KSU Kansas City Southern

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

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

Delaware

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)

Large accelerated filer  ¨ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

DOCUMENTS INCORPORATED BY REFERENCE

						Page
PART I
Item 1.			Business			3
Item 1A.			Risk Factors			12
Item 1B.			Unresolved Staff Comments			21
Item 2.			Properties			21
Item 3.			Legal Proceedings			23
Item 4.			Mine Safety Disclosures			23
PART II
Item 5.			Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6.			Selected Financial Data			24
Item 7.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A.			Quantitative and Qualitative Disclosures About Market Risk			42
Item 8.			Financial Statements and Supplementary Data			45
Item 9.			Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			85
Item 9A.			Controls and Procedures			85
Item 9B.			Other Information			85
Item 9C.			Disclosure Regarding Foreign Jurisdictions that Prevent Inspections			85
PART III
Item 10.			Directors, Executive Officers and Corporate Governance			86
Item 11.			Executive Compensation			86
Item 12.			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			87
Item 13.			Certain Relationships and Related Transactions, and Director Independence			87
Item 14.			Principal Accountant Fees and Services			87
PART IV
Item 15.			Exhibits and Financial Statement Schedules			88
Item 16.			Form 10-K Summary			95
Signatures						95

•Meridian Speedway, LLC (“MSLLC”), a seventy percent-owned consolidated affiliate that owns the former KCSR rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the portion of the rail line between Dallas, Texas and Meridian known as the “Meridian Speedway.” Norfolk Southern Corporation, through its wholly-owned subsidiary, The Alabama Great Southern Railroad Company, owns the remaining thirty percent of MSLLC;

•TFCM, S. de R.L. de C.V. (“TCM”), a forty-five percent-owned unconsolidated affiliate that operates a bulk liquid terminal in San Luis Potosí, Mexico;

•Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty-five percent-owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area; and

•PTC-220, LLC (“PTC-220”), a thirteen percent-owned unconsolidated affiliate that holds the licenses to large blocks of radio spectrum and other assets for Positive Train Control (“PTC”). See Government Regulation section for further information regarding PTC.

			2022 Revenues Business Mix
Chemical and petroleum. This commodity group includes products such as chemicals, plastics, petroleum, liquefied petroleum gas, and petroleum refined products, such as gasoline and diesel. KCS transports these products across its network and through interchanges with other rail carriers. Refined fuels and liquefied petroleum gas groups of commodities primarily supply Mexican demand. The chemical and plastic products are used in the automotive, housing and packaging industries as well as in general manufacturing. KCS hauls petroleum products across its network and as U.S. petroleum refineries have continued to increase their refining capacity, they have coordinated with KCS to develop additional long-term storage opportunities that complement a fluid freight railroad operation.

Industrial and consumer products. This commodity group includes forest products as well as metals and scrap. Forest products consist of shipments to and from paper and lumber mills in the southeast United States timber-producing region that KCS serves directly and indirectly through its various short-line connections. The United States is an important source of pulp paper and scrap paper for Mexico that ships by rail through KCS’s network. Metals and scrap consist of shipments of flat steel and long product as well as other minor moves of ores such as iron, zinc and copper. The majority of steel produced and metallic ore mined in Mexico are consumed within Mexico. Steel slab is used to make steel coils and plate-products that usually

•Conferring regularly with other railroads’ security personnel and with industry experts on security issues;

•Routing shipments of certain chemicals, which might be toxic if inhaled, pursuant to federal regulations;

•Initiating a series of over 20 voluntary action items agreed to between AAR and DHS as enhancing security in the rail industry;

•Conducting constant and targeted security training as part of the scheduled training for operating employees and managers;

•Developing sophisticated smartphone applications to ensure information, such as live video and pictures, is captured pertaining to potential operational risks and delivered timely to security supervisors;

•Developing a multi-layered security model using high-speed digital imaging, system velocity and covert and overt security filters to mitigate the risk of illicit activity;

•Measuring key security metrics to ensure positive risk mitigation and product integrity trends;

•Performing constant due diligence with the existing security model and by benchmarking rail security, including cyber security, on a world-wide basis to monitor threat streams related to rail incidents;

•Implementing a Tactical Intelligence Center by KCSM, which provides constant training with new technology, helping to prevent, detect, deter, deny and respond to potentially illicit activities; and

•Deploying an array of non-intrusive technologies including, but not limited to, digital video surveillance and analytics as part of an intelligent video security solution, including a closed-circuit television platform with geo-fencing for intrusion detection, to allow for remote viewing access to monitor ports of entry, intermodal and rail yards.

