UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2021~~March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission File Number 1-4717

KANSAS CITY SOUTHERN

(Exact name of registrant as specified in its charter)

Delaware

~~44-0663509~~87-3883291

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

427 West 12th Street

Kansas City

Missouri

64105

(Address of principal executive offices)

(Zip Code)

816.983.1303

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act: None


~~Title of Each Class~~	~~Trading Symbol(s)~~	~~Name of Each Exchange on Which Registered~~
~~Preferred Stock, Par Value $25 Per Share, 4%, Noncumulative~~	~~KSU~~	~~New York Stock Exchange~~
~~Common Stock, $.01 Per Share Par Value~~	~~KSU~~	~~New York Stock Exchange~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☐ No ☐ý (The registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large ~~Accelerated Filer~~accelerated filer ý☐ Accelerated filer ☐ Non-accelerated filer ☐ý Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						~~July 9, 2021~~April 25, 2022
Common Stock, $0.01 per share par value						~~90,964,664~~100 Shares

Table of Contents

Kansas City Southern and Subsidiaries

Form 10-Q

~~June 30, 2021~~March 31, 2022

Index


		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Statements of ~~Operations~~Income — Three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	3
	Consolidated Statements of Comprehensive Income ~~(Loss)~~ — Three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	4
	Consolidated Balance Sheets — ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	5
	Consolidated Statements of Cash Flows — ~~Six~~Three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	6
	Consolidated Statements of Changes in Equity — Three months ended March 31, 2022, December 31, 2021, September 30, 2021, June 30, 2021 ~~March 31, 2021, December 31, 2020, September 30, 2020, June 30, 2020~~ and March 31, ~~2020~~2021	7
	Notes to the Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1817
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3229
Item 4.	Controls and Procedures	3229
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	3431
Item 1A.	Risk Factors	3431
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3631
Item 3.	Defaults Upon Senior Securities	3631
Item 4.	Mine Safety Disclosures	3631
Item 5.	Other Information	3631
Item 6.	Exhibits	3732
	SIGNATURES	3833

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements (unaudited)

Kansas City Southern and Subsidiaries

Consolidated Statements of ~~Operations~~Income

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(In millions, except share and per share amounts)
(Unaudited)
Revenues $ 749.5 $ 547.9 $ 1,455.5 $ 1,279.6
Operating expenses:
Compensation and benefits 128.4 103.8 257.9 237.2
Purchased services 55.8 44.6 109.6 97.9
Fuel 79.0 39.5 149.9 114.4
Equipment costs 24.1 18.1 45.2 40.0
Depreciation and amortization 91.2 89.3 183.2 178.7
Materials and other 81.9 61.7 148.3 125.7
Merger costs 720.8 0 740.1 0
Restructuring charges 0 10.5 0 16.5
Total operating expenses 1,181.2 367.5 1,634.2 810.4
Operating income (loss) (431.7) 180.4 (178.7) 469.2
Equity in net earnings of affiliates 3.4 0.2 9.4 1.2
Interest expense (39.1) (38.1) (78.1) (72.3)
Foreign exchange gain (loss) 6.8 7.8 (0.5) (51.7)
Other income, net 1.0 0.8 0.2 2.2
Income (loss) before income taxes (459.6) 151.1 (247.7) 348.6
Income tax expense (benefit) (81.6) 40.8 (23.1) 86.0
Net income (loss) (378.0) 110.3 (224.6) 262.6
Less: Net income attributable to noncontrolling interest 0.5 0.6 0.9 1.1
Net income (loss) attributable to Kansas City Southern and subsidiaries (378.5) 109.7 (225.5) 261.5
Preferred stock dividends 0.1 0 0.1 0.1
Net income (loss) available to common stockholders $ (378.6) $ 109.7 $ (225.6) $ 261.4
Earnings (loss) per share:
Basic earnings (loss) per share $ (4.17) $ 1.16 $ (2.48) $ 2.75
Diluted earnings (loss) per share $ (4.17) $ 1.16 $ (2.48) $ 2.74
Average shares outstanding (in thousands):
Basic 90,767 94,476 90,762 95,070
Effect of dilution 0 417 0 464
Diluted 90,767 94,893 90,762 95,534


	Three Months Ended
	March 31,
		2022		2021
		(In millions) (Unaudited)
Revenues		$	778.2	$	706.0
Operating expenses:
Compensation and benefits		133.0		129.5
Purchased services		51.3		53.8
Fuel		97.1		70.9
Equipment costs		18.6		21.1
Depreciation and amortization		96.2		92.0
Materials and other		78.1		66.4
Merger costs		12.8		19.3
Total operating expenses		487.1		453.0
Operating income		291.1		253.0
Equity in net earnings of affiliates		8.8		6.0
Interest expense		(38.9)		(39.0)
Foreign exchange loss		(1.4)		(7.3)
Other income (expense), net		0.9		(0.8)
Income before income taxes		260.5		211.9
Income tax expense		72.5		58.5
Net income		188.0		153.4
Less: Net income attributable to noncontrolling interest		0.6		0.4
Net income available to common stockholder(s)		$	187.4	$	153.0

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Comprehensive Income ~~(Loss)~~

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(In millions)
(Unaudited)
Net income (loss) $ (378.0) $ 110.3 $ (224.6) $ 262.6
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate derivative instruments, net of tax of $(9.0) million, $1.5 million, $12.0 million and $2.7 million, respectively (33.9) 5.3 45.2 10.1
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.1 million, $0.2 million, $0.2 million and $0.3 million, respectively 0.5 0.4 1.0 0.9
Foreign currency translation adjustments 0.3 0.2 0.1 (1.5)
Other comprehensive income (loss) (33.1) 5.9 46.3 9.5
Comprehensive income (loss) (411.1) 116.2 (178.3) 272.1
Less: Comprehensive income attributable to noncontrolling interest 0.5 0.6 0.9 1.1
Comprehensive income (loss) attributable to Kansas City Southern and subsidiaries $ (411.6) $ 115.6 $ (179.2) $ 271.0


	Three Months Ended
	March 31,
		2022		2021
		(In millions) (Unaudited)
Net income		$	188.0	$	153.4
Other comprehensive income:
Unrealized gain on interest rate derivative instruments, net of tax of $12.6 million and $21.0 million, respectively		47.3		79.1
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.1 million for both periods		0.5		0.5
Foreign currency translation adjustments		0.3		(0.2)
Other comprehensive income		48.1		79.4
Comprehensive income		236.1		232.8
Less: Comprehensive income attributable to noncontrolling interest		0.6		0.4
Comprehensive income attributable to Kansas City Southern and subsidiaries		$	235.5	$	232.4

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Balance Sheets


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
		(In millions, except share and per share amounts)					(In millions, except share and per share amounts)
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	325.8	$	188.2	Cash and cash equivalents	$	104.6	$	339.3
Accounts receivable, net	Accounts receivable, net	298.9		247.1		Accounts receivable, net	403.4		271.0
Materials and supplies	Materials and supplies	135.3		127.2		Materials and supplies	146.6		131.0
Other current assets	Other current assets	52.0		63.3		Other current assets	121.5		142.1
Total current assets	Total current assets	812.0		625.8		Total current assets	776.1		883.4
Operating lease right-of-use assets	Operating lease right-of-use assets	71.8		70.9		Operating lease right-of-use assets	64.5		69.6
Investments	Investments	50.6		42.6		Investments	59.3		48.3
Property and equipment (including concession assets), net	Property and equipment (including concession assets), net	9,139.0		8,997.8		Property and equipment (including concession assets), net	9,236.1		9,209.3
Other assets	Other assets	320.3		226.9		Other assets	273.2		217.5
Total assets	Total assets	$	10,393.7	$	9,964.0	Total assets	$	10,409.2	$	10,428.1
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Long-term debt due within one year	Long-term debt due within one year	$	8.5	$	6.4	Long-term debt due within one year	$	10.1	$	8.8
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	1,234.3		470.0		Accounts payable and accrued liabilities	481.7		479.7
Total current liabilities	Total current liabilities	1,242.8		476.4		Total current liabilities	491.8		488.5
Long-term operating lease liabilities	Long-term operating lease liabilities	47.6		45.4		Long-term operating lease liabilities	43.2		46.4
Long-term debt	Long-term debt	3,771.7		3,764.4		Long-term debt	3,772.2		3,768.8
Deferred income taxes	Deferred income taxes	1,062.2		1,185.4		Deferred income taxes	1,242.4		1,213.7
Other noncurrent liabilities and deferred credits	Other noncurrent liabilities and deferred credits	153.0		108.8		Other noncurrent liabilities and deferred credits	155.9		178.1
Total liabilities	Total liabilities	6,277.3		5,580.4		Total liabilities	5,705.5		5,695.5
Stockholders’ equity:
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 214,542 and 215,199 shares outstanding at June 30, 2021 and December 31, 2020, respectively		5.4		5.4
$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 90,947,526 and 91,047,107 shares outstanding at June 30, 2021 and December 31, 2020, respectively		0.9		0.9
Stockholder equity:						Stockholder equity:

$.01 par, common stock, 100 shares authorized; 100 shares issued; 100 shares outstanding at March 31, 2022 and December 31, 2021						$.01 par, common stock, 100 shares authorized; 100 shares issued; 100 shares outstanding at March 31, 2022 and December 31, 2021	—		—
Additional paid-in capital	Additional paid-in capital	913.2		830.9		Additional paid-in capital	860.6		860.6
Retained earnings	Retained earnings	2,822.9		3,219.6		Retained earnings	3,446.8		3,524.4
Accumulated other comprehensive income	Accumulated other comprehensive income	46.7		0.4		Accumulated other comprehensive income	67.5		19.4
Total stockholders’ equity		3,789.1		4,057.2
Total stockholder equity						Total stockholder equity	4,374.9		4,404.4
Noncontrolling interest	Noncontrolling interest	327.3		326.4		Noncontrolling interest	328.8		328.2
Total equity	Total equity	4,116.4		4,383.6		Total equity	4,703.7		4,732.6
Total liabilities and equity	Total liabilities and equity	$	10,393.7	$	9,964.0	Total liabilities and equity	$	10,409.2	$	10,428.1

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Cash Flows


		Six Months Ended					Three Months Ended
		June 30,					March 31,
		2021		2020			2022		2021
		(In millions) (Unaudited)					(In millions) (Unaudited)
Operating activities:	Operating activities:					Operating activities:
Net income (loss)		$	(224.6)	$	262.6
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income						Net income	$	188.0	$	153.4
Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	183.2		178.7		Depreciation and amortization	96.2		92.0
Deferred income taxes	Deferred income taxes	(135.5)		34.3		Deferred income taxes	16.0		6.2
Equity in net earnings of affiliates	Equity in net earnings of affiliates	(9.4)		(1.2)		Equity in net earnings of affiliates	(8.8)		(6.0)
Share-based compensation	Share-based compensation	14.4		13.5		Share-based compensation	—		8.2
Loss on foreign currency derivative instruments	Loss on foreign currency derivative instruments	4.1		27.3		Loss on foreign currency derivative instruments	8.1		2.4
Foreign exchange (gain) loss	Foreign exchange (gain) loss	(3.6)		24.4		Foreign exchange (gain) loss	(6.7)		4.9
Merger costs	Merger costs	740.1		0		Merger costs	12.8		19.3
Restructuring charges		0		16.5
Distributions from affiliates		2.5		2.5
Settlement of foreign currency derivative instruments	Settlement of foreign currency derivative instruments	(1.9)		(29.0)		Settlement of foreign currency derivative instruments	(2.2)		(1.9)
Cash payments for merger costs	Cash payments for merger costs	(719.5)		0		Cash payments for merger costs	(27.5)		(1.2)
Reimbursement of merger termination fee		700.0		0
Refundable Mexican value added tax	Refundable Mexican value added tax	(34.5)		(18.1)		Refundable Mexican value added tax	10.5		(15.5)
Changes in working capital items:	Changes in working capital items:					Changes in working capital items:
Accounts receivable	Accounts receivable	(52.1)		44.1		Accounts receivable	(130.6)		(27.5)
Materials and supplies	Materials and supplies	(6.6)		19.3		Materials and supplies	(13.7)		(4.0)
Other current assets	Other current assets	10.5		(29.0)		Other current assets	21.3		1.1
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	33.8		(19.4)		Accounts payable and accrued liabilities	(9.3)		(9.6)
Other, net	Other, net	6.4		(1.0)		Other, net	(4.9)		4.4
Net cash provided by operating activities	Net cash provided by operating activities	507.3		525.5		Net cash provided by operating activities	149.2		226.2

Investing activities:	Investing activities:					Investing activities:
Capital expenditures	Capital expenditures	(250.5)		(194.7)		Capital expenditures	(95.7)		(106.0)
Purchase or replacement of assets under operating leases		0		(78.2)
Property investments in MSLLC	Property investments in MSLLC	(19.4)		(20.0)		Property investments in MSLLC	(16.4)		(1.1)
Investments in and advances to affiliates	Investments in and advances to affiliates	(7.2)		(4.9)		Investments in and advances to affiliates	(5.3)		(5.7)
Proceeds from disposal of property	Proceeds from disposal of property	2.8		8.0		Proceeds from disposal of property	1.7		1.5
Other, net	Other, net	(4.7)		(9.4)		Other, net	(0.1)		(2.7)
Net cash used for investing activities	Net cash used for investing activities	(279.0)		(299.2)		Net cash used for investing activities	(115.8)		(114.0)

Financing activities:	Financing activities:					Financing activities:

Proceeds from issuance of long-term debt		0		545.6
Repayment of long-term debt	Repayment of long-term debt	(3.5)		(4.8)		Repayment of long-term debt	(2.5)		(1.6)
Dividends paid	Dividends paid	(89.3)		(76.9)		Dividends paid	(265.0)		(40.2)
Shares repurchased		0		(211.7)
Debt issuance costs paid		0		(6.6)
Proceeds from employee stock plans	Proceeds from employee stock plans	2.5		4.5		Proceeds from employee stock plans	—		2.3
Net cash provided by (used for) financing activities		(90.3)		250.1
Net cash used for financing activities						Net cash used for financing activities	(267.5)		(39.5)

Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(0.4)		(5.1)		Effect of exchange rate changes on cash	(0.6)		(1.0)

Cash and cash equivalents:	Cash and cash equivalents:					Cash and cash equivalents:
Net increase during each period		137.6		471.3
Net increase (decrease) during each period						Net increase (decrease) during each period	(234.7)		71.7
At beginning of year	At beginning of year	188.2		148.8		At beginning of year	339.3		188.2
At end of period	At end of period	$	325.8	$	620.1	At end of period	$	104.6	$	259.9

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Changes in Equity

(in millions, except per share amounts)

(Unaudited)


		td5 Par Preferred Stock				$.01 Par Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Non- controlling Interest				Total				td5 Par Preferred Stock		$.01 Par Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Non- controlling Interest		Total

Balance at December 31, 2019				$	5.6			$	1.0			$	843.7			$	3,601.3			$	(29.1)			$	323.4			$	4,745.9
Net income														151.8								0.5				152.3
Other comprehensive income																		3.6								3.6
Dividends on common stock ($0.40/share)										0				(38.2)												(38.2)
Dividends on $25 par preferred stock ($0.25/share)														(0.1)												(0.1)
Share repurchases						0				(11.4)				(182.8)												(194.2)
Settlement of forward contract for accelerated share repurchases										82.5																82.5
Options exercised and stock subscribed, net of shares withheld for employee taxes						0				(0.1)																(0.1)
Share-based compensation										10.3																10.3
Balance at March 31, 2020		5.6				1.0				925.0				3,532.0				(25.5)				323.9				4,762.0
Net income														109.7								0.6				110.3
Other comprehensive income																		5.9								5.9
Dividends on common stock ($0.40/share)										0				(37.8)												(37.8)
Dividends on $25 par preferred stock ($0.25/share)														0												0
Share repurchases		0				0				(6.8)				(93.2)												(100.0)
Options exercised and stock subscribed, net of shares withheld for employee taxes						0				(0.3)																(0.3)
Share-based compensation										4.9																4.9
Balance at June 30, 2020		5.6				1.0				922.8				3,510.7				(19.6)				324.5				4,745.0
Net income														189.8								0.4				190.2
Other comprehensive income																		3.3								3.3
Contribution from noncontrolling interest																						0.9				0.9
Dividends on common stock ($0.40/share)										0				(37.6)												(37.6)
Dividends on $25 par preferred stock ($0.25/share)														(0.1)												(0.1)
Share repurchases		(0.1)				0				(6.5)				(110.5)												(117.1)
Options exercised and stock subscribed, net of shares withheld for employee taxes						0				3.9																3.9
Share-based compensation										5.4																5.4
Balance at September 30, 2020		5.5				1.0				925.6				3,552.3				(16.3)				325.8				4,793.9
Net income														165.7								0.6				166.3
Other comprehensive income																		16.7								16.7
Dividends on common stock ($0.44/share)										0				(40.1)												(40.1)
Dividends on $25 par preferred stock ($0.25/share)														0												0
Share repurchases		(0.1)				(0.1)				(26.6)				(458.3)												(485.1)
Forward contract for accelerated share repurchases										(75.0)																(75.0)
Options exercised and stock subscribed, net of shares withheld for employee taxes						0				2.7																2.7
Share-based compensation										4.2																4.2
Balance at December 31, 2020	Balance at December 31, 2020	5.4				0.9				830.9				3,219.6				0.4				326.4				4,383.6			Balance at December 31, 2020	$	5.4	$	0.9	$	830.9	$	3,219.6	$	0.4	$	326.4	$	4,383.6
Net income	Net income													153.0								0.4				153.4			Net income							153.0				0.4		153.4
Other comprehensive income	Other comprehensive income																	79.4								79.4			Other comprehensive income									79.4				79.4
Dividends on common stock ($0.54/share)	Dividends on common stock ($0.54/share)									0				(49.1)												(49.1)			Dividends on common stock ($0.54/share)					—		(49.1)						(49.1)
Dividends on $25 par preferred stock ($0.25/share)	Dividends on $25 par preferred stock ($0.25/share)													0												0			Dividends on $25 par preferred stock ($0.25/share)							—						—
Share repurchases	Share repurchases	0				0				(2.1)				(72.9)												(75.0)			Share repurchases	—		—		(2.1)		(72.9)						(75.0)
Settlement of forward contract for accelerated share repurchases	Settlement of forward contract for accelerated share repurchases									75.0																75.0			Settlement of forward contract for accelerated share repurchases					75.0								75.0
Options exercised and stock subscribed, net of shares withheld for employee taxes	Options exercised and stock subscribed, net of shares withheld for employee taxes					0				(3.0)																(3.0)			Options exercised and stock subscribed, net of shares withheld for employee taxes			—		(3.0)								(3.0)
Share-based compensation	Share-based compensation									8.2																8.2			Share-based compensation					8.2								8.2
Balance at March 31, 2021	Balance at March 31, 2021	5.4				0.9				909.0				3,250.6				79.8				326.8				4,572.5			Balance at March 31, 2021	5.4		0.9		909.0		3,250.6		79.8		326.8		4,572.5
Net income (loss)	Net income (loss)													(378.5)								0.5				(378.0)			Net income (loss)							(378.5)				0.5		(378.0)
Other comprehensive loss	Other comprehensive loss																	(33.1)								(33.1)			Other comprehensive loss									(33.1)				(33.1)
Dividends on common stock ($0.54/share)	Dividends on common stock ($0.54/share)									0				(49.1)												(49.1)			Dividends on common stock ($0.54/share)					—		(49.1)						(49.1)
Dividends on $25 par preferred stock ($0.25/share)	Dividends on $25 par preferred stock ($0.25/share)													(0.1)												(0.1)			Dividends on $25 par preferred stock ($0.25/share)							(0.1)						(0.1)

