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Utilities should be investor favorites now because of their high yields and stable revenue. But the brand names, like Con Edison ( ED) and FirstEnergy ( FE), have heavy debts, poor liquidity and dim growth prospects. And government efforts to "green the grid" add uncertainty to the mix. Here is a smaller player with strong fundamentals that is trying to modernize the old-line business.

MGE Energy ( MGEE) has been serving the fine people of Wisconsin since 1855, when it set up a gas manufacturing plant to service lamps, homes and offices in what was then the village of Madison. Then in the 1880s, the company built an electricity plant to power the Hausmann Brewery.

MGE has paid a consistent dividend since 1909 and is one of the only companies in the United States to increase its payout for 33 consecutive years. But what is most compelling about MGE, relative to utility peers, is its strong financial position and commitment to develop alternative energy sources.

First-quarter revenue declined 5% to $181 million, but net income grew 8% to $15 million as earnings per share climbed a more modest 3% to 65 cents. The operating margin passed 13% and the net margin widened from 7% to 8%, which compares favorably to small-cap competitors such as Unisource ( UNS) and UIL Holdings ( UIL).

But MGE's financial position is what sets it apart. The company holds just $10 million of cash, which amounts to a weak quick ratio of 0.4, but has tripled its reserves to $10 million since the year-earlier quarter. It also has a conservative capital structure. Unlike many of its peers, the utility opted to finance itself primarily with equity. A debt-to-equity ratio of 0.8 is well below the utility average.

The company's revenue stream and pricing power is equally impressive. MGE maintained profitability and, in fact, boosted its net income in seven of the past eight quarters despite the recession. As a result, we give the company an overall financial strength score of 8.9 out of 10, which is higher than our "buy"-rated average.

MGE's recent investment in Iowa wind farms is an admirable use of capital expenditure. The company expects to generate 12% of its energy from renewable resources in 2009, which is above regulatory requirements. The proportion of energy it derives from wind farms has multiplied by 10 since 1999.

Shares of MGE have inched up 4% in 2009, outperforming the Dow Jones Industrial Average and the S&P 500. The stock trades at a fair price-to-earnings ratio of 13 and offers a dividend yield of 6.2%, well above the S&P 500 average. We rate MGE Energy "buy."

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