EXECUTIVE SUMMARY

We operate our businesses as three segments: electric, gas and other. The Empire District Electric Company (EDE) 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 provide water service to three towns in Missouri. The Empire District Gas Company (EDG) is our wholly owned subsidiary formed to hold the Missouri Gas assets acquired from Aquila, Inc. on June 1, 2006. It provides natural gas distribution to customers in 44 communities in northwest, north central and west central Missouri. Our other segment consists of our non-regulated businesses, primarily a 100% interest in Empire District Industries, Inc., a subsidiary for our fiber optics business. During the twelve months ended December 31, 2008, 86.5% of our gross operating revenues were provided from sales from our electric segment (including 0.3% from the sale of water), 12.6% from the sale of gas and 0.9% from our non-regulated businesses.

Electric Segment

The primary drivers of our electric operating revenues in any period are:
(1) rates we can charge our customers, (2) weather, (3) customer growth and
(4) general economic conditions. The utility commissions in the states in which we operate, as well as the Federal Energy Regulatory Commission (FERC), set the rates which we can charge our customers. In order to offset expenses, we depend on our ability to receive adequate and timely recovery of our costs (primarily fuel and purchased power) and/or rate relief. We assess the need for rate relief in all of the jurisdictions we serve and file for such relief when necessary. Weather affects the demand for electricity. Very hot summers and very cold winters increase electric demand, while mild weather reduces demand. Residential and commercial sales are impacted more by weather than industrial sales, which are mostly affected by business needs for electricity and by general economic conditions. Customer growth, which is the growth in the number of customers, contributes to the demand for electricity. We expect our annual electric customer growth to range from approximately 1.1% to 1.6% over the next several years. Our electric customer growth for the twelve months ended December 31, 2008 was 0.4%. We define electric sales growth to be growth in kWh sales period over period excluding the impact of weather. The primary drivers of electric sales growth are customer growth and general economic conditions.

The primary drivers of our electric operating expenses in any period are:
(1) fuel and purchased power expense, (2) maintenance and repairs expense, including repairs following severe weather and plant outages, (3) taxes and
(4) non-cash items such as depreciation and amortization expense. Historically, fuel and purchased power costs were the expense items that had the most significant impact on our net income. In our latest rate case, the Missouri Public Service Commission (MPSC) authorized a fuel adjustment clause for our Missouri customers effective September 1, 2008. The MPSC established a base rate for the recovery of fuel and purchased power expenses used to supply energy. The clause permits the distribution to customers of 95% of the changes in fuel and purchased power costs above or below the base. With the addition of the Missouri fuel adjustment mechanism, we now have a fuel cost recovery mechanism in all of our jurisdictions, which will significantly reduce the impact of fluctuating fuel costs on our net income.

Gas Segment

The primary drivers of our gas operating revenues in any period are:
(1) rates we can charge our customers, (2) weather, (3) customer growth, (4) the cost of natural gas and interstate pipeline transportation charges and
(5) general economic conditions. The MPSC sets the rates which we can charge our customers. In order to offset expenses, we depend on our ability to receive adequate and timely recovery of our costs (primarily commodity natural gas) and/or rate relief. We assess the need for rate

relief and file for such relief when necessary. However, as part of the unanimous stipulation and agreement filed with the MPSC on March 1, 2006 and approved on April 18, 2006, we have agreed to not file a rate increase request for non-gas costs prior to June 1, 2009. A PGA clause is included in our gas rates, which allows us to recover our actual cost of natural gas from customers through rate changes, which are made periodically (up to four times) throughout the year in response to weather conditions, natural gas costs and supply demands. Weather affects the demand for natural gas. Very cold winters increase demand for gas, while mild weather reduces demand. Due to the seasonal nature of the gas business, revenues and earnings are typically concentrated in the November through March period, which generally corresponds with the heating season. Customer growth, which is the growth in the number of customers, contributes to the demand for gas. Our gas segment customer contraction for the twelve months ended December 31, 2008 was 1.5%, which we believe was due to higher gas prices and general economic conditions. The rate of gas customer contraction is expected to level out during the next two years and to remain relatively flat after 2010. We define gas sales growth to be growth in mcf sales excluding the impact of weather. The primary drivers of gas sales growth are customer growth and general economic conditions.

