FORM 10-K

35

MDU RESOURCES G ROUP, INC.

NATURAL GAS DISTRIBUTION

General The Company's natural gas distribution operations consist of Montana-Dakota, Great Plains and Cascade. Montana-Dakota

sells natural gas at retail, serving over 234,000 residential, commercial and industrial customers in 145 communities and adjacent rural

areas as of December 31, 2007, and provides natural gas transportation services to certain customers on its system. Great Plains sells

natural gas at retail, serving over 22,000 residential, commercial and industrial customers in 19 communities and adjacent rural areas as

of December 31, 2007, and provides natural gas transportation services to certain customers on its system. Cascade sells natural gas

at retail, serving over 250,000 residential, commercial and industrial customers in 98 communities and adjacent rural areas as of

December 31, 2007, and provides natural gas transportation services to certain customers on its system. These services for the three

public utility operations are provided through distribution systems aggregating approximately 11,400 miles. The natural gas distribution

operations have obtained and hold, or are in the process of renewing, valid and existing franchises authorizing them to conduct their natural

gas operations in all of the municipalities they serve where such franchises are required. These operations intend to protect their service

areas and seek renewal of all expiring franchises. As of December 31, 2007, Montana-Dakota's, Great Plains' and Cascade's net natural

gas distribution plant investment approximated $527.5 million.

Substantially all of Montana-Dakota's natural gas distribution properties are subject to the lien of the Mortgage and to the junior lien of

the Indenture.

The percentage of the natural gas distribution operations' 2007 natural gas utility operating sales revenues by jurisdiction is as follows:

North Dakota -- 23 percent; Minnesota -- 8 percent; Montana -- 15 percent; Oregon -- 10 percent; South Dakota -- 12 percent; Washington

-- 29 percent and Wyoming -- 3 percent. The above percentages reflect operating sales revenues of Cascade since the date of acquisition.

The natural gas distribution operations are subject to regulation by the NDPSC, MNPUC, MTPSC, OPUC, SDPUC, WUTC and WYPSC

regarding retail rates, service, accounting and certain security issuances.

System Supply, System Demand and Competition The natural gas distribution operations serve retail natural gas markets, consisting

principally of residential and firm commercial space and water heating users, in portions of North Dakota, including Bismarck, Dickinson,

Wahpeton, Williston, Minot and Jamestown; western Minnesota, including Fergus Falls, Marshall and Crookston; eastern Montana, including

Billings, Glendive and Miles City; central and eastern Oregon, including Bend and Pendleton; western and north-central South Dakota,

including Rapid City, Pierre and Mobridge; western and south-central Washington, including Bellingham, Bremerton, Longview, Moses Lake,

Mount Vernon, Tri-Cities, Walla Walla and Yakima; and northern Wyoming, including Sheridan. These markets are highly seasonal and sales

volumes depend largely on the weather, the effects of which are mitigated in certain jurisdictions by a weather normalization mechanism

discussed in Regulatory Matters.

Competition in varying degrees exists between natural gas and other fuels and forms of energy. The natural gas distribution operations have

established various natural gas transportation service rates for their distribution businesses to retain interruptible commercial and industrial

loads. Certain of these services include transportation under flexible rate schedules whereby interruptible customers can avail themselves

of the advantages of open access transportation on regional transmission pipelines, including the system of Williston Basin, Northern

Natural Gas Company, Viking Gas Transmission Company and Northwest Pipeline GP. These services have enhanced Montana-Dakota's,

Great Plains' and Cascade's competitive posture with alternative fuels, although certain of Montana-Dakota's and Cascade's customers

have bypassed the respective distribution systems by directly accessing transmission pipelines located within close proximity. These

bypasses did not have a material effect on results of operations.

The natural gas distribution operations obtain their system requirements directly from producers, processors and marketers. Such natural

gas is supplied by a portfolio of contracts specifying market-based pricing and is transported under transportation agreements by Williston

Basin, South Dakota Intrastate Pipeline Company, Northern Border Pipeline Company, Viking Gas Transmission Company, Northern Natural

Gas Company, Source Gas, TransCanada Alberta System, TransCanada Foothills System, Northwestern Energy, Northwest Pipeline GP, Gas

Transmission Northwest Corporation and Spectra Energy Gas Transmission to provide firm service to their customers. Montana-Dakota also

has contracted with Williston Basin, Great Plains with Northern Natural Gas Company, and Cascade with Northwest Pipeline GP, to provide

firm storage services that enable all three operations to meet winter peak requirements as well as allow them to better manage their natural

gas costs by purchasing natural gas at more uniform daily volumes throughout the year. Demand for natural gas, which is a widely traded

commodity, has historically been sensitive to seasonal heating and industrial load requirements as well as changes in market price.

Montana-Dakota, Great Plains and Cascade believe that, based on regional supplies of natural gas and the pipeline transmission network

currently available through their suppliers and pipeline service providers, supplies are adequate to meet their system natural gas

requirements for the next five years.

Regulatory Matters Montana-Dakota's, Great Plains' and Cascade's retail natural gas rate schedules contain clauses permitting

adjustments in rates based upon changes in natural gas commodity, transportation and storage costs. Current tariffs allow for recovery

or refunds of under or over recovered gas costs within a period ranging from 14 to 28 months.

Montana-Dakota's North Dakota, South Dakota-Black Hills and South Dakota-East River area natural gas tariffs contain a weather

normalization mechanism applicable to firm customers that adjusts the distribution delivery charge revenues to reflect weather fluctuations

during the billing period from November 1 through May 1.