TABLE OF CONTENTS

Table of Contents

PROXY STATEMENT

The board of directors of MDU Resources Group, Inc. is furnishing this proxy statement beginning March 8, 20077, 2008 to solicit your proxy for use at our annual meeting of stockholders on April 24, 2007.22, 2008.

We will pay the cost of soliciting your proxy and reimburse brokers and others for forwarding proxy material to you. Georgeson Inc. additionally will solicit proxies for approximately $7,500 plus out-of-pocket expenses.

The Securities and Exchange Commission has adopted new e-proxy rules that allow companies to post their proxy materials on the Internet and provide only a Notice of Internet Availability of Proxy Materials to stockholders. For 2008, we have opted to follow the Securities and Exchange Commission’s full set delivery option, which means that while we are posting our proxy materials online, we are also mailing a full set of our proxy materials to our stockholders. We believe that mailing a full set of proxy materials will help ensure that a majority of outstanding shares of our common stock are present in person or represented by proxy at our meeting. We also hope to help maximize stockholder participation. Therefore, even if you previously consented to receiving your proxy materials electronically, you will receive a full set of proxy materials in the mail for this year’s annual meeting. However, we will continue to evaluate the option of providing only a Notice of Internet Availability of Proxy Materials to some or all of our stockholders in the future.

VOTING INFORMATION

Who may vote?    You may vote if you owned shares of our common stock at the close of business on February 26, 2007.2008. You may vote each share that you owned on that date on each matter presented at the meeting. As of February 26, 2007,2008, we had 181,473,340182,771,430 shares outstanding entitled to one vote per share.

What am I voting on?    You are voting on:

•

the election of four directors for three year terms each



•

the increase in the number of authorized shares of common stock from 250,000,000 to 500,000,000



•

the declassification of our board of directors



•

the ratification of Deloitte & Touche LLP as our independent auditors for 2007



•

a stockholder proposal requesting a sustainability report and



•

any other business a stockholder properly brings before the meeting.

What vote is required to pass an item of business?    A majority of our outstanding shares of common stock entitled to vote must be present in person or represented by proxy to hold the meeting.

If you hold shares through an account with a bank or broker, the bank or broker may vote your shares on certain matters even if you do not provide voting instructions. Brokerage firms have the authority under the New York Stock Exchange rules to vote shares on routine matters for which their customers do not provide voting instructions. The election of directors and the ratification of Deloitte & Touche LLP as our independent auditors for 20072008 are considered routine matters. When a proposal is not routine and the brokerage firm has not received voting instructions from its customers, the brokerage firm cannot vote the shares on that proposal. Those shares are considered "broker“broker non-votes."”

1

Table of Contents

Item 1—Election of Directors

A plurality of votes of the common stock entitled to vote and present in person or represented by proxy is required to elect a director. In the election of directors, you may vote for the director or withhold your vote. Withheld votes will be excluded from the vote and will have no effect on the outcome. If any nominee becomes unavailable for any reason, or if a vacancy should occur before the

election, which we do not anticipate, the proxies will vote your shares for another person in their discretion.

        We amended our corporate governance guidelines in February 2006 in connection with the election of directors. In an uncontested election of directors, our corporate governance guidelines require any nominee for director who receives a greater number of votes "withheld"“withheld” from his or her election than votes "for"“for” his or her election to promptly tender his or her resignation to the chairman of the board following certification of the stockholder vote. The nominating and governance committee will then recommend to the board of directors whether to accept or reject the tendered resignation.

Item 2—Increase in Authorized Number of Shares of Common Stock

        In order to increase the number of authorized shares of common stock from 250,000,000 to 500,000,000, a majority of the outstanding shares of common stock must vote "for" the increase. Abstentions and broker non-votes will count as votes "against" the increase.

Item 3—Declassification of Board of Directors

        In order to declassify our board of directors, a majority of the outstanding shares of common stock must vote "for" declassification. Abstentions and broker non-votes will count as votes "against" declassification.

Item 4—Ratification of Deloitte & Touche LLP as Independent Auditors for 20072008

Ratification of the appointment of Deloitte & Touche LLP as our independent auditors for 20072008 requires the affirmative vote of a majority of our common stock present in person or represented by proxy at the meeting and entitled to vote on the proposal. Abstentions will count as votes "against"“against” the proposal.

Item 5—Stockholder Proposal Requesting Sustainability Report

        Approval of the stockholder proposal requesting a sustainability report requires an affirmative vote of a majority of our common stock present in person or represented by proxy at the meeting and entitled to vote on the proposal. Abstentions will count as votes "against" the proposal, and broker non-votes will have no effect on the outcome.

Unless you specify otherwise when you submit your proxy, the proxies will vote your shares of common stock "for"“for” proposals 1 2, 3 and 4 and "against" proposal 5.2.

How do I vote?    There are three ways to vote by proxy:

•

by calling the toll free telephone number on the proxy



•

by using the internet or



•

by returning the enclosed letter proxy in the envelope provided.

You may be able to vote by telephone or the internetInternet if your shares are held in the name of a bank or broker. Follow their instructions.

        You may have to pay electronic access charges for internet voting.

Can I revoke my proxy?    Yes. You can revoke your proxy by:

•

filing written revocation with the corporate secretary before the meeting



•

filing a proxy bearing a later date with the corporate secretary before the meeting or



•

revoking your proxy at the meeting and voting in person.

ITEM 1. ELECTION OF DIRECTORS

        Martin A. White retired on August 17, 2006. He had served as chairmanAt the 2007 annual meeting of stockholders, a majority of our board since February 15, 2001 and chief executive officer since April 1, 1998. Robert L. Nance also retired fromstockholders voted in favor of declassifying our board on August 17, 2006. Mr. Nance had been a director since 1993of directors. The directors elected at the 2006 and was the chairman2007 annual meetings of the finance committee.stockholders will continue to serve their full three-year terms through 2009 and 2010, respectively. However, directors whose terms expire this year are nominated for one-year terms.

You will be voting on fourthree directors to serve for a term of three yearsone year each until 20102009 or until their respective successors are elected. All nominees are incumbent directors and nominated for reelection, except Mr. Hildestad who was elected by the board of directors in August 2006 and is a nominee for election for the first time.reelection. Your proxy holder will vote your shares for the board'sboard’s nominees unless you instruct otherwise. If a nominee is unable to serve as a director, your proxy holder may vote for any substitute nominee proposed by the board. Unless we specifically note below, no corporation or organization named below is a subsidiary or other affiliate of ours. Information concerning the

2

Table of Contents

nominees, including their ages, years of service as directors and business experience, which each nominee has furnished to us, is as follows:

DIRECTOR NOMINEES FOR THREEONE YEAR TERM

		Thomas Everist Age 58		Director Since 1995 Nominated for Term Expiring in 2009
		Mr. Everist has served as President and Chairman of The Everist Company, Sioux Falls, South Dakota, an aggregate, concrete and asphalt production company, since April 15, 2002. He previously was President and Chairman of L.G. Everist, Inc., Sioux Falls, South Dakota, an aggregate production company, from 1987 to April 15, 2002. He also is Managing Member of South Maryland Creek Ranch, LLC, a land development company, and President of SMCR, Inc., an investment company. He is a Director of Showplace Wood Products, Sioux Falls, South Dakota, a custom cabinets manufacturer, and a Director of Raven Industries, Inc., Sioux Falls, South Dakota, a general manufacturer of electronics, flow controls and engineered films. He currently serves on the Compensation Committee of MDU Resources Group, Inc.
		Karen B. Fagg Age 54		Director Since 2005 Nominated for Term Expiring in 2009
		Ms. Fagg has been President since April 1, 1995 and Chairman and majority owner since June 2000 of HKM Engineering, Inc., Billings, Montana, an engineering and physical science services firm. She was employed with MSE, Inc., Butte, Montana, an environmental technology research and development company, as Business Development Director and Vice President of Operations from 1976 through 1988. Ms. Fagg also served a four-year term as Director of the Montana Department of Natural Resources and Conservation, Helena, Montana, from 1989 through 1992. From 1993 through 1995, she served as Corporate Development Director for MSE, Inc. Ms. Fagg is a member of the Board of Trustees for Carroll College and for St. Vincent’s Healthcare. Ms. Fagg currently serves on the Compensation and Nominating and Governance Committees of MDU Resources Group, Inc.
		Patricia L. Moss Age 54		Director Since 2003 Nominated for Term Expiring in 2009
		Ms. Moss has been President, Chief Executive Officer and a Director of Cascade Bancorp, a financial holding company, and Bank of the Cascades, Bend, Oregon, since 1998. She also serves as a Director of the Oregon Business Council, whose mission is to mobilize business leaders to contribute to Oregon’s quality of life and economic prosperity, a Director of the Oregon Investment Fund Advisory Council, a state sponsored program to encourage the growth of small businesses within Oregon, and a Director of Clear Choice Health Plans Inc., a multi-state insurance company. She currently serves on the Compensation Committee of MDU Resources Group, Inc.

The board of directors recommends a vote “for” each nominee.

3

Table of Contents

A plurality of votes of the common stock entitled to vote and present in person or represented by proxy is required to elect a director. “Withheld” votes do not count in determining whether a director nominee receives a plurality of votes.

In an uncontested election, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election is required to promptly tender his or her resignation to the chairman of the board following certification of the stockholder vote. The nominating and governance committee will then recommend to the board of directors whether to accept or reject the tendered resignation.

CONTINUING INCUMBENT DIRECTORS

Information concerning our continuing incumbent directors, whose terms expire in 2009 or 2010, including their ages, years of service as directors and business experience which each director has furnished to us, is as follows:

DIRECTOR TERMS EXPIRING IN 2009

		Richard H. Lewis Age 58		Director Since 2005 Term Expires in 2009
		Mr. Lewis has been the Managing General Partner of Brakemaka LLLP, a private investment partnership for managing family investments, and President of the Lewis Family Foundation since August 2004. He founded Prima Energy Corporation, a natural gas and oil exploration and production company, in 1980 and served as Chairman, President and Chief Executive Officer of the company until its sale in July 2004. Mr. Lewis serves as Chairman of the Board of Entre Pure Industries, Inc., a privately held company involved in the purified water and ice business. He is past President and a current Board member of the Colorado Oil and Gas Association and serves as a Director of Colorado State Bank and Trust. He is a Director of Colorado UpLift, a non-profit organization, whose mission is to build long-term, life-changing relationships with urban youth. Mr. Lewis also serves on the Board of Trustees of the Metro Denver YMCA, which strives to build strong kids, strong families and strong communities, and the Alliance for Choice in Education, which provides scholarships to inner city youth. He currently serves on the Audit and Nominating and Governance Committees for MDU Resources Group, Inc.

4

Table of Contents

		Harry J. Pearce Age 65		Director Since 1997 Term Expires in 2009
		Mr. Pearce was elected Chairman of the Board of the Company on August 17, 2006. Prior to that, he served as Lead Director effective February 15, 2001 and was Vice Chairman of the Board from November 16, 2000 until February 15, 2001. Mr. Pearce was named Chairman of the Board of Nortel Networks Corporation, a global telecommunications company, on June 29, 2005. He retired on December 19, 2003, as Chairman of Hughes Electronics Corporation, a General Motors Corporation subsidiary and provider of digital television entertainment, broadband satellite network, and global video and data broadcasting. He had served as Chairman since June 1, 2001. Mr. Pearce formerly was Vice Chairman and a Director of General Motors Corporation, the world’s largest vehicle manufacturer, from January 1, 1996 to May 31, 2001. He is a Director of Marriott International, Inc., a major hotel chain, and is Chairman of The Marrow Foundation. He is a Director of the Leukemia & Lymphoma Society Research Foundation, a Fellow of the American College of Trial Lawyers, and a member of the International Society of Barristers. He also serves on the Board of Trustees of Northwestern University.
		Sister Thomas Welder, O.S.B. Age 67		Director Since 1988 Term Expires in 2009
		Sister Welder has been the President of the University of Mary, Bismarck, North Dakota since 1978. She is a Director of St. Alexius Medical Center of Bismarck, the Bismarck-Mandan Development Association and the Missouri Slope Areawide United Way. She also is a member of the North Dakota Higher Education Roundtable and the Theodore Roosevelt Medora Founder’s Society and is a past member of the Bismarck-Mandan Area Chamber of Commerce Board and the Consultant-Evaluator Corps for the North Central Association of Colleges and Schools. She currently serves on the Nominating and Governance Committee for MDU Resources Group, Inc.

DIRECTOR TERMS EXPIRING IN 2010

		Terry D. Hildestad Age 5758		Director Since 2006 Nominated for Term ExpiringExpires in 2010
						Mr. Hildestad was elected President and Chief Executive Officer and a Director of the Company effective August 17, 2006. He had served as President and Chief Operating Officer from May 1, 2005 until August 17, 2006. Prior to that, he served as President and Chief Executive Officer of our subsidiary, Knife River Corporation, from 1993 until May 1, 2005. He additionally serves as an executive officer and as chairman of the Company'sCompany’s principal subsidiaries and of the Managing Committees of Montana-Dakota Utilities Co. and Great Plains Natural Gas Co. Mr. Hildestad serves on the Foundation Board at Dickinson State University in Dickinson, North Dakota.