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

Earnings

For the twelve months ended December 31, 2008, basic and diluted earnings per weighted average share of common stock were $1.17 compared to $1.09 for the twelve months ended December 31, 2007. As reflected in the table below, the primary positive drivers were increased electric and gas revenues while the primary negative drivers were increased fuel and purchased power costs.

The following reconciliation of basic earnings per share between 2007 and 2008 is a non-GAAP presentation. We believe this information is useful in understanding the fluctuation in earnings per share between the prior and current years. The reconciliation presents the after tax impact of significant items and components of the income statement on a per share basis before the impact of additional stock issuances which is presented separately. Earnings per share for the years ended December 31, 2007 and 2008 shown in the reconciliation are presented on a GAAP basis and are the same as the amounts included

in the statements of operations. This reconciliation may not be comparable to other companies or more useful than the GAAP presentation included in the statements of operations.

              Earnings Per Share - 2007                       $  1.09
              Revenues
                Electric on-system                            $  0.22
                Electric off-system and other                    0.26
                Gas                                              0.12
                Water                                               -
                Other                                            0.03
              Expenses
                Electric fuel and purchased power               (0.29 )
                Cost of natural gas sold and transported        (0.11 )
                Regulated - electric segment                    (0.02 )
                Regulated - gas segment                          0.01
                Other segment                                   (0.01 )
                Maintenance and repairs                          0.08
                Depreciation and amortization                   (0.02 )
                Other taxes                                     (0.01 )
                Interest charges                                (0.09 )
                AFUDC                                            0.11
                Gain on sale of assets                          (0.03 )
                Change in effective income tax rates            (0.04 )
                Other income and deductions                     (0.02 )
                Dilutive effect of additional shares issued     (0.11 )

              Earnings Per Share - 2008                       $  1.17

Fourth Quarter Results

Earnings for the fourth quarter of 2008, were $7.7 million, or $0.23 per share, as compared to a net loss of $0.4 million, or ($0.01) per share, in the fourth quarter 2007. Total revenues increased approximately $16.5 million (14.4%) for the fourth quarter of 2008 as compared to the fourth quarter of 2007 primarily due to the Missouri rate increase. Total electric revenues were $11.5 million higher, primarily as a result of the rate increase, which had an estimated $5.3 million impact, weather, which had a positive impact of an estimated $2.3 million and an increase in off-system sales of $3.0 million. Increased revenues from our gas segment were $4.8 million. Electric fuel and purchased power costs were $2.8 million less this quarter versus last year, primarily due to lower natural gas prices and our regulatory adjustment of $1.7 million. Our fourth quarter electric fuel and purchased power expenditures were higher than the base cost in our Missouri rates. Therefore, $1.7 million was transferred from fuel costs to a regulatory asset. Costs of natural gas sold and transported for our gas segment increased $4.6 million. Other impacts to the quarter included increased income taxes (approximately $5.7 million) and maintenance and repairs expense (approximately $0.7 million).

2008 Activities

Recent Capital Market Events

We have monitored recent market events that could have potential business and accounting issues associated with our operations.

We evaluated our credit exposure with trading counterparties and we do not at this time believe that counterparty default is likely, although, according to published reports, certain of our counterparties

continue to be adversely impacted by the current credit crisis. In the event that the counterparties to our hedging arrangements were no longer probable of performance, we would discontinue the use of cash flow hedge treatment for these contracts. However, the fuel adjustment clause authorized in the recent Missouri rate case allows us to record any gains or losses associated with our hedging arrangements as a regulatory asset or liability. Accordingly, we believe any counterparty defaults we may experience should not substantially impact our earnings.

Similar to many companies, we are exposed to the risk of credit rating downgrades from rating agencies; however, we have not received any downgrades of our securities.

