Empire District Electric Company (EDE)

Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our

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Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our established Energy Risk Management Policy, which typically includes entering into various derivative transactions. We utilize derivatives to manage our gas commodity market risk and to help manage our exposure resulting from purchasing most of our natural gas on the volatile spot market for the generation of power for our native-load customers. See Note 5 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 financing through our issuance of commercial paper and other short-term debt. We manage our interest rate exposure by limiting our variable-rate exposure (applicable to commercial paper and borrowings under our unsecured credit agreement) to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates.

If market interest rates average 1% more in 2008 than in 2007, our interest expense would increase, and income before taxes would decrease by less than $0.4 million. This amount has been determined by considering the impact of the hypothetical interest rates on our highest month-end commercial paper balance for 2007. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

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

We satisfied 58.6% of our 2007 generation fuel supply need through coal. Approximately 86% of our 2007 coal supply was Western coal. We have contracts and current coal inventories sufficient to supply fuel for our coal plants through 2010. These contracts and inventories satisfy approximately 94% of our anticipated fuel requirements for 2008, 67% for 2009 and 48% for our 2010 requirements for our Asbury and Riverton coal plants. In order to manage our exposure to fuel prices, future coal supplies will be acquired using a combination of short-term and long-term contracts.

We are exposed to changes in market prices for natural gas we must purchase to run our combustion turbine generators. Our natural gas procurement program is designed to minimize our risk from volatile natural gas prices. We enter into physical forward and financial derivative contracts with counterparties relating to our future natural gas requirements that lock in prices (with respect to predetermined percentages of our expected future natural gas needs) in an attempt to lessen the volatility in our fuel expense and improve predictability. We expect that increases in gas prices will be partially offset by realized gains under financial derivative transactions. As of April 18, 2008,

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our established Energy Risk Management Policy, which typically includes entering into various derivative transactions. We utilize derivatives to manage our gas commodity market risk and to help manage our exposure resulting from purchasing most of our natural gas on the volatile spot market for the generation of power for our native-load customers. See Note 15 of "Notes to Consolidated Financial Statements" under Item 8 for further information.

        Interest Rate Risk.    We are exposed to changes in interest rates as a result of financing through our issuance of commercial paper and other short-term debt. We manage our interest rate exposure by limiting our variable-rate exposure (applicable to commercial paper and borrowings under our unsecured credit agreement) to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. See Notes 7 and 8 of "Notes to Consolidated Financial Statements" under Item 8 for further information.

        If market interest rates average 1% more in 2008 than in 2007, our interest expense would increase, and income before taxes would decrease by less than $0.4 million. This amount has been determined by considering the impact of the hypothetical interest rates on our highest month-end commercial paper balance for 2007. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

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

        We satisfied 58.6% of our 2007 generation fuel supply need through coal. Approximately 86% of our 2007 coal supply was Western coal. We have contracts to supply fuel for our coal plants through 2010. These contracts and current inventory satisfy approximately 93% of our anticipated fuel requirements for 2008, 61% for 2009 and 48% for our 2010 requirements for our Asbury and Riverton coal plants. In order to manage our exposure to fuel prices, future coal supplies will be acquired using a combination of short-term and long-term contracts.

        We are exposed to changes in market prices for natural gas we must purchase to run our combustion turbine generators. Our natural gas procurement program is designed to minimize our risk from volatile natural gas prices. We enter into physical forward and financial derivative contracts with counterparties relating to our future natural gas requirements that lock in prices (with respect to predetermined percentages of our expected future natural gas needs) in an attempt to lessen the volatility in our fuel expense and improve predictability. We expect that increases in gas prices will be partially offset by realized gains under financial derivative transactions. As of January 25, 2008, 88%, or 6.8 million Dths's, of our anticipated volume of natural gas usage for our electric operations for the remainder of 2008 is hedged. See Note 15 of "Notes to Consolidated Financial Statements" under Item 8 for further information.

        Based on our expected natural gas purchases for our electric operations for 2008, if average natural gas prices should increase 10% more in 2008 than the price at December 31, 2007, our natural gas expense would increase, and income before taxes would decrease by approximately $0.9 million based on our December 31, 2007 total hedged positions for the next twelve months.

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        We attempt to mitigate a portion of our natural gas price risk associated with our gas segment using physical forward purchase agreements, storage and derivative contracts. As of February 15, 2008, we have 93% of our expected remaining winter heating season usage (through March 2008) hedged with physical storage, physical forward contracts and financial derivative contracts. The average price of these hedges is $5.488 per Dth. We target to have 95% of our storage capacity full by November 1 for the upcoming winter heating season. As the winter progresses, gas is withdrawn from storage to serve our customers. As of February 16, 2008, we have 0.4 million Dths in storage on the three pipelines that serve our customers. This represents 21% of our storage capacity. Our long-term hedge strategy for our gas segment is still in the development process. However, due to purchased natural gas cost recovery mechanisms for our retail customers, fluctuations in the cost of natural gas have little effect on income.

