FORM 10-K

50

MDU RESOURCES G ROUP, INC.

PART II

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The Company's strategy is to apply its expertise in energy and transportation infrastructure industries to increase market share, increase

profitability and enhance shareholder value through:

· Organic growth as well as a continued disciplined approach to the acquisition of well-managed companies and properties

· The elimination of system-wide cost redundancies through increased focus on integration of operations and standardization and

consolidation of various support services and functions across companies within the organization

· The development of projects that are accretive to earnings per share and return on invested capital

The Company has capabilities to fund its growth and operations through various sources, including internally generated funds, commercial

paper facilities and the issuance from time to time of debt securities and the Company's equity securities. For more information on the

Company's net capital expenditures, see Liquidity and Capital Commitments.

The key strategies for each of the Company's business segments and certain related business challenges are summarized below. For

a discussion of the Company's business segments, see Item 8 -- Note 16.

Key Strategies and Challenges

Electric and Natural Gas Distribution

Strategy Provide competitively priced energy to customers while working with them to ensure efficient usage. Both the electric and natural

gas distribution segments continually seek opportunities for growth and expansion of their customer base through extensions of existing

operations and through selected acquisitions of companies and properties at prices that will provide stable cash flows and an opportunity

for the Company to earn a competitive return on investment. The natural gas distribution segment also continues to pursue growth by

expanding its level of energy-related services.

Challenges Both segments are subject to extensive regulation in the state jurisdictions where they conduct operations with respect to

costs and permitted returns on investment as well as subject to certain operational regulations at the federal level. The ability of these

segments to grow through acquisitions is subject to significant competition from other energy providers. In addition, as to the electric

business, the ability of this segment to grow its service territory and customer base is affected by significant competition from other energy

providers, including rural electric cooperatives.

Construction Services

Strategy Provide a competitive return on investment while operating in a competitive industry by: building new and strengthening existing

customer relationships; effectively controlling costs; retaining, developing and recruiting talented employees; focusing business

development efforts on project areas that will permit higher margins; and properly managing risk. This segment continuously seeks

opportunities to expand through strategic acquisitions.

Challenges This segment operates in highly competitive markets with many jobs subject to competitive bidding. Maintenance of effective

operational and cost controls, retention of key personnel and managing through down turns in the economy are ongoing challenges.

Pipeline and Energy Services

Strategy Leverage the segment's existing expertise in energy infrastructure and related services to increase market share and profitability

through optimization of existing operations, internal growth, and acquisitions of energy-related assets and companies. Incremental and new

growth opportunities include: access to new sources of natural gas for storage, gathering and transportation services; expansion of existing

gathering and transmission facilities; and incremental expansion of pipeline capacity to allow customers access to more liquid and

higher-priced markets.

Challenges Energy price volatility; natural gas basis differentials; regulatory requirements; ongoing litigation; recruitment and retention

of a skilled workforce; and increased competition from other natural gas pipeline and gathering companies.

Natural Gas and Oil Production

Strategy Apply technology and leverage existing exploration and production expertise, with a focus on operated properties, to increase

production and reserves from existing leaseholds, and to seek additional reserves and production opportunities in new areas to further

diversify the segment's asset base. By optimizing existing operations and taking advantage of new and incremental growth opportunities,

this segment's goal is to increase both production and reserves over the long term so as to generate competitive returns on investment.

Challenges Fluctuations in natural gas and oil prices; ongoing environmental litigation and administrative proceedings; timely receipt of

necessary permits and approvals; recruitment and retention of a skilled workforce; availability of drilling rigs, auxiliary equipment and

industry-related field services; inflationary pressure on development and operating costs; and increased competition from other natural gas

and oil companies.