capital expenditures for the quarter and nine months endedSeptember 30, 2007 is as follows:

 
| ** **                                                                                  | ** ** | **Capital Expenditures**    | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **Quarter Ended**           | ** ** | **Nine months Ended** | ** ** |
| **(in millions)**                                                                      | ** ** | **September 30, 2007** | ** ** | **September 30, 2007** | ** ** |
| Distribution and  transmission system additions                                             |       | $                                | 12.1       |   | $ | 34.6 |   |
| New Generation –  Riverton combustion turbine                                          |       | —                           |       | 3.8 |   |
| New Generation –  Plum Point Energy Station                                            |       | 7.0                              |       | 20.6 |   |
| New Generation –  Iatan 2                                                              |       | 15.1                             |       | 31.3 |   |
| Storms*                                                                                     |       | 0.4                              |       | 18.2 |   |
| Additions and replacements  – Asbury                                                   |       | 9.7                              |       | 17.3 |   |
| Additions and  replacements – Riverton, Ozark Beach and State Line Combined Cycle Unit |       | 0.1                              |       | 0.5 |   |
| Additions and  replacements – Iatan 1                                                  |       | 4.4                              |       | 8.1 |   |
| Additions and  replacements – State Line Unit 1                                        |       | —                           |       | 0.5 |   |
| Additions and  replacements – Energy Center                                            |       | —                           |       | 0.8 |   |
| Transportation                                                                              |       | 0.3                              |       | 0.4 |   |
| Gas segment  additions and replacements                                                     |       | 0.8                              |       | 1.4 |   |
| Other (including  retirements and salvage -net)*                                            |       | —                           |       | 1.2 |   |
| Subtotal                                                                                    |       | $                                | 49.9       |   | $ | 138.7 |   |
| Non-regulated  capital expenditures (primarily fiber optics)                                |       | 1.4                              |       | 3.2 |   |
| TOTAL                                                                                       |       | $                                | 51.3       |   | $ | 141.9 |   |

 

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*For the nine monthsended September 30, 2007, storm costs of $17.8 million and Other of $1.4million, which relates to the cost of removal, are specifically related tocapital expenditures associated with the January 2007 ice storm.

 

Approximately69% of our cash requirements for capital expenditures during the third quarterof 2007 were satisfied internally from operations (funds provided by operatingactivities less dividends paid). We currently expect that internally generatedfunds will provide less than 1% of the funds required for the remainder of ourbudgeted 2007 capital expenditures. We intend to utilize a combination ofshort-term debt, the proceeds of sales of long-term debt and/or common stock(including common stock sold under our Employee Stock Purchase Plan, ourDividend Reinvestment and Stock Purchase Plan, and our 401(k) Plan and ESOP) tofinance additional amounts needed beyond those provided by operating activitiesfor such capital expenditures. We will continue to utilize short-term debt asneeded to support normal operations or other temporary requirements. Forfurther information see Note 7 of “Notes to Consolidated Financial Statements(Unaudited).”

 

Wehad estimated that our 2007 capital expenditures would total approximately$171.0 million (including AFUDC). However, due to the ice storm costscapitalized as additions to our utility plant in the first six months of 2007,we now estimate our 2007 capital expenditures to be approximately $189 million.

 

Asof April 10, 2007, our new Siemens V84.3A2 combustion turbine, Unit 12 at ourRiverton plant, began commercial operation. Riverton Unit 12 has a summer ratedcapacity of 150 megawatts, increasing our Riverton Plant’s total generatingcapacity to 286 megawatts.

 

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**Financing Activities**

 

Financingactivities from continuing operations provided $44.2 million during the ninemonths ended September 30, 2007 as compared to $115.5 million during the sameperiod in 2006. Our 2007 sources include the $80 million principal amount offirst mortgage bonds issued March 26, 2007. The net proceeds of $79.1 million,less $0.4 million of legal and other financing fees, were added to our generalfunds and used to pay down short-term indebtedness incurred as a result of ouron-going construction program.

