4. Common Stock

Stock Based Compensation

We have several stock-based awards and programs, which are described below. Performance-based restricted stock awards, time-vested restricted stock, stock options and their related dividend equivalents are valued as liability awards, in accordance with fair value guidelines. We allow employees to elect to have taxes in excess of the minimum statutory requirements withheld from their awards and, therefore, the awards are classified as liability instruments under the ASC guidance on share based payment. Awards treated as liability instruments must be revalued each period until settled, and cost is accrued over the requisite service period and adjusted to fair value at each reporting period until settlement or expiration of the award.

We recognized the following amounts in compensation expense and tax benefits for all of our stock-based awards and programs for the applicable years ended December 31 (in thousands):

	2012		2011		2010

Compensation expense	$	1,863	$	1,765	$	3,193
Tax benefit recognized		649		614		1,160

Stock Incentive Plans

Our 2006 Stock Incentive Plan (the 2006 Incentive Plan) was adopted by shareholders at the annual meeting on April 28, 2005 and provides for grants of up to 650,000 shares of common stock through January 2016. The 2006 Stock Incentive Plan permits grants of stock options and restricted stock to qualified employees and permits Directors and, if approved by the Compensation Committee of the Board of Directors, qualified employees to receive common stock in lieu of cash. Certain executive officers and other senior managers applied to receive annual incentive awards related to 2010, 2011 and 2012 performance in the form of Empire common stock rather than cash. These requests were granted by the Compensation Committee of the Board of Directors under the terms of our 2006 Stock Incentive Plan. The terms and conditions of any option or stock grant are determined by the Board of Directors Compensation Committee, within the provisions of these Stock Incentive Plans.

Time-Vested Restricted Stock Awards

Beginning in 2011, we began granting, to qualified individuals, time-vested restricted stock awards that vest after a three-year period, in lieu of stock options. No dividend rights accumulate during the vesting period. Time-vested restricted stock is valued at an amount equal to the fair market value of our common stock on the date of grant. If employment terminates during the vesting period because of death, retirement, or disability, the participant is entitled to a pro-rata portion of the time-vested restricted stock awards such participant would otherwise have earned, which is distributed six months following the date of termination, with the remainder of the award forfeited. If employment is terminated during the vesting period for reasons other than those listed above, the time-vested restricted stock awards will be forfeited on the date of the termination, unless the Board of Directors Compensation Committee determines, in its sole discretion, that the participant is entitled to a pro-rata portion of the award.

No shares of time-vested restricted stock were granted in 2012 as a result of the limitation on incentive compensation in place in 2011. A summary of time vested restricted stock activity under the plan for 2011 and 2012 is presented in the table below:

	December 31, 2012					December 31, 2011

	Number of shares			Weighted Average Fair Market Value		Number of shares			Weighted Average Fair Market Value
Outstanding at January 1,		3,433		$	21.84		—		$	—
Granted		—			—		10,200		$	21.84
Vested		—			—		794		$	19.32
Distributed		(133	)	$	20.13		(661	)	$	21.02
Forfeited		—			—		(6,106	)	$	—
Vested but not distributed		—			—		133		$	20.13
Outstanding at December 31,		3,300		$	20.358		3,433		$	21.84

All time-vested restricted stock awards are classified as liability instruments, which must be revalued each period until settled. The cost of the awards is generally recognized over the requisite (explicit) service period.