Options exercised and stock subscribed, net of shares withheld for employee taxes	Options exercised and stock subscribed, net of shares withheld for employee taxes					0				(2.0)																(2.0)			Options exercised and stock subscribed, net of shares withheld for employee taxes			—		(2.0)								(2.0)
Share-based compensation	Share-based compensation									6.2																6.2			Share-based compensation					6.2								6.2
Balance at June 30, 2021	Balance at June 30, 2021	$	5.4			$	0.9			$	913.2			$	2,822.9			$	46.7			$	327.3			$	4,116.4		Balance at June 30, 2021	5.4		0.9		913.2		2,822.9		46.7		327.3		4,116.4
Net income																													Net income							156.2				0.3		156.5
Other comprehensive loss																													Other comprehensive loss									(1.4)				(1.4)
Dividends on common stock ($0.54/share)																													Dividends on common stock ($0.54/share)					—		(49.1)						(49.1)
Dividends on $25 par preferred stock ($0.25/share)																													Dividends on $25 par preferred stock ($0.25/share)							(0.1)						(0.1)

Options exercised and stock subscribed, net of shares withheld for employee taxes																													Options exercised and stock subscribed, net of shares withheld for employee taxes			—		4.4								4.4
Share-based compensation																													Share-based compensation					6.1								6.1
Balance at September 30, 2021																													Balance at September 30, 2021	5.4		0.9		923.7		2,929.9		45.3		327.6		4,232.8
Net income																													Net income							594.5				0.6		595.1
Other comprehensive loss																													Other comprehensive loss									(25.9)				(25.9)

Options exercised and stock subscribed, net of shares withheld for employee taxes																													Options exercised and stock subscribed, net of shares withheld for employee taxes			—		0.4								0.4
Share-based compensation																													Share-based compensation					59.9								59.9
Replacement of equity share awards with liability awards																													Replacement of equity share awards with liability awards					(54.5)								(54.5)
Cash settlement of stock options																													Cash settlement of stock options					(75.2)								(75.2)
Recapitalization of stock																													Recapitalization of stock	(5.4)		(0.9)		6.3								—
Balance at December 31, 2021																													Balance at December 31, 2021	—		—		860.6		3,524.4		19.4		328.2		4,732.6
Net income																													Net income							187.4				0.6		188.0
Other comprehensive income																													Other comprehensive income									48.1				48.1
Dividend to Canadian Pacific																													Dividend to Canadian Pacific							(265.0)						(265.0)
Balance at March 31, 2022																													Balance at March 31, 2022	—		—		$	860.6	$	3,446.8	$	67.5	$	328.8	$	4,703.7

See accompanying notes to the unaudited consolidated financial statements.

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

For purposes of this ~~report,~~Quarterly Report on Form 10-Q, “KCS” or the “Company” may refer to Kansas City Southern or, as the context requires, to one or more subsidiaries of Kansas City Southern.

1. Basis of Presentation

In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to reflect a fair statement of the results for interim periods in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. The results of operations for the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2021. Certain prior year amounts~~2022.

On September 15, 2021, KCS and Canadian Pacific Railway Limited (“CP”), a Canadian corporation, entered into a merger agreement (the “Merger Agreement”) and on December 14, 2021, CP acquired the outstanding common and preferred stock of KCS. Therefore, earnings per share data is not presented because the Company does not have ~~been reclassified~~any outstanding or issued publicly traded stock. The merger is further discussed in Note 2, Merger Agreement.

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. The standard is intended to ~~conform to~~increase transparency of government assistance including the ~~current year presentation.~~disclosures of the following: (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on the entity’s financial statements. This ASU was effective for the Company on January 1, 2022 and the Company adopted the ASU prospectively. See Note 4, Property and Equipment for the newly required disclosure.

2. Merger Agreement

On ~~March 21,~~December 14, 2021, ~~KCS entered into a merger agreement with Canadian Pacific Railway Limited, a Canadian corporation (“CP”), under which~~ CP ~~agreed to acquire KCS in a~~acquired the outstanding common and preferred stock and cash transaction valued at $275 per common share. On April 20, 2021, KCS received an unsolicited merger proposal valued at $325 per common share from Canadian National Railway Company, a Canadian corporation (“CN”), which, after negotiation with and a revised proposal from CN, was determined on May 13, 2021 by the Company’s board of directors to be a superior proposal as defined by the CP merger agreement. On May 21, 2021, KCS terminated the CP merger agreement and paid CP a merger termination fee of $700.0 million, which was recognized in merger costs on the consolidated statements of operations.

On May 21, 2021, KCS and CN entered into a merger agreement (The “Merger Agreement”), and a U.S. affiliate of CN paid KCS $700.0 million as reimbursement for the termination fee paid to CP. KCS is obligated to repay the termination fee to CN under certain circumstances, including but not limited to, if KCS were to terminate the Merger Agreement to accept a superior proposal as defined by the Merger Agreement. As a result, the $700.0 million reimbursement from CN was recognized within accounts payable and accrued liabilities on the consolidated balance sheets. In addition, KCS would be required to pay CN a termination fee of $700.0 million to terminate the Merger Agreement with CN.

Per the Merger Agreement, KCS would merge into a wholly-owned, U.S. subsidiary of CN (the “Merger”) and be the surviving entity of the Merger. The ownership interest of KCS would then be deposited into a voting trust subject to a voting trust agreement (the “Voting Trust Transaction”).KCS. Each share of common stock, par value $0.01 per share, of KCS that iswas outstanding immediately prior to the ~~Merger will be~~merger was converted into the right to receive (1) ~~1.129~~2.884 common shares of CNCP and (2) ~~$200~~$90 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that iswas outstanding immediately prior to the ~~Merger will be~~merger was converted into the right to receive $37.50 in cash. The Merger Consideration value received by KCS stockholders was $301.20 per KCS common share.

~~Subject~~The merger transaction was completed through a series of mergers as outlined in the Merger Agreement. These mergers ultimately resulted in KCS being merged with and into Cygnus Merger Sub 1 Corporation (“Surviving Merger Sub”), a wholly owned subsidiary of CP, with Surviving Merger Sub continuing as the surviving entity. Pursuant to ~~receipt of regulatory clearances, approval by stockholders~~the Merger Agreement, Surviving Merger Sub was renamed “Kansas City Southern” and as successor company of KCS, ~~and other customary closing conditions,~~continued to own the ~~completion~~assets of KCS. Immediately following the consummation of the ~~Voting Trust Transaction is currently expected~~mergers, CP caused the contribution, directly and indirectly, of all of the outstanding shares of capital stock of Surviving Merger Sub, as successor to ~~occur in the second half of 2021, and upon completion,~~ KCS, ~~stockholders are expected~~ to ~~own approximately 12.65% of CN’s outstanding common shares. KCS’s management and its board of directors will continue to manage KCS while it is in the~~be deposited into an independent, irrevocable voting trust ~~pursuing KCS’s independent business plan and growth strategies. Final control approval from~~(the “Voting Trust”) under a voting trust agreement (the “Voting Trust Agreement”) approved by the U.S. Surface Transportation Board (“STB”), pending receipt of the final and non-appealable approval or exemption by the STB pursuant to 49 U.S.C. § 11323 et seq., of the transactions contemplated by the Merger Agreement (“STB Final Approval”). The Voting Trust prevents CP, or any affiliate of CP, from controlling or having the power to control KCS prior to STB Final Approval. Following receipt of STB Final Approval and approval from other applicable regulatory authorities, ~~is expected~~the Voting Trust will be terminated and CP will acquire control over KCS’s railroad operations.

On December 14, 2021, the merger of KCS and Surviving Merger Sub was accounted for as a recapitalization of KCS’s equity. Upon STB Final Approval, the transaction will be accounted for as a business combination using the acquisition method of accounting.

In the first quarter of 2022, pursuant to the Merger Agreement, KCS paid a cash dividend of $265.0 million to a wholly-owned subsidiary of CP. Periodic cash distributions may be ~~completed in~~made to a wholly-owned subsidiary of CP based upon cash generated, the ~~second half~~timing of ~~2022.~~capital expenditures and working capital needs of the Company.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, KCS ~~incurred $720.8~~reported $12.8 million and ~~$740.1~~$19.3 million, respectively, of merger-related costs. These merger costs ~~consisting of the $700.0 million termination fee paid~~primarily related to ~~CP,~~incentive compensation costs in 2022 and bankers’ and legal ~~fees. These merger-related costs~~fees in 2021, and were recognized in merger costs inwithin the consolidated statements of ~~operations.~~

On June 8, 2021, KCS entered into a letter waiver with lenders to the KCS revolving credit facility to waive the events of default that would occur under the KCS revolving credit facility as a result of the changes of control that would arise upon consummation of the Voting Trust Transaction and as a result of CN obtaining control of KCS following final approval of the transaction by the STB.

income.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

3. Revenue

Disaggregation of Revenue

The following table presents revenues disaggregated by the major commodity groups as well as the product types included within the major commodity groups (in millions). The Company believes disaggregation by product type best depicts how cash flows are affected by economic factors. See Note 1210 for revenues by geographical area.


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
		2021		2020		2021		2020				2022		2021
Chemical & Petroleum	Chemical & Petroleum									Chemical & Petroleum
Chemicals	Chemicals	$	64.8	$	52.2	$	125.4	$	114.7	Chemicals		$	69.9	$	60.6
Petroleum	Petroleum	132.9		70.6		268.1		166.4		Petroleum		79.0		135.2
Plastics	Plastics	34.8		35.7		70.3		76.0		Plastics		38.5		35.5
Total	Total	232.5		158.5		463.8		357.1		Total		187.4		231.3

Industrial & Consumer Products	Industrial & Consumer Products									Industrial & Consumer Products
Forest Products	Forest Products	62.6		57.8		120.3		126.7		Forest Products		69.1		57.7
Metals & Scrap	Metals & Scrap	51.0		40.4		97.3		102.7		Metals & Scrap		56.5		46.3
Other	Other	31.0		22.4		61.0		50.2		Other		35.1		30.0
Total	Total	144.6		120.6		278.6		279.6		Total		160.7		134.0

Agriculture & Minerals	Agriculture & Minerals									Agriculture & Minerals
Grain	Grain	88.9		64.1		163.6		141.9		Grain		105.7		74.7
Food Products	Food Products	36.6		39.0		73.6		81.7		Food Products		40.2		37.0
Ores & Minerals	Ores & Minerals	6.1		5.3		11.3		11.1		Ores & Minerals		8.3		5.2
Stone, Clay & Glass	Stone, Clay & Glass	8.3		6.0		15.8		14.2		Stone, Clay & Glass		9.2		7.5
Total	Total	139.9		114.4		264.3		248.9		Total		163.4		124.4

Energy	Energy									Energy
Utility Coal	Utility Coal	31.2		23.2		62.9		46.8		Utility Coal		40.2		31.7
Coal & Petroleum Coke	Coal & Petroleum Coke	12.0		9.5		22.4		21.1		Coal & Petroleum Coke		12.4		10.4
Frac Sand	Frac Sand	4.2		1.7		7.6		5.5		Frac Sand		4.9		3.4
Crude Oil	Crude Oil	7.1		4.9		19.1		22.2		Crude Oil		14.1		12.0
Total	Total	54.5		39.3		112.0		95.6		Total		71.6		57.5

Intermodal	Intermodal	91.1		63.5		172.4		152.2		Intermodal		95.9		81.3

Automotive	Automotive	49.4		15.6		93.5		69.5		Automotive		54.3		44.1

Total Freight Revenues	Total Freight Revenues	712.0		511.9		1,384.6		1,202.9		Total Freight Revenues		733.3		672.6

Other Revenue	Other Revenue	37.5		36.0		70.9		76.7		Other Revenue		44.9		33.4

Total Revenues	Total Revenues	$	749.5	$	547.9	$	1,455.5	$	1,279.6	Total Revenues		$	778.2	$	706.0

Contract Balances

The amount of revenue recognized in the ~~second~~first quarter of ~~2021~~2022 from performance obligations partially satisfied in previous periods was ~~$27.0~~$17.9 million. The performance obligations that were unsatisfied or partially satisfied as of ~~June 30, 2021,~~March 31, 2022, were ~~$28.5~~$23.2 million, which represents in-transit shipments that are fully satisfied the following month.

A receivable is any unconditional right to consideration, and is recognized as shipments have been completed and the relating performance obligation has been fully satisfied. At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the accounts receivable, net balance was ~~$298.9~~$403.4 million and ~~$247.1~~$271.0 million, respectively. Contract assets represent a conditional right to consideration in exchange for goods or services. The Company did not have any contract assets at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Contract liabilities represent consideration received in advance from customers, and are recognized as revenue over time as the relating performance obligation is satisfied. The amount of revenue recognized in the ~~second~~first quarter of ~~2021~~2022 that was included in the opening contract liability balance was $8.3 million. The Company has recognized contract liabilities within the accounts payable and accrued liabilities financial statement caption on the balance sheet. These are considered current liabilities as they will be settled in less than 12 months.

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

opening contract liability balance was $11.2 million. The Company has recognized contract liabilities within the accounts payable and accrued liabilities and other long-term liabilities financial statement captions on the consolidated balance sheets.

The following tables summarize the changes in contract liabilities (in millions):


Contract liabilities	Contract liabilities	Three Months Ended				Six Months Ended				Contract liabilities	Three Months Ended
		June 30,				June 30,					March 31,
		2021		2020		2021		2020				2022		2021
Beginning balance	Beginning balance	$	18.8	$	21.1	$	29.9	$	30.5	Beginning balance		$	68.4	$	29.9
Revenue recognized that was included in the contract liability balance at the beginning of the period	Revenue recognized that was included in the contract liability balance at the beginning of the period	(8.3)		(7.8)		(20.1)		(17.9)		Revenue recognized that was included in the contract liability balance at the beginning of the period		(11.2)		(12.6)
Increases due to consideration received, excluding amounts recognized as revenue during the period	Increases due to consideration received, excluding amounts recognized as revenue during the period	9.2		2.8		9.9		3.5		Increases due to consideration received, excluding amounts recognized as revenue during the period		3.9		1.5
Ending balance	Ending balance	$	19.7	$	16.1	$	19.7	$	16.1	Ending balance		$	61.1	$	18.8

4. ~~Earnings (Loss) Per Share Data~~

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per common share for the effects of potentially dilutive common shares, if the effect is not anti-dilutive. Potentially dilutive common shares include the dilutive effects of shares issuable under the stock option and performance award plans.

~~The following table reconciles the basic earnings (loss) per share computation to the diluted earnings (loss) per share computation~~ ~~(in millions, except share and per share amounts)~~:

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net income (loss) available to common stockholders for purposes of computing basic and diluted earnings (loss) per share $ (378.6) $ 109.7 $ (225.6) $ 261.4
Weighted-average number of shares outstanding (in thousands):
Basic shares 90,767 94,476 90,762 95,070
Effect of dilution 0 417 0 464
Diluted shares 90,767 94,893 90,762 95,534
Earnings (loss) per share:
Basic earnings (loss) per share $ (4.17) $ 1.16 $ (2.48) $ 2.75
Diluted earnings (loss) per share $ (4.17) $ 1.16 $ (2.48) $ 2.74

~~Potentially dilutive shares excluded from the calculation~~ ~~(in thousands):~~
~~Stock options excluded as their inclusion would be anti-dilutive 584 72 558 72~~

For the three and six months ended June 30, 2021, 584,416 and 557,804 shares, respectively, were excluded from the computation of diluted shares because the impact would have been anti-dilutive due to the loss reported during the periods.