        Credit Risk.    Credit risk is the risk of financial loss to the Company if counterparties fail to perform their contractual obligations. In order to minimize overall credit risk, we maintain credit policies, including the evaluation of counterparty financial condition and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. In addition, certain counterparties make available collateral in the form of cash held as margin deposits as a result of exceeding agreed-upon credit exposure thresholds or may be required to prepay the transaction. Amounts reported as margin deposit liabilities represent funds we hold that result from various trading counterparties exceeding agreed-upon credit exposure thresholds. Amounts reported as margin deposit assets represent funds held on deposit by various trading counterparties that resulted from us exceeding agreed-upon credit limits established by the counterparties. The following table depicts our margin deposit assets and margin deposit liabilities recorded on our balance sheet at December 31:

        In addition, we are holding a letter of credit from a counterparty in our favor for $6.5 million as of December 31, 2007.

        We sell electricity and gas and provide distribution and transmission services to a diverse group of customers, including residential, commercial and industrial customers. Credit risk associated with trade accounts receivable from energy customers is limited due to the large number of customers. In addition, we enter into contracts with various companies in the energy industry for purchases of energy-related commodities, including natural gas in our fuel procurement process.

        Our exposure to credit risk is concentrated primarily within our fuel procurement process, as we transact with a smaller, less diverse group of counterparties and transactions may involve large notional volumes and potentially volatile commodity prices. At January 25, 2008, gross credit exposure related to these transactions totaled $22.9 million, reflecting the unrealized gains for contracts carried at fair value.

        Subprime Market Risk.    We have evaluated our exposure to the current housing subprime risk environment and do not feel it has a significant effect on our business, financial position and results of operations. However, if the credit market continues to deteriorate, we will re-evaluate any effects.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations
in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our established Energy Risk Management Policy, which typically includes entering
into various derivative transactions. We utilize derivatives to manage our gas commodity market risk and to help manage our exposure resulting from purchasing most of our natural gas on the volatile
spot market for the generation of power for our native-load customers. See Note 15 of "Notes to Consolidated Financial Statements" under Item 8 for further information.

        Interest Rate Risk.    We are exposed to changes in interest rates as a result of financing through our issuance of commercial
paper and other short-term debt. We manage our interest rate exposure by limiting our variable-rate exposure (applicable to commercial paper and borrowings under our unsecured
credit agreement) to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. See Notes 7 and 8 of "Notes to
Consolidated Financial Statements" under Item 8 for further information.

        If
market interest rates average 1% more in 2008 than in 2007, our interest expense would increase, and income before taxes would decrease by less than $0.4 million. This amount
has been determined by considering the impact of the hypothetical interest rates on our highest month-end commercial paper balance for 2007. These analyses do not consider the effects of
the reduced level of overall economic activity that could exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate
its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial
structure.

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

        We
satisfied 58.6% of our 2007 generation fuel supply need through coal. Approximately 86% of our 2007 coal supply was Western coal. We have contracts to supply fuel for our coal plants
through 2010. These contracts and current inventory satisfy approximately 93% of our anticipated fuel requirements for 2008, 61% for 2009 and 48% for our 2010 requirements for our Asbury and Riverton
coal plants. In order to manage our exposure to fuel prices, future coal supplies will be acquired using a combination of short-term and long-term contracts.

        We
are exposed to changes in market prices for natural gas we must purchase to run our combustion turbine generators. Our natural gas procurement program is designed to minimize our risk
from volatile natural gas prices. We enter into physical forward and financial derivative contracts with counterparties relating to our future natural gas requirements that lock in prices (with
respect to predetermined percentages of our expected future natural gas needs) in an attempt to lessen the volatility in our fuel expense and improve predictability. We expect that increases in gas
prices will be partially offset by realized gains under financial derivative transactions. As of January 25, 2008, 88%, or 6.8 million Dths's, of our anticipated volume of natural gas
usage for our electric operations for the remainder of 2008 is hedged. See Note 15 of "Notes to Consolidated Financial Statements" under Item 8 for further information.

        Based
on our expected natural gas purchases for our electric operations for 2008, if average natural gas prices should increase 10% more in 2008 than the price at December 31,
2007, our natural gas expense would increase, and income before taxes would decrease by approximately $0.9 million based on our December 31, 2007 total hedged positions for the next
twelve months.

