Long-term investors know that our company has experienced tremendous success. Each milestone has been accompanied by a growing expectation — from our shareholders, from those we serve and from ourselves — of even greater accomplishments.

That is part of what makes 2007 particularly remarkable. Although each of the past few years has been outstanding in its own right, our employees’ achievements this past year were exceptional. We once again increased the financial value delivered to shareholders. Operating performance was strong. We also made a number of acquisitions that will help us accomplish even more in the future.

Fifth year of record earnings
2007 was the fifth consecutive year of record earnings, with earnings of $431.4 million, or $2.36 per common share, diluted. Earnings from continuing operations, which exclude the gain from the sale of our domestic independent power business and certain related income, totaled $322.1 million, or $1.76 per share, diluted. We believe earnings from continuing operations provide a better comparison of year-to-year operating performance. Total revenues for the year reached $4.2 billion.

In August, we increased our quarterly common stock dividend by 7.4 percent to 14.5 cents per share, or 58 cents per share on an annualized basis. This was the 17th consecutive year of dividend increases, an accomplishment matched by fewer than 5 percent of publicly traded North American businesses. We have provided investors with 70 consecutive years of uninterrupted dividend payments, stretching back to 1937.

We also continued to deliver outstanding value to investors, with a one-year total return to shareholders of 10 percent. Our total average annual return for the five -year period ending in 2007 was 22 percent, which outperformed the S&P 500. In November, the Edison Electric Institute presented the company with its Index Award, which recognizes the best total shareholder returns among shareholderowned electric utilities. Our total return of 212 percent for the five-year period ending September 30, 2007, led all companies in EEI’s small-cap category.

In July, we completed the sale of our domestic independent power business for a gain of $91.5 million, after tax. The sale took advantage of a strong market for electric generating facilities. The funds have been used to help grow our remaining businesses.

Strong operating performance
As our financial results indicate, we had strong operating performance in each of our three lines of business — energy, construction materials and utility resources.

Our exploration and production business aggressively expanded its three-pronged growth strategy, which is built around developing existing reserves, acquiring properties with existing production, and exploration in high-potential areas.

Participation in more than 360 new wells, principally in our existing Rocky Mountain areas, pushed natural gas and oil production to record levels and helped us retain our position as the largest natural gas producer in Montana. We believe there is strong potential for continued growth, based on our strong reserve position. We hold approximately 707 billion cubic feet equivalent of proved reserves. In addition, in June we estimated probable and possible reserves of 800 Bcfe, about half of which are probable.

Early this year, we purchased natural gas properties in eastern Texas that will increase our total reserves by about 14 percent. The purchase includes significant existing production, which we plan to increase this year with 25 additional wells. We expect that the acquisition will increase our projected 2008 production growth in the range of 12 percent to 16 percent, up from our original expectation of a 5 percent to 8 percent increase.

Finally, we have had good initial success with exploration efforts outside our traditional areas of operation. Our first well in the Paradox Basin in Utah is showing good results, and we expect production from our first operated Bakken well in the first quarter. The Bakken region is one of the hottest oil plays in the United States.

Our natural gas pipeline and gathering systems both had record delivery volumes, and we expanded firm capacity on our Grasslands Pipeline by about 40 percent.

Our construction materials and contracting business added five acquisitions during 2007, solidifying our position as the fifth-largest producer of sand and gravel in the United States and the eighth-largest aggregate producer. Two of the acquisitions included aggregate reserves, which are a critical asset for sustaining production capabilities.

A sharp focus on cost and production efficiencies helped offset some of the effects of the depressed housing market and increasing material costs. In addition, the business completed the first phase of a national branding effort that will put its operations under a single name — Knife River — and help these operations capitalize on their combined market strength.

We finalized the purchase of Cascade Natural Gas Corp., which serves high-growth areas in Washington and Oregon. This was the largest acquisition in our company’s history, and it nearly doubled the number of natural gas customers we serve.