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

5. Property and Equipment (including Concession Assets)

Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Land	Land	$	227.5	$	227.5	Land	$	244.7	$	243.0
Concession land rights	Concession land rights	141.1		141.1		Concession land rights	141.1		141.1
Road property	Road property	8,263.0		8,174.4		Road property	8,503.9		8,430.6
Equipment	Equipment	2,804.7		2,764.6		Equipment	2,863.3		2,842.4
Technology and other	Technology and other	379.9		372.6		Technology and other	377.1		372.6
Construction in progress	Construction in progress	304.6		221.9		Construction in progress	338.7		335.8
Total property	Total property	12,120.8		11,902.1		Total property	12,468.8		12,365.5
Accumulated depreciation and amortization	Accumulated depreciation and amortization	2,981.8		2,904.3		Accumulated depreciation and amortization	3,232.7		3,156.2
Property and equipment (including concession assets), net	Property and equipment (including concession assets), net	$	9,139.0	$	8,997.8	Property and equipment (including concession assets), net	$	9,236.1	$	9,209.3

Concession assets, net of accumulated amortization of ~~$704.3~~$744.7 million and ~~$709.7~~$744.8 million, totaled ~~$2,416.6~~$2,456.6 million and ~~$2,383.5~~$2,459.3 million at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

The Company has historically received assistance from governmental entities, typically in the form of cash, for purposes of making improvements to its rail network as part of public safety and/or economic revitalization initiatives. The governmental entity generally specifies how the monetary assistance is to be spent, and may include limited conditions requiring the Company to return the assistance. The Company accounts for this assistance received as reductions to property and equipment in the period in which the improvement is made, with the assistance being amortized as an offset to depreciation expense over the life of the improvement. As of March 31, 2022 and December 31, 2021, the total governmental assistance received, net of accumulated amortization, was $36.7 million and $37.3 million, respectively. For the three months ended, March 31, 2022, governmental assistance amortization was $0.6 million.

6.5. Fair Value Measurements

The Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of foreign currency forward ~~and option~~ contracts and treasury lock agreements, which are classified as Level 2 valuations. The Company determines the fair value of its derivative financial instrument positions based upon pricing models using inputs observed from actively quoted markets and also takes into consideration the contract terms as well as other inputs, including market currency exchange rates and in the case of option contracts, volatility, the risk-free interest rate and the time to expiration.

The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings. The carrying value of the short-term financial instruments approximates their fair value.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

The fair value of the Company’s debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities and credit quality. The carrying value of the Company’s debt was ~~$3,780.2~~$3,782.3 million and ~~$3,770.8~~$3,777.6 million at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. If the Company’s debt were measured at fair value, the fair value measurements of the individual debt instruments would have been classified as Level 2 in the fair value hierarchy.

The fair value of the Company’s financial instruments is presented in the following table (in millions):


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
		Level 2		Level 2			Level 2		Level 2
Assets	Assets					Assets

Treasury lock agreements	Treasury lock agreements	$	92.8	$	35.6	Treasury lock agreements	$	117.3	$	57.4

Liabilities	Liabilities					Liabilities
Debt instruments	Debt instruments	4,299.4		4,368.6		Debt instruments	3,886.0		4,311.1
Foreign currency derivative instruments	Foreign currency derivative instruments	2.2		0		Foreign currency derivative instruments	7.7		1.8

7.6. Derivative Instruments

The Company enters into derivative transactions in certain situations based on management’s assessment of current market conditions and perceived risks. Management intends to respond to evolving business and market conditions and in doing so, may enter into such transactions as deemed appropriate.

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

Credit Risk. As a result of the use of derivative instruments, the Company is exposed to counterparty credit risk. The Company manages this risk by limiting its counterparties to large financial institutions which meet the Company’s credit rating standards and have an established banking relationship with the Company. As of ~~June 30, 2021,~~March 31, 2022, the Company did not expect any losses as a result of default of its counterparties.

Interest Rate Derivative Instruments. In ~~March~~ 2020, the Company executed 36 30-year treasury lock agreements with an aggregate notional value of ~~$400.0~~$650.0 million and a weighted average interest rate of ~~1.45%, and in November 2020, the Company executed 3 30-year treasury lock agreements with an aggregate notional value of $250.0 million and a weighted-average interest rate of 1.78%~~1.58%. The purpose of the treasury locks is to hedge the U.S. Treasury benchmark interest rate associated with future interest payments related to the anticipated refinancing of the $444.7 million principal amount of 3.00% senior notes due May 15, 2023 (the “3.00% Senior Notes”) and the $200.0 million principal amount of 3.85% senior notes due November 15, 2023 (the “3.85% Senior Notes”). The Company has designated the treasury locks as cash flow hedges and recorded unrealized gains and losses in accumulated other comprehensive income (loss). For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, the total unrealized gain of ~~$92.8~~$117.3 million recognized in accumulated other comprehensive income ~~decreased by $42.9 million and~~ increased by ~~$57.2~~$59.9 million ~~respectively, from the balances at March 31, 2021 and~~compared to December 31, ~~2020,~~2021, reflecting a change in the value of the treasury locks as U.S. treasury rates ~~rose during the first quarter of 2021, and then fell during the second quarter of 2021.~~rose. Upon settlement, the unrealized gain or loss in accumulated other comprehensive income (loss) will be amortized to interest expense over the life of the future underlying debt issuance.

Foreign Currency Derivative Instruments. The Company’s Mexican subsidiaries have net U.S. dollar-denominated monetary liabilities which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the Mexican peso against the U.S dollar. This revaluation creates fluctuations in the Company’s Mexican income tax expense in the consolidated statements of ~~operations~~income and the amount of income taxes paid in Mexico. The Company also has net monetary assets denominated in Mexican pesos that are subject to periodic re-measurement and settlement that create fluctuations in foreign currency gains and losses in the consolidated statements of ~~operations.~~income. The Company hedges its net exposure to foreign currency fluctuations in earnings by entering into foreign currency forward contracts. The foreign currency forward contracts involve the Company’s agreement to buy or sell pesos at an agreed-upon exchange rate on a future date.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

Below is a summary of the Company’s ~~2021~~2022 and ~~2020~~2021 foreign currency derivative contracts (amounts in millions, except Ps./USD):

Foreign currency forward contracts
Contracts to sell Ps./receive USD Offsetting contracts to purchase Ps./pay USD
Notional amount
Notional amount
Weighted-average exchange rate
(in Ps./USD)
Notional amount
Notional amount
Weighted-average exchange rate
(in Ps./USD)
Cash received/(paid) on settlement
Contracts executed in 2021 and outstanding $ 100.0 Ps. 2,088.1 Ps. 20.9 — — — —
Contracts executed in 2020 and settled in 2020 $ 75.0 Ps. 1,555.5 Ps. 20.7 $ 78.0 Ps. 1,555.5 Ps. 20.0 $ (2.9)
Contracts to purchase Ps./pay USD Offsetting contracts to sell Ps./receive USD
Notional amount
Notional amount
Weighted-average exchange rate
(in Ps./USD)
Notional amount
Notional amount
Weighted-average exchange rate
(in Ps./USD)
Cash received/(paid) on settlement
Contracts executed in 2021 and settled in 2021 $ 100.0 Ps. 1,993.5 Ps. 19.9 $ 98.1 Ps. 1,993.5 Ps. 20.3 $ (1.9)
Contracts executed in 2020 and settled in 2020 (i) $ 555.0 Ps. 11,254.3 Ps. 20.3 $ 534.3 Ps. 11,254.3 Ps. 21.1 $ (20.7)
Contracts executed in 2019 and settled in 2020 (ii) $ 105.0 Ps. 2,041.2 Ps. 19.4 $ 108.6 Ps. 2,041.2 Ps. 18.8 $ 3.6


Foreign currency forward contracts
	Contracts to sell Ps./receive USD						Offsetting contracts to purchase Ps./pay USD
	Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Cash received/(paid) on settlement
Contracts executed in 2022 and outstanding	$	195.0	Ps.	4,244.5	Ps.	21.8	—		—		—		—
Contracts executed in 2022 and settled in 2022	$	50.0	Ps.	1,105.3	Ps.	22.1	$	50.5	Ps.	1,105.3	Ps.	21.9	$	(0.5)
Contracts executed in 2021 and settled in 2022	$	270.0	Ps.	5,583.3	Ps.	20.7	$	271.7	Ps.	5,583.3	Ps.	20.6	$	(1.7)
	Contracts to purchase Ps./pay USD						Offsetting contracts to sell Ps./receive USD
	Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Cash received/(paid) on settlement

Contracts executed in 2021 and settled in 2021 (i)	$	100.0	Ps.	1,993.5	Ps.	19.9	$	98.1	Ps.	1,993.5	Ps.	20.3	$	(1.9)

(i) During the first ~~half~~quarter of ~~2020,~~2021, the Company settled ~~$430.0~~$100.0 million of these forward contracts, resulting in cash paid of ~~$32.6~~$1.9 million.

~~(ii) During the first half of 2020, the Company settled $105.0 million of these forward contracts, resulting in cash received of $3.6 million.~~

The Company has not designated any of the foreign currency derivative contracts as hedging instruments for accounting purposes. The Company measures the foreign currency derivative contracts at fair value each period and recognizes any change in fair

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~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

value in foreign exchange gain (loss) within the consolidated statements of ~~operations.~~income. The cash flows associated with these instruments is classified as an operating activity within the consolidated statements of cash flows.

Offsetting. The Company’s treasury lock agreements and foreign currency forward contracts are executed with counterparties in the U.S. and are governed by International Swaps and Derivatives Association agreements that include standard netting arrangements. Asset and liability positions from contracts with the same counterparty are net settled upon maturity/expiration and presented on a net basis in the consolidated balance sheets prior to settlement. ~~There was no offsetting of derivative assets or liabilities in the consolidated balance sheets as of June 30, 2021 and December 31, 2020.~~

The following tables present the fair value of derivative instruments included in the Consolidated Balance Sheets (in millions):


		Derivative Assets						Derivative Assets
		Balance Sheet Location	June 30, 2021		December 31, 2020			Balance Sheet Location	March 31, 2022		December 31, 2021
Derivatives designated as hedging instruments:	Derivatives designated as hedging instruments:						Derivatives designated as hedging instruments:
Treasury lock agreements	Treasury lock agreements	Other assets	$	92.8	$	35.6	Treasury lock agreements	Other assets	$	117.3	$	57.4
Total derivatives designated as hedging instruments	Total derivatives designated as hedging instruments		92.8		35.6		Total derivatives designated as hedging instruments		117.3		57.4

Total derivative assets	Total derivative assets		$	92.8	$	35.6	Total derivative assets		$	117.3	$	57.4

Derivative Liabilities
Balance Sheet Location June 30,
2021 December 31, 2020
Derivatives not designated as hedging instruments:
Foreign currency forward contracts Accounts payable and accrued liabilities $ 2.2 $ 0
Total derivatives not designated as hedging instruments 2.2 0
Total derivative liabilities $ 2.2 $ 0

The following table presents the effects of derivative instruments on the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30 ~~(in millions)~~:

Derivatives Not Designated as Hedging Instruments Location of Gain/(Loss) Recognized in Income on Derivative Amount of Gain/(Loss) Recognized in Income on Derivative
2021 2020
Foreign currency forward contracts Foreign exchange gain (loss) $ (1.7) $ 6.4
Total $ (1.7) $ 6.4


	Derivative Liabilities
	Balance Sheet Location	March 31, 2022		December 31, 2021




Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued liabilities	$	7.7	$	1.8

Total derivatives not designated as hedging instruments		7.7		1.8
Total derivative liabilities		$	7.7	$	1.8

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

The following table summarizes the gross and net fair value of derivative liabilities (in millions):


As of March 31, 2022	Gross Liabilities		Gross Assets		Net Amounts Presented in the Consolidated Balance Sheets
Derivatives subject to a master netting arrangement or similar agreement	$	7.7	$	—	$	7.7
As of December 31, 2021
Derivatives subject to a master netting arrangement or similar agreement	$	2.8	$	(1.0)	$	1.8

The following table presents the effects of derivative instruments on the Consolidated Statements of ~~Operations~~Income and Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the ~~six~~three months ended ~~June 30~~March 31 (in millions):

Derivatives in Cash Flow Hedging Relationships Amount of Gain/(Loss) Recognized in OCI on Derivative Location of Gain/(Loss) Reclassified from AOCI into Income Amount of Gain/(Loss) Reclassified from AOCI into Income
2021 2020 2021 2020
Treasury lock agreements $ 57.2 $ 12.8 Interest expense $ (1.2) $ (1.2)
Total $ 57.2 $ 12.8 $ (1.2) $ (1.2)
Derivatives Not Designated as Hedging Instruments Location of Gain/(Loss) Recognized in Income on Derivative Amount of Gain/(Loss) Recognized in Income on Derivative
2021 2020
Foreign currency forward contracts Foreign exchange gain (loss) $ (4.1) $ (27.3)
Total $ (4.1) $ (27.3)


Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative				Location of Gain/(Loss) Reclassified from AOCI into Income	Amount of Gain/(Loss) Reclassified from AOCI into Income


	2022		2021			2022		2021
Treasury lock agreements	$	59.9	$	100.1	Interest expense	$	(0.6)	$	(0.6)
Total	$	59.9	$	100.1		$	(0.6)	$	(0.6)


Derivatives Not Designated as Hedging Instruments		Location of Gain/(Loss) Recognized in Income on Derivative			Amount of Gain/(Loss) Recognized in Income on Derivative


					2022				2021
Foreign currency forward contracts	Foreign exchange loss		$	(8.1)			$	(2.4)

Total					$	(8.1)			$	(2.4)

See Note 6,5, Fair Value Measurements, for the determination of the fair values of derivatives.

8.7. Short-Term Borrowings

Commercial Paper. The Company’s commercial paper program generally serves as the primary means of short-term funding. As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, KCS had 0no commercial paper outstanding. For the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ any commercial paper borrowings were outstanding for less than 90 days and the related activity is presented on a net basis in the consolidated statements of cash flows.

~~9. Share Repurchases~~

In November 2020, the Company announced a new common share repurchase program authorizing the Company to purchase up to $3.0 billion of its outstanding shares of common stock through December 31, 2023 (the “2020 Program”). Share repurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) transactions. The 2020 Program replaced KCS’s $2.0 billion common share repurchase program announced on November 12, 2019 (the “2019 Program”).

Under an ASR agreement, the Company pays a specified amount to a financial institution and receives an initial delivery of shares. The final number and total cost of shares repurchased are then based on the volume-weighted average price of the Company’s common stock during the term of the agreements. The transactions are accounted for as equity transactions with any excess of repurchase price over par value allocated between additional paid-in capital and retained earnings. At the time the shares are received, there is an immediate reduction in the weighted-average number of shares outstanding for purposes of the basic and diluted earnings per share computation.

During the fourth quarter of 2020, the Company paid $500.0 million for 2 ASR agreements under the 2019 Program and received an aggregate initial delivery of shares, which represented approximately 85% of the total shares to be received under the agreements. The final number and total cost of shares repurchased was then based on the volume-weighted-average price of the Company’s common stock during the term of the agreements, which were settled in January 2021. The terms of the ASR agreements, structured as outlined above, were as follows:

Third Party Institution Agreement Date Settlement Date
Total Amount of Agreement (in millions)
Initial Shares Delivered
Fair Market Value of Initial Shares
(in millions)
Additional Shares Delivered
Fair Market Value of Additional Shares
(in millions)
Total Shares Delivered Weighted-Average Price Per Share
ASR Agreement #1 October 2020 January 2021 $ 250.0 1,187,084 $ 212.5 116,314 $ 37.5 1,303,398 $ 191.81
ASR Agreement #2 October 2020 January 2021 $ 250.0 1,187,084 $ 212.5 117,088 $ 37.5 1,304,172 $ 191.69
Total $ 500.0 2,374,168 $ 425.0 233,402 $ 75.0 2,607,570 $ 191.75

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~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

During the three months ended March 31, 2021, KCS received 233,402 shares of common stock as final settlement of the forward contracts totaling $75.0 million under the ASR agreements entered into during October 2020 under the 2019 Program. The final weighted-average price per share of the shares repurchased under these ASR agreements was $191.75. The excess of repurchase price over par value was allocated between additional paid-in capital and retained earnings.

During the three months ended March 31, 2021, KCS repurchased 657 shares of its $25 par preferred stock for less than $0.1 million at an average price of $37.79 per share. The excess of repurchase price over par value was allocated between paid-in-capital and retained earnings.

~~The Company terminated its share repurchase program upon entering into its initial merger agreement with CP in March 2021.~~

~~10.~~8. Refundable Mexican Value Added Tax

Kansas City Southern de México, S.A. de C.V. (“KCSM”) is not required to charge its customers value added tax (“VAT”) on international import or export transportation services, resulting in KCSM paying more VAT on its expenses than it collects from customers. These excess VAT payments are refundable by the Mexican government. Prior to 2019, ~~KCSM~~Mexican companies could offset ~~its~~their monthly refundable VAT balance with other tax obligations. In January 2019, Mexico tax reform eliminated the ability to offset other tax obligations with refundable VAT. Since January 2019, ~~the Company~~KCSM has generated a refundable VAT balance and filed refund claims with the Servicio de Administración Tributaria (the “SAT”) which have not been refunded.

In November 2021, changes to the VAT law were announced and became effective beginning January 1, 2022. These changes reduced the recoverability of VAT paid by KCSM on its expenditures that support international import transportation service revenues that are ~~still under review.~~not subject to a VAT charge. VAT that is unrecoverable from the Mexican government results in incremental VAT expense for KCSM. Beginning in 2022, KCSM changed certain service offerings to either require VAT to be charged to customers on revenue, or impose a rate increase to offset the incremental VAT expense. These measures implemented by KCSM increase the VAT to be collected from customers and payable to the Mexican government.