5

Table of Contents

		Dennis W. Johnson Age 5758		Director Since 2001 Nominated for Term ExpiringExpires in 2010
						Mr. Johnson is Chairman, Chief Executive Officer and President of TMI Corporation, and Chairman and Chief Executive Officer of TMI Systems Design Corporation, TMI Transport Corporation and TMI Storage Systems Corporation, all of Dickinson, North Dakota, manufacturers of casework and architectural woodwork. He has been employed at TMI since 1974 serving as President or Chief Executive Officer since 1982 and has been the majority stockholder since 1985. Mr. Johnson serves as President of the Dickinson City Commission. He previously was a Director of the Federal Reserve Bank of Minneapolis. He currently serves on the Audit Committee.Committee for MDU Resources Group, Inc.

		John L. Olson Age 6768		Director Since 1985 Nominated for Term ExpiringExpires in 2010
						Mr. Olson has been President and Chief Executive Officer of Blue Rock Products Company and of Blue Rock Distributing Company, a beverage bottling company and a distributing company, respectively, in Sidney, Montana since 1965. He also is Chairman of Admiral Beverage Corporation, Worland, Wyoming, and Ogden, Utah;Utah, former Chairman and Director of the Foundation for Community Care, Sidney, Montana;Montana, past Chairman and a member of the Executive Committee of the University of Montana Foundation;Foundation, a Director of BlueCross BlueShield of Montana;Montana, and trustee for Blue Rock Products Company Profit Sharing Trust, Sidney, Montana.President of Liquid Assets of Montana, Inc. He currently serves on the Audit and Nominating and Governance Committees.Committees for MDU Resources Group, Inc.
		John K. Wilson Age 5253		Director Since 2003 Nominated for Term ExpiringExpires in 2010
						Mr. Wilson has been President of Durham Resources, LLC, a privately held financial management company, in Omaha, Nebraska since 1994. He also serves as President of the Durham Foundation and is a Director of Bridges Investment Fund, a mutual fund, the Greater Omaha Chamber of Commerce and the Durham Western Heritage Museum, all in Omaha. He additionally serves on the community relations board of US Bank NA Omaha and is a governor of the Joslyn Art Museum in Omaha. He previously was President of Great Plains Energy Corp., a public utility holding company and an affiliate of Durham Resources, LLC, from 1994 to July 1, 2000. He also was Vice President of Great Plains Natural Gas Co., an affiliate company of Durham Resources, LLC, until July 1, 2000. The Company bought Great Plains Energy Corp. and Great Plains Natural Gas Co. were sold to the Company on July 1, 2000. He currently serves on the Audit Committee.Committee for MDU Resources Group, Inc.

The board6

Table of directors recommends a vote "for" each nominee.Contents

        A plurality of votes of the common stock entitled to vote and present in person or represented by proxy is required to elect a director. "Withheld" votes do not count in determining whether a director nominee receives a plurality of votes.

        In an uncontested election, any nominee for director who receives a greater number of votes "withheld" from his or her election than votes "for" his or her election is required to promptly tender his or her resignation to the chairman of the board following certification of the stockholder vote. The nominating and governance committee will then recommend to the board of directors whether to accept or reject the tendered resignation.

CONTINUING INCUMBENT DIRECTORS

        Information concerning our continuing incumbent directors, whose terms expire in 2008 or 2009, including their ages, years of service as directors and business experience which each director has furnished to us, is as follows:

DIRECTOR TERMS EXPIRING IN 2008

		Thomas Everist Age 57		Director Since 1995 Term Expires in 2008
		Mr. Everist has served as President and Chairman of The Everist Company, Sioux Falls, South Dakota, an aggregate, concrete and asphalt production company, since April 15, 2002. He previously was President and Chairman of L.G. Everist,  Inc., Sioux Falls, South Dakota, an aggregate production company, from 1987 to April 15, 2002. He also is Managing Member of South Maryland Creek Ranch, LLC, a land development company, and President of SMCR, Inc., an investment company. He is a Director of Showplace Wood Products, Sioux Falls, South Dakota, a custom cabinets manufacturer; and a Director of Raven Industries, Inc., Sioux Falls, South Dakota, a general manufacturer of electronics, sewn products, flow controls and engineered films. He currently serves on the Compensation Committee.
		Karen B. Fagg Age 53		Director Since 2005 Term Expires in 2008
		Ms. Fagg has been President since April 1, 1995 and Chairman and majority owner since June 2000 of HKM Engineering, Inc., Billings, Montana, an engineering and physical science services firm. She was employed with Mountain States Energy, Inc., Butte, Montana, an environmental technology research and development company, as Business Development Director and Vice President of Operations from June 1976 through December 1988. Ms. Fagg also served a four-year term as Director of the Montana Department of Natural Resources and Conservation, Helena, Montana, from January 1989 through December 1992. From January 1993 through March 1995, she served as Corporate Development Director for Mountain States Energy, Inc. Ms. Fagg is a member of the Board of Trustees for Carroll College and for St. Vincent's Healthcare. Ms. Fagg currently serves on the Compensation and Nominating and Governance Committees.

		Patricia L. Moss Age 53		Director Since 2003 Term Expires in 2008
		Ms. Moss has been President, Chief Executive Officer and a Director of Cascade Bancorp, a financial holding company, and Bank of the Cascades, Bend, Oregon, since 1998. She also serves as a Director of North Pacific Products, Inc., a distributor of wood products, building materials and agricultural commodities, the Oregon Investment Fund Advisory Council, a state sponsored program to encourage the growth of small businesses within Oregon, and Clear Choice Health Plans, a ten-county health insurance company. She currently serves on the Compensation Committee.

DIRECTOR TERMS EXPIRING IN 2009

		Richard H. Lewis Age 57		Director Since 2005 Term Expires in 2009
		Mr. Lewis has been the Managing General Partner of Brakemaka LLLP, a private investment partnership for managing family investments, and President of the Lewis Family Foundation since August 2004. He founded Prima Energy Corporation, a natural gas and oil exploration and production company, in 1980 and served as Chairman, President and Chief Executive Officer of the company until its sale in July 2004. Mr. Lewis serves as Chairman of the Board of Entre Pure Industries,  Inc., a privately held company involved in the purified water and ice business. He is past President and a current Board member of the Colorado Oil and Gas Association and serves as a Director of Colorado State Bank and Trust. He currently serves on the Audit and Nominating and Governance Committees.
		Harry J. Pearce Age 64		Director Since 1997 Term Expires in 2009
		Mr. Pearce was elected Chairman of the Board of the Company on August 17, 2006. Prior to that, he served as Lead Director effective February 15, 2001 and was Vice Chairman of the Board from November 16, 2000 until February 15, 2001. Mr. Pearce was named Chairman of the Board of Nortel Networks Corporation, a telecommunications equipment manufacturer, on June 29, 2005. He retired on December 19, 2003, as Chairman of Hughes Electronics Corporation, a General Motors Corporation subsidiary and provider of digital television entertainment, broadband satellite network, and global video and data broadcasting. He had served as Chairman since June 1, 2001. Mr. Pearce formerly was Vice Chairman and a Director of General Motors Corporation, the world's largest vehicle manufacturer, from January 1, 1996 to May 31, 2001. He is a Director of Marriott International, Inc., a major hotel chain, and is Chairman of The Marrow Foundation. He is a Director of the Leukemia & Lymphoma Society Research Foundation, a Fellow of the American College of Trial Lawyers, and a member of the International Society of Barristers. He also serves on the Board of Trustees of Northwestern University.

		Sister Thomas Welder, O.S.B. Age 66		Director Since 1988 Term Expires in 2009
		Sister Welder has been the President of the University of Mary, Bismarck, North Dakota since 1978. She is a Director of St. Alexius Medical Center of Bismarck, the Bismarck-Mandan Development Association and the Missouri Slope Areawide United Way. She also is a member of the North Dakota Higher Education Roundtable and the Theodore Roosevelt Medora Founder's Society and is a past member of the Bismarck-Mandan Area Chamber of Commerce Board and the Consultant-Evaluator Corps for the North Central Association of Colleges and Schools. She currently serves on the Nominating and Governance Committee.

ITEM 2. INCREASE IN AUTHORIZED COMMON STOCK

        Our capital stock consists of 252,000,000 authorized shares divided into four classes:

•

500,000 shares of preferred stock with a par value of $100 per share



•

1,000,000 shares of preferred stock A without par value



•

500,000 shares of preference stock without par value and



•

250,000,000 shares of common stock with a par value of $1.00 per share.

        We split our common stock three-for-two effective July 26, 2006. As of February 26, 2007, we had issued and outstanding 181,473,340 shares of common stock, and we had reserved 21,303,212 additional shares for issuance under our director, executive and employee stock plans, potential earn-outs in connection with prior acquisitions, our dividend reinvestment plan and a sales agency financing agreement. Because of the limited number of shares available to issue, our board of directors has unanimously approved and voted to recommend that you approve an amendment to our restated certificate of incorporation to increase our authorized common stock from 250,000,000 to 500,000,000 shares. There would be no change in the par value of $1.00 per share. The board resolution including the proposed amendment to our restated certificate of incorporation is included in exhibit "A" to this proxy statement.

        The additional authorized shares would enable us to issue common stock to raise capital funds expeditiously and economically for our ongoing operational needs. We could use the shares for our director, executive and employee stock plans and our dividend reinvestment plan, for possible acquisitions, stock distributions or splits or other corporate purposes. We would be able to issue common stock without the delay and expense involved in obtaining stockholder approval when we believe that such issuance is appropriate; however, we would be required to obtain all necessary regulatory approvals prior to issuance of any additional common stock. We have no present plans for issuance or use of the proposed additional authorized common stock.

        All newly authorized shares of common stock when issued would have the same rights as the presently authorized shares, including the right to cast one vote per share and to receive dividends when and to the extent we declare and pay them. Company stockholders would have no preemptive rights with respect to the issuance of the additional common stock.

        Any issuance of additional shares of common stock would increase the outstanding number of shares of common stock and dilute the percentage ownership of existing stockholders. The dilutive effect of an issuance could discourage a change of control by making it more difficult or costly. We are

not aware of any specific effort to obtain control of us, and we have no present intention of using the proposed increase in authorized common stock to deter a change of control.

        None of our directors or officers has any interest, direct or indirect, in the adoption of the proposed amendment except as a holder of our common stock.

        We are not furnishing financial statements as we do not believe that they are material for the exercise of prudent judgment regarding this proposal.

The board of directors recommends a vote "for" the proposal to increase
our authorized shares of common stock.

        Approval requires the affirmative vote of a majority of all outstanding common stock. Abstentions and broker non-votes will count as votes against this proposal.

ITEM 3. DECLASSIFICATION OF BOARD OF DIRECTORS

        Article THIRTEENTH of our restated certificate of incorporation, as amended, provides for a classified board of directors. This means that our board of directors is divided into three classes, as nearly equal in number as possible, with members of each class serving staggered three-year terms. We adopted this system for electing directors in 1985.

        Our board of directors has approved and voted to recommend that you approve an amendment to our restated certificate of incorporation to provide for a declassified board of directors. This means that all directors would be elected annually and serve one-year terms.

        The board of directors has set the current number of directors at ten, and this proposal would not change the present number of directors. Directors will retain the authority to change the number of directors and to fill any vacancies or newly-created directorships. However, any director elected to fill a vacancy or a newly-created directorship would serve for a term expiring at the next annual meeting.

        Classified or staggered boards have been widely adopted and have a long history in corporate law. Proponents of classified boards assert they promote the independence of directors because directors elected for multi-year terms are less subject to outside influence. Proponents of a staggered system for the election of directors also believe it provides continuity and stability in the management of the business and affairs of a company because a majority of directors always have prior experience as directors of the company. Proponents further assert that classified boards may enhance stockholder value by forcing an entity seeking control of a target company to initiate arms-length discussions with the board of the target company because the entity is unable to replace the entire board in a single election.

        On the other hand, some investors view classified boards as having the effect of reducing the accountability of directors to stockholders because classified boards limit the ability of stockholders to evaluate and elect all directors on an annual basis. The election of directors is a primary means for stockholders to influence corporate governance policies and to hold management accountable for implementing those policies. In addition, opponents of classified boards assert that a staggered structure for the election of directors may discourage proxy contests in which stockholders have an opportunity to vote for a competing slate of nominees and therefore may erode stockholder value. A number of major corporations have determined that, regardless of the merits of a classified board, principles of good corporate governance dictate that all directors of a corporation be elected annually.

        The board of directors has considered carefully the advantages and disadvantages of maintaining a classified board structure, and in the past concluded that it would be in the best interests of the company and its stockholders to maintain the classified board. This year, the company received a stockholder proposal on declassification, and the board again gave due consideration to the various arguments for and against a classified board and consulted with internal and outside advisors. After this review, the board of directors decided that it is an appropriate time to propose declassifying the board. This determination by the board is in furtherance of our goal of ensuring that our corporate governance policies maximize our accountability to stockholders and allow stockholders the opportunity each year to register their views on the performance of the board of directors.