Jeffrey M. Songer — Executive Vice President — Strategic Merger Planning — 53 — Served in this capacity since April 16, 2021. Mr. Songer served as Executive Vice President and Chief Operating Officer of the Company from March 2016 to April 2021, Senior Vice President Engineering and Chief Transportation Officer of the Company from August 2014 to February 2016 and as Vice President and Chief Engineer for KCSR from June 2012 to July 2014. Prior to serving as KCSR’s Vice President and Chief Engineer, Mr. Songer served as Assistant Vice President — Engineering and Planning from March 2011 to June 2012, and as its General Director — Planning, Scheduling & Administration from January 2007 to March 2011.

John F. Orr - Executive Vice President — Operations — 59 — Served in this capacity since April 16, 2021. Mr. Orr began his railroading career in 1984 as a conductor with Canadian National in London, Ontario. Progressively taking on positions of increasing executive responsibilities across Canada and the United States, Mr. Orr ultimately completed his career at Canadian National as Senior Vice President and Chief Transportation Officer after 34 years of service. Since 2019, he has worked as a top-level operations executive in railroading and transportation ecosystems across Europe, Asia, and North America.

Oscar Augusto Del Cueto Cuevas — President, General Manager and Executive Representative — KCSM — 56 — Served in this capacity since August 1, 2020. Mr. Del Cueto previously served as KCSM Servicios Vice President and General Director from November 2018 to July 2020 and as KCSM Servicios Vice President-Operations from January 2009 to October 2018. Mr. Del Cueto joined KCSM in 2006 and held various leadership positions prior to 2009. He has over 32 years of railway industry experience, working in institutional relations, communication, operations, planning and logistics.

Lora S. Cheatum — Senior Vice President — Human Resources — 66 — Served in this capacity since joining KCS in October 2014. Ms. Cheatum previously served as Senior Vice President Global Human Resources of Layne Christensen Company, a global water management, construction, and drilling company, from 2012 to October 2014. From 2010 to 2012, she served as Director — Field Operations at Fitness Together Holdings, Inc. Ms. Cheatum spent nine years with Kansas City Power & Light, from 2001 to 2010, where she was Vice President of Procurement and previously as Vice President Human Resources.

Suzanne M. Grafton — Vice President and Chief Accounting Officer — 47 — Served in this capacity since July 24, 2017. Ms. Grafton served as Vice President of Audit and Enterprise Risk Management of the Company from April 2016 to July 2017 and as Vice President of Accounting from May 2014 to March 2016. From September 2006 to May 2014, Ms. Grafton served in various accounting leadership positions at KCS.

Adam J. Godderz — Senior Vice President — Chief Legal Officer and Corporate Secretary — 48 — Served in this capacity since February 1, 2020. Mr. Godderz served as General Counsel and Corporate Secretary from January 2019 to January 2020 and as Associate General Counsel and Corporate Secretary of the Company from June 2018 to December 2018. From November 2015 to May 2018, he served as Vice President of Labor Relations and Corporate Secretary. From January 2013 to November 2015, Mr. Godderz served as Associate General Counsel and Corporate Secretary.  From September 2007 to January 2013, Mr. Godderz served as Associate General Counsel at KCS.

•Employee Health & Safety - KCS is committed to operating in a safe, secure and responsible manner for the benefit of its employees, customers and the communities KCS serves in the U.S. and Mexico. See below for further discussion of employee health and safety as well as noted in the Company’s sustainability report at https://www.kcsouthern.com/pdf/community/kcs-sustainability-data-2021.pdf (the sustainability report is not incorporated into this Form 10-K).

