FORM 10-K
78
MDU RESOURCES G ROUP, INC.
PART II
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a
business combination. Goodwill is required to be tested for impairment annually, which is completed in the fourth quarter, or more
frequently if events or changes in circumstances indicate that goodwill may be impaired. For more information on goodwill impairments and
goodwill, see Notes 3 and 5.
Natural gas and oil properties
The Company uses the full-cost method of accounting for its natural gas and oil production activities. Under this method, all costs incurred
in the acquisition, exploration and development of natural gas and oil properties are capitalized and amortized on the units-of-production
method based on total proved reserves. Any conveyances of properties, including gains or losses on abandonments of properties, are
treated as adjustments to the cost of the properties with no gain or loss recognized. 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. Future net revenue is estimated based on end-of-
quarter spot market prices adjusted for contracted price changes. If capitalized costs exceed the full-cost ceiling at the end of any quarter,
a permanent noncash write-down is required to be charged to earnings in that quarter unless subsequent price changes eliminate or reduce
an indicated write-down.
At December 31, 2007 and 2006, the Company's full-cost ceiling exceeded the Company's capitalized cost. However, sustained downward
movements in natural gas and oil prices subsequent to December 31, 2007, could result in a future write-down of the Company's natural
gas and oil properties.
The following table summarizes the Company's natural gas and oil properties not subject to amortization at December 31, 2007, in total and
by the year in which such costs were incurred:
Year Costs Incurred
2004
Total
2007
2006
2005
and prior
(In thousands)
Acquisition
$ 62,619
$15,632
$19,135
$ 8,812
$19,040
Development
60,352
33,380
16,853
5,225
4,894
Exploration
15,643
13,771
812
1,060
--
Capitalized interest
3,910
1,771
1,038
426
675
Total costs not subject to amortization
$142,524
$64,554
$37,838
$15,523
$24,609
Costs not subject to amortization as of December 31, 2007, consisted primarily of unevaluated leaseholds, drilling costs, seismic costs and
capitalized interest associated primarily with CBNG in the Powder River Basin of Montana and Wyoming; oil and gas development in the Big
Horn Basin of Wyoming; an enhanced recovery development project in the Cedar Creek Anticline in southeastern Montana; oil and gas
development in the Paradox Basin of Utah; a waterflood facility and injection project in southern Texas; and development of the Bakken play
in western North Dakota. The Company expects that the majority of these costs will be evaluated within the next five years and included in
the amortization base as the properties are evaluated and/or developed.
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 Company recognizes utility revenue each month based on the services provided to all utility customers during the month.
Accrued unbilled revenue which is included in receivables, net, represents revenues recognized in excess of amounts billed. Accrued
unbilled revenue at Montana-Dakota and Cascade was $66.6 million at December 31, 2007. Accrued unbilled revenue at Montana-Dakota
was $35.6 million at December 31, 2006. The Company recognizes construction contract revenue at its construction businesses using the
percentage-of-completion method as discussed later. The Company recognizes revenue from natural gas and oil production properties only
on that portion of production sold and allocable to the Company's ownership interest in the related well. The Company recognizes all other
revenues when services are rendered or goods are delivered.
Percentage-of-completion method
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. If a loss is anticipated on a contract, the loss is immediately recognized. Costs in excess of billings on uncompleted
contracts of $45.2 million and $41.3 million at December 31, 2007 and 2006, respectively, represent revenues recognized in excess of
amounts billed and were included in receivables, net. Billings in excess of costs on uncompleted contracts of $81.4 million and $84.2
million at December 31, 2007 and 2006, respectively, represent billings in excess of revenues recognized and were included in accounts
payable. Amounts representing balances billed but not paid by customers under retainage provisions in contracts amounted to $80.3
million and $81.8 million at December 31, 2007 and 2006, respectively. The amounts expected to be paid within one year or less are
included in receivables, net, and amounted to $68.9 million and $81.8 million at December 31, 2007 and 2006, respectively. The long-term
retainage which was included in deferred charges and other assets -- other was $11.4 million at December 31, 2007.