        The board of directors has approved the proposed amendment declassifying the board of directors. If approved by the stockholders, we will amend our restated certificate of incorporation to provide for the annual election of all directors.

        If our stockholders approve the amendment, the directors elected at this annual meeting of stockholders in 2007 will, along with the directors elected at the annual meetings of stockholders held in 2005 and 2006, serve their full three-year terms. Beginning with the annual meeting of stockholders to be held in 2008, each director whose term is ending will be elected annually and serve until the next following annual meeting or until his or her earlier resignation or termination from the board.

        The board resolution including the proposed amendment to our restated certificate of incorporation is included in exhibit B to this proxy statement. We have shown the changes to the relevant sections of Article THIRTEENTH of the restated certificate of incorporation resulting from the amendment. If approved, the amendment will become effective upon filing with the Secretary of State of the State of Delaware, which filing we would make promptly after the annual meeting.

The board of directors recommends a vote "for" the proposal to amend our restated certificate of incorporation to declassify our board of directors.

        Approval requires the affirmative vote of a majority of all outstanding stock. Abstentions and broker non-votes will count as votes against this proposal.

ITEM 4.2. RATIFICATION OF INDEPENDENT AUDITORS

The audit committee at its February 20072008 meeting appointed Deloitte & Touche LLP as our independent auditors for fiscal year 2007.2008. The board of directors concurred with the audit committee'scommittee’s decision. Deloitte & Touche LLP has served as our independent auditors since fiscal year 2002.

Although your ratification vote will not affect the appointment or retention of Deloitte & Touche LLP for 2007,2008, the audit committee will consider your vote in determining its appointment of our independent auditors for the next fiscal year. The audit committee, in appointing our independent auditors, reserves the right, in its sole discretion, to change an appointment at any time during a fiscal year if it determines that such a change would be in our best interests.

A representative of Deloitte & Touche LLP will be present at the annual meeting and will be available to respond to appropriate questions. We do not anticipate that the representative will make a prepared statement at the meeting; however, he or she will be free to do so if he or she chooses.

The board of directors recommends a vote "for"“for” the ratification of Deloitte &
Touche LLP as our independent auditors for 2007.

2008.

Ratification of the appointment of Deloitte & Touche LLP as our independent auditors for 20072008 requires the affirmative vote of a majority of our common stock present in person or represented by proxy at the meeting and entitled to vote on the proposal. Abstentions will count as votes against this proposal.

In connection with the audit of our financial statements for 2008, the parties have drafted an agreement for Audit Committee approval that contains provisions for alternative dispute resolution and for the exclusion of punitive damages. The agreement provides that disputes arising out of our engagement of Deloitte & Touche LLP are resolved through mediation or arbitration, commonly referred to as alternative dispute resolution procedures, and that the company and Deloitte & Touche LLP’s rights to pursue punitive damages or other forms of relief not based upon actual damages are waived. The alternative dispute resolution provisions do not apply to claims by third parties, such as our stockholders or creditors.

7

Table of Contents

ACCOUNTING AND AUDITING MATTERS

Fees

Fees

The following table summarizes the aggregate fees that our independent auditors, Deloitte & Touche LLP, billed or are expected to bill us for professional services rendered for 20062007 and 2005:2006:

*

The 2005 amounts were adjusted from amounts shown in the 2006 proxy statement to reflect actual amounts.

(a)

Audit fees for both 2006 and 2005 consisted of services rendered for the audit of our annual financial statements; reviews of our quarterly financial statements; comfort letters; statutory and regulatory audits; and consents and other services related to Securities and Exchange Commission matters.

(b)

Audit-related fees for 2006 and 2005 consisted of services rendered for the audit of our employee benefit plans; due diligence associated with mergers and acquisitions; and consultation on accounting issues.

(c)

Tax fees for 2006 are associated with property tax consulting services; tax fees for 2005 consisted of services related to tax credit filings.

(d)

No all other fees were incurred during 2006 or 2005.

(e)

Total fees reported above include out of pocket expenses related to the services provided of $234,739 and $219,457 for 2006 and 2005, respectively.

Pre-Approval Policy

The audit committee pre-approved all services Deloitte & Touche LLP performed in 20062007 in accordance with the pre-approval policy and procedures the audit committee adopted at its August 12, 2003 meeting. This policy is designed to achieve the continued independence of Deloitte & Touche LLP and to assist in our compliance with Sections 201 and 202 of the Sarbanes-Oxley Act of 2002 and related rules of the Securities and Exchange Commission.

The policy defines the permitted services in each of the audit, audit-related, tax and all other services categories as well as prohibited services. The pre-approval policy requires management to

submit annually for approval to the audit committee a service plan describing the scope of work and anticipated cost associated with each category of service. At each regular audit committee meeting, management reports on services performed by Deloitte & Touche LLP and the fees paid or accrued through the end of the quarter preceding the meeting. Management may submit requests for

8

Table of Contents

additional permitted services contemplated to be performed before the next scheduled audit committee meeting to the designated member of the audit committee, Dennis W. Johnson, for approval. The designated member updates the audit committee at the next regularly scheduled meeting regarding any services that he approved during the interim period. At each regular audit committee meeting, management may submit to the audit committee for approval a supplement to the service plan containing any request for additional permitted services.

In addition, prior to approving any request for audit-related, tax or all other services of more than $50,000, Deloitte & Touche LLP will provide a statement setting forth the reasons why the rendering of the proposed services does not compromise Deloitte & Touche LLP'sLLP’s independence. This description and statement by Deloitte & Touche LLP may be incorporated into the service plan or as an exhibit thereto or may be delivered in a separate written statement.

ITEM 5. STOCKHOLDER PROPOSAL REQUESTING SUSTAINABILITY REPORT

        Calvert Asset Management has notified us that it intends to submit the proposal set forth below for consideration at the annual meeting.

Calvert Resolution and Supporting Statement

SUSTAINABILITY REPORT RESOLUTIONEXECUTIVE COMPENSATION

 Whereas:

        Investors increasingly seek disclosure of companies' social and environmental practices in the belief that they impact shareholder value. Many investors believe companies that are good employers, environmental stewards, and corporate citizens are more likely to generate incremental financial returns, be more stable in turbulent economic and political conditions, and enjoy long-term business success.

        Mainstream financial companies are seeking tools to understand the links between sustainability performance and capital markets. According to research consultant Innovest, major investment firms including ABN-AMRO, Schroders, T. Rowe Price, and Legg Mason subscribe to information on companies' social and environmental practices to help make investment decisions.

        Sustainability refers to endeavors that meet present needs without impairing the ability of future generations to meet their own needs. It includes "encouraging long lasting social well being in communities where [companies] operate, interacting with different stakeholders (e.g. clients, suppliers, employees, government, local communities, and non-governmental organizations), and responding to their specific and evolving needs, thereby securing a long-term "license to operate,' superior customer and employee loyalty, and ultimately superior financial returns" (Dow Jones Sustainability Group).

        Globally, approximately 1,500 companies produce reports on sustainability issues (Association of Chartered Certified Accountants, www.corporateregister.com), including more than half of the global Fortune 500 (KPMG International Survey of Corporate Responsibility Reporting 2005).

        MDU Resources Group competes internationally, and global expectations regarding sustainability reporting are increasing. The European Commission recommends corporate sustainability reporting, and listed companies in Australia, South Africa and France are required to provide investors with information on their social and environmental performance.

        Companies increasingly recognize that transparency and dialogue about sustainability are elements of business success. For example, Unilever's Chairman stated in a 2003 speech, "So when we talk about corporate social responsibility, we don't see it as something business "does" to society but as something that is fundamental to everything we do. Not just philanthropy or community investment, important though that is, but the impact of our operations and products as well as the interaction we have with the societies we serve."

        RESOLVED: Shareholders request that the Board of Directors issue a sustainability report to shareholders, at reasonable cost, and omitting proprietary information, by December 31, 2007.

SUPPORTING STATEMENT

        The report should include the company's definition of sustainability, as well as a company-wide review of company policies, practices, and metrics related to long-term social and environmental sustainability.

        We recommend that MDU Resources Group use the Global Reporting Initiative's Sustainability Reporting Guidelines ("The Guidelines") to prepare the report. The Global Reporting Initiative (www.globalreporting.org) is an international organization developed with representatives from the business, environmental, human rights and labor communities. The Guidelines provide guidance on report content, including performance on direct economic impacts, environmental, labor practices and decent work conditions, human rights, society, and product responsibility. The Guidelines provide a flexible reporting system that allows the omission of content that is not relevant to company operations. Over 700 companies use or consult the Guidelines for sustainability reporting, including Anheuser-Busch, Cadbury Schweppes, Diageo, PepsiCo, and SABMiller.

Company Response

The board of directors recommends a vote "against" this proposal.

        While there are a number of different definitions of sustainability, we believe that sustainability means our ability to meet the needs of the present without compromising the ability of the future generations to meet their own needs.

        We are committed to the conduct of business according to the highest ethical standards, as reflected in our code of conduct and our code of ethics, which are posted on our website.

        Our code of ethics includes the following provisions:

Introduction

        Among the many objectives of MDU Resources Group, Inc., its utility division and its subsidiaries, stands the constant goal of serving the long-term interests of the owners—our shareholders. In fulfilling this objective we must fully respect the legitimate claims and rights of customers, employees, regulators, the general public, and others whose interests touch upon ours.

No "Quick Fix"...

        Our long-term profitability can only be achieved through fair, honest and intelligent decisions with respect to all those with whom we deal. Considering this position, we will not accept a "quick fix" at the expense of our future well-being.

A Step Beyond...

        Our company has always maintained a strong commitment to the concept of corporate citizenship including the view that companies as well as individuals must contribute to the well-being of society. We accomplish this contribution through the important services we provide but it extends far beyond our basic products and services. Our corporate citizenship must include active interest in the quality of life enjoyed by our fellow employees and the citizens of the many cities, towns and states we serve. These contributions are further enhanced by conducting our business with integrity.

        In addition to these provisions, the codes cover other sustainability issues including equal opportunity, compliance with laws, workplace safety, fair competition and fair dealing. Further, the codes illustrate our involvement in community activities and professional organizations.

        In 1983, we established the MDU Resources Foundation to support institutions, organizations and programs within the geographic area in which we conduct business. The MDU Resources Foundation considers requests from health and human services organizations, educational institutions, civic and community activity organizations, cultural organizations and environmental organizations. Information about the MDU Resources Foundation is on our website.

        Our commitment to conducting our business with integrity includes responsibly developing our earth's natural resources. All of our operating business units are subject to a number of laws, rules and regulations that have been put in place to protect the environment and are regulated by federal, state and local agencies and governments. A guiding principle of our corporation is environmental responsibility. We are dedicated to fulfilling that tenet.

        We are committed to:

•

Minimizing waste and maximizing resources.



•

Supporting environmental laws and regulations that are based on sound science and cost-effective technology.



•

Meeting or surpassing all applicable environmental laws, regulations and permit requirements.

        An environmental statement is included on our website.

        As evidenced in our codes and through the MDU Resources Foundation, our company has a commitment towards sustainability. Our board of directors respects our stockholders' interest in sustainability. However, our board believes that the investment of human and financial resources that would be required to produce a sustainability report based on the Sustainability Reporting Guidelines of the Global Reporting Initiative, as requested in the Calvert proposal, would not represent a necessary or prudent use of the stockholders' assets.

Therefore, the board of directors recommends a vote "against" this proposal.

        Approval requires the affirmative vote of a majority of our common stock present in person or represented by proxy at the meeting and entitled to vote on the proposal. Abstentions and broker non-votes will count as votes against this proposal.

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Introduction

The following compensation discussion and analysis may contain statements regarding corporate performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.

Introduction

In this compensation discussion and analysis, we discuss our compensation objectives, our decisions and the rationale behind thosereasons for our decisions relating to 20062007 compensation for our named executive officers.

There have been a few changes in our named executive officers from 2006 to 2007. Terry D. Hildestad, Vernon A. Raile, William E. Schneider and John G. Harp were named executive officers in 2006 and continue to be named executive officers for 2007. Bruce T. Imsdahl, the president and chief executive officer of Montana-Dakota Utilities Co. and Great Plains Natural Gas Co., joins our named executive officer group for 2007. Martin A. White, our former chief executive officer, and Warren L. Robinson, our former executive vice president and chief financial officer, retired in 2006, and John K. Castleberry, our former executive vice president – administration, retired in 2007.

Each year we conduct a strategic analysis to identify opportunities and challenges associated with the operating environments in which we do business. Some of our ongoing strategic goals include:

Objectives of our Compensation Program

We structure our compensation program to help retain and reward the executive officers who we believe are critical to our long-term success. We have a written executive compensation policy which was last amended in November 2006, for our Section 16 officers, including all our named executive officers whom we discuss later in this compensation discussion and analysis.officers. Our policy has the following stated objectives:

•

recruit, motivate, reward and retain the high performing executive talent required to create superior long-term total stockholder return in comparison to our peer group



•

reward executives for short-term performance as well as the growth in enterprise value over the long-term



•

provide a competitive package relative to industry-specific and general industry comparisons and internal pay equity, as appropriate and



•

ensure effective utilization and development of talent by working in concert with other management processes—for example, performance appraisal, succession planning and management development.

