Note 7— Commitments and Contingencies

Legal Proceedings

We are a party to various claims and legal proceedings arising out of the normal course of our business. We regularly analyze this information, and provide accruals for any liabilities, in accordance with the guidelines presented in the ASC on accounting for contingencies. In the opinion of management, it is not probable, given the company’s defenses, that the ultimate outcome of these claims and lawsuits will have a material adverse effect upon our financial condition, or results of operations or cash flows.

Proceedings in connection with the pending merger with Liberty Central

On March 24, 2016, a purported shareholder of Empire filed a complaint styled as a class action lawsuit in the District Court for the 3rd Judicial District, in Shawnee County, Kansas. The shareholder filed an amended complaint on April 15, 2016. The complaint alleges that Empire’s Board of Directors breached its fiduciary duties in agreeing to the Merger Agreement by, among other things, conducting an inadequate sales process and failing to obtain adequate consideration, having an interest in completing the Merger, and failing to make adequate disclosures in the proxy statement. The complaint seeks various relief, including an injunction against the Merger. The complaint also alleges that Empire, APUC, Liberty Central and Merger Sub aided and abetted such alleged breaches.

On June 7, 2016, following arm’s length negotiations, Empire and other defendants entered into a Memorandum of Understanding (MOU) providing for the settlement, subject to court approval, of all claims asserted in the complaint against all defendants. In connection with the MOU, Empire agreed to make additional disclosures related to the Merger in the proxy statement (which were made on June 8, 2016). Empire and the other defendants that entered into the MOU did so solely to avoid the costs, risks and uncertainties inherent in litigation and without admitting any liability or wrongdoing, and vigorously denied, and continue to vigorously deny, that they committed any violation of law or engaged in any wrongful acts alleged in the complaint.

The parties to the MOU have agreed to attempt in good faith to finalize and execute a stipulation of settlement and to present the stipulation of settlement to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court. The stipulation of settlement will provide for, among other things, certification of the alleged class as a non-opt-out class action and an award of plaintiff’s reasonable attorneys’ fees and expenses. The stipulation of settlement will also provide for the release of any and all claims arising out of or relating to the Merger. The settlement is subject to final Court approval following notice to the class members. There can be no assurance that the settling parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement. In such event, or if the Merger is not consummated for any reason, the proposed settlement will be null and void and of no force and effect.

The outcome of the lawsuit cannot be predicted with any certainty. A preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the Merger. All of the defendants believe that the claims asserted against them in the lawsuit are without merit.

Coal, Natural Gas and Transportation Contracts

The following table sets forth our firm physical gas, coal and transportation contracts for the periods indicated as of June 30, 2016 (in millions).

	Firm physical gas and transportation contracts		Coal and coal transportation contracts

July 1, 2016 through December 31, 2016	$	14.3	$	8.2
January 1, 2017 through December 31, 2018	37.4		27.3
January 1, 2019 through December 31, 2020	28.8		10.7
January 1, 2021 and beyond	45.7		—

We have entered into long and short-term agreements to purchase coal and natural gas for our energy supply and natural gas operations. Under these contracts, the natural gas supplies are divided into firm physical commitments and derivatives that are used to hedge future purchases. The firm physical gas and transportation commitments are detailed in the table above.

We have coal supply agreements and transportation contracts in place to provide for the delivery of coal to the plants. These contracts are written with Force Majeure clauses that enable us to reduce tonnages or cease shipments under certain circumstances or events. These include mechanical or electrical maintenance items, acts of God, war or insurrection, strikes, weather and other disrupting events. This reduces the risk we have for not taking the minimum requirements of fuel under the contracts. The minimum requirements for our coal and coal transportation contracts as of June 30, 2016, are detailed in the table above.

Purchased Power

We have three purchased power agreements.

The Plum Point Energy Station (Plum Point) is a 670-megawatt, coal-fired generating facility near Osceola, Arkansas. We own, through an undivided interest, 50 megawatts of the unit’s capacity. We also have a long-term agreement for the purchase of an additional 50 megawatts of capacity from Plum Point. Commitments under this agreement are approximately $272.6 million through August 31, 2039, the end date of the agreement.

We have a long-term purchased power agreement, which expires in 2028, with Cloud County Windfarm, LLC, majority owned by EDP Renewables North America LLC, Houston, Texas to purchase the energy generated at the approximately 105-megawatt Phase 1 Meridian Way Wind Farm located in Cloud County, Kansas. Annual payments are contingent upon output of the facility and can range from zero to a maximum of approximately $14.6 million based on a 20-year average cost.

We also have a long-term purchased power agreement, which expires in 2020, with Elk River Windfarm, LLC, owned by IBERDROLA RENEWABLES, Inc., to purchase the energy generated at the 150-megawatt Elk River Windfarm located in Butler County, Kansas. Annual payments are contingent upon output of the facility and can range from zero to a maximum of approximately $16.9 million based on a 20-year average cost.