 

Wehave an effective shelf registration statement with the SEC under whichapproximately $243.2 million of our common stock, unsecured debt securities,preference stock and first mortgage bonds remain available for issuance. Ofthis amount, $120 million remains available of the original $200 millionapproved by the MPSC as available for first mortgage bonds. We plan to use aportion of the proceeds from issuances under this shelf to fund a portion ofthe 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 commercial paper)are at the bank’s prime commercial rate or LIBOR plus 100 basis points based onour current credit ratings and the pricing schedule in the line of creditfacility. On March 14, 2006, we entered into the First Amended and RestatedUnsecured Credit Agreement which amends and restates the $150 million unsecuredrevolving credit facility. The principal amount of the credit facility wasincreased to $226 million, with the additional $76 million allocated to supporta letter of credit issued in connection with our participation in the PlumPoint Energy Station project. This extra $76 million of availability reducesover a four year period in line with the amount of construction expenditures weowe for Plum Point Unit 1 and was $47.5 million as of November 1, 2007. Theunallocated credit facility is used for working capital, general corporatepurposes and to back-up our use of commercial paper. This facility requires ourtotal 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 ofSeptember 30, 2007, we are in compliance with these ratios. This credit facilityis also subject to cross-default if we default on in excess of $10 million inthe aggregate on our other indebtedness. This arrangement does not serve tolegally restrict the use of our cash in the normal course of operations. Therewere no outstanding borrowings under this agreement at September 30, 2007,however, $67.7 million of the availability thereunder was used at such date toback up our outstanding commercial paper.

 

Restrictionsin the 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, 2007 would permitus to issue approximately $352.8 million of new first mortgage bonds based onthis test with an assumed interest rate of 6.5%. In addition to the interestcoverage requirement, the EDE Mortgage provides that new bonds must be issuedagainst, among other things, retired bonds or 60% of net property additions. AtSeptember 30, 2007, we had retired bonds and net property additions which wouldenable the issuance of at least $547.9 million principal amount of bonds if theannual interest requirements are met. As of September 30, 2007, we are incompliance with all restrictive covenants of the EDE Mortgage.

 

TheEDG Mortgage contains a requirement that for new first mortgage bonds to beissued, the amount of such new first mortgage bonds shall not exceed 75% of thecost of property additions acquired after the date of the Missouri Gasacquisition. At September 30, 2007, we had property additions of $2.1 million.The mortgage also contains a limitation on the issuance by EDG 

 

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ofdebt (including first mortgage bonds, but excluding short-term debt incurred inthe ordinary course under working capital facilities) unless, after givingeffect to such issuance, EDG’s ratio of EBITDA (defined as net income plusinterest, taxes, depreciation, amortization and certain other non-cash charges)to interest charges for the most recent four fiscal quarters is at least 2.0 to1. As of September 30, 2007, this test would not allow us to issue any newfirst mortgage bonds. The transition service costs, although expected,negatively impact the coverage ratio.

 

Asof September 30, 2007, our corporate credit ratings and the ratings for oursecurities were as follows:

 
| ** **                                       | ** ** | **Fitch** | ** ** | **Moody’s** | ** ** | **Standard & Poor’s** | ** ** |
|--------------------------------------------------|------------|-----------|------------|------------------|------------|------------------------------------------|------------|
| Corporate Credit  Rating                         |       | n/r       |       | Baa2             |       | BBB-                                     |       |
| First Mortgage  Bonds                            |       | BBB+      |       | Baa1             |       | BBB+                                     |       |
| First Mortgage  Bonds - Pollution Control Series |       | AAA       |       | Aaa              |       | AAA                                      |       |
| Senior Notes                                     |       | BBB       |       | Baa2             |       | BB+                                      |       |
| Trust Preferred  Securities                      |       | BBB-      |       | Baa3             |       | BB                                       |       |
| Commercial Paper                                 |       | F2        |       | P-2              |       | A-3                                      |       |
| Outlook                                          |       | Stable    |       | Negative         |       | Stable                                   |       |

 

OnSeptember 22, 2005, Standard & Poor’s (S&P), reflecting ourannouncement of our proposed acquisition of Aquila, Inc.’s Missouri natural gasproperties, placed our corporate credit rating on credit watch with negativeimplications. S&P stated that the acquisition comes in addition to ourembarking on a capital spending program that is significantly higher thanhistorical levels and will be partially debt financed. On February 13, 2006,S&P removed our corporate credit rating from credit watch, but placed us onnegative outlook. S&P also reduced the rating on our commercial paper fromA-2 to A-3 on February 21, 2006. This reduction made it more difficult for usto issue commercial paper and, as a result, our short-term debt during theperiod from February 21, 2006 to June 30, 2006, was in the form of borrowingsunder our revolving credit facility. However, beginning on June 30, 2006, wewere able to again issue commercial paper at the current rating under a newagreement with Wells Fargo Bank. On May 17, 2006, S&P lowered our long-termcorporate credit rating to BBB- from BBB, senior secured debt to BBB+ from A-,senior unsecured debt rating to BB+ from BBB- and affirmed our short-termrating of A-3. S&P’s downgrade reflected their view that our financial measureswill be constrained over the next several years by fuel and power costs thatcontinue to exceed the level recoverable in rates, and by ourhigher-than-historical level of capital spending, including the acquisition ofMissouri Gas. S&P affirmed our ratings on June 8, 2007 with a stableoutlook.