Determination of Compensation

How we structure compensation

We pay our Section 16 officers a combination of base salary, annual cash incentive and long-term equity-based incentive, in addition to providing income for their retirement and other benefits. We pay pay/grant

        Each year, the compensation committee sets overall compensation targets for each Section 16 officer, as well as individual targets for the three components of compensation—base salary, annual incentive and long-term incentive.

        The compensation committee structures the target levels of compensation to enable us to retain and reward the executive officers that we believe are critical to our long-term success. The compensation committee also structures compensation to ensure that a significant portion of our executive officers' opportunity is directly related to our stock performance and other factors that

directly and indirectly influence stockholder value. This includes tying incentive compensation to both (i) total stockholder return, which reflects our corporate performance relative to our performance graph peer group and (ii) business unit or other operational goals.

        Because our executive officers recommend to the compensation committee the levels of achievement for our annual incentive compensation awards, the compensation committee and the board of directors review the recommended levels carefully before approving them. This is to ensure that the goals are set sufficiently high to provide our executive officers with true stretch performance goals.

        In addition, commencing in 2006, the compensation committee implemented a process whereby annual incentive award payments above the targeted incentive amounts are limited. The limitation restricts total above target incentive payments, on an after-tax basis, to executives at the major business units to 20% of after-tax earnings above target earnings. This limitation ensures that only a portion of incremental earnings above target will be paid to annual incentive award recipients. The compensation committee also imposed this limitation on executives at the MDU Resources Group, Inc. level, using 20% of our after-tax incremental earnings above target as the limit. As we discuss later, the committee also established a requirement for minimum improvement in the return on invested capital measures for incentive purposes to ensure that return on invested capital equals or exceeds the weighted average cost of capital.

If earned, incentive compensation, which consists of annual cash incentive awards and three-year performance share awards under our Long-Term Performance-Based Incentive Plan, makes up the greatest portion of our named executive officers'officers’ total compensation. The following table shows the allocationcompensation committee

10

Table of total targeted compensation for 2006 among the individual components of base salary, annual incentive and long-term incentive:Contents

(1)

Mr. Hildestad's and Mr. Castleberry's percentages are annualized.

(2)

Mr. Robinson received no incentive awards during 2006 due to his retirement.

(3)

WBI Holdings, Inc. is a subsidiary.

        The compensation committee believes incentive compensation comprising 50%55% to 70% of total target compensation for the named executive officers is appropriate because:

•

these executive officers are in positions to drive corporate performance

•

results beneficial to stockholders will trigger incentive compensation payments to these executive officers



•

this compensation is "at risk" and earned only if financial results warrant any payments and



•

tying

	•	our named executive officers are in positions to drive, and therefore bear high levels of responsibility for, our corporate performance
	•	incentive compensation is at risk and dependent upon our performance
	•	at risk compensation helps ensure focus on the goals that are aligned with our overall strategy and
	•	the interests of our named executive officers will be aligned with those of our stockholders by making a majority of the named executive officers’ target compensation contingent upon results that are beneficial to stockholders.

The following table shows the majorityallocation of total target compensation tofor 2007 among the individual components of base salary, annual incentive payments helps ensure focus on the incentive goals.

In order to reward long-term growth as well as short-term results, the compensation committee establishes incentive targets that emphasize long-term compensation as much as or more than short-term compensation for all officer positions.Section 16 officers. The annual incentive targets for 2007 range from 10% to 100% of base salary and the long-term incentive targets range from 15% to 133% of base salary, depending on the executive'sexecutive’s salary grade. Generally, our approach is to allocate a higher percentage of total target compensation to the long-term incentive than to the short-term incentive for our higher level executives, since they are in a better position to influence our long-term performance.

Additionally, the long-term incentive, if earned, is paid in company common stock. These awards, combined with our stock ownership guidelines, which we discuss later, promote ownership of our stock by the named executive officers. The compensation committee believes that, as stockholders, the named executive officers will be motivated to consistently deliver financial results that build wealth for all stockholders over the long-term.

How we determined 2006 compensation

        The compensation committee, in conjunction with the boardWe also offer our Section 16 officers, including all of directors, determined all compensation for each named executive officer for 2006.

        The compensation committee determines our named executive officers' annual salaries and annual and long-term incentive targets by reference to salary grades. Each salary grade has a minimum, median and maximum annual salary level as well as annual and long-term incentive target levels, which are expressed as a percentage of the individual's actual annual salary. Named executive officers generally are placed into a salary grade based on historical classification of their positions; however, the compensation committee may place an executive into a different salary grade if it determines that the executive's position, responsibilities or performance warrant the change. Also, the committee considers, upon recommendation from the chief executive officer, a position's relative value. A position's relative value is determined by considering:

•

participation on our management policy committee, which is the body responsible for setting enterprise-wide operating and management policies and procedures as well as the company's strategic direction



•

the position's responsibilities relative to the company's total earnings, use of invested capital, and the stable generation of earnings and cash flows and



•

the position's impact on key strategic initiatives.

        Our historical classifications have been:

        For 2006, all our named executive officers, were placedbenefits under our pension plans and our non-qualified defined benefit retirement plan, which we refer to as the Supplemental Income Security Plan or SISP. The SISP was adopted in their salary grades based on historical classification1982 to provide participants with additional retirement income and death benefits. We provide these benefits because of their positions. importance to our success in recruiting and retaining executive talent.

All of our named executive officers have change of control employment agreements. The change of control employment agreements define “change of control” to include consummation of a merger or similar transaction rather than merely stockholder approval. This prevents severance and other benefits from being provided if the transaction is not consummated.

In addition to these agreements, the Long-Term Performance-Based Incentive Plan provides for accelerated vesting of awards previously granted but not yet vested at the time of a new position, executive vice president—administration, for Mr. Castleberry, was assignedchange of control and payment of performance awards. The compensation committee believes that these protections are necessary to reassure the officers that they will not lose prior incentive awards or otherwise be adversely affected by a salary grade—"I".change of control.

        At least every two years theRole of Compensation Consultants and Management

Role of Compensation Consultants

The compensation committee uses an outside consulting firm to assess the competitive pay levels for base salary and incentive compensation for each Section 16 officer position. The assessment

12

Table of Contents

includes identifying material changes to Section 16 officer jobs,the positions analyzed, updating competitive compensation information, gathering and analyzing relevant general and industry-specific survey data and updating the base salary structure. In 2005,August 2006, the committee retained Towers Perrin, a nationally recognized consulting firm, assisted the committeeto assist it in establishing competitive 20062007 compensation targets for our Section 16 officers. Towers Perrin assessed competitive pay levels for base salary, total annual cash, which is base salary plus annual bonus,incentives, and total direct compensation, which is the sum of total annual cash and the expected value of long-term incentives. Towers Perrin also prepared an updated salary grade structure based on the above competitive analyses.

        Towers Perrinanalyses and identified overall competitive compensation targets as well as individual targets for salaries, annual incentives and long-term incentives for each Section 16 officer position.targets. They compared our Section 16 officer positions to like positions contained in general industry salary surveys, industry-specific salary surveys and, for our chief executive officer, the chief executive officers in our performance graph peer group. The salary surveys used by Towers Perrin were:

•

Towers Perrin's Executive Compensation Database

Survey*				Number of Companies Participating (#)				Median Number of Employees (#)				Number of Publicly- Traded Companies (#)(1)				Median Revenue (000s) ($)
Towers Perrin’s Executive Compensation Database					363				20,500				273				6,114,000
Towers Perrin’s Energy Services Industry Executive Compensation Database					93				3,064				67				2,696,400
Effective Compensation, Inc.’s Oil & Gas Exploration and Production Survey					87				151				54				258,000
Mercer’s Energy Compensation Survey					156				359				114				379,467
Watson Wyatt’s Report on Top Management Compensation					2,567				(2)				(2)				(2)




(1)

For the Towers Perrin Executive Compensation Database, the number listed in the table is the number of companies reporting market capitalization. For the Towers Perrin Energy Services Industry Executive Compensation Database, the number listed in the table is the number of companies reporting three-year stockholder return.

(2)

The 2,567 organizations participating in the Watson Wyatt Report included: 370 organizations with 2,000 to 4,999 employees; 301 organizations with 5,000 to 9,999 employees; 292 organizations with 10,000 to 19,999 employees and 362 organizations with 20,000 or more employees. Watson Wyatt did not provide a revenue breakdown or the number of publicly-traded companies participating in its survey.




•

Towers Perrin's Energy Services Industry Executive Compensation Database



•

Effective Compensation, Inc.'s Oil & Gas Exploration and Production Survey



•

Mercer's Energy Compensation Survey



•

Watson Wyatt's Report on Top Management Compensation

Our revenues for 2005 were approximately $3.46$3.5 billion.

        A total of 2,305 organizations participated in Watson Wyatt's Report on Top Management Compensation. There For 2006, our revenues were 405 organizations with 2,000 to 4,999 employees; 304 organizations with 5,000 to 9,999 employees; 260 organizations with 10,000 to 19,999 employeesapproximately $4.0 billion and 355 organizations with 20,000 or more employees. Also, therefor 2007, our revenues were 539 organizations with sales of $2.0 billion or more. Watson Wyatt did not report the number of publicly traded companies participating in its survey.$4.2 billion.

*

*

The information in the table and on the Watson Wyatt report is based solely upon information provided by the publishers of the surveys and is not deemed filed or a part of this compensation discussion and analysis for certification purposes.

13

Table of Contents

        ExecutiveIn addition to the above salary surveys, for the chief executive officer comparison, Towers Perrin used salary information for the chief executive officers also played an important partat the following companies, which comprised 24 of the 26 companies in determining 2006 compensation. Executive officers assessedour performance for those officers reporting to them. graph peer group in July 2006:

Role of Management

The chief executive officer played an important role in recommending 2007 compensation to the committee for the other named executive officers. The chief executive officer attended compensation committee meetings; however, he was not present during discussions regarding his compensation. In addition, he assessed the performance for allof the named executive officers and then worked with the human resources department and compensation consultants to determine the recommended salary grades for the executive positions. The vice president of human resources and otherrecommend:

Our human resources personnel also supported the chief executive officer and the compensation committee by:

•

	•	working with the outside compensation consultants and the chief executive officer on the determination of recommended salary grades, which have associated annual base salaries and incentive targets
	•	reviewing recommended salary increases and incentive targets submitted by executive officers for officers reporting to them for reasonableness and alignment with company or business unit objectives and to help ensure internal equity and
	•	designing annual and long-term incentive programs.

Once performance goals are approved by the compensation committee, the committee generally does not modify the goals. However, if major unforeseen changes in economic and environmental conditions or other significant factors beyond the control of management substantially affected their ability to achieve the specified performance goals, the compensation committee, in consultation with the chief executive officer, onmay modify the determinationperformance goals. Such goal modifications will only be considered in years of recommendedunusually adverse or favorable external conditions.

Decisions for 2007

The compensation committee, in conjunction with the board of directors, determined all compensation for each named executive officer for 2007 and set overall and individual compensation targets for the three components of compensation — base salary, annual incentive and long-term incentive. The compensation committee made recommendations to the board of directors regarding





14

---

Table of Contents

compensation of all Section 16 officers, and the board of directors then approved the recommendations.

The compensation committee began its review of executive compensation data at its August 2006 meeting. At the November 2006 meeting, it established salary grades which have associated annualand individual base salariessalaries. At the February meetings of the compensation committee and incentive targets



•

reviewing recommended salary increases and incentive targets submitted by executive officers for officers reporting to them for reasonableness and alignment with company or business unit objectives and to help ensure internal equity and



•

designingthe board of directors, we determine annual and long-term incentive programs.

awards, along with the payouts based on performance from the recently completed performance period for prior annual and long-term awards. The following chart showsFebruary meetings occur after the median annualrelease of earnings for the prior year.

Salary Grades for 2007

The compensation committee determines our named executive officers’ base salarysalaries and the approximate target annual and long-term incentive targets by reference to salary grades. Each salary grade has a minimum, midpoint and maximum annual salary level with the midpoint targeted at approximately the 50th percentile of data provided by Towers Perrin for positions in the salary grade. The compensation committee may adjust the salary grades away from the 50th percentile in order to balance the external market data with the internal equity and relative value of the positions. The salary grades also have annual and long-term incentive target levels, which are expressed as a percentage of the individual’s actual annual salary. Named executive officers generally are placed into a salary grade based on historical classification of their positions; however, the compensation committee, at its August meeting, reviews each classification and may place a position into a different salary grade if it determines that the targeted competitive compensation for the relevantposition changes significantly or the executive’s responsibilities and/or performance warrants the change. The committee also considers, upon recommendation from the chief executive officer, a position’s relative value. A position’s relative value is determined by considering

15

Table of Contents

Our named executive officers’ salary grades. As shown ingrade classifications are listed below along with the following chart,2007 base salary ranges associated with each classification:

The executive vice president, treasurer and chief financial officer and the president and chief executive officer of Knife River Corporation are assigned to salary grade “J.” The committee believes that from an internal equity standpoint, these two positions should carry the same salary grade based on the above factors. The positions of president and chief executive officer of MDU Construction Services Group, Inc. and Montana-Dakota Utilities Co. and Great Plains Natural Gas Co. have historically been assigned to salary grade “I.” The committee believes that from an internal equity standpoint, these two positions should carry the same salary grade based on the above factors. For all of our named executive officers, were assigned to one of three salary grades.

