FORM 10-K

55

MDU RESOURCES G ROUP, INC.

· Higher operation and maintenance expense, largely due to the natural gas storage litigation and higher material costs. For further

information regarding natural gas storage litigation, see Item 8 -- Note 20.

The decrease in energy services revenues and purchased natural gas sold reflects the effect of lower natural gas prices.

2006 compared to 2005 Pipeline and energy services earnings increased $7.9 million (36 percent) due largely to:

· Higher transportation and gathering volumes ($5.3 million after tax)

· Higher storage services revenue ($5.8 million after tax)

· Higher gathering rates ($3.2 million after tax)

Partially offsetting this increase in earnings were:

· Absence in 2006 of the benefit from the resolution of a rate proceeding of $5.0 million (after tax) recorded in 2005, which was largely

offset by the benefit from the resolution of a rate proceeding of $4.1 million (after tax) recorded in 2006, both of which included a

reduction to depreciation, depletion and amortization expense.

· Higher operation and maintenance expense, primarily due to the natural gas storage litigation. For further information, see Item 8 -- Note 20.

· An increased loss from discontinued operations of $1.3 million (after tax), related to Innovatum. For further information,

see Item 8 -- Note 3.

The decrease in energy services revenues and purchased natural gas sold reflects the effect of lower natural gas prices.

Natural Gas and Oil Production

Years ended December 31,

2007

2006

2005

(Dollars in millions, where applicable)

Operating revenues:

Natural gas

$ 374.1

$373.9

$362.5

Oil

140.1

103.4

72.7

Other

.6

6.7

4.2

514.8

484.0

439.4

Operating expenses:

Purchased natural gas sold

.3

6.6

4.3

Operation and maintenance:

Lease operating costs

66.9

52.8

39.2

Gathering and transportation

20.4

18.3

14.1

Other

34.6

31.9

31.2

Depreciation, depletion and amortization

127.4

106.8

84.8

Taxes, other than income:

Production and property taxes

36.7

35.2

34.8

Other

.8

.6

.6

287.1

252.2

209.0

Operating income

227.7

231.8

230.4

Earnings

$142.5

$145.7

$ 141.6

Production:

Natural gas (MMcf)

62,798

62,062

59,378

Oil (MBbls)

2,365

2,041

1,707

Average realized prices (including hedges):

Natural gas (per Mcf)

$ 5.96

$ 6.03

$ 6.11

Oil (per Bbl)

$59.26

$50.64

$42.59

Average realized prices (excluding hedges):

Natural gas (per Mcf)

$ 5.37

$ 5.62

$ 6.87

Oil (per Bbl)

$59.53

$ 51.73

$48.73

Depreciation, depletion and amortization rate, per equivalent Mcf

$ 1.59

$ 1.38

$ 1.19

Production costs, including taxes, per equivalent Mcf:

Lease operating costs

$

.87

$

.71

$

.56

Gathering and transportation

.26

.25

.20

Production and property taxes

.48

.47

.50

$ 1.61

$ 1.43

$ 1.26