FORM 10-K

51

MDU RESOURCES G ROUP, INC.

Construction Materials and Contracting

Strategy Focus on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas;

strengthen long-term, strategic aggregate reserve position through purchase and/or lease opportunities; enhance profitability through cost

containment, margin discipline and vertical integration of the segment's operations; and continue growth through organic and acquisition

opportunities. Ongoing efforts to increase margin are being pursued through the implementation of a variety of continuous improvement

programs, including corporate purchasing of equipment, parts and commodities (liquid asphalt, diesel fuel, cement and other materials),

and negotiation of contract price escalation provisions. Vertical integration allows the segment to manage operations from aggregate

mining to final lay-down of concrete and asphalt, with control of and access to adequate quantities of permitted aggregate reserves being

significant. A key element of the Company's long-term strategy for this business is to further expand its presence, through acquisition, in

the higher-margin materials business (rock, sand, gravel, liquid asphalt, ready-mixed concrete and related products), complementing and

expanding on the Company's expertise.

Challenges Price volatility with respect to, and availability of, raw materials such as liquid asphalt, diesel fuel and cement; recruitment and

retention of a skilled workforce; and management of fixed-price construction contracts, which are particularly vulnerable to volatility of

these energy and material prices. The slowdown in the residential housing sector has adversely impacted operations. A greater emphasis

on commercial, industrial, energy and public works projects and cost containment should partially mitigate the effects.

For further information on the risks and challenges the Company faces as it pursues its growth strategies and other factors that should be

considered for a better understanding of the Company's financial condition, see Item 1A -- Risk Factors. For further information on each

segment's key growth strategies, projections and certain assumptions, see Prospective Information.

For information pertinent to various commitments and contingencies, see Item 8 -- Notes to Consolidated Financial Statements.

Earnings Overview

The following table summarizes the contribution to consolidated earnings by each of the Company's businesses.

Years ended December 31,

2007

2006

2005

(Dollars in millions, where applicable)

Electric

$ 17.7

$ 14.4

$ 13.9

Natural gas distribution

14.0

5.7

3.5

Construction services

43.8

27.8

14.6

Pipeline and energy services

31.4

32.1

22.9

Natural gas and oil production

142.5

145.7

141.6

Construction materials and contracting

77.0

85.7

55.1

Other

(4.3)

(4.3)

13.0

Earnings before discontinued operations

322.1

307.1

264.6

Income from discontinued operations, net of tax

109.3

8.0

9.8

Earnings on common stock

$431.4

$315.1

$274.4

Earnings per common share -- basic:

Earnings before discontinued operations

$ 1.77

$ 1.70

$ 1.48

Discontinued operations, net of tax

.60

.05

.06

Earnings per common share -- basic

$ 2.37

$ 1.75

$ 1.54

Earnings per common share -- diluted:

Earnings before discontinued operations

$ 1.76

$ 1.69

$ 1.47

Discontinued operations, net of tax

.60

.05

.06

Earnings per common share -- diluted

$ 2.36

$ 1.74

$ 1.53

Return on average common equity

18.5%

15.6%

15.7%

2007 compared to 2006 Consolidated earnings for 2007 increased $116.3 million from the comparable period largely due to:

· Increased income from discontinued operations, net of tax, largely related to the gain on the sale of the Company's domestic

independent power production assets and earnings related to an electric generating facility construction project

· Higher margins, workloads and equipment sales and rentals at the construction services business

· Increased earnings at the natural gas distribution business largely due to the acquisition of Cascade

Partially offsetting the increase were decreased earnings at the construction materials and contracting business, primarily related to

decreased volumes and margins resulting from the slowdown in the residential housing sector.