•Compensation and Benefits - KCS strives to offer competitive compensation, benefits and services that meet the needs of its employees, including short and long-term incentive packages, a defined contribution plan, healthcare benefits, and wellness and employee assistance programs. Management monitors market compensation and benefits to be able to attract, retain, and promote employees and reduce turnover and its associated costs. In addition, KCS’s short and long-term incentive programs are aligned with the Company’s vision and key business objectives and are intended to motivate strong performance. KCS engages a nationally recognized outside consulting firm to objectively evaluate its compensation and benefits and benchmark them against industry peers and other similarly situated organizations.

For the year ended December 31, 2022, compensation and benefits expense totaled $567.0 million. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of compensation and benefits expense.

The Company’s railroad operations may be affected by severe weather or other natural disasters. The Company operates in and along the Gulf of Mexico, and its facilities, equipment, and railroad infrastructure may be materially adversely affected by hurricanes, floods, fires, earthquakes and other extreme weather conditions in the regions where the Company operates, and this could also adversely affect the Company’s shipping, agricultural, chemical and other customers. Severe weather or other natural disasters could result in significant business interruption due to an increase in events such as train derailments or wash outs of track structure that could have a material adverse effect on KCS’s consolidated financial statements. The Company's revenues can also be adversely affected by severe weather that causes damage and disruptions to the Company's customers. Insurance to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations and may not be sufficient to cover all of KCS’s damages or damages to others. This insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of services, this could have a material adverse effect on KCS’s consolidated financial statements.

			2022																								2021
			Owned						Leased						Total						Avg Age (in Years)						Owned						Leased						Total						Avg Age (in Years)
Freight Cars:
Box cars			2,044						755						2,799						28.0						2,072						691						2,763						27.3
Hoppers (covered and open top)			4,785						1,161						5,946						16.9						4,809						1,164						5,973						15.9
Gondolas			2,409						1,331						3,740						24.4						2,418						1,180						3,598						24.9
Automotive			3,281						321						3,602						9.2						3,304						323						3,627						8.2
Flat cars (intermodal and other)			852						53						905						29.4						793						53						846						27.5
Tank cars			—						347						347						28.0						—						332						332						27.1
Total			13,371						3,968						17,339						19.6						13,396						3,743						17,139						18.8
Locomotives:
Freight			816						—						816						19.3						815						—						815						17.9
Switching			190						—						190						49.4						192						—						192						46.7
Total			1,006						—						1,006						25						1,007						—						1,007						23.4

At December 31, 2022, all of the outstanding shares of the Company’s common stock are held in the Voting Trust. Prior to the closing of the acquisition, the Company’s common stock was traded on the New York Stock Exchange under the ticker symbol “KSU”. The merger is further discussed within Item 7, Management’s Discussion and Analysis of Financial Information and Results of Operations — Merger Agreement.

•public health threats or outbreaks of communicable diseases;

•transportation of hazardous materials;

•United States, Mexican and global economic, political and social conditions (including inflation);

•the adverse impact of any termination or revocation by the Mexican government of Kansas City Southern de México, S.A. de C.V.’s (“KCSM”) Concession;

•changes in legislation and regulations or revisions of controlling authority;

•the effects of adverse general economic conditions affecting customer demand and the industries and geographic areas that produce and consume the commodities KCS carries;

•the effect of demand for KCS’s services exceeding network capacity or traffic congestion on operating efficiencies and service reliability;

•KCS’s reliance on agreements with other railroads and third parties to successfully implement its business strategy, operations and growth and expansion plans, including the strategy to convert customers from using trucking services to rail transportation services;

•the dependence on the stability, availability and security of the information technology systems to operate its business;

•acts of terrorism, war or other acts of violence or crime or risk of such activities;

•uncertainties regarding the litigation KCS faces and any future claims and litigation;

•the outcome of claims and litigation, including those related to environmental contamination, personal injuries and property damage;

•compliance with environmental regulations;

•natural events such as severe weather, fire, floods, hurricanes, earthquakes or other disruptions to the Company’s operating systems, structures and equipment or the ability of customers to produce or deliver their products;

•insurance coverage limitations;

•climate change and the market and regulatory responses to climate change;

•the impact of competition, including competition from other rail carriers, trucking companies and maritime shippers in the United States and Mexico;

•the effects of fluctuations in the peso-dollar exchange rate;

