Founding Principles Basis for Today's Success

A strong foundation is critical to success. Whether it's a building's foundation, a business's founding principles or a person's foundation of values, a solid base affects the future. Our people have built a company with $4.9 billion in assets by using their values, vision and expertise to provide the essential elements of America's infrastructure foundation.

MDU Resources' employees once again brought the corporation record financial results. Revenues for 2006 totaled $4.1 billion, up 18 percent from $3.5 billion in 2005. We also posted our highest earnings, $315.1 million, up 15 percent from $274.4 million in 2005. Earnings per common share, diluted, totaled $1.74, up 14 percent from $1.53 in 2005. Our strategically diverse business model and solid asset base drives our earnings growth. Our targeted annual long-term earnings per share growth rate is 7 percent to 10 percent.

We work hard at creating superior shareholder value. Our one-year total return to shareholders was 20 percent. Our total average annual return for the five-year period ending in 2006 was 19 percent, outperforming both our peer group and the S&P 500. In July, we effected a three-for-two split of our common stock.

During the past 10-year period, we have provided a compound annual rate of return to our shareholders of 18 percent. If someone had invested $1,000 in MDU Resources 10 years ago, that investment today would be worth more than five times that at $5,160, including price appreciation and dividends.

Since 1937, MDU Resources has had an unbroken record of quarterly dividend payments. We increased our quarterly dividend 6.55 percent in August 2006. With this increase, our annualized dividend grew to 54 cents per share. Our dividend has increased every year since 1990.

Growth strategies built on firm foundation
Our company is comprised of solid business lines, and we deliver sound, long-term returns. We do that by providing the essential goods and services that keep America's foundation - its infrastructure - strong. Our country needs fuel. It needs electricity. It needs roads. Without them, our economy grinds to a halt. And each of these essential elements must be repaired and rebuilt over time. That's where we come in.

We've created a unique and balanced portfolio of assets. Our base of reserves in natural gas, oil and construction materials, as well as our solid foundation in infrastructure such as electric generating facilities, transmission lines and pipelines, provides a substantial resource for the products and services we deliver.

Our growth strategies are based on firm principles - we build on what we know. We only diversify into businesses in which we have expertise. Higher-growth opportunities in our nonregulated businesses are supported by the stability and predictability of our regulated businesses. We focus on organic growth and selective acquisitions. We capitalize on synergies that can be captured across our business portfolio.

We continually evaluate how each of our business units adds value to our shareholders. As economic and industry environments change, we modify our strategies to enhance our performance. For example, we moved out of lignite coal operations and diversified ed into construction materials and mining. We are considering the sale of domestic independent power production assets. The strong market for these types of assets and our desire to efficiently fund future capital needs means selling these assets may provide shareholders a greater benefit than continuing to own them.

As a result of our successful strategies and conservative financial culture, our balance sheet is strong. We have financing in place at reasonable interest rates that will take us through many years of growth. Our management, both at the corporate headquarters and in the field, is top-notch. They lead teams of talented, hard-working employees who focus every day on delivering outstanding customer service.

Energy reserves and production increase
In 1996, our natural gas and oil production segment had 297 billion cubic feet equivalent of proved reserves. Today our proved reserves have grown to 701 Bcfe, including a 51 Bcfe acquisition in 2006. We have interests in more than 1.7 million acres of leaseholds. Natural gas and oil prices were up and down this year, but the company's production growth and hedging strategy ensured steady returns.

The company's long-term compound annual production growth goal is in the range of 7 percent to 10 percent. We are the largest producer of natural gas in Montana, where we have low-cost legacy fields that have been producing since the 1930s.

Vertically integrated with our natural gas and oil company is our pipeline and energy services segment, which helps move our production to the customer. We own the largest natural gas storage field in North America and benefited from higher storage revenues in 2006. We connect natural gas in the Rocky Mountain region to more lucrative Mid-Continent markets. Capacity on our Grasslands Pipeline increased this year, and our gathering and transportation throughput hit record levels.

