Patriot Coal (PCX) is the third largest coal producer in the eastern United States. Because coal is expensive to transport (in some cases, transportation costs can account for up to 70% the cost of delivered coal), most coal is mined near where it is used - usually to power electricity plants and make steel. Therefore, to cater to the eastern U.S. market, Patriot Coal has operations in the eastern U.S., namely Central Appalachia, Northern Appalachia, and the Illinois Basin.
Although coal is less expensive than other energy sources, it also creates more pollution, and environmental repercussions of coal are a significant concern, especially with the advent of new, clean, and cheap energy sources, such as solar power and wind energy. The advent of legislation such as the cap-and-trade system suggests that governments are pushing for cleaner sources of energy, such as natural gas and renewables.
Patriot Coal produces coal for electricity generation and metallurgical quality coal for steel manufacturing.Patriot Coal controls around 1.3 billion tons of proven coal reserves, making it the third largest producer and marketer of coal in the eastern United States.
The type of coal used in steel-making is referred to as metallurgical-quality coal and is distinguished by its high carbon content as well as various other chemical attributes. Metallurgical-quality coal is generally higher in heat content (as measured in Btus), and is better for both electricity generation and steel production, making it more expensive.
In 2009, PCX generated a net income of $127.2 million on revenues of $2.05 billion. This represents a 10.7% decrease in net income against a 23.6% increase in total revenues from 2008, when the company earned $142.7 million on $1.65 billion in revenue.
Patriot's mining and coal operations are divided into two regions: Appalachia and the Illinois Basin:
Coal is the most abundant fossil fuel produced in the United States. The United States has the world's largest known coal reserves (about 263.8 billion tons). This is enough coal to last approximately 225 years at today's level of use. However, coal is a nonrenewable energy source that takes millions of years to create. Analysts project that U.S. utilities will increase consumption by 39% by 2030. Globally, coal consumption increased 30% in the past five years alone, and it is projected to increase another 1.1 billion tons over the next 10 years.
Coal is a highly cost-efficient source of energy. When burned to produce electricity, coal-powered plants tend to have an average efficiency of 33% energy-to-electricity output. About 92 percent of the coal used in the United States is for generating electricity. However, coal can also be used for various industry applications, for making steel, and for export (more than half of exported coal is used for making steel). Patriot Coal distributes coal for generating electricity as well as metallurgical-quality coal for steelmaking purposes.
One of coal's competitors is natural gas. Since coal is cheaper and its price has increased less than that of natural gas, coal continues to lead the market for electricity generation. If the price of natural gas falls sharply, demand for coal is likely to drop and demand for natural gas will increase.
However, natural gas is a cleaner burning alternative to coal, and composes 19% to annual US electricity production. Natural gas is therefore increasingly gaining market share over coal.
Coal is a commodity and is therefore subject to commodity cycles driven by the forces of supply and demand. In times of excess supply, coal prices fall, and in times of rising demand, coal prices rise. Presently, demand for energy is soaring, especially in developing nations like China and India that harbor massive populations. This causes global coal prices to rise. While Patriot Coal does not export coal overseas In times of commodity booms, coal companies achieve increased profit margins as revenues soar in proportion to coal prices. However, in times of commodity busts, coal companies suffer lower net profits. Since there is not much product discrimination in the commodity market, Patriot Coal's coal is virtually indistinguishable from its competitors' coal; coal companies are therefore price competitors that must lower prices to achieve a competitive advantage. Patriot Coal is therefore vulnerable to price cycles; Patriot has no control over the price of coal, which is subject to greater market forces.
The adjacent figure indicates that coal is one of the dirtiest forms of energy production. Coal produces nearly 1200 kilotons of CO2 per terawatt of electricity produced. Other cleaner forms of energy, such as natural gas, wind energy, solar power, and hydroelectric power produce much less CO2 but also cost much more than coal. However, legislation has been passed to subsidize renewable energy sources while capping on CO2 emission by establishing incentives such as carbon trading. The Clean Air Act and the Carbon Principles (set by Citigroup, JP Morgan, and Morgan Stanley) are two examples of legislation and policies that seek to discourage dependence on coal as an energy source that have increased costs for coal producers such as Patriot Coal.
The Renewable Portfolios Standard (RPS), a regulatory policy requiring US states to increase the production and use of renewable energy sources, is likely to pose a future threat to Patriot Coal's revenues as states increase their percentages of cleaner energy. For example, Pennsylvania has planned to obtain 18% of its energy from clean sources by 2020, and Illinois has planned to obtain 25% by 2025. Currently, there are 27 states and the District of Columbia that have RPS policies in place, and this number is likely to grow. As legislative measures increase pressure on coal production, Patriot Coal's profits are likely to decrease.
A significant issue most coal companies face is transportation costs. Coal is expensive to transport (in some cases, transportation costs can account for up to 70% the cost of delivered coal), . Since Patriot Coal only supplies coal for electricity generation to US power plants, international transportation is not an issue the company faces (while other coal companies, such as Peabody Peabody Energy (BTU), which has operations in Australia, face high coal transportation costs). Additionally, all of Patriot Coal's reserves are located within a 500 mile radius of the majority of electricity-generating power plants and steel producers in the United States.  By being in close proximity to buyers of coal, Patriot minimizes its transportation costs, thereby increasing potential profit margins.
As a small, newly spun-off company, Patriot Coal faces competition from other small US coal producers that operate in similar regions and have comparable market caps. Two such companies that represent Patriot's most direct competitors include International Coal Group (ICO) and James River Coal Company (JRCC). Since coal is a commodity good, there is no real product differentiation between competitors, resulting in coal companies engaging in price competition. This leads to competitive price cycles and, as a result, relatively low profit margins.