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

As of March 31, 2022 and December 31, 2021, the KCSM refundable VAT balance was $141.2 million and $152.2 million, respectively. As of March 31, 2022 and December 31, 2021, $73.0 million and $78.0 million, respectively, of the refundable VAT balance was classified as a short-term asset, which represents the estimated amount of VAT to be collected from customers and payable to the Mexican government in 2022 that will reduce the VAT receivable balance from the Mexican government. KCSM has prior favorable Mexican court decisions and a legal opinion supporting its right under Mexican law to recover the refundable VAT balance from the Mexican government and believes the VAT to be fully collectible. As of June 30, 2021 and December 31, 2020, the KCSM refundable VAT balance was $138.9 million and $103.1 million, respectively. Refundable VAT is classified as a long-term asset on the consolidated balance sheets as a result of the prolonged refund claim process.recoverable.

~~11.~~9. Commitments and Contingencies

Concession Duty. Under KCSM’s 50-year railroad concession from the Mexican government (the “Concession”), which could expire in 2047 unless extended, KCSM pays annual concession duty expense of 1.25% of gross revenues. For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, the concession duty expense, which is recorded within materials and other in operating expenses, was $4.9 million, ~~and $9.4 million, respectively,~~ compared to ~~$3.5 million and $8.3~~$4.5 million, for the same ~~periods~~period in ~~2020.~~2021.

Litigation. Occasionally, the Company is a party to various legal proceedings, regulatory examinations, investigations,

administrative actions, and other legal matters, arising for the most part in the ordinary course of business, incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job-related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability provisions that management believes are adequate to cover expected costs. The outcome of litigation and other legal matters is always uncertain. KCS believes it has valid defenses to the legal matters currently pending against it, is defending itself vigorously, and has recorded accruals determined in accordance with U.S. GAAP, where appropriate. In making a determination regarding accruals, using available information, KCS evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party to and records a loss contingency when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. These subjective determinations are based on the status of such legal or regulatory proceedings, the merits of KCS’s defenses and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from the current estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to KCS’s consolidated results of operations, liquidity or financial condition.

During the second quarter 2021, several shareholder lawsuits were filed against the Company, naming the Company and members of its board of directors or CN and a wholly-owned subsidiary of CN as defendants. These claims allege, among other things, that the defendants caused a materially incomplete and misleading registration statement on Form F-4 relating to the proposed merger to be filed with the SEC in violation of Section 14(a) and Section 20(a) of the Exchange Act and rules and regulations promulgated thereunder. The complaints seek, among other relief, an injunction preventing the defendants from proceeding with, consummating, or closing the Merger unless and until purportedly omitted information is disclosed; rescission of the Merger if consummated or awarding of rescissory damages; unspecified further damages; and an award of costs, including attorneys’ and experts’ fees. The Company believes the claims asserted in the lawsuits are without merit.

Environmental Liabilities. The Company’s U.S. operations are subject to extensive federal, state and local environmental laws and regulations. The major U.S. environmental laws to which the Company is subject include, among others, the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law), the Toxic Substances Control Act, the Clean Water Act, and the Hazardous Materials Transportation Act. CERCLA can impose joint and several

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~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

liabilities for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of hazardous substances. The Company does not believe that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. The Company is, however, subject to environmental remediation costs as described in the following paragraphs.

The Company’s Mexico operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.

The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle environmental issues that might occur in the transport of such materials.

The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated financial statements.

Personal Injury. The Company’s personal injury liability is based on semi-annual actuarial studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. This liability is based on personal injury claims filed and an estimate of claims incurred but not yet reported. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Adjustments to the liability are reflected within operating expenses in the period in which changes to estimates are known. Personal injury claims in excess of self-insurance

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. The personal injury liability as of ~~June 30, 2021,~~March 31, 2022, is based on an updated actuarial study of personal injury claims through ~~April 30,~~October 31, 2021, and review of the last ~~two~~five months’ experience. Although these estimates cannot be predicted with certainty, management believes that the ultimate outcome will not have a material adverse effect on the Company’s consolidated financial statements.

Tax Contingencies. Tax returns filed in the U.S. for periods after 2015 and in Mexico for periods after 2012 remain open to examination by the taxing authority. The Internal Revenue Service (“IRS”) has ~~initiated an~~completed its examination of the 2017 deemed mandatory repatriation tax included in the 2017 U.S. federal tax return and ~~an examination of~~ the 2016 U.S. federal tax ~~return.~~return with no material impact to the consolidated financial statements. The SAT, the Mexican equivalent of the IRS, has initiated examinations of the KCSM 2013 through 2020 Mexico tax returns and the Financiera Inspira, S.A. de C.V. SOFOM, E.N.R. 2016 and 2017 Mexico tax returns. The Company does not expect that these examinations will have a material impact on the consolidated financial statements. During ~~the first quarter of~~ 2017, the Company received audit assessments from the SAT for the KCSM 2009 and 2010 Mexico tax returns. ~~In 2017, the~~The Company commenced administrative actions with the ~~SAT. During the first quarter of 2018,~~SAT and the audit assessments were ~~nullified by the SAT.~~subsequently nullified. In the third quarter of 2018, the SAT issued new assessments and the Company filed administrative appeals with the SAT. During the first quarter of 2022, the Company received an audit assessment from the SAT for the KCSM 2013 Mexico tax return. The Company intends to file an administrative appeal of the assessment. The Company believes that it has strong legal arguments in its favor and it is more likely than not that it will prevail in any challenge of the assessments.

Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, product loss or damage, charges, and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company believes that, when resolved, these disputes will not have a material effect on its consolidated financial statements.

Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, bankruptcy, insolvency or liquidation of a customer, or weakening in economic trends could have a significant impact on the collectability of the Company’s receivables and its operating results. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for credit losses based on its best estimate at ~~June 30, 2021.~~March 31, 2022.

Panama Canal Railway Company (“PCRC”) Guarantees and Indemnities. At ~~June 30, 2021,~~March 31, 2022, the Company had issued and outstanding ~~$5.6~~$5.7 million under a standby letter of credit to fulfill its obligation to fund 50 percent of the debt service reserve and

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~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

liquidity reserve established by PCRC in connection with the issuance of the 7.0% Senior Secured Notes due November 1, 2026 (the “PCRC Notes”). Additionally, KCS has pledged its shares of PCRC as security for the PCRC Notes.

~~12.~~

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

10. Geographic Information

The Company strategically manages its rail operations as 1 reportable business segment over a single coordinated rail network that extends from the midwest and southeast portions of the United States south into Mexico and connects with other Class I railroads. Financial information reported at this level, such as revenues, operating income and cash flows from operations, is used by corporate management, including the Company’s chief operating decision-maker, in evaluating overall financial and operational performance, market strategies, as well as the decisions to allocate capital resources. The Company’s chief operating decision-maker is the chief executive officer.

The following tables provide information by geographic area (in millions):


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
Revenues	Revenues	2021		2020		2021		2020		Revenues		2022		2021
U.S.	U.S.	$	384.1	$	304.4	$	751.0	$	684.3	U.S.		$	425.7	$	366.9
Mexico	Mexico	365.4		243.5		704.5		595.3		Mexico		352.5		339.1
Total revenues	Total revenues	$	749.5	$	547.9	$	1,455.5	$	1,279.6	Total revenues		$	778.2	$	706.0

Property and equipment (including concession assets), net	Property and equipment (including concession assets), net					June 30, 2021		December 31, 2020		Property and equipment (including concession assets), net		March 31, 2022		December 31, 2021
U.S.	U.S.					$	5,703.6	$	5,594.6	U.S.		$	5,774.9	$	5,744.4
Mexico	Mexico					3,435.4		3,403.2		Mexico		3,461.2		3,464.9
Total property and equipment (including concession assets), net	Total property and equipment (including concession assets), net					$	9,139.0	$	8,997.8	Total property and equipment (including concession assets), net		$	9,236.1	$	9,209.3

~~13.~~11. Subsequent Event

Foreign Currency Hedging. During ~~July 2021,~~April 2022, the Company entered into a foreign currency forward ~~contract~~contracts with aan aggregate notional amount of ~~$20.0~~$35.0 million, which ~~matures~~mature in January ~~2022. This contract obligates~~2023. These contracts obligate the Company to sell a total of ~~Ps.407.6~~Ps.733.5 million at a weighted-average exchange rate of ~~Ps.20.4~~Ps.21.0 to each U.S. dollar.

The Company has not designated ~~this~~these foreign currency derivative instrument as a hedging ~~instrument~~instruments for accounting purposes. The Company will measure the foreign currency derivative ~~instrument~~instruments at fair value each period and will recognize any change in fair value in foreign exchange gain (loss) within the consolidated statements of ~~operations.~~income.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. In addition, management may make forward-looking statements orally or in other writing, including, but not limited to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings with the Securities and Exchange Commission. Readers can usually identify these forward-looking statements by the use of such words as “may,” “will,” “should,” “likely,” “plans,” “projects,” “expects,” “anticipates,” “believes” or similar words. These statements involve a number of risks and uncertainties. Actual results could materially differ from those anticipated by such forward-looking statements. Such differences could be caused by a number of factors or combination of factors including, but not limited to, the factors identified below and those discussed under the captions “Part II - Item 1A - Risk Factors” herein and Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the “Annual Report”). Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company: the merger with Canadian National Railway Company ("CN") is subject to various closing conditions and there can be no assurances as to whether and when it may be completed; failure to complete the Company’s merger with CN could negatively impact the Company’s stock price and future business and financial results; Company’s stockholders cannot be sure of the value of the merger consideration they will receive from CN in the merger; lawsuits may be filed against the Company and/or CN challenging the transactions contemplated by the merger between, among others, the Company and CN; the shares of CN common stock to be received by the Company’s stockholders upon completion of the merger will have different rights from shares of the Company’s common stock; after completion of the merger, CN may fail to realize the projected benefits and cost savings of the merger; public health threats or outbreaks of communicable diseases, such as the ongoing COVID-19 pandemic (including its variants) and its impact on KCS’s business, suppliers, consumers, customers, employees and supply chains; rail accidents or other incidents or accidents on KCS’s rail network or at KCS’s facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; legislative and regulatory developments and disputes, including environmental regulations; loss of the rail concession of Kansas City Southern’s subsidiary, Kansas City Southern de México, S.A. de C.V.; ~~domestic~~North American and ~~international~~global economic, political and social conditions; disruptions to the Company’s technology infrastructure, including its computer systems; increased demand and traffic congestion; the level of trade between the United States and Asia or Mexico; fluctuations in the peso-dollar exchange rate; natural events such as severe weather, hurricanes and floods; the outcome of claims and litigation involving the Company or its subsidiaries; changes in business strategy and strategic opportunities; competition and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; the termination of, or failure to renew, agreements with customers, other railroads and third parties; the satisfaction of by third parties of their obligations; fluctuation in prices or availability of key materials, fluctuations in commodity demand; in particular diesel fuel; insurance coverage limitations; access to capital; sufficiency of budgeted capital expenditures in carrying out business plans; services infrastructure; climate change and the market and regulatory responses to climate change; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; unavailability of qualified personnel; difficulty attracting, motivating, and retaining executives and other key employees due to the uncertainty of the merger transaction with Canadian Pacific Railway Limited (“CP”); significant demands placed on the Company as a result of the merger of the Company with CP; labor difficulties, including strikes and work stoppages; acts of terrorism or risk of terrorist activities, war or other acts of violence; and other factors affecting the operation of the business. For more discussion about each risk factor, see “Part II - Item 1A - Risk Factors” herein and Part I, Item 1A - “Risk Factors” in the Company’s Annual Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report, in each case as updated by the Company’s periodic filings with the Securities and Exchange Commission (the “SEC”).

Forward-looking statements reflect the information only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statements to reflect future events, developments, or other information. If KCS does update one or more forward-looking statements, no inference should be drawn that additional updates will be made regarding that statement or any other forward-looking statements.

This discussion is intended to clarify and focus on KCS’s results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2021.~~March 31, 2022. This discussion should be read in conjunction with those consolidated financial statements and the related notes and is qualified by reference to them.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial position and results of operations is based upon its consolidated financial statements. The preparation of these consolidated financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the accounting for assets and liabilities that are not readily apparent from other sources. If the estimates differ materially from actual results, the impact on the consolidated financial statements may be material. The Company’s critical accounting policies are disclosed in its ~~2020~~2021 Annual Report.

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Overview

The Company is engaged primarily in the freight rail transportation business, operating a single coordinated rail network under one reportable business segment. The primary operating subsidiaries of the Company consist of the following: The Kansas City Southern Railway Company (“KCSR”), Kansas City Southern de México, S.A. de C.V. (“KCSM”), Meridian Speedway, LLC (“MSLLC”), and The Texas Mexican Railway Company (“TexMex”). The Company generates revenues and cash flows by providing customers with freight delivery services both within its regions and throughout North America through connections with other Class I rail carriers. KCS’s customers conduct business in a number of different industries, including chemical and petroleum, industrial and consumer products, agriculture and minerals, energy, automotive, and intermodal transportation. Appropriate eliminations and reclassifications have been recorded in preparing the consolidated financial statements.

Merger Agreement

On ~~March 21,~~September 15, 2021, KCS and CP entered into a merger agreement with Canadian Pacific Railway Limited, a Canadian corporation (“CP”), under which CP agreed to acquire KCS in a stock and cash transaction valued at $275 per common share. On April 20, 2021, KCS received an unsolicited merger proposal valued at $325 per common share from Canadian National Railway Company, a Canadian corporation (“CN”), which, after negotiation with and a revised proposal from CN, was determined on May 13, 2021 by the Company’s board of directors to be a superior proposal as defined by the CP merger agreement. On May 21, 2021, KCS terminated the CP merger agreement and paid CP a merger termination fee of $700.0 million, which was recognized in merger costs on the consolidated statements of operations.

~~On May 21, 2021, KCS and CN entered into a merger agreement (“Merger~~(the “Merger Agreement”), and a U.S affiliate of CN paid KCS $700.0 million as reimbursement for the termination fee paid to CP. KCS is obligated to repay the termination fee to CN under certain circumstances, including but not limited to, if KCS were to terminate the Merger Agreement to accept a superior proposal as defined by the Merger Agreement. As a result, the $700.0 million reimbursement from CN was recognized within accounts payable and accrued liabilities on the consolidated balance sheets. In addition, KCS would be required to pay CN a termination fee of $700.0 million to terminate the Merger Agreement with CN.

~~Per the Merger Agreement, KCS would merge into a wholly-owned, U.S. subsidiary of CN (the “Merger”~~) and beon December 14, 2021, CP acquired the ~~surviving entity~~outstanding common and preferred stock of ~~the Merger. The ownership interest of KCS would then be deposited into a voting trust subject to a voting trust agreement (the “Voting Trust Transaction”).~~KCS. Each share of common stock, par value $0.01 per share, of KCS that iswas outstanding immediately prior to the ~~Merger will be~~merger was converted into the right to receive (1) ~~1.129~~2.884 common shares of CNCP and (2) ~~$200~~$90 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that iswas outstanding immediately prior to the ~~Merger will be~~merger was converted into the right to receive $37.50 in cash. The Merger Consideration value received by KCS stockholders was $301.20 per KCS common share.

~~Subject~~The merger transaction was completed through a series of mergers as outlined in the Merger Agreement. These mergers ultimately resulted in KCS being merged with and into Cygnus Merger Sub 1 Corporation (“Surviving Merger Sub”), a wholly owned subsidiary of CP, with Surviving Merger Sub continuing as the surviving entity. Pursuant to ~~receipt of regulatory clearances, approval by stockholders~~the Merger Agreement, Surviving Merger Sub was renamed “Kansas City Southern” and as successor company of KCS, ~~and other customary closing conditions,~~continued to own the ~~completion~~assets of KCS. Immediately following the consummation of the ~~Voting Trust Transaction is currently expected~~mergers, CP caused the contribution, directly and indirectly, of all of the outstanding shares of capital stock of Surviving Merger Sub, as successor to ~~occur in the second half of 2021, and upon completion,~~ KCS, ~~stockholders are expected~~ to ~~own approximately 12.65% of CN’s outstanding common shares. KCS’s management and its board of directors will continue to manage KCS while it is in the~~be deposited into an independent, irrevocable voting trust ~~pursuing KCS’s independent business plan and growth strategies. Final control approval from~~(the “Voting Trust”) under a voting trust agreement (the “Voting Trust Agreement”) approved by the U.S. Surface Transportation Board (“STB”), pending receipt of the final and non-appealable approval or exemption by the STB pursuant to 49 U.S.C. § 11323 et seq., of the transactions contemplated by the Merger Agreement (“STB Final Approval”). The Voting Trust prevents CP, or any affiliate of CP, from controlling or having the power to control KCS prior to STB Final Approval. Following receipt of STB Final Approval and approval from other applicable regulatory authorities, the Voting Trust will be terminated and CP will acquire control over KCS’s railroad operations. STB Final Approval is expected to be ~~completed~~granted in the ~~second half~~first quarter of ~~2022.~~2023, subject to the regulatory review process.

In the first quarter of 2022, pursuant to the Merger Agreement, KCS paid a cash dividend of $265.0 million to a wholly-owned subsidiary of CP. Periodic cash distributions may be made to a wholly-owned subsidiary of CP based upon cash generated, the timing of capital expenditures and working capital needs of the Company.