        After approving the salary grade assigned to each named executive officer, thegrades remained unchanged for 2007.

The compensation committee determineddetermines where, within thateach salary grade, the individual'san individual’s base salary should be. This determination was based on recommendations from our chief executive officer for executives reporting to him. The compensation committee independently determined the chief executive officer's base salary.

The compensation committee believes that having a range of possible salaries within each salary grade is advantageous as it gives the committee the flexibility to assign different salaries to individual executives within a salary grade to reflect one or more of the following:

•

the executive's

	•	our performance on financial measurements as compared to our performance graph peer group
	•	the executive’s performance on financial goals
	•	the executive’s performance on non-financial goals, including the results of the performance assessment program
	•	the executive’s experience, tenure and future potential
	•	the position’s relative value compared to other positions within the company
	•	the relationship of the salary to the competitive salary market value
	•	internal pay equity with other executives and
	•	the economic environment of the corporation or executive’s business unit.





•

the executive's performance on non-financial goals, including the results

16

---

Table of the performance assessment program



•

the executive's experience, tenure and future potential



•

the position's relative value compared to other positions within the company



•

the relationship of the salary to the competitive salary market value

•

internal pay equity with other executives and/or



•

the economic environment of the corporation or executive's business unit.

Our performance assessment program evaluatesrates performance based on behavioral and results-oriented competencies and objectives. in the following areas, which help determine actual salaries within the range of salaries associated with the executive’s salary grade:

The chief executive officer assessed each named executive officer'sofficer’s performance under the performance assessment program, and the compensation committee, as well as the full board of directors, assessed the chief executive officer'sofficer’s performance. Our performance assessment program rates performance

Base Salaries of the Named Executive Officers for 2007

Terry D. Hildestad

Mr. Hildestad was promoted to chief executive officer in different competencies, as follows:

•

visionary leadership



•

strategic thinking



•

leading with integrity



•

managing customer focus



•

financial responsibility



•

achievement focus



•

judgment



•

planning & organization



•

leadership



•

mentoring



•

relationship building



•

conflict resolution



•

communications



•

safety and



•

great place to work

        In the following discussion, we provide further explanation of why and howAugust 2006. At that time the compensation committee determined each named executive officer'sassigned Mr. Hildestad to salary grade and the executive's actual 2006 salary and annual and long-term incentives.

2006 Salary Grades and Base Salaries for Named Executive Officers

        The compensation committee began its review of executive compensation data at its August 2005 meeting. It assigned 2006 salary grades and determined 2006 individual base salaries and annual and long-term incentive targets under the annual and long-term plans at the November 2005 meeting. Actual 2006 annual and long-term incentive awards, along with the payouts based on performance from the recently completed performance period for prior annual and long-term awards, were determined at the February 2006 meetings of the compensation committee and the board of directors. The February meetings occurred after the release of earnings for the prior year.

        The compensation committee also adjusted compensation, as necessary, at other times during the year to reflect promotions or other changes in executive officers' positions with the company.

Martin A. White

        As we discussed above, the compensation committee used data provided by Towers Perrin from five different salary surveys for compensation comparison. In addition to these salary surveys described

above, for the chief executive officer comparison, Towers Perrin also used salary information for the chief executive officers at the following companies, which comprised our performance graph peer group:

        Mr. White served as our chief executive officer from April 1, 1998 until his retirement on August 17, 2006. In 2006, as chief executive officer, Mr. White was assigned to“K,” our highest salary grade, "K."and increased Mr. White's salary grade contained salary ranges from a minimum of $600,000 to a target of $750,000 and a maximum of $900,000. In determining Mr. White's salary grade, the compensation committee reviewed the performance graph peer group survey data and the other market data discussed above. The performance graph peer group showed a medianHildestad’s base salary of $685,000, and the other market data showed a base salary target of $830,000 for chief executive officers. The committee set Mr. White's actual 2006 base salary at $750,000, which was his assigned salary grade's midpoint and an increase of 7.14% from his 2005 base salary; this was above the peer group median of $685,000 but below the target level based on the other market data. The committee's decision was based on Mr. White's commendable performance assessment rating, his outstanding leadership and his contribution to our record financial results.

Terry D. Hildestad

        Terry D. Hildestad was our chief operating officer until August 17, 2006 when he was elected as chief executive officer. Mr. Hildestad was assigned to a salary grade "K." The base salary target for a president and chief operating officer was $485,000, based on the survey data provided by Towers Perrin as a part of their annual competitive analysis. The committee set Mr. Hildestad's actual base salary at $525,000 because he received a commendable performance assessment rating and Knife River Corporation's 2005 financial results were above plan. Mr. Hildestad had been president and chief executive officer of Knife River Corporation. The committee believed that this salary was appropriate because Mr. Hildestad assumed additional responsibilities as our president and chief operating officer and was making significant strides to successfully assume our chief executive officer position in August 2006.

        When Mr. Hildestad became our chief executive officer, the committee increased his base salary to $625,000. While the "K"“K” salary grade midpoint was $750,000 in 2006, the compensation committee believed that setting Mr. Hildestad'sHildestad’s salary at the midpoint would have been premature given his short tenure innew promotion to the position. The committee looks to sustained performance and contribution over time before setting a named executive officer's base salary at or aboveIn addition, the salary grade midpoint. The committee also decided that it would not give Mr. Hildestad a salary increase onin January 1, 2007 and took this into consideration when increasing his salary to $625,000 in August$625,000.

Vernon A. Raile

Mr. Raile has served as executive vice president, treasurer and chief financial officer since January 2006. Mr. Raile’s 2007 base salary was $350,700, representing an increase of 10.0% over his 2006 base salary of $318,750. The committee set his 2007 base salary at $350,700 due to his commendable performance assessment rating and to continue to move his base salary closer to the $390,000 midpoint of his salary grade. In addition, the committee increased Mr. Raile’s base salary due to results associated with these key achievements:

17

Table of Contents

William E. Schneider

        William E.Mr. Schneider ishas served as president and chief executive officer of our subsidiary, Knife River Corporation.Corporation, since May 2005. Mr. Schneider's assigned salary grade of "J" had a midpoint of $375,000, with a minimum of $300,000 and a maximum of $450,000. Upon recommendation from the chief executive officer, the committee chose the "J" salary grade because they believed Mr. Schneider should be in the same salary grade as our chief financial officer and the chief executive officer of WBI Holdings, Inc.

        Mr. Schneider's actual 2006Schneider’s 2007 base salary was $392,000,$422,000, which was above the 20062007 salary grade midpoint of $375,000,$390,000, and 7.7% higher than his 2006 base salary of $392,000. The committee set his 2007 base salary at $422,000 because of Knife River Corporation's 2005Corporation’s record 2006 financial results were above plan, he assumed additional responsibilities as business unit chief executive officer and he received aMr. Schneider’s commendable performance assessment rating. Also,In addition, the committee believed amaintained Mr. Schneider’s salary above the salary grade midpoint was appropriate given the fact that Mr. Schneider was successfully spearheading a number of Knife River Corporation initiatives, such as a regional operating structure to improve efficiencies and acceleration of Knife River Corporation's migration to a common information systems platform.

Warren L. Robinson

        Warren L. Robinson was our executive vice president and chief financial officer until January 3, 2006 and an employee until he retired February 17, 2006. Because of his retirement, Mr. Robinson received no base salary increase or incentive compensation for 2006. As we discussed in our 2006 proxy statement, we entered into an agreement with Warren L. Robinson on November 23, 2005 in connection with his retirement as executive vice president and chief financial officer. Mr. Robinson received a severance payment of $1,000,000. The compensation committee determined that this was an appropriate amount in light of Mr. Robinson's years of service to the company, business acumen and timing in the capital markets, which contributed to our six-fold increase in earnings from 1988 to 2004. Mr. Robinson also had long-term incentive awards which have been or will be paid out based upon company performance in accordance with the terms of the awards.

Vernon A. Raile

        Vernon A. Raile was elected our chief financial officer effective January 3, 2006. The 2006 market data provided by Towers Perrin showed a targeted base salary of $390,000. However, Mr. Raile was assigned to salary grade "J", the historical classification for our chief financial officer. The salary grade had a midpoint of $375,000, a minimum of $300,000 and a maximum of $450,000.

        The committee determined Mr. Raile's actual 2006 base salary at $318,750, which was an increase of 46.65% from his 2005 base salary. This reflected Mr. Raile's assumption of additional responsibilities as executive vice president, treasurer and chief financial officer, a desire to move his base salary closer to the midpoint of $375,000, record financial results and his commendable performance assessment rating. However, Mr. Raile's base salary was significantly below the 2006 salary grade midpoint of $375,000 primarily because of his short tenure as executive vice president, treasurer and chief financial officer. The committee believes aligning compensation targets to competitive benchmarks over time versus all at once is prudent because it gives them the opportunity to assess the executive's performance and contribution in his new role.

John K. Castleberry

        John K. Castleberry was president and chief executive officer of our subsidiary, WBI Holdings, Inc., and had planned to retire in 2006. However, effective March 4, 2006, Mr. Castleberry accepted our offer to become executive vice president—administration of MDU Resources Group, Inc.

        As president and chief executive officer of WBI Holdings, Inc., Mr. Castleberry's assigned salary grade of "J" had a midpoint of $375,000, a minimum of $300,000 and a maximum of $450,000. Mr. Castleberry's actual base salary for 2006 was $370,000, which was the same as 2005 due to his anticipated retirement in early 2006.

        As executive vice president—administration of MDU Resources Group, Inc., Mr. Castleberry was placed in a lower salary grade of "I", with a midpoint of $310,000, a minimum of $248,000 and a maximum of $372,000. The compensation committee approved the salary grade assignment for the executive vice president—administration position based on the chief executive officer's recommendation. The chief executive officer's rationale for recommending this salary grade was:

•

The position's importance in leading our initiative of moving certain functions to a shared services environment. This initiative involves placing duplicative functions across the organization, e.g., payroll, information technology and purchasing, into a centralized organization to leverage economies of scale and to leverage our purchasing powerresults associated with suppliers and vendors.



•

Mr. Castleberry's past success in leading WBI Holdings, Inc. In addition, his operational orientation and disciplined approach to developing systems and processes were viewed as qualities necessary to make the shared services initiative a success.



•

The desire to have Mr. Castleberry in the same salary grade as the president and chief executive officer of MDU Construction Services Group, Inc.

        Mr. Castleberry's actual salary was set at $300,000 per year, slightly below the midpoint, because of his short tenure in this position. The committee believes that aligning compensation targets to competitive benchmarks over time versus all at once is prudent because it gives them the opportunity to assess the executive's performance and contribution in his new role.

John G. Harp

        John G.Mr. Harp iswas appointed president and chief executive officer of MDU Construction Services Group, Inc. in September 2004. Mr. Harp was assigned to salary grade "I", which had a midpoint of $310,000, a minimum of $248,000 and a maximum of $372,000. The Towers Perrin competitive analysis showed a target base salary of $280,000 for his position. Upon recommendation from the chief executive officer, the committee chose a salary grade with targeted ranges higher than the Towers Perrin data would indicate because the position manages a business unit that until 2005 had poor operational and financial performance, requiring a greater degree of leadership and problem solving than would otherwise have been called for had the business unit been more stable.

        Mr. Harp's actual 2006Harp’s 2007 base salary was set at $310,000,$341,000, which was above the salary grade midpoint becauseof $315,000 and 10% higher than his 2006 base salary of $310,000. This increase was primarily attributable to Mr. Harp’s leadership of the financial turn-around of MDU Construction Services Group, Inc. from a loss in 2004 to a profit in 2005 andrecord 2006 financial results, as well as Mr. Harp'sHarp’s commendable performance assessment rating. The committee also considered these additional accomplishments in determining his 2007 base salary:

18

Table of Contents

The following table shows each named executive officer'sofficer’s base salary for 20052006 and 20062007 and the percentage change.

20062007 Annual Incentives

        AnnualWhat the Performance Measures Are and long-term incentive targets were established by the compensation committee for each salary grade as a percentage of the individual's actual base salary.Why We Chose Them

        The chief executive officer's and the chief operating officer's target annual incentive was 100% of base salary, and the other named executive officers' target annual incentives were 50% of their base salaries. These incentive targets were derived in part from competitive data provided by Towers Perrin and in part by the committee's judgment on internal equity of the positions, their relative value to the company and the desire to maintain a consistent annual incentive target for the chief executive officer and the chief operating officer positions as well as for the president and chief executive officers of the business units.