•changes in labor costs and labor difficulties, including strikes and work stoppages affecting either operations or customers’ abilities to deliver goods for shipment;

•the effects of current and future multinational trade agreements on the level of trade among the United States, Mexico and Canada;

•the level of trade between the United States and Asia or Mexico;

•unavailability of qualified personnel;

•disruption in fuel supplies, changes in fuel prices and the Company’s ability to recapture its costs of fuel from customers;

•business uncertainties and contractual restrictions that could arise during the pendency of the Voting Trust

•difficulty attracting, motivating, and retaining executives and other key employees;

•significant demands placed on KCS as a result of the merger of the two companies;

•KCS’s reliance on certain key suppliers of core rail equipment; and

•material adverse changes in economic and industry conditions, including the availability of short and long-term financing, both within the United States and Mexico and globally.

•The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary;

•KCSM, a wholly-owned subsidiary;

•Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary which, in turn, wholly owns The Texas Mexican Railway Company (“Tex-Mex”);

•Meridian Speedway, LLC (“MSLLC”), a seventy percent-owned consolidated affiliate;

•Panama Canal Railway Company (“PCRC”), a fifty percent-owned unconsolidated affiliate;

•TFCM, S. de R.L. de C.V. (“TCM”), a forty-five percent-owned unconsolidated affiliate;

•Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty-five percent-owned unconsolidated affiliate; and

•PTC-220, LLC (“PTC-220”), a thirteen percent-owned unconsolidated affiliate.

Merger Agreement

On September 15, 2021, KCS and CP entered into a merger agreement (the “Merger Agreement”) and on December 14, 2021, CP acquired the outstanding common and preferred stock of KCS. Each share of common stock, par value $0.01 per share, of KCS that was outstanding immediately prior to the merger was converted into the right to receive (1) 2.884 common shares of CP and (2) $90 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that was outstanding immediately prior to the 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.

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 the Merger Agreement, Surviving Merger Sub was renamed “Kansas City Southern” and as successor company of KCS, continued to own the assets of KCS. Immediately following the consummation of the mergers, CP caused the contribution, directly and indirectly, of all of the outstanding shares of capital stock of Surviving Merger Sub, as successor to KCS, to be deposited into an independent, irrevocable voting trust (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, the Voting Trust will be terminated and CP will acquire control over KCS’s railroad operations. STB Final Approval is expected to be granted in the first quarter of 2023, subject to the regulatory review process.

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. See more details regarding the recapitalization in Item 8, Financial Statements and Supplementary Data — Note 14, Stockholder(s)’ Equity.

Pursuant to the Merger Agreement, 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. During 2022, KCS paid cash dividends of $880.0 million to a wholly-owned subsidiary of CP.

For the year ended December 31, 2022, KCS reported $46.6 million of merger-related costs. These merger costs primarily related to incentive compensation costs. For the year ended December 31, 2021, KCS reported $264.0 million of merger-related costs. These merger costs primarily related to bankers’ fees, compensation and benefits costs, and legal fees. These costs were recognized in merger costs, net within the consolidated statements of income.

Ukraine Crisis

Inflation

2022 Financial Overview

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

			2022						2021						Change
Revenues			$	3,370.4					$	2,947.3					$	423.1
Operating expenses			2,143.3						2,063.5						79.8
Operating income			1,227.1						883.8						343.3
Equity in net earnings of affiliates			8.7						16.7						(8.0)
Interest expense			(156.6)						(156.0)						(0.6)
Foreign exchange loss			(33.2)						(9.0)						(24.2)
Gain on settlement of treasury lock agreements			259.3						—						259.3
Other income, net			4.4						2.6						1.8
Income before income taxes			1,309.7						738.1						571.6
Income tax expense			325.9						211.1						114.8
Net income			983.8						527.0						456.8
Less: Net income attributable to noncontrolling interest			1.6						1.8						(0.2)
Net income attributable to Kansas City Southern and subsidiaries			$	982.2					$	525.2					$	457.0

						Years ended												Improvement/ (Deterioration)
						December 31,
						2022						2021
Gross velocity (mph) (i)						14.1						14.0						1%
Terminal dwell (hours) (ii)						22.2						23.5						6%
Train length (feet) (iii)						6,479						6,635						(2)%
Fuel efficiency (gallons per 1,000 GTM's) (iv)						1.26						1.23						(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 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 following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:

