FORM 10-K

76

MDU RESOURCES G ROUP, INC.

PART II

Notes to Consolidated Financial Statements

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements of the Company include the accounts of the following businesses: electric, natural gas distribution,

construction services, pipeline and energy services, natural gas and oil production, construction materials and contracting, and other. The

electric, natural gas distribution, and pipeline and energy services businesses are substantially all regulated. Construction services, natural

gas and oil production, construction materials and contracting, and other are nonregulated. For further descriptions of the Company's

businesses, see Note 16. The statements also include the ownership interests in the assets, liabilities and expenses of two jointly owned

electric generating facilities.

The Company's regulated businesses are subject to various state and federal agency regulations. The accounting policies followed by these

businesses are generally subject to the Uniform System of Accounts of the FERC. These accounting policies differ in some respects from

those used by the Company's nonregulated businesses.

The Company's regulated businesses account for certain income and expense items under the provisions of SFAS No. 71. SFAS No. 71

requires these businesses to defer as regulatory assets or liabilities certain items that would have otherwise been reflected as expense or

income, respectively, based on the expected regulatory treatment in future rates. The expected recovery or flowback of these deferred

items generally is based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are being amortized

consistently with the regulatory treatment established by the FERC and the applicable state public service commissions. See Note 6 for

more information regarding the nature and amounts of these regulatory deferrals.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Allowance for doubtful accounts

The Company's allowance for doubtful accounts as of December 31, 2007 and 2006, was $14.6 million and $7.7 million, respectively.

Natural gas in underground storage

Natural gas in underground storage for the Company's regulated operations is generally carried at cost using the last-in, first-out method.

The portion of the cost of natural gas in underground storage expected to be used within one year was included in inventories and was

$28.8 million and $32.6 million at December 31, 2007 and 2006, respectively. The remainder of natural gas in underground storage, which

represents the cost of the gas required to maintain pressure levels for normal operating purposes, was included in other assets and was

$43.0 million and $44.2 million at December 31, 2007 and 2006, respectively.

Inventories

Inventories, other than natural gas in underground storage for the Company's regulated operations, consisted primarily of aggregates held

for resale of $102.2 million and $88.1 million, materials and supplies of $56.0 million and $54.1 million, and other inventories of $42.3

million and $29.6 million, as of December 31, 2007 and 2006, respectively. These inventories were stated at the lower of average cost or

market value.

Short-term investments

The Company had auction rate securities of $91.6 million and $23.3 million at December 31, 2007 and 2006, respectively, which are

long-term variable rate bonds tied to short-term interest rates that are reset through an auction process which typically occurs every 90 days

or less. The Company accounts for these investments as available-for-sale in accordance with SFAS No. 115. Due to the short interest

rate reset period, the fair value of the auction rate securities approximates cost and, as a result, there are no accumulated unrealized gains

or losses recorded in accumulated other comprehensive income on the Consolidated Balance Sheets related to these investments.

Investments

The Company's investments include its equity method investments as discussed in Note 4, the cash surrender value of life insurance

policies, and investments in fixed-income and equity securities which are accounted for as available-for-sale investments in accordance with

SFAS No. 115. Under the equity method, investments are initially recorded at cost and adjusted for dividends and undistributed earnings

and losses. The Company's fixed-income and equity securities are recorded at fair value with any unrealized gains and losses, net of income

taxes, recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets until realized. For more

information, see comprehensive income in this note.