FORM 10-K

40

MDU RESOURCES G ROUP, INC.

PART I

Reserve Information Estimates of reserves are arrived at using actual historical wellhead production trends and/or standard reservoir

engineering methods utilizing available geological, geophysical, engineering and economic data. Other factors used in the reserve estimates

are current natural gas and oil prices, current estimates of well operating and future development costs, taxes, timing of operations, and the

interest owned by the Company in the well. The reserve estimates are prepared by internal engineers and are reviewed by management.

These estimates are refined as new information becomes available.

Fidelity's recoverable proved reserves by region at December 31, 2007, are as follows:

Natural

PV-10

Gas

Oil

Total

Percent

Value*

Region

(MMcf)

(MBbls)

(MMcfe)

of Total

(in millions)

Rocky Mountain

392,174

22,118

524,883

74%

$1,398.4

Mid-Continent/Gulf States

119,500

7,616

165,197

23

527.0

Offshore Gulf of Mexico

12,063

878

17,329

3

82.1

Total reserves

523,737

30,612

707,409

100%

$2,007.5

* PV-10 value represents the discounted future net cash flows attributable to proved reserves before income taxes, discounted at 10 percent. The standardized measure of discounted

future net cash flows in Item 8 -- Supplementary Financial Information represents the present value of future cash flows attributable to proved reserves after income taxes, discounted

at 10 percent.

For additional information related to natural gas and oil interests, see Item 8 -- Note 1 and Supplementary Financial Information.

CONSTRUCTION MATERIALS AND CONTRACTING

General Knife River operates construction materials and contracting businesses headquartered in Alaska, California, Hawaii, Idaho, Iowa,

Minnesota, Montana, North Dakota, Oregon, Texas, Washington and Wyoming. These operations mine, process and sell construction

aggregates (crushed stone, sand and gravel); produce and sell asphalt mix and supply liquid asphalt for various commercial and roadway

applications; and supply ready-mixed concrete for use in most types of construction, including roads, freeways and bridges, as well as

homes, schools, shopping centers, office buildings and industrial parks. Although not common to all locations, other products include the

sale of cement, various finished concrete products and other building materials and related construction services.

During 2007, the Company acquired construction materials and contracting businesses with operations in North Dakota, Texas and

Wyoming. None of these acquisitions was material to the Company.

Knife River continues to investigate the acquisition of other construction materials properties, particularly those relating to construction

aggregates and related products such as ready-mixed concrete, asphalt and related construction services.

The construction materials business had approximately $462 million in backlog at December 31, 2007, compared to $483 million at

December 31, 2006. The Company anticipates that a significant amount of the current backlog will be completed during the year ending

December 31, 2008.

Competition Knife River's construction materials products are marketed under highly competitive conditions. Price is the principal

competitive force to which these products are subject, with service, quality, delivery time and proximity to the customer also being

significant factors. The number and size of competitors varies in each of Knife River's principal market areas and product lines.

The demand for construction materials products is significantly influenced by the cyclical nature of the construction industry in general.

In addition, construction materials activity in certain locations may be seasonal in nature due to the effects of weather. The key economic

factors affecting product demand are changes in the level of local, state and federal governmental spending, general economic conditions

within the market area that influence both the commercial and private sectors, and prevailing interest rates.

Knife River is not dependent on any single customer or group of customers for sales of its products and services, the loss of which would

have a materially adverse effect on its construction materials businesses.

Reserve Information Reserve estimates are calculated based on the best available data. These data are collected from drill holes and

other subsurface investigations, as well as investigations of surface features such as mine highwalls and other exposures of the aggregate

reserves. Mine plans, production history and geologic data also are utilized to estimate reserve quantities. Most acquisitions are made of

mature businesses with established reserves, as distinguished from exploratory-type properties.

Estimates are based on analyses of the data described above by experienced internal mining engineers, operating personnel and geologists.

Property setbacks and other regulatory restrictions and limitations are identified to determine the total area available for mining. Data

described above are used to calculate the thickness of aggregate materials to be recovered. Topography associated with alluvial sand and

gravel deposits is typically flat and volumes of these materials are calculated by simply applying the thickness of the resource over the areas

available for mining. Volumes are then converted to tons by using an appropriate conversion factor. Typically, 1.5 tons per cubic yard in the

ground is used for sand and gravel deposits.