We do not own any portion of these windfarms. Payments for these agreements are recorded as purchased power expenses, and, because of the contingent nature of these payments, are not included in our operating lease obligations.

New Construction

In April 2016 we completed the conversion of Riverton Unit 12 from a simple cycle combustion turbine to a combined cycle unit. The conversion included the installation of a heat recovery steam generator (HRSG), steam turbine generator, auxiliary boiler, cooling tower, and other auxiliary equipment. Construction costs through June 30, 2016 were $167.5 million for the project to date, excluding AFUDC. Final costs are estimated to range from $167.5 million to $175 million, excluding AFUDC. This amount was included in our five-year capital expenditure plan.

See “Environmental Matters” below for more information.

Leases

We have purchased power agreements with Cloud County Windfarm, LLC and Elk River Windfarm, LLC, which are considered operating leases for GAAP purposes. Details of these agreements are disclosed in the Purchased Power section of this note.

We also currently have short-term operating leases for two unit trains to meet coal delivery demands, for garage and office facilities for our electric segment and for one office facility related to our gas segment. In addition, we have capital leases for certain office equipment and 108 railcars to provide coal delivery for our ownership and purchased power agreement shares of the Plum Point generating facility.

The gross amount of assets recorded under capital leases total $5.3 million at June 30, 2016.

Environmental Matters

We are subject to various federal, state, and local laws and regulations with respect to air and water quality and with respect to hazardous and toxic materials and hazardous and other wastes, including their identification, transportation, disposal, record-keeping and reporting, as well as remediation of contaminated sites and other environmental matters. We believe that our operations are in material compliance with present environmental laws and regulations. While we are not in a position to accurately estimate compliance costs for any new requirements, we expect these costs to be material, although recoverable in rates.

Compliance Plan

In order to comply with current and forthcoming environmental regulations, we implemented our compliance plan and strategy (2013 Compliance Plan), which largely followed our Integrated Resource Plan (IRP) filed with the Missouri Public Service Commission (MPSC) in mid-2013. On April 1, 2016, we filed our updated IRP, reflecting the completion of our 2013 Compliance Plan. The Mercury Air Toxic Standards (MATS) and the Clean Air Interstate Rule (CAIR), replaced by the Cross State Air Pollution Rule (CSAPR), were the drivers behind our 2013 Compliance Plan and its implementation schedule. Compliance costs we have incurred associated with the MATS, CAIR and CSAPR regulations are being recovered in our rates and we anticipate any future costs to continue to be recoverable in our rates.

The following list summarizes the most significant environmental regulations affecting our operations:

Regulations

Air Emissions - NOx and SO2

ACID RAIN

CAIR (Clean Air Interstate Rule)

CSAPR (Cross State Air Pollution Rule)

MATS (Mercury Air Toxic Standards)

NAAQS (National Ambient Air Quality Standards)

Greenhouse Gases (GHGs) — CO2

Surface Impoundments

Coal Ash Impoundments

Water Discharges

MATS: As noted above, the completion of our Compliance Plan puts us in compliance with MATS. In June 2015, the U.S. Supreme Court remanded the MATS back to the D.C. Circuit Court, holding that the EPA must consider cost (including cost of compliance) before deciding whether a regulation is appropriate and necessary. The court noted that it will be up to the EPA to decide within the limits of reasonable interpretation how to account for cost. The EPA’s determination claimed that considering cost does not alter the agency’s conclusion that it is appropriate and necessary to regulate coal and oil-fired electric utility steam generating units (EGUs) under the regulation. MATS has remained in place, and a final supplemental finding issued on April 14, 2016 completes the EPA’s response to the Supreme Court’s decision. The final Technical Corrections Rule was signed March 17, 2016.

Greenhouse Gases: On August 3, 2015, the EPA released the final rule for limiting carbon emissions from existing power plants. The “Clean Power Plan” (CPP) requires a 32% carbon emission reduction from 2005 baseline levels by 2030 and requires fossil fuel-fired power plants across the nation, including those in Empire’s fleet, to meet state-specific goals to lower carbon levels. States will choose between two plan types to meet their goals: an emission standards plan which includes source-specific requirements impacting affected power plants or a state measures plan which includes a mixture of measures implemented by the state.

On February 9, 2016, the Supreme Court ordered a stay on the CPP. Twenty-seven states and numerous industry groups have challenged the CPP’s legality in the D.C. Circuit. The stay will remain in effect until the court resolves the legal challenges to the CPP. Presentation of oral arguments before a three-judge panel scheduled for early June has been changed as defenders and challengers of the climate rule will make their case before all participating judges on September 27, 2016.