 

Moody’saffirmed our ratings on May 13, 2005 and revised their rating outlook on usfrom negative to stable. On January 24, 2007, Moody’s again affirmed ourratings but changed their rating outlook on us back to negative. The change toa negative rating outlook reflects Moody’s view on the longer-term prospectsfor our ratings given the sizable capital spending program we have committed tothrough 2010 and the potential for further weakness in our credit metrics thatcould develop during this time.

 

In****September 2005, we entered into an agreement with FitchRatings to initiate coverage of us and to assign ratings to our outstandingdebt securities. On December 19, 2005, Fitch Ratings initiated coverage andassigned ratings (see table above) with a stable rating outlook. Fitchannounced that their ratings reflect our low business risk position as aregulated electric utility, a stable service territory and a seeminglyimproving regulatory environment in Missouri where we receive approximately 89%of our electric retail revenues. Fitch reaffirmed these ratings and outlook onApril 3, 2007.

 

**CONTRACTUAL OBLIGATIONS**

 

Set forth below isinformation summarizing our contractual obligations as of September 30, 2007.Not included in these amounts are expected obligations associated with ourshare of the Iatan 2 construction and Iatan 1 environmental constructionadditions for which we have not yet 

 

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been billed. Other postretirementbenefit plans are funded on an ongoing basis to match their correspondingcosts, per regulatory requirements and have been estimated for 2007-2011 asnoted below. Future pension funding commitments are not expected to be materialover the next 5 years and have not been estimated for later years.

 
| ** **                                 | ** ** | **Payments  Due by Period  (in millions)** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| **Contractual Obligations (1)**  | ** ** | **Total**                                  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Long-term debt  (w/o discount)             |       | $                                          | 492.5      |   | $ | — |   | $ | 70.0 |   | $ | — |   | $ | 422.5 |   |
| Note payable to  securitization trust      |       | 50.0                                       |       | — |   | — |   | — |   | 50.0 |   |
| Interest on  long-term debt                |       | 624.7                                      |       | 34.3 |   | 65.4 |   | 58.8 |   | 466.2 |   |
| Short-term debt                            |       | 67.7                                       |       | 67.7 |   | — |   |   |   | — |   |
| Capital lease  obligations                 |       | 0.9                                        |       | 0.3 |   | 0.6 |   | — |   | — |   |
| Operating lease  obligations (2)           |       | 3.8                                        |       | 1.5 |   | 1.2 |   | 0.4 |   | 0.7 |   |
| Electric  purchase obligations (3)         |       | 356.1                                      |       | 84.9 |   | 100.6 |   | 52.8 |   | 117.8 |   |
| Gas purchase  obligations (4)              |       | 79.9                                       |       | 15.5 |   | 14.3 |   | 14.5 |   | 35.6 |   |
| Open purchase  orders                      |       | 23.6                                       |       | 23.5 |   | — |   | 0.1 |   | — |   |
| Plum Point                                 |       | 49.2                                       |       | 23.8 |   | 25.4 |   | — |   | — |   |
| SPP transmission  system upgrades          |       | 8.9                                        |       | 8.9 |   | — |   | — |   | — |   |
| Postretirement  benefit obligation funding |       | 9.7                                        |       | 1.4 |   | 3.7 |   | 4.1 |   | 0.5 |   |
| Other long-term  liabilities (5)           |       | 4.2                                        |       | 0.1 |   | 0.4 |   | 0.4 |   | 3.3 |   |
| Total  Contractual Obligations             |       | $                                          | 1,771.2    |   | $ | 261.9 |   | $ | 281.6 |   | $ | 131.1 |   | $ | 1,096.6 |   |

* *

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*(1) Some of our contractualobligations have price escalations based on economic indices, but we do notanticipate these escalations to be significant.*

 

