FORM 10-K

34

MDU RESOURCES G ROUP, INC.

PART I

Through the Sheridan System, Montana-Dakota serves Sheridan, Wyoming, and neighboring communities. The maximum peak demand

experienced to date and attributable to Montana-Dakota sales to retail customers on that system was approximately 60,600 kW and

occurred in July 2007.

In December 2004, Montana-Dakota entered into a power supply contract with Black Hills Power to purchase up to 74,000 kW of

capacity annually during the period from January 1, 2007, to December 31, 2016. This contract also provides an option for Montana-Dakota

to purchase 25 MW of an existing or future baseload coal-fired electric generating facility from Black Hills Power to serve the Sheridan load.

Montana-Dakota is subject to competition in varying degrees, in certain areas, from rural electric cooperatives, on-site generators,

co-generators and municipally owned systems. In addition, competition in varying degrees exists between electricity and alternative forms

of energy such as natural gas.

Regulatory Matters and Revenues Subject to Refund Fuel adjustment clauses contained in North Dakota and South Dakota

jurisdictional electric rate schedules allow Montana-Dakota to reflect monthly increases or decreases in fuel and purchased power costs

(excluding demand charges). In North Dakota, the Company is deferring electric fuel and purchased power costs (excluding demand

charges) that are greater or less than amounts presently being recovered through its existing rate schedules. In Wyoming, an annual Electric

Power Supply Cost Adjustment mechanism allows Montana-Dakota to reflect increases or decreases in fuel and purchased power costs

(including demand charges) related to power supply and Montana-Dakota is deferring costs that are greater or less than amounts presently

being recovered through its existing rate schedules. Such orders generally provide that these amounts are recoverable or refundable

through rate adjustments within a period ranging from 14 to 25 months from the time such costs are paid. In Montana, such cost changes

are includable in general rate filings. For additional information, see Item 8 -- Note 19.

In July 2007, Montana-Dakota filed an electric rate case with the MTPSC. For additional information, see Item 8 -- Note 19.

In November 2006, Montana-Dakota filed an application with the NDPSC requesting an advance determination of prudence of

Montana-Dakota's ownership interest in Big Stone Station II. For additional information, see Item 8 -- Note 19.

Environmental Matters Montana-Dakota's electric operations are subject to federal, state and local laws and regulations providing for air,

water and solid waste pollution control; state facility-siting regulations; zoning and planning regulations of certain state and local authorities;

federal health and safety regulations; and state hazard communication standards. Montana-Dakota believes it is in substantial compliance

with these regulations.

Montana-Dakota's electric generating facilities have Title V Operating Permits, under the Clean Air Act, issued by the states in which it

operates. Each of these permits has a five-year life. Near the expiration of these permits, renewal applications are submitted. Permits

continue in force beyond the expiration date, provided the application for renewal is submitted by the required date, usually six months

prior to expiration. Renewal is pending for the Big Stone Station Title V Operating Permit which expired in 2002. An application for renewal

will be submitted for the Coyote Station Title V Operating Permit that expires in September 2008. State water discharge permits issued

under the requirements of the Clean Water Act are maintained for power production facilities on the Yellowstone and Missouri rivers.

These permits also have five-year lives. Montana-Dakota renews these permits as necessary prior to expiration. Other permits held by

these facilities may include an initial siting permit, which is typically a one-time, preconstruction permit issued by the state; state permits

to dispose of combustion by-products; state authorizations to withdraw water for operations; and Army Corps permits to construct water

intake structures. Montana-Dakota's Army Corps permits grant one-time permission to construct and do not require renewal. Other permit

terms vary and the permits are renewed as necessary.

Montana-Dakota's electric operations are conditionally exempt small-quantity hazardous waste generators and subject only to minimum

regulation under the RCRA. Montana-Dakota routinely handles PCBs from its electric operations in accordance with federal requirements.

PCB storage areas are registered with the EPA as required.

In November 2006, the Sierra Club sent a notice of intent to file a citizen suit in federal court under the Clean Air Act to the co-owners,

including Montana-Dakota, of the Big Stone Station. For more information regarding this notice, see Item 8 -- Note 20.

Montana-Dakota incurred $7.8 million of environmental expenditures in 2007. Expenditures are estimated to be $29.1 million, $19.5 million

and $6.3 million in 2008, 2009 and 2010, respectively, to maintain environmental compliance as new emission controls are required.

Projects will include sulfur-dioxide and mercury control equipment installation at electric generating facilities. For matters involving

Montana-Dakota and the ND Health Department, see Item 8 -- Note 20.