The general market decline has negatively impacted the performance of our pension assets through December 31, 2008. Our net pension liability increased $53.2 million and our net liability for other postretirement benefits increased $15.5 million. These increases were recorded as increases in regulatory assets as we believe they are probable of recovery through customer rates based on rate orders received in our jurisdictions. We expect future pension funding commitments to increase. The expected minimum funding for 2009 is estimated to be between $0 million and $4 million. For 2010 it is estimated to be between $9 million and $15 million. The actual minimum funding requirements will be determined based on the results of the actuarial valuations, and, in the case of 2010, the performance of our pension assets during 2009.

Historically, we have met most of our short-term cash flow needs through the issuance of commercial paper. However, due to recent market events, we have generally been unable to issue commercial paper at rates below what we can borrow the funds at under our unsecured revolving credit facility. As a result, we have borrowed under this credit facility to meet short-term cash flow needs. See "Liquidity and Capital Resources" below for further discussion.

Financing

On May 16, 2008, we issued $90 million principal amount of first mortgage bonds. The net proceeds of approximately $89.4 million, less $0.4 million of legal and other financing fees, were added to our general funds and used primarily to pay down short-term indebtedness incurred, in part, as a result of our on-going construction program.

We have a $400 million shelf registration statement with the SEC, which became effective on August 15, 2008, covering our common stock, unsecured debt securities, preference stock, first mortgage bonds and trust preferred securities. We have received regulatory approval in all four of our state jurisdictions. Of the $400 million, $250 million is available for first mortgage bonds. We plan to use a portion of the proceeds from issuances under this shelf to fund a portion of the capital expenditures for our new generation projects.

Regulatory Matters

On October 1, 2007, we filed a request with the MPSC for an annual increase in base rates for our Missouri electric customers in the amount of $34.7 million, or 10.11%. The MPSC issued an order on July 30, 2008, granting an annual increase in revenues for our Missouri electric customers in the amount of $22.0 million, or 6.7%, based on a 10.8% return on equity. The new rates went into effect August 23, 2008.

The order contains two components. The first component provides an addition to base rates of approximately $27.7 million. This increase in base rates was partially offset by a $5.7 million reduction to regulatory amortization, which is the second component of the overall change in revenue authorized by the MPSC. Regulatory amortization provides us additional cash through rates to support certain credit metrics during the current construction cycle. This construction, which is part of our long-range plan to ensure reliability, includes the facilities at the Riverton Power Plant and Iatan 2 Power Plant, as well as

environmental improvements at the Asbury Power Plant and at Iatan 1. The regulatory amortization is now approximately $4.5 million annually and is recorded as depreciation expense.

The MPSC also authorized a fuel adjustment clause for our Missouri customers effective September 1, 2008. The MPSC established a base cost for the recovery of fuel and purchased power expenses used to supply energy. The clause permits the distribution to customers of 95% of the changes in fuel and purchased power costs prudently incurred above or below the base cost. Off-system sales margins are also part of the recovery of fuel and purchased power costs. As a result, the off-system sales margin flows back to the customer. Rates related to the fuel adjustment clause will be modified twice a year subject to the review and approval by the MPSC. In accordance with FAS 71, 95% of the difference between the actual cost of fuel and purchased power and the base cost of fuel and purchased power recovered from our customers is recorded as an adjustment to fuel and purchased power expense with a corresponding regulatory asset or a regulatory liability. If the actual fuel and purchased power costs are higher or lower than the base fuel and purchased power costs billed to customers, 95% of these amounts will be recovered or refunded to our customers when the fuel adjustment clause is modified. At December 31, 2008, Missouri fuel and purchased power costs were over recovered $0.2 million, which is reflected as a regulatory liability.