Ukraine Crisis

The invasion of Ukraine by Russia in February 2022 has led to disruption, instability, and volatility in global markets and industries. The U.S. government and other foreign governments have imposed severe economic sanctions and export controls against Russia, certain regions of Ukraine and particular entities and individuals, removed Russia from the ~~Merger~~Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) system, and may impose additional sanctions and controls. The full impact of these sanctions and controls, as well as responses to them by Russia has and could in the ~~third quarter~~future result in, among other things, severe or complete restrictions on exports to and other commerce and business dealings involving Russia, certain regions of ~~2021,~~Ukraine, and/or particular entities and individuals. In addition, this ongoing invasion has caused energy prices to rise, leading to increased inflationary impacts. To date, the Company ~~expects~~has not experienced a material impact to ~~recognize the $700.0 million reimbursement from CN within merger costs in~~operations or the consolidated statement of operations. Excluding the termination fee payment and reimbursement, the Company expects to have estimated net merger costs in 2021 of approximately $260.0 million, consisting of bankers’ and legal fees and accelerated vesting of share-based compensation expense, assuming the Voting Trust Transaction occurs in the second half of 2021 and the Merger Consideration is $325 per share.

~~On June 8, 2021, KCS entered into a letter waiver with lenders to the KCS revolving credit facility to waive the events of default that would occur under the KCS revolving credit facility~~financial statements as a result of the ~~changes~~invasion of ~~control~~Ukraine; however, KCS will continue to monitor for events that ~~would arise upon consummation~~could materially impact the Company.

Inflation

U.S. consumer price inflation rose at its fastest pace in over 40 years and Mexico inflation reached levels not seen for 20 years. Consumer price annual inflation rates as of March 31, 2022 were 8.5% and 7.5% in the ~~Voting Trust Transaction~~U.S. and ~~as a result~~Mexico, respectively. KCS is closely monitoring the impact of ~~CN obtaining control~~rapidly increasing inflation on the Company’s financial results and procurement supply chain. As of KCS following final approval of the transaction by the STB. The foregoing description of the letter waiver is qualified in its entirety by the full text of the letter waiver, attached hereto as Exhibit 10.3.

March

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~~Second~~31, 2022, higher inflation has not had a material impact on the Company’s financial results. Additionally, supply chain disruptions have not materially impacted the Company’s ability to procure essential materials and services on a timely basis.

First Quarter Highlights

~~Revenues increased 37% for~~For the three months ended ~~June 30,~~March 31, 2022, revenues increased 10% compared to the same period in 2021, primarily due to a 5% increase in revenue per carload/unit, and an increase of 4% in carload/unit volumes. Revenue per carload/unit increased due to higher fuel surcharge and positive pricing impacts, partially offset by mix. Volumes increased due to favorable comparable volumes as a result of network congestion driven by weather impacts in 2021, improved cycle times, strong demand, and partial recovery of the global microchip shortage. These increases were partially offset by decreased volumes in chemicals and petroleum refined fuel products due to regulatory impacts.

Operating expenses increased 8% during the three months ended March 31, 2022, as compared to the same period in ~~2020, due to a 31% increase in carload/unit volumes and a 7% increase in revenue per carload/unit. Revenues increased~~2021, primarily due to higher ~~volumes, higher~~diesel fuel ~~surcharge, and the strengthening of the Mexican peso against the U.S. dollar. The volume increases were primarily~~prices, non-creditable value-added tax (“VAT”) due to ~~recovery from COVID-19 impacts~~VAT law changes, and increased ~~volumes in the chemical~~materials and ~~petroleum business unit due to strength in refined fuel product shipments into Mexico.~~

Operating expenses increased 221% during the three months ended June 30, 2021, as compared to the same period in 2020, primarily due to the CP merger agreement termination fee payment, higher diesel fuel price and consumption, the strengthening of the Mexican peso against the U.S. dollar and increased overtime and recrews related to network congestion,supplies expense, partially offset by decreased ~~restructuring charges.~~merger costs. Operating expenses as a percentage of revenues was ~~157.6%~~62.6% for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~67.1%~~64.2% for the same period in ~~2020.~~

The Company reported quarterly losses of $4.17 per diluted share on consolidated net loss of $378.5 million for the three months ended June 30, 2021, compared to earnings of $1.16 per diluted share on consolidated net income of $109.7 million for the same period in 2020, primarily due to the $700.0 million expense recognized for the termination fee associated with the termination of the CP merger agreement by KCS.

2021.

Results of Operations

The following summarizes KCS’s consolidated statement of ~~operations~~income components (in millions):

Three Months Ended Change
June 30,
2021 2020
Revenues $ 749.5 $ 547.9 $ 201.6
Operating expenses 1,181.2 367.5 813.7
Operating income (loss) (431.7) 180.4 (612.1)
Equity in net earnings of affiliates 3.4 0.2 3.2
Interest expense (39.1) (38.1) (1.0)
Foreign exchange gain 6.8 7.8 (1.0)
Other income, net 1.0 0.8 0.2
Income (loss) before income taxes (459.6) 151.1 (610.7)
Income tax expense (benefit) (81.6) 40.8 (122.4)
Net income (loss) (378.0) 110.3 (488.3)
Less: Net income attributable to noncontrolling interest 0.5 0.6 (0.1)
Net income (loss) attributable to Kansas City Southern and subsidiaries $ (378.5) $ 109.7 $ (488.2)


		Six Months Ended				Change			Three Months Ended				Change
		June 30,							March 31,
		2021		2020					2022		2021
Revenues	Revenues	$	1,455.5	$	1,279.6	$	175.9	Revenues	$	778.2	$	706.0	$	72.2
Operating expenses	Operating expenses	1,634.2		810.4		823.8		Operating expenses	487.1		453.0		34.1
Operating income (loss)		(178.7)		469.2		(647.9)
Operating income								Operating income	291.1		253.0		38.1
Equity in net earnings of affiliates	Equity in net earnings of affiliates	9.4		1.2		8.2		Equity in net earnings of affiliates	8.8		6.0		2.8
Interest expense	Interest expense	(78.1)		(72.3)		(5.8)		Interest expense	(38.9)		(39.0)		0.1
Foreign exchange loss	Foreign exchange loss	(0.5)		(51.7)		51.2		Foreign exchange loss	(1.4)		(7.3)		5.9
Other income, net		0.2		2.2		(2.0)
Income (loss) before income taxes		(247.7)		348.6		(596.3)
Income tax expense (benefit)		(23.1)		86.0		(109.1)
Net income (loss)		(224.6)		262.6		(487.2)
Other income (expense), net								Other income (expense), net	0.9		(0.8)		1.7
Income before income taxes								Income before income taxes	260.5		211.9		48.6
Income tax expense								Income tax expense	72.5		58.5		14.0
Net income								Net income	188.0		153.4		34.6
Less: Net income attributable to noncontrolling interest	Less: Net income attributable to noncontrolling interest	0.9		1.1		(0.2)		Less: Net income attributable to noncontrolling interest	0.6		0.4		0.2
Net income (loss) attributable to Kansas City Southern and subsidiaries		$	(225.5)	$	261.5	$	(487.0)
Net income available to common stockholder(s)								Net income available to common stockholder(s)	$	187.4	$	153.0	$	34.4

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Operating Metrics

The Company has established the following key metrics ~~and goals~~ to measure precision scheduled railroading (“PSR”) progress and performance:


		Three Months Ended		Improvement/ (Deterioration)	Six Months Ended		Improvement/ (Deterioration)	FY 2021 Goal			Three Months Ended		Improvement/ (Deterioration)
		June 30,			June 30,					March 31,		Improvement/ (Deterioration)
		2021	2020		2021	2020					2022
Gross velocity (mph) (i)	Gross velocity (mph) (i)	12.2	17.1	(29)%	12.6	16.4	(23)%	16.2	Gross velocity (mph) (i)				12.9	21%
Terminal dwell (hours) (ii)	Terminal dwell (hours) (ii)	26.1	20.3	(29)%	26.4	20.0	(32)%	21.3	Terminal dwell (hours) (ii)			19.7	26.8	26%
Train length (feet) (iii)	Train length (feet) (iii)	6,778	6,921	(2)%	6,800	6,349	7%	7,250	Train length (feet) (iii)			6,467	6,824	(5)%

Fuel efficiency (gallons per 1,000 GTM's) (iv)	Fuel efficiency (gallons per 1,000 GTM's) (iv)	1.22	1.21	(1)%	1.24	1.24	—	1.16	Fuel efficiency (gallons per 1,000 GTM's) (iv)			1.24	1.26	2%

(i) Gross velocity is the average train speed between origin and destination in miles per hour calculated as the sum of the miles traveled divided by the sum of total transit hours. Transit hours are measured as the difference between a train’s origin departure and destination arrival date and times broken down by segment across the train route (includes all time spent including crew changes, terminal dwell, delays, and incidents).

(ii) Terminal dwell is the average amount of time in hours between car arrival to and departure from the yard (excludes cars that move through a terminal on a run-through train, stored, bad ordered, and maintenance-of-way cars). Calculated by dividing the total number of hours cars spent in terminals by the total count of car dwell events.

(iii) Train length is the average length of a train across its reporting stations, including the origin and intermediate stations. Length of a train is the sum of car and locomotive lengths measured in feet.

(iv) Fuel efficiency is calculated by taking locomotive fuel consumed in gallons divided by thousand gross ton miles (“GTM’s”) net of detours with no associated fuel gallons. ~~GTM’s~~GTM��s are the movement of one ton of train weight over one mile calculated by multiplying total train weight by distance the train moved. GTM’s exclude locomotive gross ton miles.

~~The decline~~For the three months ended March 31, 2022, the increase in velocity and ~~increase~~decrease in dwell, ~~are primarily~~as compared to the same period in 2021, were due to ~~lingering~~efforts to improve network ~~congestion as well as greater efficiencies realized during the second quarter of 2020 from lower volumes due to COVID-19.~~

~~Table of Contents~~fluidity including reductions in train length, along with other operating initiatives and new capacity projects.

Revenues

The following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:

Revenues Carloads and Units Revenue per Carload/Unit
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
2021 2020 % Change 2021 2020 % Change 2021 2020 % Change
Chemical and petroleum $ 232.5 $ 158.5 47 % 103.4 75.6 37 % $ 2,249 $ 2,097 7 %
Industrial and consumer products 144.6 120.6 20 % 74.4 68.0 9 % 1,944 1,774 10 %
Agriculture and minerals 139.9 114.4 22 % 65.9 57.7 14 % 2,123 1,983 7 %
Energy 54.5 39.3 39 % 63.1 44.1 43 % 864 891 (3 %)
Intermodal 91.1 63.5 43 % 250.3 191.0 31 % 364 332 10 %
Automotive 49.4 15.6 217 % 27.7 11.6 139 % 1,783 1,345 33 %
Carload revenues, carloads and units 712.0 511.9 39 % 584.8 448.0 31 % $ 1,218 $ 1,143 7 %
Other revenue 37.5 36.0 4 %
Total revenues (i) $ 749.5 $ 547.9 37 %
(i) Included in revenues:
Fuel surcharge $ 69.9 $ 37.6


		Revenues						Carloads and Units				Revenue per Carload/Unit							Revenues						Carloads and Units				Revenue per Carload/Unit
		Six Months Ended						Six Months Ended				Six Months Ended							Three Months Ended						Three Months Ended				Three Months Ended
		June 30,						June 30,				June 30,							March 31,						March 31,				March 31,
		2021		2020		% Change		2021	2020	% Change		2021		2020		% Change			2022		2021		% Change		2022	2021	% Change		2022		2021		% Change
Chemical and petroleum	Chemical and petroleum	$	463.8	$	357.1	30	%	205.0	166.5	23	%	$	2,262	$	2,145	5	%	Chemical and petroleum	$	187.4	$	231.3	(19	%)	80.4	101.6	(21	%)	$	2,331	$	2,277	2	%
Industrial and consumer products	Industrial and consumer products	278.6		279.6		—		146.7	151.4	(3	%)	1,899		1,847		3	%	Industrial and consumer products	160.7		134.0		20	%	78.3	72.3	8	%	2,052		1,853		11	%
Agriculture and minerals	Agriculture and minerals	264.3		248.9		6	%	126.6	120.8	5	%	2,088		2,060		1	%	Agriculture and minerals	163.4		124.4		31	%	73.0	60.7	20	%	2,238		2,049		9	%
Energy	Energy	112.0		95.6		17	%	124.7	101.7	23	%	898		940		(4	%)	Energy	71.6		57.5		25	%	67.2	61.6	9	%	1,065		933		14	%
Intermodal	Intermodal	172.4		152.2		13	%	483.1	424.6	14	%	357		358		—		Intermodal	95.9		81.3		18	%	245.3	232.8	5	%	391		349		12	%
Automotive	Automotive	93.5		69.5		35	%	54.1	43.8	24	%	1,728		1,587		9	%	Automotive	54.3		44.1		23	%	31.0	26.4	17	%	1,752		1,670		5	%
Carload revenues, carloads and units	Carload revenues, carloads and units	1,384.6		1,202.9		15	%	1,140.2	1,008.8	13	%	$	1,214	$	1,192	2	%	Carload revenues, carloads and units	733.3		672.6		9	%	575.2	555.4	4	%	$	1,275	$	1,211	5	%
Other revenue	Other revenue	70.9		76.7		(8	%)											Other revenue	44.9		33.4		34	%
Total revenues (i)	Total revenues (i)	$	1,455.5	$	1,279.6	14	%											Total revenues (i)	$	778.2	$	706.0	10	%

(i) Included in revenues:	(i) Included in revenues:																	(i) Included in revenues:
Fuel surcharge	Fuel surcharge	$	120.8	$	115.2													Fuel surcharge	$	87.9	$	50.9

For the three months ended ~~June 30, 2021,~~March 31, 2022, revenues ~~and carload/unit volumes~~ increased ~~37% and 31%, respectively,~~10% compared to the same period in ~~2020.~~2021. Revenues increased ~~primarily~~ due to higher volumes, higher fuel surcharge, and the strengthening of the Mexican peso against the U.S. dollar. For the six months ended June 30, 2021, revenues and carload/unit volumes increased 14% and 13%, respectively, compared to the same perioda 5% increase in 2020. Revenues increased primarily due to higher volumes resulting from the recovery from COVID-19 impacts and increased volumes in the chemical and petroleum business unit due to strength in refined fuel product shipments into Mexico.

~~For the three months ended June 30, 2021,~~ revenue per carload/unit ~~increased by 7%, compared to the same period~~and an increase of 4% in ~~2020~~carload/unit volumes. Revenue per carload/unit increased due to higher fuel surcharge ~~the strengthening of the Mexican peso against the U.S. dollar,~~ and positive pricing impacts, partially offset by mix. ~~For the six months ended June 30, 2021, revenue per carload/unit~~Volumes increased ~~by 2%, compared to the same period in 2020~~ due to ~~positive pricing~~favorable comparable volumes as a result of network congestion driven by weather impacts ~~the strengthening~~in 2021, improved cycle times, strong demand, and partial

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recovery of the ~~Mexican peso against the U.S. dollar, and higher fuel surcharge,~~global microchip shortage. These increases were partially offset by ~~shorter average length of haul.~~decreased volumes in chemicals and petroleum refined fuel products due to regulatory impacts. The average exchange rate of Mexican pesos per U.S. dollar was ~~Ps.20.1~~Ps.20.5 for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~Ps.23.4~~Ps.20.3 for the same period in ~~2020,~~2021, which resulted in ~~an increase~~a decrease in revenues of approximately ~~$16.2~~$1.6 million. The average exchange rate of Mexican pesos per U.S. dollar was Ps.20.2 for the six months ended June 30, 2021, compared to Ps.21.6 for the same period in 2020, which resulted in an increase in revenues of approximately $12.2 million.

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KCS’s fuel surcharges are a mechanism to adjust revenue based upon changes in fuel prices above fuel price thresholds set in KCS’s tariffs or contracts. Fuel surcharge revenue is calculated using a fuel price from a prior time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge revenue may differ.

For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, fuel surcharge revenue increased ~~$32.3~~$37.0 million, ~~and $5.6 million, respectively,~~ compared to the same ~~periods~~period in ~~2020,~~2021, primarily due to higher fuel ~~prices and volumes.~~prices.

The following discussion provides an analysis of revenues by commodity group:


			Revenues by commodity group for the three months ended ~~June 30, 2021~~March 31, 2022
Chemical and petroleum. Revenues ~~increased $74.0~~decreased $43.9 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to a ~~37% increase~~21% decrease in carload/unit volumes, ~~and an 7% increase in revenue per carload/unit. Revenues increased $106.7 million for the six months ended June 30, 2021, compared to the same period in 2020, due to~~partially offset by a ~~23% increase in carload/unit volumes and a 5%~~2% increase in revenue per carload/unit. Volumes ~~increased~~decreased due to refined fuel product shipments into ~~Mexico.~~ ~~For the three months ended June 30, 2021, revenue~~Mexico being negatively impacted by supply chain disruptions as a result of increased regulation. Refer to Mexico Regulatory and Legal Updates for further discussion. Revenue per carload/unit increased due to ~~longer average length of haul,~~ higher fuel surcharge ~~the strengthening of the Mexican peso against the U.S. dollar,~~ and positive pricing impacts, partially offset by mix. For the six months ended June 30, 2021, revenue per carload/unit increased due to mix, positive pricing impacts, the strengthening of the Mexican peso against the U.S. dollar, and higher fuel surcharge, partially offset by shorter average length of ~~haul.~~haul and mix.