The compensation committee develops and reviews financial and other corporate performance measures to help ensure that compensation to the executives reflects the success of thetheir respective business unit and/or the corporation, as well as the value provided to our stockholders. For Messrs. White, Hildestad Robinson,and Raile, and Castleberry, as executive vice president—administration, the performance measures for annual incentive awards are the company'sour annual return on invested capital results compared to target and the company'sour annual earnings per share results compared to target. For Messrs. Schneider, Harp and Castleberry, as president and chief executive officer of WBI Holdings, Inc.,Imsdahl, the performance measures for annual incentive awards are their respective business unit'sunits’ annual return on invested capital results compared to target and their respective business unit'sunits’ allocated earnings per share results compared to target. During Mr. Castleberry's tenure as president

The compensation committee believes earnings per share and return on invested capital are very good measurements in assessing company performance from a financial standpoint. Earnings per share is a generally accepted accounting principle measurement and is a key driver of stockholder return over the long-term. Return on invested capital measures how efficiently and effectively management deploys its capital. Sustained returns on invested capital in excess of our cost of capital create wealth for our stockholders.

Allocated earnings per share for a business unit is calculated by dividing that business unit’s earnings by the business unit’s proportion of the total company weighted average shares outstanding. Return on invested capital for the company is calculated by dividing our earnings before after tax interest expense and preferred stock dividends, by our average capitalization for the calendar year. Return on invested capital for a business unit is calculated by dividing the business unit’s earnings before after tax interest expense and preferred stock dividends, by the business unit’s average capitalization for the calendar year.

The compensation committee determines the weighting of the goals each year based upon recommendations from the chief executive officerofficer. The compensation committee weighted the 2007 goals for return on invested capital compared to planned results and allocated earnings per share compared to planned results each at 50%. The compensation committee believes both measures are equally important in driving shareholder value in the short term and over time.

In 2006 we began limiting the incentive compensation we will pay above the target amount. The after-tax incentives paid above target will be limited to 20% of WBI Holdings, Inc.,earnings in excess of planned earnings. The earnings in excess of planned earnings are calculated without regard to the safety record of thatafter-tax incentive amounts above target. The 20% limitation is measured at the major business unit waslevel for business unit and operating company executives, which include Messrs. Schneider, Harp and Imsdahl, and at the corporate level for corporate executives, which include Messrs. Hildestad and Raile. The committee also a performanceconsiders annual improvement in the return on invested capital measure for Mr. Castleberry.incentive

19

Table of Contents

        Target resultspurposes to help ensure that return on invested capital equals or exceeds the weighted average cost of capital.

Targets are generally developed through the company'sestablished in connection with our annual financial planning process, wherebywhere we assess the future operating environment and buildset projections of anticipated results. ForBeginning in 2006, the committee implemented a change in how the return on investment capital targets are established for use in our annual incentive plans. The change was implemented to emphasize the need

for each business unit and the company to generate, within a reasonable period of time, a return on invested capital that is at least equal to the business unit'sunit’s or company'scompany’s weighted average cost of capital. If a business unit'sunit’s or the company'scompany’s return on invested capital, as determined byestablished in the annual financial planning process, was below theirits weighted average cost of capital, the return on invested capital target used for incentive plan purposes waswould be increased.

        The In February 2008, the compensation committee believes earnings per sharedetermined the amount of incremental increase, if any, would be based on a consideration of factors including the economic environment, industry trends and company specific conditions when establishing the return on invested capital are very good measurements in assessing how well or how poorlytargets.

What the company is performing from a financial standpoint. The former is a generally accepted accounting principle measurementTargets Are and is a key driver of stockholder return over the long-term. The latter measures how efficiently and effectively management deploys its capital. Sustained returns on invested capital in excess of the company's cost of capital create wealth for the company's stockholders.Why We Chose Them

        Allocated earnings per share for a business unit is calculatedAnnual incentive targets were established by dividing that business unit's earnings by the business unit's proportion of the total company weighted average shares outstanding. Return on invested capital for the company is calculated by dividing the company's net income before interest expense, net of tax, and preferred dividends by the company's average capitalization for a 12-month period. Return on invested capital for a business unit is calculated by dividing the business unit's net income before interest expense, net of tax, and preferred dividends by the business unit's average capitalization for a 12-month period.

        The committee determines the weighting of the goals each year based upon recommendations from the chief executive officer. For 2006, the compensation committee weightedas a percentage of the goals forindividual’s actual base salary.

The chief executive officer’s target annual return on invested capital compared to planned resultsincentive was 100% of his base salary, and allocated earnings per share compared to planned results each atthe other named executive officers’ target annual incentives were 50%. The equal weight given to these two goals represents a change of their base salaries. These incentive targets were derived in part from prior years whencompetitive data provided by Towers Perrin and in part by the compensation committee weightedcommittee’s judgment on internal equity of the goal for annual return on invested capital at 25%positions, their relative value to the company and the goaldesire to maintain a consistent annual incentive target for allocated earnings per share at 75%. Upon recommendation from thepresidents and chief executive officer, the committee changed the weighting. The compensation committee determined that return on invested capital is a key factor in determining how well a business unit, or the company, generates returns for a given level of investment and should therefore comprise a more significant portionofficers of the annual incentive compensation of executives.business units and the executive vice president, treasurer and chief financial officer positions.

The named executive officers were eligible to earn from 0% to 200% of their targeted annual incentive. The award opportunities available to each named executive officer ranged from no payment if the goals were met below the 85% level to a 200% payout if the goals were met at or above the 115% level. We discuss the award opportunities in more detail later in this proxy statement.

The table below lists each named executive officer's 2006officer’s 2007 base salary, which was used to calculate the annual incentive, the officer's 2006officer’s 2007 annual incentive target,plan performance targets, the 2006 financial results as a percentage of planned2007 incentive plan results and the annual incentive earned for 2006.2007.

(1)

Mr. White's annual incentive was prorated due to his retirement

Name				2007 Base Salary (000s) ($)				2007 Annual Incentive Target (%)				2007 Incentive Plan Performance Targets								2007 Incentive Plan Results								2007 Annual Incentive Earned (000s) ($)
												EPS ($)				ROIC (%)				EPS ($)				ROIC (%)
Terry D. Hildestad1					625				100				1.57				9.4				2.36				13.1				1,250
Vernon A. Raile1					351				50				1.57				9.4				2.36				13.1				351
William E. Schneider2					422				50				1.13				8.0				1.08				7.6				207
John G. Harp3					341				50				2.53				10.8				4.00				16.7				341
Bruce T. Imsdahl4					322				50				.52				7.1				.67				8.3				322

(1)	2007 Incentive Plan results include both continuing and discontinued operations.

(2)	Based on allocated earnings per share and return on invested capital for Knife River Corporation.

20

---

Table of Contents

(3)	Based on allocated earnings per share and return on invested capital for MDU Construction Services Group, Inc.

(4)	Based on allocated earnings per share and return on invested capital for Montana-Dakota Utilities Co. and Great Plains Natural Gas Co.

The following table shows the changes in August 2006.

(2)

Mr. Robinson did not receive an annual incentive inour performance targets and achievements for both 2006 due to his retirement.and 2007.

Name				2006 Incentive Plan Performance Targets								2006 Incentive Plan Results								2007 Incentive Plan Performance Targets								2007 Incentive Plan Results
				EPS ($)				ROIC (%)				EPS ($)				ROIC (%)				EPS ($)				ROIC (%)				EPS ($)				ROIC (%)
Terry D. Hildestad1					1.40				9.2				1.74				10.6				1.57				9.4				2.36				13.1
Vernon A. Raile1					1.40				9.2				1.74				10.6				1.57				9.4				2.36				13.1
William E. Schneider2					.93				7.0				1.22				8.7				1.13				8.0				1.08				7.6
John G. Harp3					1.54				8.6				2.56				11.6				2.53				10.8				4.00				16.7
Bruce T. Imsdahl4					—				—				—				—				.52				7.1				.67				8.3

(3)

Mr. Castleberry's annual incentive is based upon

(1)	2007 Incentive Plan results include both continuing and discontinued operations.

(2)	Based on allocated earnings per share and return on invested capital for Knife River Corporation.

(3)	Based on allocated earnings per share and return on invested capital for MDU Construction Services Group, Inc.

(4)	Based on allocated earnings per share and return on invested capital for Montana-Dakota Utilities Co. and Great Plains Natural Gas Co.

Terry D. Hildestad’s 2007 Annual Incentive Award

As president and chief executive officer of MDU Resources Group, Inc. goals, Mr. Hildestad’s 2007 incentive plan performance targets were based on our earnings per share and WBI Holdings, Inc. goals prorated toreturn on invested capital. We set his target levels below the 2006 achievement for these performance measures and above the 2006 targets. The committee believed that the incentive plan performance targets for Mr. Hildestad were sufficiently challenging targets because 2006 was a record year, we anticipated softness in the residential construction market, and we believed the upward trend in natural gas prices would abate in 2007. For 2007 incentive plan results, we exceeded 2007 target earnings per share and return on invested capital by 50.3% and 39.4%, respectively. These results reflect Mr. Castleberry'sHildestad’s leadership in deciding to divest the independent power assets, yielding a substantial gain and enabling redeployment of the proceeds into our core lines of business, and his leadership in furthering a culture of customer service, with each company.

Vernon A. Raile’s 2007 Annual Incentive Award

As executive vice president, treasurer and chief financial officer of MDU Resources Group, Inc., Mr. Raile’s 2007 incentive plan performance targets were based on our earnings per share and return on invested capital. We set his target levels below the 2006 achievement for these performance measures and above the 2006 targets. The committee believed that the incentive plan performance targets for Mr. Raile were sufficiently challenging targets because 2006 was a record year, we anticipated softness in the residential construction market, and we believed the upward trend in natural gas prices would abate for 2007. For 2007 incentive plan results, we exceeded 2007 target earnings per share and return on invested capital by 50.3% and 39.4%, respectively. These results

21

Table of Contents

reflect Mr. Raile’s assistance in the divestiture of our independent power assets and his leadership in successfully representing the company in the capital markets.

William E. Schneider’s 2007 Annual Incentive Award

As president and chief executive officer of Knife River Corporation, Mr. Schneider's 2006Schneider’s 2007 incentive plan performance targets were based on allocated earnings per share and return on invested capital for Knife River Corporation. HisThese targets wereincluded $4,000,000 in anticipated net income attributable to acquisitions throughout 2007, and $2,000,000 in anticipated net income on the sale of certain real estate assets. We set his targets at levels 18 percentbelow 2006 achievement for allocated earnings per share and 8 percent, respectively,return on invested capital but above the 2005 achievements2006 targets for these performance measures. The committee believed that these targets were sufficiently challenging for Mr. Schneider because of the anticipated softness in order to attain these financial targets, Mr. Schneider would be required, atthe residential construction market, the substantial completion of a minimum, to implement significant operational changes at certain underperforming subsidiaries.major project in 2006, and the overall record results that occurred in 2006. With respect to the 20062007 incentive plan results, Knife River Corporation exceeded 2006fell short of target earnings per share by 4.4% and fell short of the target return on invested capital by 31 percent and 24 percent, respectively. Mr. Schneider achieved these excellent results through a combination of operational improvements, changes in market strategy and implementation of effective cost controls.5.0%.

        Mr. Castleberry's annual incentive was prorated to reflect his service as president andUpon recommendation from the chief executive officer, the committee and board of WBI Holdings, Inc. and executive vice president—administration of MDU Resources Group, Inc. The goals shown in the table are for MDU Resources Group, Inc. only. Mr. Castleberry's incentive plan performance targets, during the portion of time he served as president and chief executive officer of WBI Holdings, Inc., were based ondirectors agreed to reduce Knife River’s 2007 allocated earnings per share and return on invested capital for WBI Holdings, Inc.targets by the equivalent of $3,748,000 in net income. The targets were set at levels 2 percent and 19 percent lower, respectively, than the 2005 achievement for these performance measures. $3,748,000 was comprised of:

The committee believedconsiders these events to be unusual conditions that thewarranted modifications to Mr. Schneider’s annual incentive plan performance targets under the terms of the Knife River Corporation Executive Incentive Compensation Plan. Also, the compensation committee believes the adjustment is appropriate under the Knife River Corporation Executive Incentive Compensation Plan for WBI Holdings, Inc. required sufficient stretch on Mr. Castleberry's part, given that 2005 financial results had benefited from the effects of a favorable regulatory order, combined with expected lower natural gas commodity prices and increasing operational costs for 2006. Furthermore, Mr. Castleberry's performance target for return on invested capital would still be significantly abovefollowing reasons:

Had the cost of capital for his business unit. With respect to the 2006 incentive plan results, WBI Holdings, Inc. exceeded 2006 target2007 allocated earnings per share and return on invested capital targets not been reduced by 14 percent and 5 percent, respectively.the $3,748,000, Mr. Schneider’s 2007 annual incentive award would have been $164,053, or approximately $43,000 less than the $207,000 annual incentive award earned for 2007.