Performance-Based Restricted Stock Awards

Performance-based restricted stock awards are granted to qualified individuals consisting of the right to receive a number of shares of common stock at the end of the restricted period assuming performance criteria are met. The performance measure for the award is the total return to our shareholders over a three-year period compared with an investor-owned utility peer group. The threshold level of performance under the 2010, 2011 and 2012 grants was set at the 20th percentile level of the peer group, target at the 50th percentile level, and the maximum at the 80th percentile level. Shares would be earned at the end of the three-year performance period as follows: 100% of the target number of shares if the target level of performance is reached, 50% if the threshold is reached, and 200% if the percentile ranking is at or above the maximum, with the number of shares interpolated between these levels. However, no shares would be payable if the threshold level is not reached. As noted previously, all performance-based restricted stock awards are classified as liability instruments, which must be revalued each period until settled. The fair value of the outstanding restricted stock awards was estimated as of December 31, 2012, 2011 and 2010 using a Monte Carlo option valuation model. The assumptions used in the model for each grant year are noted in the following table:

	Fair Value of Grants Outstanding at December 31,

	2012	2011	2010
Risk-free interest rate	0.16% to 0.25%	0.12% to 0.23%	0.30% to 0.62%
Expected volatility of Empire stock	20.6%	23.8%	26.9%
Expected volatility of peer group stock	12.4% to 29.2%	15.7% to 57.4%	21.7% to 82.7%
Expected dividend yield on Empire stock	4.9%	4.7%	6.5%
Expected forfeiture rates	3%	3%	3%
Plan cycle	3 years	3 years	3 years
Fair value percentage	18.0% to 96.0%	51.0% to 75.0%	138.0% to 193.7%
Weighted average fair value per share	$10.94	$13.67	$37.17

Non-vested restricted stock awards (based on target number) as of December 31, 2012, 2011 and 2010 and changes during the year ended December 31, 2012, 2011 and 2010 were as follows:

	2012					2011					2010

	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value		Number Of Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1,		37,400		$	19.28		47,500		$	19.86		52,200		$	21.57
Granted		10,000		$	20.97		10,900		$	21.84		13,000		$	18.36
Awarded		(7,823	)	$	18.12		(39,621	)	$	21.92		(15,104	)	$	23.81
Awarded in excess of target		—		$	—		18,621		$	21.92
Not awarded		(5,677	)	$	18.12		—		$	—		(2,596	)	$	—

Nonvested at December 31,		33,900		$	20.25		37,400		$	19.28		47,500		$	19.86

At December 31, 2012 and 2011, unrecognized compensation expense related to estimated outstanding awards was $0.1 million and $0.1 million, respectively.

Stock Options

Beginning in 2011, we began issuing time-vested restricted stock in lieu of stock options and dividend equivalents. Stock options were issued with an exercise price equal to the fair market value of the shares on the date of grant, become exercisable after three years and expire ten years after the date granted. Participants' options that are not vested become forfeited when participants leave Empire except for terminations of employment under certain specified circumstances. Dividend equivalent awards were also issued to the recipients of the stock options under which dividend equivalents will be accumulated for the three-year period until the option becomes exercisable. Dividend equivalents cease to be accumulated on the date that a participant leaves Empire, and the accumulated dividend equivalents are forfeited when a participant leaves the Company, except for terminations of employment under certain specified circumstances. There were no stock options or dividend equivalents granted in 2012 or 2011. The fair value per dividend equivalent grant for 2010 and outstanding at December 31, 2012, was $2.92.

The dividend equivalents are accumulated for the three-year period and are converted to shares of common stock based on the fair market value of the shares on the date converted. The dividend equivalent awards vest and are payable in fully vested shares of our common stock on the third anniversary of the grant date (conversion date) or at a change in control and not dependent upon the exercise of the related option.

As noted previously, all outstanding stock option awards are classified as liability instruments, which must be revalued each period until settled. Stock option grants vest upon satisfaction of service conditions. The cost of the awards is generally recognized over the requisite (explicit) service period. The fair value of the outstanding options was estimated as of December 31, 2012, 2011 and 2010, under a Black-Scholes methodology. The assumptions used in the valuations are shown below:

	Fair Value of Grants Outstanding at December 31,

	2012	2011	2010
Risk-free interest rate	0.11% to 0.44%	0.12% to 0.72%	0.45% to 2.34%
Dividend yield	4.9%	4.7%	6.5%
Expected volatility	24.0%	25.0%	23.0%
Expected life in months	78	78	78
Market value	$20.38	$21.09	$22.20
Weighted average fair value per option	$1.34	$2.08	$2.02