			Revenues																		Carloads and Units																		Revenue per Carload/Unit
			2022						2021						% Change						2022						2021						% Change						2022						2021						% Change
Chemical and petroleum			$	783.5					$	851.8					(8		%)				323.3						371.5						(13		%)				$	2,423					$	2,293					6		%
Industrial and consumer products			710.6						589.6						21		%				335.0						304.3						10		%				2,121						1,938						9		%
Agriculture and minerals			682.0						571.7						19		%				288.5						269.9						7		%				2,364						2,118						12		%
Energy			305.2						254.8						20		%				271.1						263.1						3		%				1,126						968						16		%
Intermodal			449.7						346.3						30		%				1,034.1						952.8						9		%				435						363						20		%
Automotive			258.4						183.2						41		%				130.6						104.6						25		%				1,979						1,751						13		%
Carload revenues, carloads and units			3,189.4						2,797.4						14		%				2,382.6						2,266.2						5		%				$	1,339					$	1,234					9		%
Other revenue			181.0						149.9						21		%
Total revenues (i)			$	3,370.4					$	2,947.3					14		%
(i) Included in revenues:
Fuel surcharge			$	501.6					$	274.5

			Revenues by commodity group for 2022
Chemical and petroleum. Revenues decreased $68.3 million for the year ended December 31, 2022, compared to 2021, due to a 13% decrease in carload/unit volumes, partially offset by a 6% increase in revenue per carload/unit. Volumes decreased due to refined fuel product shipments into 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 higher fuel surcharge and positive pricing impacts, partially offset by mix and shorter average length of haul.

Industrial and consumer products. Revenues increased $121.0 million for the year ended December 31, 2022, compared to 2021, due to a 10% increase in carload/unit volumes and 9% increase in revenue per carload/unit. Metal volumes increased due to new steel plants that opened on the KCSM network in 2021 and higher demand. Revenue per carload/unit increased due to higher fuel surcharge, positive pricing impacts, and longer average length of haul, partially offset by mix.

			Revenues by commodity group for 2022
Agriculture and minerals. Revenues increased $110.3 million for the year ended December 31, 2022, compared to 2021, due to 12% increase in revenue per carload/unit and a 7% increase in carload/unit volumes. Revenue per carload/unit increased due to higher fuel surcharge, positive pricing impacts, and longer average length of haul, partially offset by mix. Volumes increased due to higher demand for cross-border grain and improved cycle times.

Energy. Revenues increased $50.4 million for the year ended December 31, 2022, compared to 2021, due to a 16% increase in revenue per carload/unit and a 3% increase in carload/unit volumes. Revenue per carload/unit increased due to higher fuel surcharge, positive pricing impacts, and longer average length of haul, partially offset by mix. Volumes increased due to new crude oil business, partially offset by a decline in utility coal as a result of deteriorated interchange cycle times and utility plant maintenance outages.

															Change
			2022						2021						Dollars						Percent
Compensation and benefits			$	567.0					$	522.0					$	45.0					9		%
Purchased services			225.9						211.8						14.1						7		%
Fuel			461.7						313.6						148.1						47		%
Equipment costs			91.4						82.2						9.2						11		%
Depreciation and amortization			390.9						365.8						25.1						7		%
Materials and other			359.8						304.1						55.7						18		%
Merger costs, net			46.6						264.0						(217.4)						(82		%)
Total operating expenses			$	2,143.3					$	2,063.5					$	79.8					4		%

Merger costs, net. For the years ended December 31, 2022 and 2021, the Company recognized merger costs, net, of $46.6 million and $264.0 million, respectively. Merger costs in 2022 primarily related to incentive compensation. Merger costs in 2021 primarily related to bankers’ fees, compensation and benefits costs, and legal fees. Refer to Item 8, Financial Statements and Supplementary Data — Note 3, Merger Agreement for more information.