John G. Harp’s 2007 Annual Incentive Award

As president and chief executive officer of MDU Construction Services Group, Inc., Mr. Harp's 2006Harp’s 2007 incentive plan performance targets were based on allocated earnings per share and return on invested capital for MDU Construction Services Group, Inc. His targets wereWe set athis target levels 6 percentbelow the 2006 achievement for these performance measures and above the 2005 targets for these same performance measures. At the time Mr. Harp assumed the

presidency of this business unit in late 2004, he was confronted with significant challenges in turning around a business unit that had incurred significant losses in 2004. Although the compensation committee believed that Mr. Harp had achieved commendable progress in 2005, significant efforts would be required in 2006 to resolve a number of the issues remaining. Thus, thetargets. The committee believed that the incentive plan performance targets for 2006MDU Construction Services Group, Inc. were sufficiently challenging but not so aggressive as to impede the orderly progress of Mr. Harp's improvement plan.targets because 2006 was an exceptional year. For 20062007 incentive plan results, MDU Construction Services Group, Inc. exceeded 20062007 target earnings per share and return on invested capital by 66 percent58.1% and 35 percent,54.6%, respectively. This reflects the outstanding efforts byThese results reflect Mr. HarpHarp’s leadership in improving 2006 financial results for this business unit over those for the prior two years.

        In additiondriving operating efficiencies, providing superior value to the annual incentive of $310,000 Mr. Harp earned under our executive incentive compensation plan, he also earned an additional $500,000 one-time incentive payment. When Mr. Harp was hired in September 2004 to effectuate a turn-aroundcustomers and continuation of the Utility Services Inc. business unit, now calleddramatic turnaround of MDU Construction Services Group, Inc.

22

Table of Contents

Bruce T. Imsdahl’s 2007 Annual Incentive Award

As president and chief executive officer of Montana-Dakota Utilities Co. and Great Plains Natural Gas Co., he was offered one-timeMr. Imsdahl’s 2007 incentive opportunitiesplan performance targets were based on allocated earnings per share and return on invested capital for Montana-Dakota Utilities Co. and Great Plains Natural Gas Co. We set his 2007 target levels for allocated earnings per share at $0.52 and return on invested capital at 7.1%. The committee believed that the incentive plan performance targets for Montana-Dakota Utilities Co. and Great Plains Natural Gas Co. were sufficiently challenging targets because they required focus on maintaining solid execution of (i) $250,000 if MDU Construction Services Group, Inc. reported annual net incomeoperating responsibilities in a year when significant time and energy were dedicated to consummating the Cascade Natural Gas Corporation acquisition. For 2007 incentive plan results, Montana-Dakota Utilities, Co. and Great Plains Natural Gas Co. exceeded 2007 target earnings per share and return on invested capital by 28.8% and 16.9%, respectively. These results reflect Mr. Imsdahl’s leadership in keeping his team of $12.5 millionemployees engaged in 2007 or soonereffectively operating Montana-Dakota Utilities Co. and in addition (ii) $500,000 if MDU Construction Services Group, Inc. reported annual net incomeGreat Plains Natural Gas Co. while, at the same time, dealing with regulatory matters and integration issues associated with the acquisition of $18.6 million or more in fiscal year 2008 or sooner. The first goal was met in 2005, and in fiscal year 2006 MDU Construction Services Group, Inc. met the second goal.Cascade Natural Gas Corporation.

DeferredDeferral of Annual Incentive Compensation

We provide executives the opportunity to defer receipt of earned annual incentives. If an executive chooses to defer his/her annual incentive, the company will credit the deferral with interest. In August 2007, the compensation committee, effective January 1, 2008, reduced the interest atrate on deferred compensation from the prime rate plus one percentage point. Messrs. Hildestad, Schneider and Raile deferred all or a portion of their annual incentives for 2005.point to the prime rate.

2007 Long-Term Incentives

Awards Granted in 20062007 under the Long-Term Performance-Based Incentive Plan

We use the Long-Term Performance-Based Incentive Plan, which is an omnibus plan and has been approved by our stockholders, for long-term incentive compensation. We discontinued the use of stock options in 2003 and now use performance shares as the only form of long-term incentive compensation.

At its August 2006 meeting, the compensation committee updated the list of companies that comprise our performance graph peer group to better reflect changes in the mix of our businesses since the establishment of the prior performance graph peer group in 2001. The compensation committee used the updated performance graph peer group as the comparator group to determine relative stockholder return and potential payments under the Long-Term Performance-Based Incentive Plan beginning with the 2007-2009 performance share award cycle. The companies comprising our updated performance graph peer group are as follows:

23

Table of Contents

The performance measures are our total stockholder return over a three-year measurement period as compared to the total stockholder returns of the companies in our performance graph peer group.group over the same three-year period. The compensation committee selected this goal because it believes executive pay under a long-term, capital accumulation program such as this should mirror our long-term performance in stockholder return as compared to other public companies in our industries. Payments are made in company stock; dividend equivalents are paid in cash.

        Similar toTotal stockholder return is the percentage change in the value of an investment of the common stock of a company, from the last trading day in the calendar year preceding the beginning of the performance period, through the last trading day in the final year of the performance period. It is assumed that dividends are reinvested in additional shares of common stock at the frequency paid.

As with the annual incentive target, the long-term incentive target for a given position is determined by reference to the salary grade. Mr. White's target was 133% of base salary, although Mr. White was not granted performance shares under the program in 2006 due to his retirement. Mr. Hildestad's target was 105% of base salary. Messrs. Schneider's, Raile's and Robinson's targets were 90% of base salary each, although Mr. Robinson was not granted performance shares under the program in 2006 due to his retirement. Messrs. Castleberry's and Harp's targets were 75% of base salary. These incentive targets were derived in part from competitive data provided by Towers Perrin and in part by the committee'scommittee’s judgment on the impact each position has on our total stockholder return. The committee also believed consistency across positions in the same salary grades was important from an internal equity standpoint. The variance in target percentages reflects our philosophy that executives in higher salary grades should have more of their total compensation at risk because they are in positions to have a more direct impact on our long-term results.

On February 16, 2006,15, 2007, the board of directors, upon recommendation of the compensation committee, made long-term incentiveperformance share grants to the named executive officers in the form of performance shares.officers. The compensation committee determined the target number of performance shares granted to each named executive officer by multiplying the named executive officer's 2006officer’s 2007 base salary by his long-term incentive target

and then dividing this product by the average of the closing prices of our stock from January 1, 20063, 2007 through January 23, 2006.

(1)

Mr. White was not granted performance shares22, 2007, as shown in 2006 due to his retirement.

(2)

Mr. Hildestad did not receive any additional performance shares when he became president and chief executive officer in August 2006.

(3)

Mr. Robinson was not granted performance shares in 2006 due to his retirement.

From 0% to 200% of the target grant will be paid out in February 20092010 depending on our three-year 2006-20082007-2009 total stockholder return compared to the total three-year stockholder returns of companies in our performance graph peer group. The payout percentage will be a function of our rank against our performance graph peer group as follows:

24

Table of Contents

Payouts for percentile ranks falling between the intervals will be interpolated. We also will pay dividend equivalents in cash on the number of shares actually earned for the performance period. The dividend equivalents will be paid in 20092010 at the same time as the performance awards are paid.

Awards Paid on February 16, 200615, 2007 under the Long-Term Performance-Based Incentive Plan

We granted performance shares to our named executive officers under the Long-Term Performance-Based Incentive Plan on February 13, 200312, 2004 for the 20032004 through 20052006 performance period. As we reported in last year's proxy statement, these performance shares vested at the 118% payout level. Our total stockholder return for the 20032004 through 20052006 performance period was 106.56%73.92%, which corresponded to a percentile rank of 59%48% against our performance graph peer group. The percentile rank of 59%48% corresponded to a payout percentage of 118%82%, meaning 118%82% of the target shares originally granted plus dividend equivalents were paid to the named executive officers. The table below

lists the shares granted on February 13, 2003,12, 2004, the shares paid on February 16, 200615, 2007 based on the payout percentage and the dividend equivalents earned.

(1)    Mr. Harp was not granted performance shares in 2003 because he was not then an employee of the company.Options That Accelerated Vested on February 15, 2007

(2)    Shares are adjusted for the 3-for-2 stock split effective October 29, 2003 and the July 26, 2006 stock split.

We granted shares of restricted stock options to our named executive officers in 2000,2001, pursuant to ourthe 1992 Key Employee Stock Option Plan or the Long-Term Performance-Based Incentive Plan. These options become exercisable automatically on February 15, 2010. Vesting is accelerated restricted stock program. Vestingupon change of 54%control or upon attainment of performance goals. A portion of these shares was acceleratedoptions vested on February 12, 2004 after goals were met for the first performance cycle, 2000-2002, based upon achievement of total shareholder return results as compared to2001-2003; the performance graph peer group. Our total shareholder return as compared to the performance graph peer groupremaining options vested on February 15, 2007 after goals were met for the second performance cycle, 2003-2005, resulted in acceleration2004-2006.

The performance goals for Messrs. Hildestad and Schneider were based on Knife River Corporation’s earnings and three-year average return on invested capital. The vesting of vesting theMessrs. Hildestad and Schneider’s remaining sharesoptions was accelerated because Knife River Corporation’s 2006 earnings were 135.8% of its forecasted 2006 earnings, and its three-year average return on February 16, 2006.invested capital for 2004-2006 was 95.9% of its forecasted three-year average return on invested capital.

Mr. Imsdahl’s performance goals were based on Montana-Dakota Utilities Co.’s earnings and three-year average return on invested capital. The named executive officers received shares as follows: Mr. White—10,350 shares; Mr. Hildestad—5,175 shares; Mr. Robinson—4,140 shares; Mr. Raile—2,587 shares; Mr. Schneider—4,140 shares; and Mr. Castleberry—4,140 shares. Mr. Harp was not granted restricted shares.

Perquisites and Tax Gross-Ups

        Our named executive officers have limited perquisites, which may include personal use of our plane, limited accompaniment of family members with executives traveling for business purposes, reasonable vehicle allowances, home office allowances and subsidized annual physical examinations.

        In connection with Martin White's retirement in August 2006, we paid the cost of travel for membersvesting of Mr. White's family to attend his retirement party and also provided a tax gross-up to Mr. White on this amount. While the company has rarely provided tax gross-ups, the board believed that itImsdahl’s remaining options was appropriate in recognitionaccelerated because Montana-Dakota Utilities Co.’s 2006 earnings were 96.6% of Mr. White's very successful tenure as our chairman and chief executive officer.

Pension Plans

        Effectiveits forecasted 2006 we no longer offer pensions to new employees. Instead, executives and other employees are offered increased company contributions to our 401(k) plan. The pension plans continue in effect for all employees hired before 2006.

        We provide our executives and other employees hired before 2006 with income for their retirement through our qualified defined benefit pension plans, where benefits are determined by years of service and base salary. For benefits under the pension plans, 35 years is the maximum number of years of service the participants in these plans can accrue. Pension benefits are determined by the step-rate

formula that emphasizes the highest consecutive 60 months of base salary within the last 10 years of service. Employees who retire early receive reduced benefits under the pension plans. We discuss other material terms of the pension plans later in this proxy statement. Because benefits under our pension plan increase with an employee's period of service and earnings, we believe the pension encourages our employees to make long-term commitments to the company, and as such, serves as an important retention tool.

Supplemental Income Security Plan

        We also offer certain key managers and executives, including all of our named executive officers, benefits under our nonqualified retirement plan, which we refer to as the Supplemental Income Security Plan or SISP. The SISP was adopted in 1982 to provide participants with additional retirement income and death benefits.

        The additional retirement income may take two forms:

•

a supplemental retirement benefit payable for fifteen years beginning at the later of age 65 or after employment ends and



•

an additional retirement benefit to offset the Internal Revenue Code limitations placed on benefits payable under our qualified defined benefit pension plans. If eligible, the participants receive this retirement benefit after they separate from the company and until they reach age 65. In order to be eligible to receive the additional retirement benefit, they must vest in their pension benefit, which requires five years of service, and their pension must be limited by the Internal Revenue Code. Mr. Harp has an additional qualification in that he must remain employed until age 60 in order to receive this additional retirement benefit.

        A death benefit is provided if SISP participants die before their supplemental retirement benefits commence or if they elect to receive death benefits in lieu of all or a part of their supplemental retirement benefits.

        We discuss the other terms of the SISP later in the proxy statement.

        In November 2006, we amended the SISP to give the compensation committee the responsibility of selecting participants and establishing levels of participation. The committee's selections are based on recommendations from the chief executive officer. Previously, the chief executive officer selected participants in the SISP and their level of participation. Participation, as well as the level of participation, was solely at the discretion of the chief executive officer and was intended to reward those who made significant contributions to our success and profitability. In November 2005, certain named executive officers received upgrades to their SISP levels that became effective on January 1,

2006. The upgrades, along with the chief executive officer's rationale for the upgrades, are summarized in the following table:

(1)

Mr. White did not receive an upgrade to his SISP level.

