FORM 10-K

61

MDU RESOURCES G ROUP, INC.

The Company recognizes construction contract revenue from fixed-price and modified fixed-price construction contracts at its construction

businesses using the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for

each contract. This method depends largely on the ability to make reasonably dependable estimates related to the extent of progress

toward completion of the contract, contract revenues and contract costs. Inasmuch as contract prices are generally set before the work is

performed, the estimates pertaining to every project could contain significant unknown risks such as volatile labor, material and fuel costs,

weather delays, adverse project site conditions, unforeseen actions by regulatory agencies, performance by subcontractors, job

management and relations with project owners.

Several factors are evaluated in determining the bid price for contract work. These include, but are not limited to, the complexities of the

job, past history performing similar types of work, seasonal weather patterns, competition and market conditions, job site conditions, work

force safety, reputation of the project owner, availability of labor, materials and fuel, project location and project completion dates. As a

project commences, estimates are continually monitored and revised as information becomes available and actual costs and conditions

surrounding the job become known.

The Company believes its estimates surrounding percentage-of-completion accounting are reasonable based on the information that is

known when the estimates are made. The Company has contract administration, accounting and management control systems in place

that allow its estimates to be updated and monitored on a regular basis. Because of the many factors that are evaluated in determining bid

prices, it is inherent that the Company's estimates have changed in the past and will continually change in the future as new information

becomes available for each job.

Purchase accounting

The Company accounts for its acquisitions under the purchase method of accounting and, accordingly, the acquired assets and liabilities

assumed are recorded at their respective fair values. The excess of the purchase price over the fair value of the assets acquired and

liabilities assumed is recorded as goodwill. The recorded values of assets and liabilities are based on third-party estimates and valuations

when available. The remaining values are based on management's judgments and estimates, and, accordingly, the Company's financial

position or results of operations may be affected by changes in estimates and judgments.

Acquired assets and liabilities assumed by the Company that are subject to critical estimates include property, plant and equipment

and intangibles.

The fair value of owned recoverable aggregate reserve deposits is determined using qualified internal personnel as well as geologists.

Reserve estimates are calculated based on the best available data. This data is collected from drill holes and other subsurface investigations

as well as investigations of surface features such as mine highwalls and other exposures of the aggregate reserves. Mine plans, production

history and geologic data are also used to estimate reserve quantities. Value is assigned to the aggregate reserves based on a review of

market royalty rates, expected cash flows and the number of years of recoverable aggregate reserves at owned aggregate sites.

The fair value of property, plant and equipment is based on a valuation performed either by qualified internal personnel and/or outside

appraisers. Fair values assigned to plant and equipment are based on several factors including the age and condition of the equipment,

maintenance records of the equipment and auction values for equipment with similar characteristics at the time of purchase.

The fair value of leasehold rights is based on estimates including royalty rates, lease terms and other discernible factors for acquired

leasehold rights, and estimated cash flows.

While the allocation of the purchase price of an acquisition is subject to a considerable degree of judgment and uncertainty, the Company

does not expect the estimates to vary significantly once an acquisition has been completed. The Company believes its estimates have been

reasonable in the past as there have been no significant valuation adjustments subsequent to the final allocation of the purchase price to

the acquired assets and liabilities. In addition, goodwill impairment testing is performed annually in accordance with SFAS No. 142.

Asset retirement obligations

Entities are required to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The

Company has recorded obligations related to the plugging and abandonment of natural gas and oil wells, decommissioning of certain

electric generating facilities, reclamation of certain aggregate properties, special handling and disposal of hazardous materials at certain

electric generating facilities, natural gas distribution and transmission facilities and buildings and certain other obligations associated

with leased properties.

The liability for future asset retirement obligations bears the risk of change as many factors go into the development of the estimate of

these obligations and the likelihood that over time these factors can and will change. Factors used in the estimation of future asset

retirement obligations include estimates of current retirement costs, future inflation factors, life of the asset and discount rates. These

factors determine both a present value of the retirement liability and the accretion to the retirement liability in subsequent years.