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        We
attempt to mitigate a portion of our natural gas price risk associated with our gas segment using physical forward purchase agreements, storage and derivative contracts. As of
February 15, 2008, we have 93% of our expected remaining winter heating season usage (through March 2008) hedged with physical storage, physical forward contracts and financial derivative
contracts. The average price of these hedges is $5.488 per Dth. We target to have 95% of our storage capacity full by November 1 for the upcoming winter heating season. As the winter
progresses, gas is withdrawn from storage to serve our customers. As of February 16, 2008, we have 0.4 million Dths in storage on the three pipelines that serve our customers. This
represents 21% of our storage capacity. Our long-term hedge strategy for our gas segment is still in the development process. However, due to purchased natural gas cost recovery mechanisms
for our retail customers, fluctuations in the cost of natural gas have little effect on income.

        Credit Risk.    Credit risk is the risk of financial loss to the Company if counterparties fail to perform their contractual
obligations. In order to minimize overall credit risk, we maintain credit policies, including the evaluation of counterparty financial condition and the use of standardized agreements that facilitate
the netting of cash flows associated with a single counterparty. In addition, certain counterparties make available collateral in the form of cash held as margin deposits as a result of exceeding
agreed-upon credit exposure thresholds or may be required to prepay the transaction. Amounts reported as margin deposit liabilities represent funds we hold that result from various trading
counterparties exceeding agreed-upon credit exposure thresholds. Amounts reported as margin deposit assets represent funds held on deposit by various trading counterparties that resulted
from us exceeding agreed-upon credit limits established by the counterparties. The following table depicts our margin deposit assets and margin deposit liabilities recorded on our balance
sheet at December 31:

        In addition, we are holding a letter of credit from a counterparty in our favor for $6.5 million as of December 31, 2007.

        We
sell electricity and gas and provide distribution and transmission services to a diverse group of customers, including residential, commercial and industrial customers. Credit risk
associated with trade accounts receivable from energy customers is limited due to the large number of customers. In addition, we enter into contracts with various companies in the energy industry for
purchases of energy-related commodities, including natural gas in our fuel procurement process.

        Our
exposure to credit risk is concentrated primarily within our fuel procurement process, as we transact with a smaller, less diverse group of counterparties and transactions may
involve large notional volumes and potentially volatile commodity prices. At January 25, 2008, gross credit exposure related to these transactions totaled $22.9 million, reflecting the
unrealized gains for contracts carried at fair value.

        Subprime Market Risk.    We have evaluated our exposure to the current housing subprime risk environment and do not feel it has
a significant effect on our business, financial position and results of operations. However, if the credit market continues to deteriorate, we will re-evaluate any effects.

61

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Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our established Energy Risk Management Policy, which typically includes entering into various derivative transactions. We utilize derivatives to manage our gas commodity market risk and to help manage our exposure resulting from purchasing most of our natural gas on the volatile spot market for the generation of power for our native-load customers. 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 financing through our issuance of commercial paper and other short-term debt. We manage our interest rate exposure by limiting our variable-rate exposure (applicable to commercial paper and borrowings under our unsecured credit agreement) to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates.

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

Commodity Price Risk. We are exposed to the impact of market fluctuations in the price and transportation costs of coal, natural gas, and electricity and employ established policies and

52

Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our established Energy Risk Management Policy, which typically includes entering into various derivative transactions. We utilize derivatives to manage our gas commodity market risk and to help manage our exposure resulting from purchasing most of our natural gas on the volatile spot market for the generation of power for our native-load customers. 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 financing through our issuance of commercial paper and other short-term debt. We manage our interest rate exposure by limiting our variable-rate exposure (applicable to commercial paper and borrowings under our unsecured credit agreement) to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates.

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

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

We satisfied 72.5% of our 2006 generation fuel supply need through coal. Approximately 85% of our 2006 coal supply was Western coal. We have contracts and have accepted binding

49

proposals to supply fuel for our coal plants through 2010. These contracts and accepted proposals satisfy approximately 100% of our anticipated fuel requirements for 2007, 78% for 2008, 52% for 2009 and 41% of our 2010 requirements for our Asbury and Riverton coal plants. In order to manage our exposure to fuel prices, future coal supplies will be acquired using a combination of short-term and long-term contracts.

We are exposed to changes in market prices for natural gas we must purchase to run our combustion turbine generators. Our natural gas procurement program is designed to minimize our risk from volatile natural gas prices. We enter into physical forward and financial derivative contracts with counterparties relating to our future natural gas requirements that lock in prices (with respect to predetermined percentages of our expected future natural gas needs) in an attempt to lessen the volatility in our fuel expense and improve predictability. We expect that increases in gas prices will be partially offset by realized gains under financial derivative transactions. As of July 27, 2007, 91%, or 4.1 million Dths’s, of our anticipated volume of natural gas usage for our electric operations for the remainder of 2007 is hedged.

