FORM 10-K

79

MDU RESOURCES G ROUP, INC.

Derivative instruments

The Company's policy allows the use of derivative instruments as part of an overall energy price, foreign currency and interest rate risk

management program to efficiently manage and minimize commodity price, foreign currency and interest rate risk. The Company's policy

prohibits the use of derivative instruments for speculating to take advantage of market trends and conditions, and the Company has

procedures in place to monitor compliance with its policies. The Company is exposed to credit-related losses in relation to derivative

instruments in the event of nonperformance by counterparties. The Company's policy generally requires that natural gas and oil price

derivative instruments at Fidelity and interest rate derivative instruments not exceed a period of 24 months and foreign currency derivative

instruments not exceed a 12-month period. The Company's policy allows Cascade to maintain a portfolio of natural gas derivative

instruments not to exceed a period of three years. The Company's policy requires settlement of natural gas and oil price derivative

instruments monthly and all interest rate derivative transactions must be settled over a period that will not exceed 90 days, and any foreign

currency derivative transaction settlement periods may not exceed a 12-month period. The Company has policies and procedures that

management believes minimize credit-risk exposure. Accordingly, the Company does not anticipate any material effect on its financial

position or results of operations as a result of nonperformance by counterparties. For more information on derivative instruments, see Note 7.

Asset retirement obligations

The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is

initially recorded, the Company capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is

accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement

of the liability, the Company either settles the obligation for the recorded amount or incurs a gain or loss at its nonregulated operations or

incurs a regulatory asset or liability at its regulated operations. For more information on asset retirement obligations, see Note 11.

Natural gas costs recoverable or refundable through rate adjustments

Under the terms of certain orders of the applicable state public service commissions, the Company is deferring natural gas commodity,

transportation and storage costs that are greater or less than amounts presently being recovered through its existing rate schedules. Such

orders generally provide that these amounts are recoverable or refundable through rate adjustments within a period ranging from 14 to 28

months from the time such costs are paid. Natural gas costs refundable through rate adjustments were $11.6 million and $7.5 million at

December 31, 2007 and 2006, respectively, which is included in other accrued liabilities. Natural gas costs recoverable through rate

adjustments were $3.9 million at December 31, 2007, which is included in prepayments and other current assets.

Insurance

Certain subsidiaries of the Company are insured for workers' compensation losses, subject to deductibles ranging up to $750,000 per

occurrence. Automobile liability and general liability losses are insured, subject to deductibles ranging up to $500,000 per accident or

occurrence. These subsidiaries have excess coverage above the primary automobile and general liability policies on a claims first-made

basis beyond the deductible levels. The subsidiaries of the Company are retaining losses up to the deductible amounts accrued on the basis

of estimates of liability for claims incurred and for claims incurred but not reported.

Income taxes

The Company provides deferred federal and state income taxes on all temporary differences between the book and tax basis of the

Company's assets and liabilities. Excess deferred income tax balances associated with the Company's rate-regulated activities resulting

from the Company's adoption of SFAS No. 109 have been recorded as a regulatory liability and are included in other liabilities. These

regulatory liabilities are expected to be reflected as a reduction in future rates charged to customers in accordance with applicable

regulatory procedures.

The Company uses the deferral method of accounting for investment tax credits and amortizes the credits on electric and natural gas

distribution plant over various periods that conform to the ratemaking treatment prescribed by the applicable state public service commissions.

Foreign currency translation adjustment

The functional currency of the Company's investment in the Brazilian Transmission Lines and its former investment in the Termoceara

Generating Facility, as further discussed in Note 4, is the Brazilian Real. Translation from the Brazilian Real to the U.S. dollar for assets and

liabilities is performed using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated on a year-to-date

basis using weighted average daily exchange rates. Adjustments resulting from such translations are reported as a separate component of

other comprehensive income (loss) in common stockholders' equity.

Transaction gains and losses resulting from the effect of exchange rate changes on transactions denominated in a currency other than the

functional currency of the reporting entity would be recorded in income.

Common stock split

On May 11, 2006, the Company's Board of Directors approved a three-for-two common stock split. For more information on the common

stock split, see Note 13.

Earnings per common share

Basic earnings per common share were computed by dividing earnings on common stock by the weighted average number of shares of

common stock outstanding during the year. Diluted earnings per common share were computed by dividing earnings on common stock by

the total of the weighted average number of shares of common stock outstanding during the year, plus the effect of outstanding stock

options, restricted stock grants and performance share awards. In 2007, 2006 and 2005, there were no shares excluded from the

calculation of diluted earnings per share. Common stock outstanding includes issued shares less shares held in treasury.