Equity in net earnings of affiliates. Equity in net earnings of affiliates decreased $8.0 million for the year ended December 31, 2022, compared to 2021, primarily due to a decrease in net earnings from the operations of TFCM, S. de R.L de C.V. (“TCM”) due to higher interest and tax expense, a decrease in net earnings from the operations of Panama Canal Railway Company (“PCRC”) resulting from a gain on insurance recoveries recognized in 2021, and decreased net earnings from unrealized depreciation of investments held in a fifteen percent-owned equity investment.

Foreign exchange loss. For the year ended December 31, 2022, foreign exchange loss was $33.2 million, compared to $9.0 million in 2021. 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.

Income tax expense. Income tax expense increased $114.8 million for the year ended December 31, 2022, compared to 2021, primarily due to higher pre-tax income resulting from the gain on settlement of treasury lock agreements in 2022 and higher merger costs included in 2021.

 Differences between the Company’s effective income tax rate and the U.S. federal statutory income tax rate of 21% for 2022 and 2021 follow (in millions):

			2022												2021												Change
			Dollars						Percent						Dollars						Percent						Dollars						Percent
Income tax expense using the statutory rate in effect			$	275.0					21.0		%				$	155.0					21.0		%				$	120.0					—
Tax effect of:
Difference between U.S. and foreign tax rate			57.4						4.4		%				51.9						7.0		%				5.5						(2.6		%)
Inflation			(25.8)						(2.0		%)				(10.4)						(1.4		%)				(15.4)						(0.6		%)
Tax credits			(11.9)						(0.9		%)				(11.7)						(1.6		%)				(0.2)						0.7		%
Foreign exchange (i)			9.4						0.7		%				5.9						0.8		%				3.5						(0.1		%)
State and local income tax provision, net			9.1						0.7		%				0.2						—						8.9						0.7		%
Withholding tax			8.5						0.6		%				8.5						1.2		%				—						(0.6		%)
Non-deductible executive compensation			3.6						0.3		%				14.7						2.0		%				(11.1)						(1.7		%)
Non-deductible transaction costs			0.6						—						14.0						1.9		%				(13.4)						(1.9		%)
Global intangible low-taxed income tax, net			0.1						—						0.4						0.1		%				(0.3)						(0.1		%)
Share-based compensation			—						—						(25.2)						(3.4		%)				25.2						3.4		%
Other, net			(0.1)						0.1		%				7.8						1.0		%				(7.9)						(0.9		%)
Income tax expense			$	325.9					24.9		%				$	211.1					28.6		%				$	114.8					(3.7		%)

(i)The Company’s Mexican subsidiaries have net U.S. dollar-denominated monetary assets 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 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 creates fluctuations in foreign currency gains and losses in the consolidated statements of income. 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 to Item 8, Financial Statements and Supplementary Data — Note 10, Derivative Instruments for further information.

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 monitor this law and is evaluating the effect on the Company and its business operations.

Value-Added Tax Law. KCSM is not required to charge its customers value added tax (“VAT”) on international import or export transportation services, which prior to 2022 resulted in KCSM paying more VAT on its expenses than it collected 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. From 2019 through 2021, KCSM generated a refundable balance and filed refund claims with the Servicio de Administración Tributaria (“SAT”), which have not been refunded.

Carta Porte. In the second quarter of 2021, KCSM was notified by the SAT that shipping companies (cargo airlines, trucks, maritime, railroads, etc.) 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 and 2022, with the most recent grace period extension to July 31, 2023. KCSM adapted its systems to comply with Carte Porte requirements, which delayed KCSM’s invoicing and cash collections by an average of approximately 40 days during 2022.

For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2021 to the year ended December 31, 2020, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the U.S. Securities and Exchange Commission on February 1, 2022.

For discussion regarding the agreements representing the indebtedness of KCS, refer to Note 11, Short-Term Borrowings and Note 12, Long-Term Debt of the consolidated financial statements.

Pursuant to the Merger Agreement, periodic cash distributions may be made to a wholly-owned subsidiary of CP. The amount of dividends paid is dependent upon cash generated, the timing of capital expenditures and the working capital needs of the Company. During 2022, KCS paid cash dividends of $880.0 million to a wholly-owned subsidiary of CP. On February 1, 2023, KCS paid a cash dividend of $225.0 million to a wholly-owned subsidiary of CP.

