FORM 10-K

56

MDU RESOURCES G ROUP, INC.

PART II

2007 compared to 2006 The natural gas and oil production business experienced a decrease in earnings of $3.2 million (2 percent) due to:

· Increased depreciation, depletion and amortization expense of $12.8 million (after tax) due to higher depletion rates and increased production

· Higher lease operating costs of $8.8 million (after tax), largely CBNG-related and costs related to acquired properties, as well as

increased service-related costs

· Lower average realized natural gas prices of 1 percent

· Increased general and administrative expense of $1.9 million (after tax)

Partially offsetting the decrease were:

· Increased oil production of 16 percent resulting from the May 2006 Big Horn acquisition, as well as from the South Texas properties

· Higher average realized oil prices of 17 percent

· Increased natural gas production of 1 percent

2006 compared to 2005 The natural gas and oil production business experienced an increase in earnings of $4.1 million (3 percent) due to:

· Increased oil production of 20 percent and natural gas production of 5 percent, largely due to the May 2005 South Texas and May 2006

Big Horn acquisitions and increased production in the Rocky Mountain region

· Higher average realized oil prices of 19 percent

Partially offsetting the increase were:

· Higher depreciation, depletion and amortization expense of $13.5 million (after tax) due to higher depletion rates and increased production

· Higher lease operating expense of $8.4 million (after tax), largely acquisition and CBNG-related costs

Construction Materials and Contracting

Years ended December 31,

2007

2006

2005

(Dollars in millions)

Operating revenues

$1,761.5

$1,877.0

$1,604.6

Operating expenses:

Operation and maintenance

1,483.5

1,593.7

1,381.9

Depreciation, depletion and amortization

95.8

88.7

78.0

Taxes, other than income

43.6

38.5

39.4

1,622.9

1,720.9

1,499.3

Operating income

138.6

156.1

105.3

Earnings

$

77.0

$

85.7

$

55.1

Sales (000's):

Aggregates (tons)

36,912

45,600

47,204

Asphalt (tons)

7,062

8,273

9,142

Ready-mixed concrete (cubic yards)

4,085

4,588

4,448

2007 compared to 2006 Earnings at the construction materials and contracting business decreased $8.7 million (10 percent) due to:

· Decreased earnings of $14.2 million (after tax) from construction, primarily related to the slowdown in the residential housing sector

· Lower earnings from ready-mixed concrete and aggregate operations of $13.8 million (after tax), due to lower volumes and margins

related to the slowdown in the residential housing sector

Partially offsetting the decrease were:

· Increased earnings from asphalt and related products of $9.1 million (after tax), due to higher margins

· Decreased general and administrative expense of $5.6 million (after tax), including lower payroll-related costs

· Earnings from companies acquired since the comparable prior period, which contributed approximately 3 percent of earnings for 2007

2006 compared to 2005 Earnings at the construction materials and contracting business increased $30.6 million (56 percent) due to:

· Higher earnings of $18.8 million (after tax) from construction, largely due to increased volumes and margins, the result of strong markets

and improvements in Texas