Other than the cancellation of the initial submittal deadline this September, the EPA has not made any definitive statements regarding whether CPP timelines may change under the stay. The EPA continues to work on the CPP and released a proposed rule for the Clean Energy Incentive Program (CEIP) design guidelines on June 16, 2016. The ultimate cost of compliance cannot be determined at this time because of the uncertainties regarding the final outcome of the GHG regulations, including the legal challenges thereto, and the compliance methods yet to be chosen by the jurisdictions in which we operate. In any case, we expect the cost of complying with any such regulations to be recoverable in our rates.

Surface Impoundments: On September 30, 2015, the EPA finalized a revision of the Clean Water Act (CWA) Steam Electric Effluent Limitation Guidelines (ELGs) for coal-fired power plants. The new rule sets technology-based ELGs based on the nature of the pollutants being discharged and the facilities involved. As published, beginning in November 2018, the EPA and states will begin to incorporate the new standards into all wastewater discharge permits, including permits for coal ash impoundments. We do not have sufficient information at this time to estimate additional costs at each affected facility that will result from the new standards to be in effect no later than December 2023.

Effective October 19, 2015, the EPA established a final rule to regulate the disposal of coal combustion residuals (CCRs) as a non-hazardous solid waste under subtitle D of the Resource Conservation and Recovery Act (RCRA). Compliance with both the CCR and ELG rules will result in the need to close our existing ash impoundment, construct a new utility waste landfill and convert the existing bottom ash handling from a wet to a dry system at our Asbury Power Plant. Final closure of the existing ash impoundment, for which an asset retirement obligation of $5.4 million has been recorded, is anticipated after the new landfill is operational. Separately, an asset retirement obligation of $4.4 million has been recorded for our interest in the coal ash impoundment at the Iatan Generating Station.

On February 1, 2016, a construction permit application was submitted to the Missouri Department of Natural Resources’ Solid Waste Management Program (SWMP) for a new utility waste landfill adjacent to the Asbury plant. The application has been determined to be complete and a technical review by the SWMP is in progress. Approval of the final construction permit for the CCR waste landfill is expected by February 2017.

At this time, we anticipate compliance costs to be approximately $15 million. The landfill construction, bottom ash conversion and impoundment closure are anticipated to be complete in early 2019, and we expect compliance costs to be recoverable in our rates.

Water Discharges: We operate under the Kansas and Missouri Water Pollution Plans pursuant to the Federal Clean Water Act (CWA). Our plants are in material compliance with applicable regulations and have received all necessary discharge permits.

The EPA final rule under the CWA Section 316(b) for existing cooling water intake structures became effective on October 14, 2014. An industry coalition has filed an appeal of the rule in the Fifth Circuit and additional court challenges are expected. We expect the regulations to have no future impact at Riverton as the new intake structure design and installed cooling tower, as part of the Unit 12 conversion, meets the regulatory requirement for aquatic life protections. Impacts at Iatan 1 could range from flow velocity reductions or traveling screen modifications for fish handling to installation of a closed cycle cooling tower retrofit. Iatan Unit 2 and Plum Point Unit 1 are covered by the regulation, but were constructed with cooling towers, the proposed Best Technology Available. We expect them to be unaffected or minimally affected by the final rule.

Renewable Energy

The Missouri Clean Energy Initiative (Proposition C) requires Empire and other investor-owned utilities in Missouri to generate or purchase electricity from renewable energy sources, such as solar, wind, biomass and hydro power, or purchase Renewable Energy Credits (RECs), in amounts equal to at least 5% of retail sales in 2014-2017, at least 10% in 2018-2020 and at least 15% by 2021. We are currently in compliance with this regulatory requirement as a result of generation from our Ozark Beach Hydroelectric Project and purchased power agreements previously mentioned with Cloud County Windfarm, LLC and Elk River Windfarm, LLC. Proposition C also requires that 2% of the energy from renewable energy sources must be solar. On May 6, 2015, the MPSC approved tariffs we filed on May 5, 2015 to establish solar rebate payment procedures and revise our net metering tariffs to accommodate the payment of solar rebates. We expect solar rebates to be sufficient to allow compliance with the current 2% requirement. As of June 30, 2016, we had processed 748 solar rebate applications resulting in solar rebate-related costs totaling approximately $10.3 million under the new tariff. We have recorded the $10.3 million as a regulatory asset (See Note 3 — Regulatory Matters). The law provides a number of methods that may be utilized to recover the associated expenses. We expect any costs to be recoverable in rates.

Legislation was adopted that altered the Kansas renewable portfolio standard (RPS), ending all mandatory requirements in 2015. The former mandate, which required 20% of our Kansas retail customer peak capacity requirements to be sourced from renewables by 2020, has been changed to a voluntary goal. We are currently meeting the voluntary goal as a result of purchased power agreements with Cloud County Windfarm, LLC and Elk River Windfarm, LLC.