Industrial and consumer products. Revenues increased ~~$24.0~~$26.7 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to ~~a 10%~~an 11% increase in revenue per carload/unit and 9%an 8% increase in carload/unit volumes. Revenue per carload/unit increased due to ~~mix, strengthening~~longer average length of ~~the Mexican peso against the U.S. dollar,~~haul, higher fuel surcharge, and positive pricing impacts, partially offset by ~~shorter average length of haul. Volumes~~mix. Metal volumes increased ~~primarily~~ due to ~~recovery from COVID-19 impacts~~higher demand and ~~increased demand.~~ ~~Revenues decreased $1.0 million for~~new steel plants that opened on the ~~six months ended June 30, 2021, compared to the same period~~KCSM network in ~~2020,~~2021. Forest product volumes increased due to improved cycle times, demand, and favorable comparable volumes as a ~~3% decrease in carload/unit volumes, partially offset by a 3% increase in revenue per carload/unit. Forest products volumes decreased due to lingering~~result of network congestion ~~resulting from~~driven by weather impacts in ~~February~~ 2021. ~~Revenue per carload/unit increased due to mix, positive pricing impacts, and the strengthening of the Mexican peso against the U.S. dollar, partially offset by shorter average length of haul.~~

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			Revenues by commodity group for the three months ended ~~June 30, 2021~~March 31, 2022
Agriculture and minerals. Revenues increased ~~$25.5~~$39.0 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to a ~~14%~~20% increase in carload/unit volumes and a 7% increase in revenue per carload/unit. Revenues increased $15.4 million for the six months ended June 30, 2021, compared to the same period in 2020, due to a 5% increase in carload/unit volumes and a 1%9% increase in revenue per carload/unit. Volumes increased due to ~~recovery from COVID-19 impacts.~~ ~~For the three months ended June 30, 2021, revenue~~improved cycle times and favorable comparable volumes as a result of network congestion driven by weather impacts in 2021. Revenue per carload/unit increased ~~compared to the same period in 2020~~ due to higher fuel surcharge ~~longer average length of haul, the strengthening of the Mexican peso against the U.S. dollar,~~ and positive pricing impacts, partially offset by mix. For the six months ended June 30, 2021, revenue per carload/unit increased compared to the same period in 2020 due to longer average length of haul, higher fuel surcharge, positive pricing impacts, and the strengthening of the Mexican peso against the U.S. dollar, partially offset by mix.


Energy. Revenues increased ~~$15.2~~$14.1 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to a ~~43%~~14% increase in revenue per carload/unit and a 9% increase in carload/unit ~~volumes,~~volumes. Revenue per carload/unit increased due to higher fuel surcharge, positive pricing impacts, and longer average length of haul, partially offset by ~~a 3% decrease~~mix. Volumes increased in revenue per carload/unit. Revenues increased $16.4 million for the six months ended June 30, 2021, compared to the same period in 2020, due to a 23% increase in carload/unit volumes, partially offset by a 4% decrease in revenue per carload/unit. Utilityutility coal ~~volumes increased~~ as a result of higher natural gas prices ~~plant outages~~and improved cycle times. Volumes increased in ~~prior year, colder weather, and rebuilding of stockpiles.~~ ~~For the three months ended June 30, 2021, revenue per carload/unit decreased compared to the same period in 2020~~crude oil due to shorter average length of haul and pricing impacts, partially offset by higher fuel surcharge, mix, and the strengthening of the Mexican peso against the U.S. dollar. For the six months ended June 30, 2021, revenue per carload/unit decreased compared to the same periodnew business. Additionally, volumes increased in ~~2020~~pet coke due to ~~mix, shorter average length of haul, lower fuel surcharge, and pricing impacts, partially offset by the strengthening of the Mexican peso against the U.S. dollar.~~higher demand.

Intermodal. Revenues increased ~~$27.6~~$14.6 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to a ~~31% increase in carload/unit volumes and a 10%~~12% increase in revenue per carload/~~unit. Revenues increased $20.2 million for the six months ended June 30, 2021, compared to the same period in 2020, due to~~unit and a ~~14%~~5% increase in carload/unit volumes. Carload/unit volumes increased due to recovery from COVID-19 impacts, partially offset by slow recovery at the Lazaro Cardenas port in Mexico following service interruptions in the fourth quarter of 2020 due to KCSM right-of-way blockages resulting from teachers’ protests.

~~For the three months ended June 30, 2021, revenue~~Revenue per carload/unit increased ~~compared to the same period in 2020~~ due to higher fuel surcharge, longer average length of haul, positive pricing impacts, and the strengthening of the Mexican peso against the U.S. dollar, partially offset by mix. For the six months ended June 30, 2021, revenue per carload/unit was flat compared to the same period in 2020 due to positive pricing impacts, higher fuel surcharge, and the strengthening of the Mexican peso against the U.S. dollar was offset by mix and shorter average length of haul.

~~Automotive.~~ Revenues increased $33.8 million for the three months ended June 30, 2021, compared to the same period in 2020, due to a 139% increase in carload/unit volumes and a 33% increase in revenue per carload/unit. Revenues increased $24.0 million for

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the six months ended June 30, 2021, compared to the same period in 2020, due to a 24% increase in carload/unit volumes and a 9% increase in revenue per carload/unit. Volumes increased due to recovery from COVID-19 impacts, partially offset by auto plant shutdowns driven by a global microchip shortage.

~~For the three months ended June 30, 2021, revenue per carload/unit increased compared to the same period in 2020 due to the strengthening of the Mexican peso against the U.S. dollar,~~ higher fuel surcharge and positive pricing impacts, partially offset by mix. ~~For~~Volumes increased due to favorable comparable volumes as a result of network congestion driven by weather impacts in 2021, improved cycle times, and partial recovery of the ~~six~~global microchip shortage affecting auto parts shipments.

Automotive. Revenues increased $10.2 million for the three months ended ~~June 30, 2021, revenue per carload/unit increased~~March 31, 2022, compared to the same period in ~~2020~~2021, due to ~~the strengthening~~a 17% increase in carload/unit volumes and a 5% increase in revenue per carload/unit. Volumes increased due to partial recovery of the ~~Mexican peso against the U.S. dollar,~~global microchip shortage. Revenue per carload/unit increased due to higher fuel surcharge, positive pricing impacts, ~~higher fuel surcharge,~~ and longer average length of haul, partially offset by mix.

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Operating Expenses

Operating expenses, as shown below (in millions), increased ~~$813.7~~$34.1 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, primarily due to ~~the CP merger agreement termination fee payment,~~ higher diesel fuel price, non-creditable VAT due to VAT law changes, and ~~consumption, the strengthening of the Mexican peso against the U.S. dollar~~higher materials and ~~increased overtime and recrews related to network congestion,~~supplies expense, partially offset by decreased ~~restructuring charges.~~merger costs. The strengthening of the Mexican peso against the U.S. dollar during the three months ended ~~June 30, 2021,~~March 31, 2022, resulted in increased expense of approximately ~~$16.0~~$1.0 million, compared to the same period in ~~2020,~~2021, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was ~~Ps.20.1~~Ps.20.5 for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to ~~Ps.23.4~~Ps.20.3 for the same period in ~~2020.~~2021.

~~Operating expenses, as shown below (in millions~~), increased $823.8 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to the termination fee associated with the CP merger and other merger costs, higher diesel fuel price and consumption, the strengthening of the Mexican peso against the U.S. dollar, increased overtime and recrews related to network congestion, and wage and benefit inflation, partially offset by decreased restructuring charges. The strengthening of the Mexican peso against the U.S. dollar during the six months ended June 30, 2021, resulted in increased expense of approximately $15.0 million, compared to the same period in 2020, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.20.2 for the six months ended June 30, 2021, compared to Ps.21.6 for the same period in 2020.

Three Months Ended
June 30, Change
2021 2020 Dollars Percent
Compensation and benefits $ 128.4 $ 103.8 $ 24.6 24 %
Purchased services 55.8 44.6 11.2 25 %
Fuel 79.0 39.5 39.5 100 %
Equipment costs 24.1 18.1 6.0 33 %
Depreciation and amortization 91.2 89.3 1.9 2 %
Materials and other 81.9 61.7 20.2 33 %
Merger costs 720.8 — 720.8 100 %
Restructuring charges — 10.5 (10.5) (100 %)
Total operating expenses $ 1,181.2 $ 367.5 $ 813.7 221 %


		Six Months Ended									Three Months Ended
		June 30,				Change					March 31,				Change
		2021		2020		Dollars		Percent			2022		2021		Dollars		Percent
Compensation and benefits	Compensation and benefits	$	257.9	$	237.2	$	20.7	9	%	Compensation and benefits	$	133.0	$	129.5	$	3.5	3	%
Purchased services	Purchased services	109.6		97.9		11.7		12	%	Purchased services	51.3		53.8		(2.5)		(5	%)
Fuel	Fuel	149.9		114.4		35.5		31	%	Fuel	97.1		70.9		26.2		37	%
Equipment costs	Equipment costs	45.2		40.0		5.2		13	%	Equipment costs	18.6		21.1		(2.5)		(12	%)
Depreciation and amortization	Depreciation and amortization	183.2		178.7		4.5		3	%	Depreciation and amortization	96.2		92.0		4.2		5	%
Materials and other	Materials and other	148.3		125.7		22.6		18	%	Materials and other	78.1		66.4		11.7		18	%
Merger costs	Merger costs	740.1		—		740.1		100	%	Merger costs	12.8		19.3		(6.5)		(34	%)
Restructuring charges		—		16.5		(16.5)		(100	%)
Total operating expenses	Total operating expenses	$	1,634.2	$	810.4	$	823.8	102	%	Total operating expenses	$	487.1	$	453.0	$	34.1	8	%

Compensation and benefits. Compensation and benefits increased ~~$24.6~~$3.5 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to ~~an increase in overtime and recrews of approximately $10.0 million,~~ wage and benefit inflation of approximately $6.0 million, ~~the strengthening of the Mexican peso~~an increase in headcount and hours worked of approximately ~~$5.0~~$4.0 million, and ~~increased~~costs relating to Mexican outsourcing reform of approximately $2.0 million, partially offset by decreased incentive compensation of approximately ~~$4.0~~$8.0 million.

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Compensation and benefits increased $20.7 million for the six months ended June 30, 2021, compared to the same period in 2020, due to an increase in overtime and recrews of approximately $13.0 million, wage and benefit inflation of approximately $12.0 million and the strengthening of the Mexican peso of approximately $5.0 million, partially offset by a decrease in headcount of approximately $10.0 million.

Purchased services. Purchased services expense ~~increased $11.2 million and $11.7~~decreased $2.5 million for the three ~~and six~~ months ended ~~June 30, 2021, respectively,~~March 31, 2022, compared to the same ~~periods~~period in ~~2020,~~2021, due to ~~increases~~cost reductions of approximately $5.0 million as a result of Mexico outsourcing reform and lower corporate services of approximately $2.0 million, partially offset by an increase in software and programming expense of approximately $3.0 million and $4.0 million, respectively, higher trackage rights of approximately $3.0 million and $4.0 million, respectively, and the strengthening of the Mexican peso of approximately $2.0 million for both periods.million.

Fuel. Fuel increased ~~$39.5~~$26.2 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to higher diesel fuel prices in the U.S. and Mexico of approximately ~~$13.0~~$18.0 million and ~~$6.0~~$7.0 million, respectively, and increased consumption of approximately ~~$13.0 million and the strengthening of the Mexican peso of approximately $7.0 million.~~

Fuel increased $35.5 million for the six months ended June 30, 2021, compared to the same period in 2020, due to higher diesel fuel prices in the U.S. and Mexico of approximately $12.0 million and $6.0 million, respectively, increased consumption of approximately $12.0 million, and the strengthening of the Mexican peso of approximately $6.0$1.0 million. The average price per gallon was ~~$2.51 and $2.38~~$3.01 for the three ~~and six~~ months ended ~~June 30, 2021, respectively,~~March 31, 2022, compared to ~~$1.65 and $2.04~~$2.25 for the same ~~periods~~period in ~~2020.~~2021.

Equipment costs. Equipment costs ~~increased $6.0~~decreased $2.5 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, due to ~~increased~~decreased car hire expense of approximately ~~$6.0~~$3.0 million due to ~~higher volumes and cycle times as a result of COVID-19 impacts in 2020.~~

~~Equipment costs increased $5.2 million for the six months ended June 30, 2021, compared to the same period in 2020, due to increased car hire expense of approximately $7.0 million due to higher~~decreased cycle times and ~~volumes as a result of COVID-19 impacts in 2020.~~rate. This ~~increase~~decrease was partially offset by ~~lower~~higher lease expense of approximately ~~$2.0 million primarily due to freight car lease expirations and terminations resulting from PSR initiatives.~~$1.0 million.

Depreciation and amortization. Depreciation and amortization expense increased ~~$1.9 million and $4.5~~$4.2 million for the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, compared to the same ~~periods~~period in ~~2020,~~2021, due to an increase in depreciation rates on equipment as a result of a depreciation study and a larger asset base.

Materials and other. Materials and other expense increased $20.2 million and $22.6 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020 due to a one-time contract dispute of approximately $9.0 million for both periods and increased locomotive materials expense of approximately $6.0 million and $11.0 million, respectively, resulting from the in-servicing of locomotives to support service recovery and preparing for volume growth in the second half of 2021. The remaining increase is due to the strengthening of the Mexican peso of approximately $3.0 million and $2.0 million respectively, and increased employee expenses of approximately $2.0$11.7 million for the three months ended ~~June 30, 2021.~~March 31, 2022, compared to the same period in 2021, due to increased expense of approximately $5.0 million related to the non-creditable VAT due to VAT law changes in Mexico; increased materials and supplies expense of approximately $4.0 million; and increased material purchases resulting from Mexico outsourcing reform of approximately $3.0 million.

Merger costs. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2022, the Company recognized merger costs of $12.8 million, primarily related to incentive compensation. During the three months ended March 31, 2021, the Company recognized merger costs of ~~$720.8~~$19.3 million, ~~and $740.1 million, respectively,~~ primarily related ~~to the termination fee associated with the termination of the CP merger agreement by KCS of $700.0 million. The remaining costs primarily relate~~ to bankers’ and legal fees. ~~Please see~~See Note 2, Merger Agreement for more information.

~~Restructuring charges.~~ During the three and six months ended June 30, 2020, the Company recognized $10.5 million and $16.5 million, respectively of restructuring charges primarily related to the voluntary separation program of $9.2 million and the buyout of leased locomotives. There were no restructuring charges recognized during the three and six months ended June 30, 2021.

Non-Operating Income and Expenses

Equity in net earnings of affiliates. For the three months ended ~~June 30, 2021,~~March 31, 2022, equity in net earnings of affiliates increased ~~$3.2~~$2.8 million, compared to the same period in ~~2020,~~2021, primarily due to ~~an increase in~~increased net earnings from ~~the operations~~unrealized appreciation of ~~Panama Canal Railway Company (“PCRC”) due to lower container volumes~~

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investments held in ~~2020 caused primarily~~a fifteen percent-owned equity investment, partially offset by a ~~water vessel striking a rail bridge that shut down the railroad for approximately three months.~~

~~For the six months ended June 30, 2021, equity in net earnings of affiliates increased $8.2 million, compared to the same period in 2020, primarily due to an increase~~decrease in net earnings from the operations of TFCM, S. de R.L de C.V. (“TCM”) due to ~~increased revenues,~~ decreased interest and tax expense ~~and lower foreign exchange losses, as well as increased net earnings from the operations of PCRC as a result of the aforementioned 2020 bridge outage.~~

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in 2021.

Interest expense. For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, interest expense ~~increased $1.0 million and $5.8 million, respectively,~~remained flat compared to the same ~~periods~~period in ~~2020, due to higher average debt balances.~~2021. During the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, the average debt balance (including commercial paper) was ~~$3,810.5~~$3,812.6 million, ~~and $3,807.5 million, respectively,~~ compared to ~~$3,818.6 million and $3,546.9~~$3,804.5 million for the same ~~periods~~period in ~~2020.~~2021. The average interest rate during the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 was 4.1% for both ~~periods, compared to 4.0% and 4.1% for the same periods in 2020.~~periods.

Foreign exchange ~~gain (loss).~~loss. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, the Company incurred a foreign exchange ~~gain~~loss of ~~$6.8~~$1.4 million and ~~a loss of $0.5~~$7.3 million, ~~respectively, compared to a foreign exchange gain of $7.8 million and a loss of $51.7 million for the same periods in 2020.~~respectively. Foreign exchange gain (loss) includes the re-measurement and settlement of net monetary assets denominated in Mexican pesos and the gain (loss) on foreign currency derivative contracts.

For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, the re-measurement and settlement of monetary assets and liabilities denominated in Mexican pesos resulted in a foreign exchange gain of ~~$8.5~~$6.7 million, ~~and $3.6 million, respectively,~~ compared to a ~~gain of $1.4 million and a~~ loss of ~~$24.4~~$4.9 million for the same ~~periods~~period in ~~2020.~~2021.

The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in foreign currency caused by fluctuations in the value of the Mexican peso against the U.S. dollar. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company incurred a foreign exchange loss on foreign currency derivative contracts of ~~$1.7~~$8.1 million and ~~$4.1~~$2.4 million, ~~respectively, compared to a gain of $6.4 million and a loss of $27.3 million for the same periods in 2020.~~respectively.

Other income (expense), net. Other income (expense), net ~~remained flat~~increased $1.7 million for the three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020. Other income, net decreased $2.0 million for the six months ended June 30,~~ 2021, ~~compared to the same period in 2020,~~ due to an increase in miscellaneous ~~expenses.~~income.

Income tax expense. Income tax expense ~~decreased $122.4 million and $109.1~~increased $14.0 million for the three ~~and six~~ months ended ~~June 30, 2021, respectively,~~March 31, 2022, compared to the same ~~periods~~period in ~~2020,~~2021, primarily due to ~~the payment of the termination fee associated with the termination of the CP merger agreement by KCS.~~A discrete tax benefit of $147.0 million was recognized on the CP termination fee resulting in a tax benefit for the three and six months ended June 30, 2021, and is expected to reverse upon recognition of the termination fee reimbursement in the consolidated statements of operations in the third quarter of 2021. Upon the Merger, the Company expects the termination fee paid to CP will be non-deductible and the reimbursement from CN will not be taxable.higher pre-tax income.