A summary of option activity under the plan during the years ended December 31, 2012, 2011 and 2010 is presented below:

	2012				2011				2010

	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at January 1,		190,300	$	21.56		267,400	$	21.69		232,600	$	22.19
Granted		0	$	—		0	$	—		34,800	$	18.36
Exercised		27,000	$	18.12		77,100	$	22.02		—	$	—

Outstanding at December 31,		163,300	$	22.13		190,300	$	21.56		267,400	$	21.69

Exercisable, end of year		128,500	$	23.15		128,500	$	23.15		149,200	$	23.04

The intrinsic value of the unexercised options is the difference between the Company's closing stock price on the last day of the period and the exercise price multiplied by the number of in-the-money options, had all option holders exercised their options on the last day of the period. The intrinsic value is zero if such closing price is less than the exercise price. The table below shows the aggregate intrinsic values at December 31, 2012, 2011 and 2010:

	2012	2011	2010

Aggregate intrinsic value (in millions)	$0.1	$0.2	$0.3
Weighted-average remaining contractual life of outstanding options	3.2 years	5.1 years	6.6 years
Range of exercise prices	$18.36 to $23.81	$18.12 to $23.81	$18.12 to $23.81
Total unrecognized compensation expense (in millions) related to non-vested options and related dividend equivalents granted under the plan	Less than $0.1	$0.1	$0.2
Recognition period	1 month	1 year	1 – 3 years

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (ESPP) permits the grant to eligible employees of options to purchase common stock at 90% of the lower of market value at date of grant or at date of exercise. The lookback feature of this plan is valued at 90% of the Black-Scholes methodology plus 10% of the maximum subscription price. As of December 31, 2012, there were 195,873 shares available for issuance in this plan.

	2012			2011		2010

Subscriptions outstanding at December 31,		70,850			70,756		71,326
Maximum subscription price	$	17.95	⁽¹⁾	$	17.27	$	16.06
Shares of stock issued		65,919			69,229		66,723
Stock issuance price	$	17.27		$	16.06	$	14.62

(1): Stock will be issued on the closing date of the purchase period, which runs from June 1, 2012 to May 31, 2013.

Assumptions for valuation of these shares are shown in the table below.

	2012			2011			2010

Weighted average fair value of grants	$	3.19		$	3.17		$	2.28
Risk-free interest rate		0.17	%		0.18	%		0.35	%
Dividend yield		5.00	%		2.60	%		7.20	%
Expected volatility⁽¹⁾		24.00	%		22.00	%		17.00	%
Expected life in months		12			12			12
Grant date		6/1/12			6/1/11			6/1/10

(1): One-year historic volatility

Stock Unit Plan for Directors

Our Stock Unit Plan for directors (Stock Unit Plan) provides a stock-based compensation program for directors. This plan enhances our ability to attract and retain competent and experienced directors and allows the directors the opportunity to accumulate compensation in the form of common stock units. The Stock Unit Plan also provides directors the opportunity to convert previously earned cash retirement benefits to common stock units. All eligible directors who had benefits under the prior cash retirement plan converted their cash retirement benefits to common stock units.

A total of 400,000 shares are authorized under this plan. Each common stock unit earns dividends in the form of common stock units and can be redeemed for shares of common stock. The number of units granted annually is computed by dividing an annual credit (determined by the Compensation Committee) by the fair market value of our common stock on January 1 of the year the units are granted. Common stock unit dividends are computed based on the fair market value of our stock on the dividend's record date. We record the related compensation expense at the time we make the accrual for the directors' benefits as the directors provide services. Shares accrued to directors' accounts and shares available for issuance under this plan at December 31 are shown in the table below:



Shares accrued to directors' accounts	143,058	133,956
Shares available for issuance	258,960	280,282