Montana-Dakota Utilities Co. continued to focus on adding electric generation to meet growing customer demand. Early this year, the utility completed construction of 19.5 megawatts of wind generation near Baker, Montana. The utility also is participating in a consortium that plans to build Big Stone II, a coal-fueled electric generating plant that would be located next to the existing Big Stone I plant in South Dakota. Both Big Stone plants will benefit from state-of-the-art air quality controls that will be installed. Finally, the utility completed a four-year labor agreement with unionized employees that will carry into 2011.

Our construction services group delivered record earnings for the third consecutive year. The business continues to benefit from strong demand in the energy industry, including the replacement of aging infrastructure such as electric distribution lines and the installation of air-quality control equipment at electric generating plants. Our equipment manufacturing business contributed with the best year in its history. This business builds and distributes specialty equipment used in the power line transmission and distribution industry.

National issues pose challenges
Our 2007 success was achieved despite signs of a softening economy. The nation’s depressed housing market, in particular, had a significant impact on our construction materials and contracting business, along with the rest of that industry. The bottom of this market may be at least a year away, so its challenges will continue for us in 2008.

This underscores the strength of our diversified business strategy. Our balanced portfolio of businesses reduces our exposure to weakness in any one market segment and helps provide consistency to our cash flow and earnings. These are important advantages that single-industry companies do not enjoy.

Even more important — and certainly with longer-lasting impact — is the national debate related to climate change and our energy future. Reducing greenhouse gas emissions is a critical priority. At the same time, we need to find ways to meet tomorrow’s energy needs. And, perhaps most challenging, we need to find solutions that are affordable for all of us.

Our nation’s public policy must balance our needs for affordable energy, a vibrant economy and a healthy environment. If we do not keep these in balance, we are simply trading one problem for another.

Responsibility and integrity
Our employees embrace the responsibility to operate our businesses in a manner that minimizes environmental impacts. The company encourages their efforts with annual environmental integrity awards that recognize outstanding achievements in environmental stewardship and in reclamation and habitat enhancement.

There isn’t enough space here to list all of our environmental efforts, but many of them are discussed in our first sustainability report, which we recently prepared. Environmentalism is just one part of sustainability, which actually means “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Thus, our report is a broad discussion of our commitment to be responsible members of the communities in which we operate.

A summary of the sustainability report begins on page 5 of this annual report. We also encourage you to read the full report, which is posted on our company’s Web site at www.mdu.com. The report communicates our core values and the social and economic impact that MDU Resources has on the markets and communities we serve. The report also characterizes certain initiatives and core competencies within MDU Resources and our business units that are essential to our long-term success.

One key principle is woven throughout the sustainability report — integrity. This principle is so important to us that “with integrity” are the first two words of our vision statement. The vision statement is our commitment to giving shareholders superior value; to being the supplier of choice; and to creating a safe workplace. But most of all, it is our promise that how we achieve these results is even more important than the achievement.

We can explain integrity simply: doing the right thing, even when nobody is watching to make sure you do. Unfortunately, it isn’t always so simple to put into practice in a world of complex laws, regulations and human nature. To guide employees, we provide them with an educational program called “Leading with Integrity.” It includes extensive online training and refresher courses, as well as mechanisms for confidentially reporting concerns about conduct that doesn’t meet our standards.

The year ahead
As you can tell, we are proud of the results we have delivered in 2007. We thank our employees for that performance, and we are confident that they will help make 2008 another very good year.

Although the housing market is expected to remain weak, our past experience is that these economic cycles tend to be offset by improvements in our other businesses. We expect to grow in many areas, including natural gas and oil production, natural gas pipeline throughput and aggregate reserves. The Las Vegas market remains very strong for our construction services group, which carried an excellent work backlog into 2008. Finally, we will realize the full-year benefits of the Cascade acquisition.

We raised the bar again in 2007, and our expectations are still growing.

Harry J. Pearce
Chairman of the Board

Terry D. Hildestad
President and Chief Operating Officer

February 20, 2008