The components of the effective tax rates for the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, compared to the same ~~periods~~period in ~~2020,~~2021, are as follows:


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
		2021		2020		2021		2020				2022		2021
Statutory rate in effect	Statutory rate in effect	21.0	%	21.0	%	21.0	%	21.0	%	Statutory rate in effect		21.0	%	21.0	%
Tax effect of:	Tax effect of:									Tax effect of:
Difference between U.S. and foreign tax rate	Difference between U.S. and foreign tax rate	(3.0	%)	4.9	%	(10.6	%)	5.3	%	Difference between U.S. and foreign tax rate		5.5	%	6.0	%
GILTI tax, net		—		1.3	%	(0.1	%)	1.2	%
Inflation										Inflation		(1.5	%)	(0.5	%)
State and local income tax provision, net	State and local income tax provision, net	(0.7	%)	1.5	%	(2.3	%)	1.4	%	State and local income tax provision, net		1.3	%	1.2	%
Foreign exchange (i)	Foreign exchange (i)	(0.5	%)	(1.8	%)	(1.3	%)	(3.5	%)	Foreign exchange (i)		1.1	%	0.4	%
Other, net	Other, net	1.0	%	0.1	%	2.6	%	(0.7	%)	Other, net		0.4	%	(0.5	%)
Effective tax rate	Effective tax rate	17.8	%	27.0	%	9.3	%	24.7	%	Effective tax rate		27.8	%	27.6	%

(i)The Company’s Mexican subsidiaries have net U.S. dollar-denominated monetary liabilities which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the Mexican peso against the U.S dollar. This revaluation creates fluctuations in the Company’s Mexican income tax expense in the consolidated income statements ~~of operations~~ and the amount of income taxes paid in Mexico. The Company also has net monetary assets denominated in Mexican pesos, that are subject to periodic re-measurement and settlement that creates fluctuations in foreign currency gains and losses in the consolidated ~~statements of operations.~~income statements. The Company hedges its net exposure to variations in earnings by entering into foreign currency forward contracts. The foreign currency forward contracts involve the Company’s agreement to buy or sell pesos at an agreed-upon exchange rate on a future date. Refer to Note 7,6, Derivative Instruments for more information.

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Mexico Regulatory and Legal Updates

~~Outsourcing Reform.~~ In April 2021, Mexico approved several amendments to federal labor, tax, social security, and other laws (“Outsourcing Reform”), which prohibit the subcontracting and outsourcing of personnel. Outsourcing Reform allows for certain exceptions, including the subcontracting of specialized services that are not part of a recipient company’s corporate purpose or main economic activities. A 90-day transition period was granted to allow companies to comply with Outsourcing Reform. Non-compliance could result in penalties and the loss of deductions and VAT credits on third party and related party service payments.

KCSM subcontracts its management and union employees, other than the president and executive representative of KCSM, from its affiliate, KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned and consolidated subsidiary of the Company. Under Outsourcing Reform, KCSM Servicios is prohibited from providing certain outsourced employees to KCSM. As a consequence, subsequent to June 30, 2021, KCSM Servicios was merged into KCSM, resulting in KCSM Servicios employees becoming employees of KCSM.

Outsourcing Reform also limits the statutory profit sharing payment per employee (referred to by its Spanish acronym “PTU”) to the greater of three months’ salary or the average of the amount of profit sharing received in the last three years. KCSM Servicios’ employees were eligible for PTU and received PTU payments and other bonuses. As employees of KCSM, employees will be eligible to receive PTU payments from KCSM upon the merger. As a result of the limitations on PTU, Outsourcing Reform is not expected to have a material impact on the consolidated financial statements.

Hydrocarbons Law. On May 5, 2021, new legislation pertaining to the transport and handling of hydrocarbons in Mexico became effective. This legislation addresses a wide array of issues related to the storage, transportation and handling of petroleum products, as well as the illegal import of hydrocarbons. The legislation is being challenged in the court system by a number of stakeholders and is currently subject to a court-ordered injunction, resulting in a suspension of the implementation and enforcement of this new law. To date, this law has not had a material effect on the Company or its operations. However, the Company is continuing to ~~the~~ monitor this law and is evaluating the effect on the Company and its ~~financial statements.~~business operations.

Inspections Related to Imports and Terminals. During 2021, the Ministry of Infrastructure, Communications, and Transportation (“SICT”) and other relevant Mexican authorities increased inspections of imports and enforcement of various regulations and permit

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requirements related to terminal operations, with specific focus on imports of refined products and refined fuel transloading terminals and freight terminals, in order to prevent the illegal importation of refined fuel products. These inspections resulted in delays related to the import of shipments into Mexico as well as the shutdown of several refined fuel terminals in the second half of 2021. The SICT has instructed KCSM to provide railway service only to those terminals that have the applicable permits. If KCSM were to fail to comply with the SICT requirements, the Company could be subject to fines and potential revocation of the Concession. As a result, KCS’s freight revenue from refined products decreased in 2021 and continued to decrease in the first quarter of 2022. See further discussion in the Revenues section.

Value-Added Tax Law. KCSM is not required to charge its customers VAT on international import or export transportation services, resulting in KCSM paying more VAT on its expenses than it collects from customers. These excess VAT payments are refundable by the Mexican government. Prior to 2019, Mexican companies could offset their monthly refundable VAT balance with other tax obligations. In January 2019, Mexico tax reform eliminated the ability to offset other tax obligations with refundable VAT. Since January 2019, KCSM has generated a refundable VAT balance and filed refund claims with the Servicio de Administración Tributaria (the “SAT”) which have not been refunded.

In November 2021, changes to the VAT law were announced and became effective beginning January 1, 2022. These changes reduced the recoverability of VAT paid by KCSM on its expenditures that support international import transportation service revenues that are not subject to a VAT charge. VAT that is unrecoverable from the Mexican government results in incremental VAT expense for KCSM. Beginning in 2022, KCSM changed certain service offerings to either require VAT to be charged to customers on revenue, or impose a rate increase to offset the incremental VAT expense. These measures implemented by KCSM increase the VAT to be collected from customers and payable to the Mexican government.

Carta Porte. In the second quarter of 2021, KCSM was notified by the SAT that shipping companies (cargo airlines, trucks, maritime, railroads, and other similar companies) must include additional bill of lading information (referred to in Mexico as “Carta Porte”) with the invoice for all merchandise shipped in Mexico, including cross-border, international and Mexico domestic shipments. The Carta Porte requirements and deadline were modified several times throughout 2021. The effective date of January 1, 2022 included a three month grace period during which penalties and fines for inaccurate information would not be imposed. In the first quarter of 2022, the grace period was extended to September 30, 2022. KCSM adapted its systems to comply with the Carta Porte requirements, which delayed KCSM’s invoicing and cash collections by approximately 30 days in the first quarter of 2022.

Failure to comply with Carta Porte requirements subsequent to the grace period could result in penalties and fines imposed by the SAT, shipping delays causing network congestion and delayed invoicing and cash collections. In addition, in the event of repeated noncompliance with Carta Porte requirements, the SAT has the power to preventively shut down operations of a company.

Liquidity and Capital Resources

Overview

The Company focuses its cash and capital resources on investing in the business, shareholder returns and optimizing its capital structure.

The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, and other available financing resources will be sufficient to fund anticipated operating expenses, capital expenditures, debt service costs, dividends, and other commitments for the foreseeable future.

During the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, the Company invested ~~$249.2~~$98.7 million in capital expenditures. See the Capital Expenditures section for further details.

On May 21, 2021, KCS paid CP a merger termination fee of $700.0 million and a U.S. affiliate of CN paid KCS $700.0 million as reimbursement for the termination fee paid to CP. KCS is obligated to repay the termination fee to CN under certain circumstances, including but not limited to, if KCS were to terminate the Merger Agreement to accept a superior proposal as defined by the Merger Agreement. In addition, KCS would be required to pay CN a termination fee of $700.0 million to terminate the Merger Agreement with CN. For 2021, the Company expects to pay approximately $180.0 million of merger-related costs, assuming the Voting Trust Transaction occurs in the second half of 2021.

~~During~~ the first quarter of ~~2021,~~2022, pursuant to the Merger Agreement, KCS ~~received 233,402 shares~~paid a cash dividend of ~~common stock as final settlement~~$265.0 million to a wholly-owned subsidiary of CP. KCS plans to make further periodic cash distributions based upon cash generated, the timing of capital expenditures and working capital needs of the forward contracts totaling $75.0 million under the accelerated share repurchase (“ASR”) agreements entered into during October 2020 under the 2019 share repurchase program. The final weighted-average price per share of the shares repurchased under these ASR agreements was $191.75. As a result of the merger agreement with CP, the Company terminated its share repurchase program. Refer to Note 9, Share Repurchases, for additional information on the Company’s common share repurchase program and ASR agreements.

~~During the first quarter of 2021, the Company repurchased 657 shares of its $25 par preferred stock for less than $0.1 million at an average price of $37.79 per share.~~

During the first and second quarters of 2021, the Company’s board of directors declared a quarterly cash dividend on its common stock of $0.54 per share (total of $98.2 million). Subject to capital availability, the Company intends to pay a quarterly dividend on an ongoing basis.

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Company.

The Company’s current financing instruments contain restrictive covenants that limit or preclude certain actions; however, the covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company has been, and expects to continue to be, in compliance with all of its debt covenants. For additional discussion of the agreements representing

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the indebtedness of KCS, see Note ~~12,~~11, Short-Term Borrowings and Note ~~13,~~12, Long-Term Debt in the “Notes to the Consolidated Financial Statements” section of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

KCS believes it has a strong liquidity position to continue business operations and service its debt obligations. The Company has total available liquidity of ~~$925.8~~$704.6 million as of ~~June 30, 2021,~~March 31, 2022, consisting of cash on hand and a revolving credit facility, compared to available liquidity at December 31, ~~2020~~2021 of ~~$788.2~~$939.3 million. ~~Furthermore, the Company does not have any debt maturities until 2023.~~

As of ~~June 30, 2021,~~March 31, 2022, the total cash and cash equivalents held outside of the U.S. in foreign subsidiaries was ~~$144.4~~$36.7 million, after repatriating ~~$52.8~~$19.4 million during ~~2021.~~2022. The Company expects that this cash will be available to fund operations without incurring significant additional income taxes.

~~Mexico 2020 tax reform permanently eliminated universal compensation that allowed Mexican taxpayers~~On January 1, 2022, KCSM complied with Carta Porte requirements, providing customers with additional bill of lading information with the invoice for all merchandise shipped in Mexico. KCSM adapted its systems to ~~offset~~

~~recoverable tax balances against balances due for other federal taxes. As a result~~comply with the Carta Porte requirements, which delayed KCSM’s invoicing and cash collections by approximately 30 days in the first quarter of 2022. The Company believes cash collections will normalize in the ~~elimination~~second and third quarters of universal compensation, the refundable VAT balance increased to $138.9 million as of June 30, 2021, and could negatively impact the timing of KCSM’s cash flow by up to $70.0 million in 2021 while awaiting refunds of value added tax from the Mexican government. KCSM has prior favorable Mexican court decisions and a legal opinion supporting its right under Mexican law to recover the refundable VAT balance from the Mexican government and believes the VAT to be fully collectible. However, the Company cannot predict the timing or amount of the Company’s ultimate collection of the refundable VAT balance from the Mexican government. 2022.

Cash Flow Information

Summary cash flow data follows (in millions):


		Six Months Ended					Three Months Ended
		June 30,					March 31,
		2021		2020			2022		2021
Cash flows provided by (used for):	Cash flows provided by (used for):					Cash flows provided by (used for):
Operating activities	Operating activities	$	507.3	$	525.5	Operating activities	$	149.2	$	226.2
Investing activities	Investing activities	(279.0)		(299.2)		Investing activities	(115.8)		(114.0)
Financing activities	Financing activities	(90.3)		250.1		Financing activities	(267.5)		(39.5)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(0.4)		(5.1)		Effect of exchange rate changes on cash	(0.6)		(1.0)
Net increase in cash and cash equivalents		137.6		471.3
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	(234.7)		71.7
Cash and cash equivalents beginning of year	Cash and cash equivalents beginning of year	188.2		148.8		Cash and cash equivalents beginning of year	339.3		188.2
Cash and cash equivalents end of period	Cash and cash equivalents end of period	$	325.8	$	620.1	Cash and cash equivalents end of period	$	104.6	$	259.9

Cash flows from operating activities decreased ~~$18.2~~$77.0 million for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, primarily due to ~~payments for merger-related costs~~a decrease in cash collections from a delay in invoicing and ~~increased payments related to refundable Mexican value added tax,~~cash collections resulting from implementation of Carta Porte regulations, partially offset by ~~lower payments to settle foreign currency derivatives.~~increased operating income.

Net cash used for investing activities ~~decreased $20.2~~increased $1.8 million for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, compared to the same period in ~~2020,~~2021, primarily due to ~~a decrease~~increased property investments in ~~the purchase or replacement~~MSLLC of ~~assets under existing operating leases of $78.2 million, partially offset by an increase in capital expenditures of $55.8 million.~~

Net cash provided by financing activities decreased $340.4 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to a decrease in proceeds from the issuance of long-term debt of $545.6$15.3 million, partially offset by a decrease in ~~shares repurchased~~capital expenditures of ~~$211.7~~$10.3 million.

Net cash used for financing activities increased $228.0 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to the cash dividend payment of $265.0 million to a wholly-owned subsidiary of CP.

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Capital Expenditures

KCS has funded, and expects to continue to fund capital expenditures with operating cash flows and short and long-term debt.

The following table summarizes capital expenditures by type (in millions):


		Six Months Ended					Three Months Ended
		June 30,					March 31,
		2021		2020			2022		2021
Roadway capital program	Roadway capital program	$	116.9	$	116.2	Roadway capital program	$	60.0	$	55.7
Locomotives and freight cars	Locomotives and freight cars	44.1		20.7		Locomotives and freight cars	10.3		10.8
Capacity	Capacity	57.1		20.1		Capacity	14.6		18.3
Information technology	Information technology	19.3		21.0		Information technology	12.1		9.7
Positive train control	Positive train control	9.6		6.7		Positive train control	1.3		4.2
Other	Other	2.2		1.8		Other	0.4		0.8
Total capital expenditures (accrual basis)	Total capital expenditures (accrual basis)	249.2		186.5		Total capital expenditures (accrual basis)	98.7		99.5
Change in capital accruals	Change in capital accruals	1.3		8.2		Change in capital accruals	(3.0)		6.5
Total cash capital expenditures	Total cash capital expenditures	$	250.5	$	194.7	Total cash capital expenditures	$	95.7	$	106.0

Total cash purchase or replacement of assets under operating leases		$	—	$	78.2

Generally, the Company’s capital program consists of capital replacement and equipment. ~~During 2021, the Company is upgrading its ERP system with expected costs of approximately $30.0 million.~~ For ~~2021,~~2022, internally generated cash flows are expected to fund cash capital expenditures, which are currently estimated to be approximately ~~17%~~16.5% of revenue in ~~2021,~~2022, assuming constant currency and fuel price. In addition, the Company periodically reviews its equipment and property under operating leases. Any additional purchase or replacement of equipment and property under operating leases during 2021 is expected to be funded with internally generated cash flows and/or debt.

Supplemental Guarantor Financial Information

The following is a description of the terms and conditions of the guarantees with respect to senior notes for which KCS is an issuer or provides full and unconditional guarantee.

Note Guarantees

As of ~~June 30, 2021,~~March 31, 2022, KCS had outstanding $3,736.2 million principal amount of senior notes due through 2069. ~~The Kansas City Southern Railway Company (“KCSR”)~~KCSR had outstanding $2.7 million principal amount of senior notes due through 2045 (together, the “Senior Notes”). The senior notes for which KCS is the issuer are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by each of KCS’s current and future domestic consolidated subsidiaries that from time to time guarantees certain of KCS’s credit agreements, or any other debt of KCS, or any of KCS’s significant subsidiaries that is a guarantor (each, a “Guarantor Subsidiary,” and collectively, the “Guarantor Subsidiaries”). In addition, the senior notes for which KCSR is the issuer are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by KCS and each of its current and future domestic consolidated subsidiaries that from time to time guarantees KCSR’s credit agreement, or any other debt of KCSR or any of KCSR’s significant subsidiaries that is a Guarantor Subsidiary. The obligations of each Guarantor Subsidiary under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. A guarantee of the Senior Notes by KCS or a Guarantor Subsidiary is subject to release in the following circumstances: (i) the sale, disposition, exchange or other transfer (including through merger, consolidation, amalgamation or otherwise) of the capital stock of the Guarantor Subsidiary made in a manner not in violation of the indenture; (ii) the designation of the subsidiary as an “Unrestricted Subsidiary” under the indenture; (iii) the legal defeasance or covenant defeasance of the Senior Notes in accordance with the terms of the indenture; or (iv) the Guarantor Subsidiary ceasing to be KCS’s subsidiary as a result of any foreclosure of any pledge or security interest securing KCS’s Revolving Credit Facility or other exercise of remedies in respect thereof.

KCSM and any other foreign subsidiaries of KCS do not and will not guarantee the Senior Notes (“Non-Guarantor Subsidiaries”).

The following tables present summarized financial information for KCS and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the receivable and payable balances, investment in, and equity in earnings from the Non-Guarantor Subsidiaries.

