Leases

12 Months Ended

Dec. 31, 2022

Leases - MGE Energy and MGE.

As part of its regular operations, MGE enters into various contracts related to IT equipment, substations, cell towers, land, wind easements, and other property in use for operations. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Determination as to whether an arrangement is or contains a lease is completed at inception. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets; lease expense for these leases are recognized on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as operating or financing leases on the consolidated balance sheets.

Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. For leases that do not provide an implicit rate, a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, is used in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Operating lease expense is recognized on a straight-line basis over the lease term. MGE has regulatory treatment and recognizes regulatory assets or liabilities for

timing differences between when net lease costs are recorded and when costs are recognized. As of December 31, 2022, MGE had no significant leases not yet commenced that would create significant future rights and obligations.

The following table shows lease expense for the years ended December 31:


(In thousands)	2022		2021		Income Statement Location
Finance lease expense:
Amortization of leased assets	$	1,633	$	1,609	Depreciation and amortization
Interest on lease liabilities		752		771	Interest expense, net
Operating lease expense		541		506	Other operations and maintenance
Total lease expense	$	2,926	$	2,886

The following table shows the lease assets and liabilities on the consolidated balance sheets as of December 31:


(In thousands)	2022		2021		Balance Sheet Location
Lease assets:
Finance lease assets	$	14,756	$	15,545	Property, plant, and equipment, net
Operating lease assets		7,786		7,961	Other deferred assets and other
Total lease assets	$	22,542	$	23,506
Lease liabilities:
Finance lease liabilities - current	$	1,039	$	1,050	Other current liabilities
Finance lease liabilities - long-term		17,108		17,322	Finance lease liabilities
Operating lease liabilities - current		136		161	Other current liabilities
Operating lease liabilities - long-term		7,915		7,965	Other deferred liabilities and other
Total lease liabilities	$	26,198	$	26,498

The following table shows other lease information for the years ended December 31:


(In thousands)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Finance leases - Financing cash flows	$	1,304	$	1,495
Finance leases - Operating cash flows		752		771
Operating leases - Operating cash flows		442		362
Lease assets obtained in exchange for lease liabilities:
Finance leases		1,094		1,026
Operating leases		126		2,178

The following table shows the weighted average remaining lease terms and discounts as of December 31:


Weighted-average remaining lease terms (in years):	2022			2021
Finance leases		38			38
Operating leases		34			35
Weighted-average discount rates:
Finance leases		4.34	%		4.30	%
Operating leases	3.07		%	3.07		%

The following table shows maturities of lease liabilities as of December 31, 2022:


(In thousands)	Finance			Operating
2023	$	1,782		$	372
2024		1,463			347
2025		1,203			294
2026		969			299
2027		884			304
Thereafter		38,913			11,830
Subtotal		45,214			13,446
Less: Present value discount		(27,067	)		(5,395	)
Lease liability		18,147			8,051
Less: current portion		(1,039	)		(136	)
Noncurrent lease liability	$	17,108		$	7,915