FORM 10-K

60

MDU RESOURCES G ROUP, INC.

PART II

As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently,

operating results can be affected by revisions to prior accounting estimates. The following critical accounting policies involve significant

judgments and estimates.

Impairment of long-lived assets and intangibles

The Company reviews the carrying values of its long-lived assets and intangibles, excluding natural gas and oil properties, whenever events

or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill. Unforeseen events and

changes in circumstances and market conditions and material differences in the value of long-lived assets and intangibles due to changes

in estimates of future cash flows could negatively affect the fair value of the Company's assets and result in an impairment charge. If an

impairment indicator exists for tangible and intangible assets, excluding goodwill, the asset group held and used is tested for recoverability

by comparing an estimate of undiscounted future cash flows attributable to the assets compared to the carrying value of the assets. If

impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording

a loss if the carrying value is greater than the fair value. In the case of goodwill, the first step, used to identify a potential impairment,

compares the fair value of the reporting unit using discounted cash flows, with its carrying amount, including goodwill. The second step,

used to measure the amount of the impairment loss if step one indicates a potential impairment, compares the implied fair value of the

reporting unit goodwill with the carrying amount of goodwill.

Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties. The Company uses

critical estimates and assumptions when testing assets for impairment, including present value techniques based on estimates of cash

flows, quoted market prices or valuations by third parties, or multiples of earnings or revenue performance measures. The fair value of the

asset could be different using different estimates and assumptions in these valuation techniques.

There is risk involved when determining the fair value of assets, tangible and intangible, as there may be unforeseen events and changes in

circumstances and market conditions and changes in estimates of future cash flows.

The Company believes its estimates used in calculating the fair value of long-lived assets, including goodwill and identifiable intangibles, are

reasonable based on the information that is known when the estimates are made.

Natural gas and oil properties

The Company uses the full-cost method of accounting for its natural gas and oil production activities. Capitalized costs are subject to

a "ceiling test" that limits such costs to the aggregate of the present value of future net revenues of proved reserves based on single

point-in-time spot market prices, as mandated under the rules of the SEC, plus the cost of unproved properties. Judgments and

assumptions are made when estimating and valuing reserves. There is risk that sustained downward movements in natural gas and oil

prices, changes in estimates of reserve quantities and changes in operating and development costs could result in a future noncash

write-down of the Company's natural gas and oil properties.

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

utilizing available engineering and geologic data derived from well tests. Other factors used in the reserve estimates are current natural gas

and oil prices, current estimates of well operating and future development costs, and the interest owned by the Company in the well. These

estimates are refined as new information becomes available.

Historically, the Company has not had any material revisions to its reserve estimates. As a result, the Company has not changed its practice

in estimating reserves and does not anticipate changing its methodologies in the future.

Revenue recognition

Revenue is recognized when the earnings process is complete, as evidenced by an agreement between the customer and the Company,

when delivery has occurred or services have been rendered, when the fee is fixed or determinable and when collection is reasonably

assured. The recognition of revenue in conformity with accounting principles generally accepted in the United States of America requires

the Company to make estimates and assumptions that affect the reported amounts of revenue. Critical estimates related to the recognition

of revenue include the accumulated provision for revenues subject to refund and costs on construction contracts under the percentage-of-

completion method.

Estimates for revenues subject to refund are established initially for each regulatory rate proceeding and are subject to change depending

on the applicable regulatory agency's (Agency) approval of final rates. These estimates are based on the Company's analysis of its as-filed

application compared to previous Agency decisions in prior rate filings by the Company and other regulated companies. The Company

periodically reviews the status of its outstanding regulatory proceedings and liability assumptions and may from time to time change its

liability estimates subject to known developments as the regulatory proceedings move through the regulatory review process. The accuracy

of the estimates is ultimately determined when the Agency issues its final ruling on each regulatory proceeding for which revenues were

subject to refund. Estimates have changed from time to time as additional information has become available as to what the ultimate

outcome may be and will likely continue to change in the future as new information becomes available on each outstanding regulatory

proceeding that is subject to refund.