Summary cash flow data follows (in millions):

			2022						2021
Cash flows provided by (used for):
Operating activities			$	1,073.1					$	935.8
Investing activities			(312.5)						(531.2)
Financing activities			(890.5)						(251.2)
Effect of exchange rate changes on cash			(1.8)						(2.3)
Net increase (decrease) in cash and cash equivalents			(131.7)						151.1
Cash and cash equivalents beginning of year			339.3						188.2
Cash and cash equivalents end of year			$	207.6					$	339.3

For a comparison of liquidity and capital resources and the Company’s cash flow activities for the fiscal year ended December 31, 2021 and 2020, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the U.S. Securities and Exchange Commission on February 1, 2022.

Contractual Obligations. The following table outlines the material obligations and commitments as of December 31, 2022 (in millions):

			Payments Due by Period
			Total						Less Than 1 Year						1-3 Years						3-5 Years						More than 5 years						Other
Long-term debt and short-term borrowings (including interest and finance lease obligations) (i)			$	6,894.7					$	797.1					$	271.2					$	504.5					$	5,321.9					$	—
Operating leases			104.2						29.7						44.5						26.5						3.5						—
Obligations due to uncertainty in income taxes (ii)			1.3						—						—						—						—						1.3
Capital expenditure obligations (iii)			313.1						121.5						127.0						64.6						—						—
Other contractual obligations (iv)			450.8						130.9						149.0						152.9						18.0						—
Total			$	7,764.1					$	1,079.2					$	591.7					$	748.5					$	5,343.4					$	1.3

(i)For variable rate obligations, interest payments were calculated using the December 31, 2022 rate. For fixed rate obligations, interest payments were calculated based on the applicable rates and payment dates.

(ii)For amounts where the year of settlement cannot be reasonably estimated, obligations due to uncertainty in income taxes are included in the Other column.

(iii)Capital expenditure obligations include minimum capital expenditures under the KCSM Concession agreement, the maximum funding amount of the investment in the Celaya-NBA Line Railway Bypass and related infrastructure, and other regulatory requirements.

(iv)Other contractual obligations include purchase commitments and certain maintenance agreements.

The following table summarizes capital expenditures by type for the years ended December 31, 2022 and 2021, respectively (in millions):

						2022						2021
Roadway capital program						$	296.2					$	258.8
Locomotives and freight cars						45.3						68.0
Capacity						112.6						101.1
Information technology						41.4						41.2
Positive train control						6.2						14.3
Other						3.6						6.0
Total capital expenditures (accrual basis)						505.3						489.4
Change in capital accruals						23.7						7.4
Total cash capital expenditures						$	529.0					$	496.8

			2022						2021
Track miles of rail installed			74						76
Cross ties installed (thousands)			561						494

Income Statements			KCS and Guarantor Subsidiaries
			Years ended December 31,
			2022						2021
Revenues			$	1,796.9					$	1,561.3
Operating expenses			1,158.6						1,200.8
Operating income			638.3						360.5
Income before income taxes			748.4						207.7
Net income			610.1						182.7

Balance Sheets			KCS and Guarantor Subsidiaries
			December 31, 2022						December 31, 2021
Assets:
Current assets			$	351.6					$	524.6
Property and equipment (including concession assets), net			4,938.4						4,876.5
Other non-current assets			95.7						125.8
Liabilities and equity:
Current liabilities			$	1,035.7					$	316.5
Non-current liabilities			4,321.4						4,942.7
Noncontrolling interest			331.0						328.2

•Statistical analysis of historical patterns of use and retirements of each asset class;

•Evaluation of any expected changes in current operations and the outlook for the continued use of the assets;

•Evaluation of technological advances and changes to maintenance practices;

•Historical and expected salvage to be received upon retirement;

•Review of accounting policies and assumptions; and

•Industry precedents and trends.

•The Company’s executive management is dedicated to ensuring compliance with the various provisions of the Concession and to maintaining positive relationships with the SICT and other Mexican federal, state, and municipal governmental authorities;

•During the time since the Concession was granted, the relationships between KCSM and the various Mexican governmental authorities have matured and the guidelines for operating under the Concession have become more defined with experience;

•There are no known supportable sanctions or compliance issues that would cause the SICT to revoke the Concession or prevent KCSM from renewing the Concession; and

•KCSM operations are an integral part of the KCS operations strategy, and related investment analyses and operational decisions assume that the Company’s cross border rail business operates into perpetuity, and do not assume that Mexico operations terminate at the end of the current Concession term.