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Summarized Financial Information

Statements of Operations KCS and Guarantor Subsidiaries
Six Months Ended Twelve Months Ended
June 30, 2021 December 31, 2020
Revenues $ 740.5 $ 1,368.7
Operating expenses 1,199.8 846.9
Operating income (loss) (459.3) 521.8
Income (loss) before income taxes (537.6) 375.4
Net income (loss) (411.7) 329.8


Income Statements	KCS and Guarantor Subsidiaries
	Three Months Ended		Twelve Months Ended
	March 31, 2022		December 31, 2021
Revenues	$	420.5	$	1,561.3
Operating expenses	271.9		1,200.8
Operating income	148.6		360.5
Income before income taxes	116.7		207.7
Net income	92.4		182.7


Balance Sheets	Balance Sheets	KCS and Guarantor Subsidiaries				Balance Sheets	KCS and Guarantor Subsidiaries
		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Assets:	Assets:					Assets:
Current assets	Current assets	$	370.0	$	298.8	Current assets	$	281.9	$	524.6
Property and equipment (including concession assets), net	Property and equipment (including concession assets), net	4,836.6		4,751.3		Property and equipment (including concession assets), net	4,868.4		4,876.5
Other non-current assets	Other non-current assets	156.4		110.8		Other non-current assets	189.9		125.8

Liabilities and equity:	Liabilities and equity:					Liabilities and equity:
Current liabilities	Current liabilities	$	1,039.4	$	318.2	Current liabilities	$	313.6	$	316.5
Non-current liabilities	Non-current liabilities	4,763.5		4,841.2		Non-current liabilities	4,945.5		4,942.7
Noncontrolling interest	Noncontrolling interest	327.3		326.4		Noncontrolling interest	328.8		328.2

Excluded from current assets in the table above are ~~$187.2~~$271.8 million and ~~$183.7~~$199.8 million of current intercompany receivables due to KCS and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Excluded from current liabilities in the table above are ~~$239.5~~$227.3 million and ~~$235.8~~$267.5 million of current intercompany payables due to the Non-Guarantor Subsidiaries from KCS and the Guarantor Subsidiaries as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

The Senior Notes are structurally subordinated to the indebtedness and other liabilities of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Senior Notes or the indentures, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that KCS or the Guarantor Subsidiaries have to receive any assets of any of the Non-Guarantor Subsidiaries upon the liquidation or reorganization of any Non-Guarantor Subsidiary, and the consequent rights of holders of Senior Notes to realize proceeds from the sale of any of a Non-Guarantor Subsidiary’s assets, would be effectively subordinated to the claims of such Non-Guarantor Subsidiary’s creditors, including trade creditors and holders of preferred equity interests, if any, of such Non-Guarantor Subsidiary. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of the Non-Guarantor Subsidiaries, the Non-Guarantor Subsidiaries will pay the holders of their debts, holders of preferred equity interests, if any, and their trade creditors before they will be able to distribute any of their assets to KCS or any Guarantor Subsidiary.

If a Guarantor Subsidiary were to become a debtor in a case under the U.S. Bankruptcy Code or encounter other financial difficulty, under federal or state fraudulent transfer or conveyance law, a court may avoid, subordinate or otherwise decline to enforce its guarantee of the Senior Notes. A court might do so if it is found that when such Guarantor Subsidiary entered into its guarantee of the Senior Notes, or in some states when payments became due under the Senior Notes, such Guarantor Subsidiary received less than reasonably equivalent value or fair consideration and either:

• was insolvent or rendered insolvent by reason of such incurrence;

• was left with unreasonably small or otherwise inadequate capital to conduct its business; or

• believed or reasonably should have believed that it would incur debts beyond its ability to pay.

The court might also avoid the guarantee of the Senior Notes without regard to the above factors, if the court found that a Guarantor Subsidiary entered into its guarantee with actual intent to hinder, delay or defraud its creditors.

A court would likely find that a Guarantor Subsidiary did not receive reasonably equivalent value or fair consideration for its guarantee of the Senior Notes, if such Guarantor Subsidiary did not substantially benefit directly or indirectly from the funding made available by the issuance of the Senior Notes. If a court were to avoid a guarantee of the Senior Notes provided by a Guarantor Subsidiary, holders of the Senior Notes would no longer have any claim against such Guarantor Subsidiary. The measures of

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insolvency for purposes of these fraudulent transfer or conveyance laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred, such that the Company cannot predict what standards a court would use to determine whether or not a Guarantor Subsidiary was solvent at the relevant time or, regardless of the standard that a court uses, that the guarantee of a Guarantor Subsidiary would not be subordinated to such Guarantor Subsidiary’s other debt. As noted above, each guarantee provided by a Guarantor Subsidiary includes a provision intended to limit the Guarantor Subsidiary’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer or conveyance. This provision may not be effective to protect those guarantees from being avoided under fraudulent transfer or conveyance law, or it may reduce that Guarantor Subsidiary’s obligation to an amount that effectively makes its guarantee worthless, and the Company cannot predict whether a court will ultimately find it to be effective.

On the basis of historical financial information, operating history and other factors, the Company believes that each of the Guarantor Subsidiaries, after giving effect to the issuance of its guarantee of the Senior Notes when such guarantee was issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, as to what standard a court would apply in making these determinations or that a court would agree with the Company’s conclusions in this regard.

Other Matters

Collective Bargaining

KCSR participates in industry-wide multi-employer bargaining as a member of the National Carriers’ Conference Committee (“NCCC”), as well as local bargaining for agreements that are limited to KCSR's property. Approximately ~~70%~~72% of KCSR employees are covered by collective bargaining agreements. Long-term agreements were reached voluntarily or through the arbitration process during 2017 and 2018 covering all of the participating unions. The terms of these agreements will remain in effect until new agreements are reached in the current national bargaining round. In November 2019, KCSR and its unions commenced negotiations in connection with the 2020 bargaining round.

KCSM ~~Servicios, a wholly owned subsidiary of KCS, provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. KCSM Servicios~~ union employees are covered by one labor agreement, which was signed on April 16, 2012, between KCSM Servicios, a previously wholly-owned subsidiary of KCS that was merged into KCSM in 2021, and the Sindicato de Trabajadores Ferrocarrileros de la República Mexicana (“Mexican Railroad Union”)~~, and which~~. This labor agreement remains in effect during the period of the Concession for the purpose of regulating the relationship between the parties. Approximately ~~80%~~77% of KCSM ~~Servicios~~ employees are covered by this labor agreement. The compensation terms under this labor agreement are subject to renegotiation on an annual basis and all other benefits are subject to negotiation every two years. The parties finalized negotiations over compensation terms and benefits that ~~will apply~~applied until June 30, 2021, along with other ~~terms.~~

Subsequent to June 30, 2021, KCSM Servicios merged into KCSM as part of Mexico Outsourcing Reform. Upon merger, KCSM Servicios employees became employees of KCSM. As a result, the KCSM union employees continue to be covered under the existing labor agreement.terms, and will remain in effect until new terms have been negotiated.

Union labor negotiations have not historically resulted in any strike, boycott, or other disruption in the Company’s business operations.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

There was no material change during the quarter from the information set forth in Part II, Item 7A. “Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Item 4.Controls and Procedures

(a) Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon

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that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal quarter ended ~~June 30, 2021~~March 31, 2022, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level.

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(b) Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended ~~June 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

For information related to the Company’s legal proceedings, see Note ~~11,~~9, Commitments and Contingencies, under Part I, Item 1 of this quarterly report on Form 10-Q.

Item 1A.Risk Factors

~~Except as set forth below, during the quarter ended June 30, 2021, there~~There were no material changes during the quarter to the Risk Factors disclosed in Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

The Company’s Merger with CN is subject to various closing conditions, including regulatory and stockholder approvals as well as other uncertainties, and there can be no assurances as to whether and when it may be completed.

Completion of the Merger is subject to the satisfaction or waiver of a number of customary conditions, and it is possible that such conditions may prevent, delay or otherwise materially adversely affect the completion of the Merger. These conditions include, among other things: (1) the adoption of the Merger Agreement by the Company’s stockholders; (2) the absence of any injunction or similar order prohibiting the consummation of the Merger or the Voting Trust Transaction; (3) approval of the Voting Trust Transaction by the STB, (4) approval by the Comisión Federal de Competencia Económica (the Mexican Antitrust Commission) and the Instituto Federal de Telecomunicaciones (the Mexican Federal Telecommunications Institute) of the transactions contemplated by the Merger Agreement, (5) the CN common shares issuable in the Merger having been approved for listing on the New York Stock Exchange and the Toronto Stock Exchange; (6) accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement and (7) compliance by the other party in all material respects with such other party’s obligations under the Merger Agreement.

The governmental authorities from which authorizations are required have broad discretion in administering the governing laws and regulations, and may take into account various facts and circumstances in their consideration of the Merger or the other transactions contemplated by the Merger Agreement. These governmental authorities may initiate proceedings or otherwise seek to prevent the Merger. As a condition to authorization of the Merger or the other transactions contemplated by the Merger Agreement, these governmental authorities also may impose requirements, limitations or costs, require divestitures or place restrictions on the conduct of CN’s business after completion of the Merger.

The Company can provide no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required consents and approvals are obtained and all closing conditions are satisfied (or waived, if applicable), the Company can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Merger. Many of the conditions to completion of the Merger are not within either the Company’s or CN’s control, and neither company can predict when or if these conditions will be satisfied (or waived, if applicable). Any delay in completing the Merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the Merger is successfully completed within the expected timeframe.

~~Failure to complete the Company’s Merger with CN could negatively impact the Company’s stock price and future business and financial results.~~

If the Merger or the other transactions contemplated by the Merger Agreement are not completed for any reason, including as a result of the Company’s stockholders failing to adopt the Merger Agreement, the Company will remain an independent public company. The Company’s ongoing business may be materially and adversely affected and the Company would be subject to a number of risks, including the following:

•the Company may experience negative reactions from the financial markets, including negative impacts on trading prices of the Company’s common stock, and from the Company’s employees, suppliers, vendors, regulators or customers;

•the Company may be required to pay CN a termination fee of $700.0 million and to refund CN the reimbursement of the $700.0 million termination fee paid by KCS to CP if the Merger Agreement is terminated in certain circumstances, including because the Company’s board of directors has changed its recommendation in favor of the Merger, the Company has breached the Merger Agreement such that the closing conditions fail and CN terminates the Merger Agreement as a result, or the Company has terminated the Merger Agreement in order to enter into an agreement providing for a Company Superior Proposal;

•the Merger Agreement places certain restrictions on the conduct of the Company’s business, and such restrictions, the waiver of which is subject to the consent of CN, may prevent the Company from making certain acquisitions, entering into or

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amending certain contracts, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Merger that the Company would have made, taken or pursued if these restrictions were not in place; and

•matters relating to the Merger will require substantial commitments of time and resources by the Company’s management and the expenditure of significant funds in the form of fees and expenses, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to the Company as an independent company.

In addition, the Company could be subject to litigation related to any failure to complete the Merger or related to any proceeding to specifically enforce the Company’s performance obligations under the Merger Agreement.

~~If any of these risks materialize, they may materially and adversely affect the Company’s business, financial condition, financial results and stock price.~~

Because the exchange ratio is fixed and the market price of shares of CN stock has fluctuated and will continue to fluctuate, the Company stockholders cannot be sure of the value of the Merger Consideration they will receive in the Merger.

Upon completion of the Merger, each share of common stock, par value $0.01 per share, of KCS that is outstanding immediately prior to the Merger will be converted into the right to receive (1) 1.129 common shares of CN and (2) $200 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that is outstanding immediately prior to the Merger will be converted into the right to receive $37.50 in cash. Because the exchange ratio of 1.129 common shares of CN is fixed, the value of the share consideration will depend on the market price of common shares of CN at the time the Merger is completed. The market price of common shares of CN has fluctuated since the date of the announcement of the Merger and is expected to continue to fluctuate from the date of this Quarterly Report on Form 10-Q until the date the Merger is completed, which could occur a considerable amount of time after the date hereof. CN’s common share price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in CN’s and the Company’s respective businesses, operations and prospects, risks inherent in their respective businesses, changes in market assessments of the likelihood that the Merger will be completed and/or the value that may be generated by the Merger and changes with respect to expectations regarding the timing of the Merger and regulatory considerations. Many of these factors are beyond the Company’s control.

Lawsuits have been and additional lawsuits may be filed against the Company and/or CN challenging the transactions contemplated by the Merger Agreement. An adverse ruling in any such lawsuit may delay or prevent the Merger from being completed.

Additional lawsuits arising out of or relating to the Merger Agreement, CN’s registration statement on Form F-4 (which includes the prospectus of CN and the proxy statement of the Company) and/or the Merger of the Company with CN may be filed in the future. One of the conditions to completion of the Merger is the absence of any injunction or similar order prohibiting the consummation of the Mergers or the Voting Trust Transaction. Accordingly, if a plaintiff is successful in obtaining an injunction, then such order may prevent the Merger from being completed, or from being completed within the expected timeframe. There can be no assurances that additional complaints or demands will not be filed or made with respect to the Merger. If additional similar complaints or demands are filed or made, absent new or different allegations that are material, CN and/or the Company will not necessarily announce them.

~~The shares of CN common stock to be received by the Company’s stockholders upon completion of the Merger will have different rights from shares of the Company’s common stock.~~

Upon completion of the Merger, the Company’s stockholders will no longer be stockholders of the Company but will instead become stockholders of CN. The rights of the Company’s stockholders as stockholders will then be governed by Canadian law and by the terms of the CN’s restated certificate and articles of incorporation and bylaws, which are in some respects materially different than the terms of the Company’s certificate of incorporation and bylaws, which currently govern the rights of the Company’s stockholders.

~~After completion of the Merger, CN may fail to realize the projected benefits and cost savings of the Merger, which could adversely affect the value of CN common stock.~~

The success of the Merger will depend, in part, on CN’s ability to realize the anticipated benefits and cost savings from combining the respective businesses of the Company and CN, including operational and other synergies that the Company believes the combined company will be able to achieve. The anticipated benefits and cost savings of the Merger may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that the Company does not currently foresee. Some of the assumptions that the Company has made, such as the achievement of operating synergies, may not be realized. The integration process may, for the Company and CN, result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies. There could be potential unknown liabilities and unforeseen expenses associated with the Merger that were not discovered in the course of performing due diligence. Additionally, the integration will require significant time and focus from management following the Merger.

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~~KCS’s business is subject to regulation by federal, state and local legislatures and agencies that could impose significant costs on the Company’s business operations.~~

On July 9, 2021, President Biden issued an executive order promoting competition in the American economy. The executive order encourages the chair of the Surface Transportation Board to work with the other board members to consider commencing or continuing rulemaking to strengthen regulations pertaining to reciprocal switching agreements, or any other matter of competitive access, including bottleneck rates, interchange commitments or other matters, consistent with policies set forth by the executive order, and ensure that passenger rail service is not subject to unwarranted delays and interruptions in service, enforce new on-time performance requirements and further the work of the passenger rail working group. The Company is evaluating the impact of the executive order and any related regulations that may be adopted by the STB due to this executive order on the business and the consolidated financial statements.2021.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

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Item 6.Exhibits


Exhibit No.						Exhibits

~~2.1+~~						Agreement and Plan of Merger, dated as of May 21, 2021, by and among Kansas City Southern, Canadian National Railroad Company and Brooklyn Merger Sub, Inc., filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 21, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.1.

~~10.1†~~						Form of Letter Agreement, dated May 21, 2021, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 21, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.1.

~~10.2†~~						Form of Retention Award Agreement, dated May 21, 2021, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 21, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.2.

10.3*						~~Letter waiver, dated as of June 8, 2021, among the Company, the guarantors party thereto, the financial institutions party thereto and Bank of America, N.A., as administrative agent.~~

~~10.4†~~						Confidential Separation Agreement and Full and General Release, dated June 8, 2021, by and between The Kansas City Southern Railway Company and Brian Hancock, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 11, 2021 (File No. 1-4717)~~, is incorporated herein by reference as Exhibit 10.4~~.

22.1						List of Issuers and Guarantor Subsidiaries, filed as Exhibit 22.1 to the Company’s Form 10-Q for the quarter ended March 31, 2020, filed on April 17, 2020 (File No. 1-4717), is incorporated herein by reference as Exhibit 22.1.

31.1*						Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1.

31.2*						Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2.

32.1**						Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1.

32.2**						Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2.

101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104						Cover Page Interactive Data File (formatted as an Inline XBRL document and included in Exhibit 101).

						+ Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Kansas City Southern hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission; provided, that Kansas City Southern may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedules so furnished.

						* Filed herewith.

						** Furnished herewith.

						~~† Management contract or compensatory plan or arrangement~~

3732

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on ~~July 16, 2021.~~April 27, 2022.


Kansas City Southern

/s/ MICHAEL W. UPCHURCH
Michael W. Upchurch
Executive Vice President and Chief Financial Officer (Principal Financial Officer)

/s/ SUZANNE M. GRAFTON
Suzanne M. Grafton
Vice President and Chief Accounting Officer
(Principal Accounting Officer)

3833


Stock options excluded as their inclusion would be anti-dilutive			584						72						558						72


Third Party Institution	Agreement Date	Settlement Date	Total Amount of Agreement (in millions)		Initial Shares Delivered	Fair Market Value of Initial Shares (in millions)		Additional Shares Delivered	Fair Market Value of Additional Shares (in millions)		Total Shares Delivered	Weighted-Average Price Per Share
ASR Agreement #1	October 2020	January 2021	$	250.0	1,187,084	$	212.5	116,314	$	37.5	1,303,398	$	191.81
ASR Agreement #2	October 2020	January 2021	$	250.0	1,187,084	$	212.5	117,088	$	37.5	1,304,172	$	191.69
Total			$	500.0	2,374,168	$	425.0	233,402	$	75.0	2,607,570	$	191.75


Statements of Operations	KCS and Guarantor Subsidiaries
	Six Months Ended		Twelve Months Ended
	June 30, 2021		December 31, 2020
Revenues	$	740.5	$	1,368.7
Operating expenses	1,199.8		846.9
Operating income (loss)	(459.3)		521.8
Income (loss) before income taxes	(537.6)		375.4
Net income (loss)	(411.7)		329.8