The MPSC order approved a Stipulation and Agreement providing for the recovery of deferred expenses of approximately $14.2 million over a five year period for the 2007 ice storms. In addition, the MPSC order required the implementation of a two-way tracking mechanism for recovery of the costs relating to the new MPSC rules on infrastructure inspection and vegetation management. The mechanism authorized by the MPSC creates a regulatory liability in any year we spend less than the target amount, which has been set at $8.6 million for our Missouri jurisdiction, and a regulatory asset if we spend more than the target amount. Any regulatory asset and liability amounts created using the tracking mechanism will then be netted against each other and taken into account in our next rate case. The MPSC also approved Stipulations and Agreements providing for the continuation of the pension and other post-retirement employee benefits tracking mechanism established in our 2007 and 2008 Missouri rate orders. (When we refer to rate orders dates, we are referring to the date the order was effective). See Note 1 of "Notes to Consolidated Financial Statements" under Item 8 for discussion regarding the treatment of the pension and other post-retirement employee benefits tracked.

The MPSC issued its Report and Order on July 30, 2008, effective August 9, 2008. The OPC and intervenors Praxair, Inc. and Explorer Pipeline Company filed applications for rehearing with the MPSC regarding this order. On August 12, 2008, the MPSC issued its Order Granting Expedited Treatment and Approving Compliance Tariff Sheets, effective August 23, 2008, in which the MPSC approved our tariff sheets containing our base rates for service rendered on and after August 23, 2008, and approved our fuel adjustment clause tariff sheets effective September 1, 2008. On September 3, 2008, the MPSC denied all pending applications for rehearing.

On October 2, 2008, the OPC and intervenors Praxair, Inc. and Explorer Pipeline Company filed Petitions for Writ of Review with the Cole County Circuit Court. These actions were consolidated into one proceeding.

For additional information, see "Rate Matters" below.

Renewable Energy. On November 4, 2008, Missouri voters approved the Clean Energy Initiative. This initiative requires investor-owned utilities in Missouri (such as Empire) to generate or purchase electricity from renewable energy sources, such as solar, wind, biomass and hydro power, at the rate of at least 2% in retail sales by 2011, increasing to at least 15% by 2021. At least 25 other states have adopted renewable portfolio standard (RPS) programs that mandate some form of renewable generation. Some of these RPS programs incorporate a trading system in which utilities are allowed to buy and sell renewable energy certificates (RECs) in order to meet compliance. Additionally, RECs are utilized by many companies in "green" marketing efforts. REC prices are driven by various market forces. We have been selling RECs

and plan to continue to sell all or a portion of the RECs associated with our contracts with Elk River Windfarm, LLC and Cloud County Windfarm, LLC. With respect to the energy underlying the RECs that we sell, we may not claim that we are purchasing renewable energy for any purpose, including for purposes of complying with the new Missouri requirements. Over time, we expect to retain some of the renewable attributes associated with these contracts in order to meet the new Missouri requirements. We realized revenues of $1.8 million from REC sales in 2008 and $0.9 million in 2007.

Amendment of EDE Mortgage

On March 11, 2008, we amended the Indenture of Mortgage and Deed of Trust of The Empire District Electric Company (EDE Mortgage) in order to provide us with additional flexibility to pay dividends to our shareholders by increasing the basket available to pay dividends by $10.75 million. The amendment followed the successful completion of a solicitation of consents from the holders of our First Mortgage Bonds outstanding under the EDE Mortgage. We received consents from holders of 94.46% in aggregate principal amount of the outstanding bonds and paid fees of approximately $1.6 million to the consenting bondholders. See " - Dividends" below.

Energy Supply

In June 2007, we entered into a purchased power agreement with Cloud County Windfarm, LLC, owned by Horizon Wind Energy, Houston, Texas. This agreement provides for a 20-year term commencing with the commercial operation date, which was December 15, 2008. Pursuant to the terms of the agreement, we will purchase all of the output from the approximately 105-megawatt Phase 1 Meridian Wind Farm located in Cloud County, Kansas. We do not own any portion of the windfarm.