*(2) Excludes payments under ourElk River Wind Farm and Meridian Way Wind Farm agreements, as payments arecontingent upon output of the facilities. Payments under the Elk River WindFarm agreement can run from zero up to a maximum of approximately $16.9 millionper year based on a 20 year average cost and an annual output of 550,000megawatt hours. Payments under the Meridian Way Wind Farm**agreement**can range from zero to amaximum of approximately $14.6 million per year based on a 20-year averagecost.*

 

*(3) Includes a water usagecontract for our SLCC facility, fuel and purchased power contracts andassociated transportation costs, as well as purchased power for 2010 through2015 for Plum Point.*

 

*(4) Represents fuel contracts andassociated transportation costs of our gas segment.*

 

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

 

**DIVIDENDS**

 

Holdersof our common stock are entitled to dividends if, as, and when declared by the Boardof Directors, out of funds legally available therefore, subject to the priorrights of holders of any outstanding cumulative preferred stock and preferencestock. Payment of dividends is determined by our Board of Directors afterconsidering all relevant factors, including the amount of our retained earnings(which is essentially our accumulated net income less dividend payouts). As ofSeptember 30, 2007 our retained earnings balance was $27.3 million, compared to$24.4 million as of September 30, 2006, after paying out $29.2 million individends during the first nine months of 2007. A reduction of our dividend pershare, partially or in whole, could have an adverse effect on our common stockprice.

 

Our diluted earnings pershare were $1.11 for the nine months ended September 30, 2007 and were $1.39and $0.92 for the years ended December 31, 2006 and 2005, respectively.Dividends paid per share were $0.96 for the nine months ended September 30,2007 and $1.28 for each of the years ended December 31, 2006 and 2005.

 

In addition, the EDEMortgage and our Restated Articles contain certain dividend restrictions. Themost restrictive of these is contained in the EDE Mortgage, which provides thatwe may not declare or pay any dividends (other than dividends payable in sharesof our common stock) or make any other distribution on, or purchase (other thanwith the proceeds of additional common stock financing) any shares of, ourcommon stock if the cumulative aggregate amount 

 

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thereof after August 31,1944 (exclusive of the first quarterly dividend of $98,000 paid after saiddate) would exceed the earned surplus (as defined in the EDE Mortgage)accumulated subsequent to August 31, 1944, or the date of succession in theevent that another corporation succeeds to our rights and liabilities by amerger or consolidation. As of September 30, 2007, our level of earned surplusdid not prevent us from issuing dividends. In addition, under certaincircumstances (including defaults thereunder), our Junior SubordinatedDebentures, 8-1/2% Series due 2031, reflected as a note payable tosecuritization trust on our balance sheet, held by Empire District ElectricTrust I, an unconsolidated securitization trust subsidiary, may also restrictour ability to pay dividends on our common stock.

 

**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 endedDecember 31, 2006 for a discussion of our critical accounting policies. Therewere no changes in these policies in the quarter ended September 30, 2007.

 

**RECENTLY ISSUED ACCOUNTING STANDARDS**

 

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

 

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

 

Marketrisk is the exposure to a change in the value of a physical asset or financialinstrument, derivative or non-derivative, caused by fluctuations in marketvariables such as interest rates or commodity prices. We**handleour commodity market risk in accordance with our established Energy RiskManagement Policy, which typically includes entering into various derivativetransactions. We utilize derivatives to manage our gas commodity market riskand to help manage our exposure resulting from purchasing most of our naturalgas on the volatile spot market for the generation of power for our native-loadcustomers. See Note 6 of “Notes to Consolidated Financial Statements(Unaudited)” for further information.

 

*Interest Rate Risk.*We are exposed to changes in interest rates as a result of financingthrough our issuance of commercial paper and other short-term debt. We manageour interest rate exposure by limiting our variable-rate exposure (applicableto commercial paper and borrowings under our unsecured credit agreement) to acertain percentage of total capitalization, as set by policy, and by monitoringthe effects of market changes in interest rates.

 

Ifmarket interest rates average 1 percentage point more in 2007 than in 2006, ourinterest expense would increase, and income before taxes would decrease by lessthan $800,000. This amount has been determined by considering the impact of thehypothetical interest rates on our highest month-end commercial paper balancefor 2006. These analyses do not consider the effects of the reduced level ofoverall economic activity that could exist in such an environment. In the eventof a significant change in interest rates, management would likely take actionsto further mitigate its exposure to the change. However, due to the uncertaintyof the specific actions that would be taken and their possible effects, thesensitivity analysis assumes no changes in our financial structure.

