Coal prices are falling with no bottom in sight, and one of the biggest beneficiaries is China-based Huaneng Power International. This new member of our Conservative Portfolio offers a generous 5% yield and the potential for higher profits.

In the past month, coal prices fell 8% to the lowest level since the Great Recession hit its nadir in 2009. Despite falling global demand, mining production is expected to rise in Australia and Colombia, keeping coal prices on their downward spiral. Based on analysts’ estimates for Bloomberg, the price of thermal coal, which is used to produce electricity, should average $54.54 per ton in 2015, 5.2% lower than last year.

That’s money in the bank for large coal-burning utilities like Huaneng, which rake in savings from sinking coal prices. Huaneng (NYSE: HNP) is one of China’s five largest electric utilities, operating in 18 of China’s 34 provinces as well as Singapore. With about 51,000 megawatts of capacity, the company generates about 9% of Chinese electricity.

Sales Dip, Profits Rise

As the world’s largest coal consumer, China has slowly been diversifying its energy sources, but coal still accounts for two-thirds of electricity production. After two years of strong growth, electricity production fell 7.3% in 2014 as demand slid because of China’s slowing economy and mild weather. As a result, Huaneng’s revenue decreased 6.3% to $20.2 billion.

Still, coal prices that were lower by 8% led to slightly higher profits of $1.76 billion for the utility in 2014. Without one-time expenses related to issues at a Chinese port and a construction slump, Huaneng’s underlying profit would have been about $2.1 billion, a 20% jump compared with 2013.

And Huanang didn’t reap the 12% to 13% cost savings from coal that its competitors did because it uses more natural gas and nuclear power plants to generate electricity, making it less dependent on any one resource.

In March, Deutsche Bank analysts upgraded China’s entire power sector from “hold” to “buy” because of the buoying effect that lower coal prices will have on the industry.

Powering Dividends

After paying a dividend that grew an average of 33% during the past five years, Huaneng opted against further increases in 2014. Although a 5% selloff followed the announcement, shares have since recovered to currently trade at about $50, a 17% discount to the stock’s 52-week high of $60.

The company hasn’t given any sign of making further changes, but historically the dividend has increased or shrunk based on the utility’s ability to pay it. If anything, declining coal prices should nudge those payouts higher. Although the dividend may not grow as high as it did over the past five years, the company should see earnings grow strongly enough to sustain or even raise the current yield based on China’s demand for electricity and cost savings from coal.

China’s growing power needs are the key to the company’s future. Traditionally, that higher demand relied on population and GDP growth. But according to a 2013 census, China’s birth rate is now less than 0.5%. That might give investors pause except that the only population growth that matters is China’s expanding middle class, which increasingly requires more electricity to support a higher standard of living. Today, the urban middle class represents about 35% of the company’s customers, but this figure should grow to about 45% in the next seven years.

Getting a Nudge

As for the country’s sluggish economy, China’s Central Bank hinted at a possible stimulus earlier this month. The Central Bank has lowered interest rates twice since last November in an effort to stimulate China’s economy. Even if this economic stimulus never comes to pass, China’s GDP will likely grow at an enviable 7% this year. With China’s power consumption increasing at better than 3%, Huaneng plans to boost its production 17% to meet this year’s higher demand.

As a measure of risk, the company’s low beta of 0.29 trails the market average of 1, and Huaneng has a low price-to-earnings ratio of 9.3. Although the company’s net debt-to-equity ratio of 2:1 is a concern, its debt can be refinanced at lower rates.

Yielding a strong 5%, Huaneng Power’s American depository receipt (ADR) is a Buy under $55.