Units accrued for service and dividends as well as units redeemed for common stock at December 31 are shown in the table below:



Units accrued for service and dividends	30,426	25,287	33,364
Units redeemed for common stock	21,324	31,243	6,347

401(k) Plan and ESOP

Our Employee 401(k) Plan and ESOP (the 401(k) Plan) allows participating employees to defer up to 25% of their annual compensation up to an Internal Revenue Service specified limit. We match 50% of each employee's deferrals by contributing shares of our common stock, with such matching contributions not to exceed 3% of the employee's eligible compensation. We record the compensation expense at the time the quarterly matching contributions are made to the plan. At December 31, 2012 and 2011, there were 320,576 and 36,038 shares available to be issued, respectively.

		2012			2011			2010

Shares contributed			65,502			68,523			64,830

Dividends

Holders of our common stock are entitled to dividends if, as, and when declared by the Board of Directors, out of funds legally available therefore, subject to the prior rights of holders of any outstanding cumulative preferred stock and preference stock. Payment of dividends is determined by our Board of Directors after considering all relevant factors, including the amount of our retained earnings (which is essentially our accumulated net income less dividend payouts). A reduction of our dividend per share, partially or in whole, could have an adverse effect on our common stock price. In response to the expected loss of revenues resulting from the May 22, 2011 tornado, our level of retained earnings and other relevant factors, our Board of Directors suspended our quarterly dividend for the third and fourth quarters of 2011. On February 2, 2012, the Board of Directors re-established the dividend at $0.25 per share and declared dividends payable on March 15, 2012, June 15, 2012, September 17, 2012 and December 17, 2012. As of December 31, 2012, our retained earnings balance was $47.1 million (compared to $33.7 million at December 31, 2011) after paying out $42.3 million in dividends during 2012.

Under Kansas corporate law, our Board of Directors may only declare and pay dividends out of our surplus or, if there is no surplus, out of our net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, or both. Our surplus, under Kansas law, is equal to our retained earnings plus accumulated other comprehensive income/(loss), net of income tax. However, Kansas law does permit, under certain circumstances, our Board of Directors to transfer amounts from capital in excess of par value to surplus. In addition, Section 305(a) of the Federal Power Act (FPA) prohibits the payment by a utility of dividends from any funds "properly included in capital account". There are no additional rules or regulations issued by the FERC under the FPA clarifying the meaning of this limitation. However, several decisions by the FERC on specific dividend proposals suggest that any determination would be based on a fact-intensive analysis of the specific facts and circumstances surrounding the utility and the dividend in question, with particular focus on the impact of the proposed dividend on the liquidity and financial condition of the utility.

In addition, the EDE Mortgage and our Restated Articles contain certain dividend restrictions. The most restrictive of these is contained in the EDE Mortgage, which provides that we may not declare or pay any dividends (other than dividends payable in shares of our common stock) or make any other distribution on, or purchase (other than with the proceeds of additional common stock financing) any shares of, our common stock if the cumulative aggregate amount thereof after August 31, 1944 (exclusive of the first quarterly dividend of $98,000 paid after said date) would exceed the sum of $10.75 million and the earned surplus (as defined in the EDE Mortgage) accumulated subsequent to August 31, 1944, or the date of succession in the event that another corporation succeeds to our rights and liabilities by a merger or consolidation. On June 9, 2011, we amended the EDE Mortgage in order to provide us with additional flexibility to pay dividends to our shareholders by permitting the payment of any dividend or distribution on, or purchase of, shares of its common stock within 60 days after the related date of declaration or notice of such dividend, distribution or purchase if (i) on the date of declaration or notice, such dividend, distribution or purchase would have complied with the provisions of the EDE Mortgage and (ii) as of the last day of the calendar month ended immediately preceding the date of such payment, our ratio of total indebtedness to total capitalization (after giving pro forma effect to the payment of such dividend, distribution, or purchase) was not more than 0.625 to 1.