 

*Commodity Price Risk*. We are exposed to the impact of market fluctuations in the price andtransportation costs of coal, natural gas, and electricity and employ establishedpolicies and 

 

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proceduresto manage the risks associated with these market fluctuations, includingutilizing derivatives.

 

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

 

Weare exposed to changes in market prices for natural gas we must purchase to runour combustion turbine generators. Our natural gas procurement program isdesigned to minimize our risk from volatile natural gas prices. We enter intophysical forward and financial derivative contracts with counterpartiesrelating to our future natural gas requirements that lock in prices (withrespect to predetermined percentages of our expected future natural gas needs)in an attempt to lessen the volatility in our fuel expense and improvepredictability. We expect that increases in gas prices will be partially offsetby realized gains under financial derivative transactions. As of October 26,2007, 88%, or 1.3 million Dths of our anticipated volume of natural gas usagefor our electric operations for the remainder of 2007 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, 2007, our natural gas expense would increase, and incomebefore taxes would decrease by approximately $1.2 million based on ourSeptember 30, 2007 total hedged positions for the next twelve months.

 

Weattempt to mitigate a portion of our natural gas price risk associated with ourgas segment using physical forward purchase agreements, storage and derivativecontracts. As of November 1, 2007, we had 1.8 million Dths in storage on thethree pipelines that serve our customers, which was 0.08 million Dths below our95% target. Our long-term hedge strategy for our gas segment is still in thedevelopment process. However, due to purchased natural gas cost recoverymechanisms for our retail customers, fluctuations in the cost of natural gashave little effect on income.

 

*Credit Risk*.Credit risk is the risk of financial loss to the Company if counterparties failto perform their contractual obligations. In order to minimize overall creditrisk, we maintain credit policies, including the evaluation of counterpartyfinancial condition and the use of standardized agreements that facilitate thenetting of cash flows associated with a single counterparty. In addition,certain counterparties make available collateral in the form of cash held asmargin deposits as a result of exceeding agreed-upon credit exposure thresholdsor may be required to prepay the transaction. Amounts reported as margindeposit liabilities represent funds we hold that result from various tradingcounterparties exceeding agreed-upon credit exposure thresholds. Amountsreported as margin deposit assets represent funds held on deposit by varioustrading counterparties that resulted from us exceeding agreed-upon creditlimits established by the counterparties. The following table depicts our margindeposit assets and margin deposit liabilities at September 30:

 
| **(in millions)**      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Margin deposit  assets      |       | $        | 7.1        |     | $          | 2.2 |   |
| Margin deposit  liabilities |       | $        | 0.0        |     | $          | 4.3 |   |

 

Inaddition, we are holding a letter of credit from a counterparty in our favorfor $6.4 million as of October 31, 2007.

 

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 

 

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industryfor purchases 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 26, 2007, gross credit exposure related to thesetransactions totaled $19.2 million, reflecting the unrealized gains forcontracts carried at fair value.

 

**Item 4.  Controls andProcedures**

 

Asof the end of the period covered by this report, an evaluation was carried out,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures (as suchterm is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934).Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof September 30, 2007.

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the third quarter of 2007 that have materially affected or arereasonably likely to materially affect our internal control over financialreporting.

 

**PART II.  OTHER INFORMATION**

 

**Item 1A.  Risk Factors.**

 

Therehave been no material changes to the factors disclosed in Part I, Item 1-A.Risk Factors in our Annual Report on Form 10-K for the year ended December 31,2006.

 

**Item 5.  Other Information.**

 

Forthe twelve months ended September 30, 2007, our ratio of earnings to fixedcharges was 2.62x. See Exhibit (12) hereto.

 

**Item 6.  Exhibits.**

 
| (a)    | Exhibits.                                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                          |
|   | (12) Computation of Ratio of Earnings  to Fixed Charges.                                                                                                      |
|   |                                                                                                                                                          |
|   | (31)(a)  Certification of Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                 |
|   |                                                                                                                                                          |
|   | (31)(b)  Certification of Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                 |
|   |                                                                                                                                                          |
|   | (32)(a)  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|   |                                                                                                                                                          |
|   | (32)(b)  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |

 

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*****This certification accompanies this Reportpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not bedeemed filed by the Company for purposes of Section 18 or any other provisionof the Securities Exchange Act of 1934, as amended.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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 | ** ** |
|            |                                           |  |  |  |

 

November7, 2007

 

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