FORM 10-K

80

MDU RESOURCES G ROUP, INC.

PART II

Stock-based compensation

On January 1, 2006, the Company adopted SFAS No. 123 (revised). This accounting standard revises SFAS No. 123 and requires entities to

recognize compensation expense in an amount equal to the grant-date fair value of share-based payments granted to employees. SFAS No.

123 (revised) was adopted using the modified prospective method, recognizing compensation expense for all awards granted after the date

of adoption of the standard and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In

accordance with the modified prospective method, the Company's consolidated financial statements for prior periods have not been

restated to reflect, and do not include, the impact of SFAS No. 123 (revised).

On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 and began expensing the fair market value

of stock options for all awards granted on or after January 1, 2003. As permitted by SFAS No. 148, the Company accounted for stock

options granted prior to January 1, 2003, under APB Opinion No. 25 and no compensation expense was recognized as the options granted

had an exercise price equal to the market value of the underlying common stock on the date of the grant.

The following table illustrates the effect on earnings and earnings per common share for the year ended December 31, 2005, as if the

Company had applied SFAS No. 123 and recognized compensation expense for all outstanding and unvested stock options based on the

fair value at the date of grant:

2005

(In thousands, except per share amounts)

Earnings on common stock, as reported

$274,398

Stock-based compensation expense included in reported earnings,

net of related tax effects of $1

2

Total stock-based compensation expense determined under fair value

method for all awards, net of related tax effects

(471)

Pro forma earnings on common stock

$273,929

Earnings per common share -- basic -- as reported

$1.54

Earnings per common share -- basic -- pro forma

$1.54

Earnings per common share -- diluted -- as reported

$1.53

Earnings per common share -- diluted -- pro forma

$1.53

For more information on the Company's stock-based compensation, see Note 14.

Use of estimates

The preparation of financial statements 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 assets and liabilities, and disclosure of contingent

assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting

period. Estimates are used for items such as impairment testing of long-lived assets, goodwill and natural gas and oil properties; fair values

of acquired assets and liabilities under the purchase method of accounting; natural gas and oil reserves; aggregate reserves; property

depreciable lives; tax provisions; uncollectible accounts; environmental and other loss contingencies; accumulated provision for revenues

subject to refund; costs on construction contracts; unbilled revenues; actuarially determined benefit costs; asset retirement obligations; the

valuation of stock-based compensation; and the fair value of derivative instruments. 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.

Cash flow information

Cash expenditures for interest and income taxes were as follows:

Years ended December 31,

2007

2006

2005

(In thousands)

Interest, net of amount capitalized

$ 74,404

$ 65,850

$ 47,902

Income taxes

$214,573

$105,317

$106,771

Income taxes paid for the year ended December 31, 2007, increased from the amount paid for the years ended December 31, 2006 and

2005, primarily due to higher estimated quarterly tax payments due in large part to the gain on the sale of the domestic independent power

production assets as discussed in Note 3.

New accounting standards

FIN 48 In July 2006, the FASB issued FIN 48. FIN 48 clarifies the application of SFAS No. 109 by defining a criterion that an individual tax

position must meet for any part of the benefit of that position to be recognized in an enterprise's financial statements. The criterion allows

for recognition in the financial statements of a tax position when it is more likely than not that the position will be sustained upon

examination. FIN 48 was effective for the Company on January 1, 2007. The adoption of FIN 48 did not have a material effect on the

Company's financial position or results of operations. For more information on the implementation of FIN 48, see Note 15.