        In 2003, we considered increasing the retirement benefits provided under the SISP, and we engaged Towers Perrin to compare the retirement benefits provided under the SISP to similar plans provided by companies in our performance graph peer group. Towers Perrin's analysis showed that the retirement benefits provided by the SISP were higher, as a percentage of final annual compensation, than supplemental retirement benefits provided by most of the companies in the performance graph peer group, assuming final annual compensation of $200,000, $500,000 or $1,000,000 and length of service of 15, 20, 25 or 30 years. The extent to which the benefits under the SISP exceeded benefits provided by the other companies depended on the level of final annual compensation and years of service assumed. Based on Towers Perrin's findings, we determined that the SISP benefits should not be increased; however, because of the SISP's importance to our success in recruitment and retention of exceptional executive talent, the SISP benefit levels were maintained.

        To encourage Mr. Harp to remain with the company through 2007, on November 16, 2006, upon recommendation of our chief executive officer and the compensation committee, our board of directors approved an additional retirement benefit for Mr. Harp. The benefit provides for Mr. Harp to receive payments that represent the equivalent of an additional three years of service under the pension plan and the SISP if he does not resign or retire before January 2, 2008 and if he has acceptable successors in place prior to his departure. The additional three years of service recognize Mr. Harp's previous

employment with a subsidiary of the company. To calculate the additional retirement benefit, we assumed Mr. Harp had acceptable successors in place by January 2, 2008, and he resigned on that date. Under this assumption the equivalent of adding three years of service for pension purposes would equate to $1,351 per month for the remainder of his life, and he would begin receiving the $1,351 per month on August 1, 2008. We further assumed his life expectancy on August 1, 2008 to be 25 years, or 300 months. Therefore, total payments for the equivalent of an additional three years of service under the pension plan would be $405,252. For SISP, we used the same assumptions of having acceptable successors in place by January 2, 2008 and resigning on that date. In this case the equivalent of the additional three years of service under the SISP would be $4,858 per month, which Mr. Harp would begin receiving at age 65. Under the SISP, payments last for 15 years or 180 months; therefore the total payments to Mr. Harp would be $874,440.

Post-Termination Compensation and Benefits

        We have entered into change of control employment agreements with each of our Section 16 officers, including our named executive officers. We believe it is important to provide an inducement for our executive officers to continue working for us during any change of control transition periods and to provide severance benefits if employment is terminated in connection with a change of control.

        If a change of control should occur, each agreement provides for a three-year employment period from the date of the change of control. During the employment period, the executive officer receives guaranteed minimum levels of compensation and benefits and severance benefits. In addition if the company or a successor terminates the executive officer's employment without cause or if the executive officer resigns for good reason, in either case, during the employment period or prior to the employment period if the termination is deemed to be related to the change of control, the executive officer is entitled to receive three times base salary and bonus as well as other amounts.

        The change of control employment agreements define "change of control" to include:

•

an individual, entity or group acquiring 20% or more of our voting securities



•

a turnover in a majority of our board of directors without the approval of a majority of the directors who were members of the board as of the agreement date or whose election was approved by such board members



•

consummation of a merger or consolidation, unless our stockholders immediately prior to the merger beneficially own more than 60% of the outstanding shares and voting power of the resulting corporation after the merger or



•

the stockholders approving liquidation or dissolution of the company.

        Having the actual consummation of a merger or similar transaction rather than the stockholder approval date is a conservative trigger and prevents payouts from being made prematurely, in the event consummation were not to occur.

        The agreements contain what are commonly referred to as "13th month triggers," which provide that a resignation for good reason includes resignation for any reason during the 30 day period beginning on the first anniversary of the change of control. The compensation committee believes that providing severance benefits for terminations without cause or for good reason limits the provision of severance benefits to situations where an executive officer's employment is terminated due to the change of control and through no fault of the executive. The compensation committee believes the 13th month trigger encourages executive officers to remain with the company or a successor during the critical year-long transition period following a transaction, which is beneficial to the company and its stockholders, and protects executive officers who choose to so continue employment.three-year average return on invested capital for 2004-2006 was 101.5% of its forecasted three-year average return on invested capital.

25

Table of Contents

        The agreements also provide what is commonly referred to as a modified tax gross-up. This provides for an additional payment to make an executive whole for federal excise taxes on excess parachute payments, unless the excess parachute payments are not more than 110% of the safe harbor amount. In that case, the payments to the executive would be reduced to the safe harbor amount.

        The board of directors and the compensation committee reviewed the change of control agreements in 2006. We compared the terms of our change of control agreements to those of certain members of our performance graph peer group and to the Frederic W. Cook & Co., Inc., 2005 Change-in-Control Report, Prevalence and Design of Executive Change-in-Control Arrangements at Each of the Top 50 NYSE and NASDAQ Companies. The compensation committee determined that the terms of the agreement were consistent with current practice and in the best interests of the stockholders because the agreement provides an incentive for executives to remain employed through any change of control.

        In addition to these agreements, the terms of the Long-Term Performance-Based Incentive Plan call for accelerated vesting of awards previously granted but not yet vested at the time of a change of control and payment of performance awards.

        In the case of any termination of employment, the compensation committee may also consider providing severance benefits on a case-by-case basis. The compensation committee adopted a checklist of factors in February 2005 to consider when determining whether any such severance benefits will be made upon termination.

PEER4 analysi$Analysi$: Comparison of Pay for Performance Ratios

Each year we compare our named executive officers'officers’ pay for performance ratios to the pay for performance ratios of the named executive officers in the performance graph peer group. This analysis looks at the relationship between our compensation levels and our average annual total stockholder return in comparison to the peer group over a five-year period. All data used in the analysis, including the valuation of long-term incentives and calculation of stockholder return, were compiled by Equilar, Inc., an independent service provider, which uses each company'scompany’s annual filings as a basis of theirits data collection.

This analysis consisted of comparing what we paid our named executive officers for the years 20012002 through 20052006 to our average annual total stockholder return for the same five-year period. Our pay ratio was then compared to the pay ratio of the companies in the performance graph peer group, which was calculated by dividing total direct compensation for all the proxy group executives by the sum of each company'scompany’s average annual total stockholder return for the same five-year period. The results are shown in the following chart.

5 Year Total Direct Compensation to 5 Year Total Stockholder Return*

(1)

Total direct compensation is the sum of annual base salaries, annual incentives, the value of long-term incentives at grant and all other compensation as reported in the proxy statements. For 2006, total direct compensation also includes the change in qualified and non-qualified pension values and above-market earnings on non-qualified deferred compensation as reported in the proxy statements.

*    The chart is not deemed filed or a part of this compensation discussion and analysis for certification purposes.


(1)

Total direct compensation is the sum of annual base salaries, annual incentives, the value of long-term incentives at grant and other compensation as reported in the proxy statements.

The results of the analysis showed that we paid our named executive officers significantly less than what the peer group companies paid their named executive officers for comparable levels of stockholder return over the five-year period. Specifically, as indicated in the chart, the data shows that we paid each of our named executivesexecutive officers approximately $2.7 million$106,000 less per point of stockholder return than our performance graph peer group. The compensation committee believes this comparison helps demonstrate that our stockholders receive good value for our executive compensation expense.

Clawback*The chart is not deemed filed or a part of this compensation discussion and analysis for certification purposes.

26

Table of Contents

Perquisites

Our named executive officers have limited perquisites, which may include personal use of our plane, limited accompaniment of family members with executives traveling for business purposes, reasonable vehicle allowances, home office allowances and subsidized annual physical examinations.

Post-Termination Compensation and Benefits

Pension Plans

Effective 2006, we no longer offer defined benefit pension plans to new non-bargaining unit employees. Instead, executives and other employees are offered increased company contributions to our 401(k) plan. The pension plans continue in effect for all eligible employees hired before 2006.

We provide our executives and other employees hired before 2006 with income for their retirement through our qualified defined benefit pension plans, where benefits are determined by years of service and base salary. Because benefits under our pension plan increase with an employee’s period of service and earnings, we believe the pension encourages our employees to make long-term commitments to the company and as such, serves as an important retention tool.

Supplemental Income Security Plan

Benefits Offered

We offer certain key managers and executives, including all of our named executive officers, benefits under our non-qualified retirement plan, which we refer to as the Supplemental Income Security Plan or SISP. The SISP provides participants with additional retirement income and death benefits. The additional retirement income may take two forms:

A death benefit is provided if SISP participants die before their supplemental retirement benefits commence or if they elect to receive death benefits in lieu of all or a part of their supplemental retirement benefits. The death benefit is payable for 15 years.

SISP Competitiveness Analysis

At the request of the compensation committee, the human resources department presented its report on the competitiveness of the SISP in November 2007. The human resources department analyzed the most recent proxy statements of our performance graph peer group. Of the performance graph peer companies, 15 reported offering one or more non-qualified defined benefit plans; 14 of the 15 reported the present value of the accumulated benefit at normal retirement age in the pension benefit table of their 2007 proxy statements. One company’s proxy statement containing this information was filed in January 2008 and therefore was not included in the November 2007 analysis.

The present value of the accumulated benefit at normal retirement, averaged for all of our named executive officers, was $2,044,351. This equated to the 72^nd percentile of the 14 averages (one for each of the performance graph peer companies that offered one or more non-qualified defined

27

Table of Contents

benefit plans) of the present values of the accumulated benefits at normal retirement, averaged for each company’s named executive officers.

Our SISP benefit is high when compared to benefits at our performance graph peer companies who offer one or more non-qualified defined benefit plans. We believe, however, that the SISP is critical in retaining the talent necessary to drive long-term stockholder value. In addition, we believe that the 10 year vesting provisions of the SISP help offset the amounts our named executive officers will receive for their sustained commitment to the company.

Benefit Level Increases

Each November the compensation committee considers SISP benefit level increases. The chief executive officer recommends the benefit level increases to the committee on executives other than himself; the committee considers benefit level increases for the chief executive. In November 2006, Messrs. Hildestad, Raile and Schneider received an increase in their SISP benefit level which was effective on January 1, 2007. The committee’s rationale for the benefit level increases was recognition of each named executive’s contribution to the financial success of the company. The following table reflects our named executive officers’ SISP levels:

To encourage Mr. Harp to remain with the company through 2007, on November 16, 2006, upon recommendation of our chief executive officer and the compensation committee, our board of directors approved an additional retirement benefit for Mr. Harp. The benefit provides for Mr. Harp to receive payments that represent the equivalent of an additional three years of service under the pension plan and the SISP because he did not resign or retire before January 2, 2008, and he has acceptable successors in place. The additional three years of service recognize Mr. Harp’s previous employment with a subsidiary of the company.

Clawback

In November 2005, we implemented a guideline for repayment of incentives due to accounting restatements, commonly referred to as a clawback policy, in November 2005 whereby the compensation committee may seek repayment of annual and long-term incentives paid to executives if accounting restatements occur within three years after the payment of incentives under the annual and long-term plans. Under our clawback policy, the compensation committee may require employees to forfeit awards and may rescind vesting, or the acceleration of vesting, of an award.

Impact of Tax and Accounting Treatment

The compensation committee may consider the impact of tax and/or accounting treatment in determining compensation. Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation paid to certain officers that we may deduct as a business expense in any tax year unless, among other things, the compensation qualifies as performance-based compensation, as that term is used in section 162(m). Generally, long-term incentive compensation

28

Table of Contents

and annual incentive awards for our chief executive officer and those executive officers whose overall compensation is likely to exceed $1,000,000 are structured to be deductible for purposes of Section 162(m) of the Internal Revenue Code, but we may pay compensation to an executive officer that is not deductible. Approximately $120,000All annual or long-term incentive compensation paid to Mr. Harpour named executive officers in 2006 was2007 satisfied the requirements for deductibility.

Section 409A of the Internal Revenue Code imposes additional income taxes on executive officers for certain types of deferred compensation if the deferral does not deductible for purposescomply with Section 409A. We administer our plans and agreements in accordance with Section 409A and our compensation arrangements are structured to comply with Section 409A, to the extent applicable, so that these taxes are avoided.

Section 4999 of the Internal Revenue Code imposes an excise tax on payments to executives and others of amounts that are considered to be related to a change of control if they exceed levels specified in Section 280G of the Internal Revenue Code. The potential impact of the Section 4999 excise tax is addressed with the modified tax gross-up provisions in the change of control employment agreements, which are described earlier in this compensation discussion and analysis and later in the proxy statement under the heading “Potential Payments Upon Termination or Change of Control.” We do not consider the potential impact of Section 162(m)4999 or 280G when designing our compensation programs.

The compensation committee also considers the accounting and cash flow implications of various forms of executive compensation. In our financial statements, we record salaries and performance-based compensation incentives as expenses in the amount paid, or to be paid, to the named executive officers. Accounting rules also require that we record an expense in our financial statements for equity awards. The accounting expense of equity awards to employees is calculated in accordance with SFAS 123 (revised).

Stock Ownership Guidelines

We instituted stock ownership guidelines on May 5, 1993, which we revised in February 2003, to encourage executives to own a multiple of their base salary in our common stock. All officers who participate in our Long-Term Performance-Based Incentive Plan are subject to the guidelines. The guidelines call for the executive to reach the multiple within five years. Unvested performance shares and other unvested equity awards do not count towards the guidelines. Each February the compensation committee receives a report on the status of stock holdings by executives. The table shows the named executive officers'officers’ holdings as of December 31, 2006:2007:

(1)

Retired.