Asbury SCR and Maintenance Outage

We constructed an SCR at Asbury that was completed in November 2007 and placed in service in February 2008. The total cost of the SCR project was approximately $31.0 million (excluding AFUDC), of which $28.1 million was expended through December 31, 2007 with the remainder expended in 2008. This project was also included as part of our Experimental Regulatory Plan approved by the MPSC and its cost is now in base rates in Missouri. We combined this project with our five year Asbury maintenance outage.

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

RESULTS OF OPERATIONS

The following discussion analyzes significant changes in the results of operations for the years 2008, 2007 and 2006.

The following table represents our results of operations by operating segment for the applicable periods ended December 31:

         (in millions)                                  2008     2007     2006
         Income from continuing operations:
                Electric                               $ 37.4   $ 31.8   $ 40.9
                Gas                                       1.7      1.0     (1.0 )
                Other                                     0.6      0.4      0.1

         Income from continuing operations             $ 39.7   $ 33.2   $ 40.0
         Income (loss) from discontinued operations         -        -     (0.7 )

         Net income                                    $ 39.7   $ 33.2   $ 39.3

Differences could occur due to rounding.

Electric Segment

Overview

Our electric segment income from continuing operations for 2008 was $37.4 million as compared to $31.8 million for 2007.

Electric operating revenues comprised approximately 86.5% of our total operating revenues during 2008. Of these total electric operating revenues, approximately 40.2% were from residential customers, 29.8% from commercial customers, 15.1% from industrial customers 4.3% from wholesale on-system customers, 6.6% from wholesale off-system transactions, 2.5% from miscellaneous sources, primarily public authorities and 1.5% from other electric revenues. The percentage of revenues provided from our wholesale off-system transactions has increased during 2008 as compared to 2007 primarily due to sales facilitated by the EIS market that began on February 1, 2007.

The amounts and percentage changes from the prior periods in kilowatt-hour ("kWh") sales and electric segment operating revenues by major customer class for on-system and off-system sales were as follows:

                                                             kWh Sales
                                                           (in millions)
Customer Class                 2008        2007       % Change*      2007        2006       % Change*
Residential                    1,952.9     1,930.5           1.2 %   1,930.5     1,898.8           1.7 %
Commercial                     1,622.0     1,610.8           0.7     1,610.8     1,547.1           4.1
Industrial                     1,073.3     1,110.3          (3.3 )   1,110.3     1,145.5          (3.1 )
Wholesale on-system              344.5       342.3           0.6       342.3       337.7           1.4
Other**                          123.8       116.8           6.0       116.8       112.7           3.6

   Total on-system sales       5,116.5     5,110.7           0.1     5,110.7     5,041.8           1.4
Off-system                       688.2       459.7          49.7       459.7       303.5          51.5

Total KWh Sales                5,804.7     5,570.4           4.2     5,570.4     5,345.3           4.2


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

                                               Electric Segment Operating Revenues
                                                          (in millions)
 Customer Class                  2008      2007      % Change*     2007      2006      % Change*
 Residential                    $ 179.3   $ 174.6           2.7 % $ 174.6   $ 159.4           9.5 %
 Commercial                       132.9     129.0           3.0     129.0     115.0          12.1
 Industrial                        67.4      67.7          (0.5 )    67.7      64.8           4.5
 Wholesale on-system               19.2      18.4           4.3      18.4      17.6           5.0
 Other**                           11.0      10.1           9.7      10.1       9.0          11.8

     Total on-system revenues     409.8     399.8           2.5     399.8     365.8           9.3
 Off-system                        29.7      19.6          51.3      19.6      12.2          60.4

 Total Revenues from KWh          439.5     419.4           4.8     419.4     378.0          11.0
 Sales
 Miscellaneous Revenues***          7.0       5.7          22.3       5.7       4.6          23.8

 Total Operating Revenues       $ 446.5   $ 425.1           5.0   $ 425.1   $ 382.6          11.1
 Water Revenues                     1.7       1.9          (5.1 )     1.9       1.8           2.0

 Total Electric Segment         $ 448.2   $ 427.0           5.0   $ 427.0   $ 384.4          11.1
 Operating Revenues


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