Based on our expected natural gas purchases for our electric operations for the next twelve months, if average natural gas prices should increase 10% more than the price at June 30, 2007, our natural gas expense would increase, and income before taxes would decrease by approximately $1.1 million based on our June 30, 2007 total hedged positions for the next twelve months.

We attempt to mitigate a portion of our natural gas price risk associated with our gas segment using physical forward purchase agreements, storage and derivative contracts. As of July 27, 2007, we have 0.9 million Dths in storage on the three pipelines that serve our customers. This represents 44% of our storage capacity leaving 1.0 million Dths to be injected into storage by November 1, 2007 to meet our 95% target. Our long-term hedge strategy for our gas segment is still in the development process. However, due to purchased natural gas cost recovery mechanisms for our retail customers, fluctuations in the cost of natural gas have little effect on income.

Credit Risk. Credit risk is the risk of financial loss to the Company if counterparties fail to perform their contractual obligations. In order to minimize overall credit risk, we maintain credit policies, including the evaluation of counterparty financial condition and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. In addition, certain counterparties make available collateral in the form of cash held as margin deposits as a result of exceeding agreed-upon credit exposure thresholds or may be required to prepay the transaction. Amounts reported as margin deposit liabilities represent funds we hold that result from various trading counterparties exceeding agreed-upon credit exposure thresholds. Amounts reported as margin deposit assets represent funds held on deposit by various trading counterparties that resulted from us exceeding agreed-upon credit limits established by the counterparties. As of June 30, 2007 and 2006, we had margin deposit assets of $3.8 million and $3.4 million, respectively, and margin deposit liabilities of $8.3 million and $5.3 million, respectively. On July 6, 2007, the $8.3 million of collateral being held from a counterparty was returned to the counterparty and was replaced with a letter of credit which is currently in our favor for $8.4 million, reflecting the current exposure over the threshold in our agreement with the counterparty.

We sell electricity and gas and provide distribution and transmission services to a diverse group of customers, including residential, commercial and industrial customers. Credit risk associated with trade accounts receivable from energy customers is limited due to the large number of customers. In addition, we enter into contracts with various companies in the energy industry for purchases of energy-related commodities, including natural gas in our fuel procurement process.

Our exposure to credit risk is concentrated primarily within our fuel procurement process, as we transact with a smaller, less diverse group of counterparties and transactions may involve large notional volumes and potentially volatile commodity prices. At July 27, 2007, gross credit exposure related to these transactions totaled $24.4 million, reflecting the unrealized gains for contracts carried at fair value.

50

Market risk is the exposure to a change in the value of a physical asset or financial instrument, derivative or non-derivative, caused by fluctuations in market variables such as interest rates or commodity prices. We handle our commodity market risk in accordance with our established Energy Risk Management Policy, which typically includes entering into various derivative transactions. We utilize derivatives to manage our gas commodity market risk and to help manage our exposure resulting from purchasing most of our natural gas on the volatile spot market for the generation of power for our native-load customers. 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 financing through our issuance of commercial paper and other short-term debt. We manage our interest rate exposure by limiting our variable-rate exposure (applicable to commercial paper and borrowings under our unsecured credit agreement) to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates.

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

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

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

We are exposed to changes in market prices for natural gas we must purchase to run our combustion turbine generators. Our natural gas procurement program is designed to minimize our risk from volatile natural gas prices. We enter into physical forward and financial derivative contracts with counterparties relating to our future natural gas requirements that lock in prices (with respect to predetermined percentages of our expected future natural gas needs) in an attempt to lessen the volatility in our fuel expense and improve predictability. We expect that increases in gas prices will be partially offset by realized gains under financial derivative transactions. As of April 13, 2007, 87%, or 6.5 million Dths’s, of our anticipated volume of natural gas usage for our electric operations for the remainder of 2007 is hedged.

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

47

natural gas expense would increase, and income before taxes would decrease by approximately $1.6 million based on our March 31, 2007 total hedged positions for the next twelve months.

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

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

We sell electricity and gas and provide distribution and transmission services to a diverse group of customers, including residential, commercial and industrial customers. Credit risk associated with trade accounts receivable from energy customers is limited due to the large number of customers. In addition, we enter into contracts with various companies in the energy industry for purchases of energy-related commodities, including natural gas in our fuel procurement process.

Our exposure to credit risk is concentrated primarily within our fuel procurement process, as we transact with a smaller, less diverse group of counterparties and transactions may involve large notional volumes and potentially volatile commodity prices. At March 31, 2007, gross credit exposure related to these transactions totaled $21.5 million, reflecting the unrealized gains for contracts carried at fair value.