Construction materials has record year
Our construction materials and mining segment developed from our expertise in mining coal. We are now the fifth largest producer of sand and gravel in the United States and the ninth largest in total aggregate output. We target mid-sized, high-growth markets and enjoy a distinct competitive advantage because of our solid, strategically located aggregate reserves of 1.2 billion tons. These reserves equate to more than a 30-year supply.

Record earnings in 2006 were generated primarily by existing operations, which experienced strong demand and favorable weather. In addition, our focus on improving margins was highly successful. We enhanced our vertical integration strategy in this segment by acquiring another liquid asphalt facility, which helps ensure reasonably priced supplies for all of our companies.

Utility resources seizes growth opportunities
This has been an exciting year for our electric and natural gas distribution operations. For many years, we have been looking for opportunities to grow our regulated utility but hadn't found the right partner. But things changed this year. In July, we entered into a merger agreement with Cascade Natural Gas Corp., a natural gas distribution company serving 93 communities in Washington and Oregon. We anticipate receiving all necessary regulatory approvals in the third quarter of 2007. This merger will approximately double the utility's natural gas customers and is expected to significantly enhance regulated earnings and cash fl flows.

Our utility also is growing through expansion of its electric generating facilities. We are evaluating potential projects to accommodate increasing electric loads and to replace a purchased power contract. New generation should be on line in late 2011 or early 2012.

Growing markets in the southwestern United States helped our construction services segment realize record results in 2006. This company is reaping the benefits from utilities that are replacing aging infrastructure and from several strategic acquisitions in high-growth areas. Our highly skilled workforce proves itself daily in competitive markets where employee expertise is the primary sales tool.

Projections favor business lines
Our solid asset base and talented employees provide a firm foundation for future growth. National indicators point to many growth opportunities in our industries. For example, related to our energy operations, the Energy Information Administration projects that energy consumption will increase about 31 percent in the next 25 years.

Related to our construction materials segment, the highway spending outlook continues strong. The transportation funding bill is 31 percent higher than the previous bill. In fact, the 2007 federal budget includes $31.5 billion just for the national highway system and bridges. In our utility resources section, a survey of the members of the Edison Electric Institute indicates that utilities intend to increase capital expenditures on the transmission grid by 60 percent. In addition, the Energy Information Administration says total electric consumption is projected to grow 43 percent by 2030.

With integrity
Our vision statement is our foundation. Everything we do springs from that vision:

With integrity, create superior shareholder value by expanding upon our expertise to be the supplier of choice in all of our markets while being a safe and great place to work.

With integrity, through our guiding principles, we pledge to respect our shareholders, customers, communities, environment and employees in all of our business dealings each and every day.

From our humble beginnings in 1924, we always have strived to do the right thing. We always have strived to responsibly develop our country’s rich natural resources to benefit our way of life today and in the future. There are many popular buzzwords for this: sustainability, corporate social responsibility, environmental performance, etc. But it all boils down to doing the right thing.

MDU Resources has a long history of responsible development. For generations, our activities have included reclamation, recycling, land and water management, emissions controls, wildlife protection and soil monitoring. We have been honored with environmental awards by independent groups. We have created employee awards to foster actions that benefit the environment. We have offered grants to communities that encourage environmental education and stewardship. We have been involved in many research projects to explore future avenues for environmental responsibility.

To obtain more information about MDU Resources and our commitment to the world in which we live, view the Environmental area of our Web site.

Our employees work hard every day to make our company successful and to make it a safe and great place to work. In fact, our construction materials company decreased its lost-time injuries 50 percent this year and our utility saw a 43 percent reduction. We would like to thank our employees for another outstanding year.Their contributions are the foundation for our future as we continue to help build a strong America.

Harry J. Pearce
Chairman of the Board

Terry D. Hildestad
President and Chief Operating Officer

February 20, 2007