Hypothetical Change in Exchange Rate

Amount of Gain (Loss)

Affected Line Item in the Consolidated Statements of Income

Net monetary assets denominated in Mexican pesos at December 31, 2022:

Ps.4,431.4 million

From Ps.19.4 to Ps.20.4

($11.2 million)

Foreign exchange gain (loss)

Ps.4,431.4 million

From Ps.19.4 to Ps.18.4

$12.5 million

Foreign exchange gain (loss)

    

Hypothetical Change in Exchange Rate

Increase (Decrease) in Effective Income Tax Rate

Amount of Expense (Benefit)

Affected Line Item in the Consolidated Statements of Income

From Ps.19.4 to Ps.20.4

(0.2%)

($2.7 million)

Income tax expense (benefit)

From Ps.19.4 to Ps.18.4

0.2%

$2.9 million

Income tax expense (benefit)

Aggregate notional amount:

Hypothetical Change in Exchange Rate

Amount of Gain (Loss)

Affected Line Item in the Consolidated Statements of Income

$250.0 million

From Ps.20.5 to Ps.21.5

$11.7 million

Foreign exchange gain (loss)

$250.0 million

From Ps.20.5 to Ps.19.5

($12.8 million)

Foreign exchange gain (loss)

			Page
Management’s Report on Internal Control Over Financial Reporting			46
Report of Independent Registered Public Accounting Firm on the Company’s Consolidated Financial Statements and Internal Control over Financial Reporting as of and for the three years ended December 31, 2022, 2021 and 2020 (PCAOB ID 238)			47
Consolidated Statements of Income for each of the Three Years in the period ended December 31, 2022			49
Consolidated Statements of Comprehensive Income for each of the Three Years in the period ended December 31, 2022			50
Consolidated Balance Sheets at December 31, 2022 and 2021			51
Consolidated Statements of Cash Flows for each of the Three Years in the period ended December 31, 2022			52
Consolidated Statements of Changes in Equity for each of the Three Years in the period ended December 31, 2022			54
Notes to Consolidated Financial Statements			55
Financial Statement Schedules:

Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013) (commonly referred to as the COSO Framework). Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022, based on the criteria outlined in the COSO Framework.

To the Board of Directors and Stockholder of Kansas City Southern

We have audited the accompanying consolidated balance sheets of Kansas City Southern and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

			2022						2021						2020
			(In millions)
Revenues			$	3,370.4					$	2,947.3					$	2,632.6
Operating expenses:
Compensation and benefits			567.0						522.0						476.5
Purchased services			225.9						211.8						198.1
Fuel			461.7						313.6						219.8
Equipment costs			91.4						82.2						85.8
Depreciation and amortization			390.9						365.8						357.9
Materials and other			359.8						304.1						260.9
Merger costs, net			46.6						264.0						—
Write-off of software development costs			—						—						13.6
Restructuring charges			—						—						17.0
Total operating expenses			2,143.3						2,063.5						1,629.6
Operating income			1,227.1						883.8						1,003.0
Equity in net earnings (losses) of affiliates			8.7						16.7						(1.4)
Interest expense			(156.6)						(156.0)						(150.9)
Foreign exchange loss			(33.2)						(9.0)						(29.6)
Gain on settlement of treasury lock agreements			259.3						—						—
Other income, net			4.4						2.6						2.1
Income before income taxes			1,309.7						738.1						823.2
Income tax expense			325.9						211.1						204.1
Net income			983.8						527.0						619.1
Less: Net income attributable to noncontrolling interest			1.6						1.8						2.1
Net income attributable to Kansas City Southern and subsidiaries			982.2						525.2						617.0
Preferred stock dividends			—						0.2						0.2
Net income available to common stockholder(s)			$	982.2					$	525.0					$	616.8

			2022						2021						2020
			(In millions)
Net income			$	983.8					$	527.0					$	619.1
Other comprehensive income (loss):
Unrealized gain on interest rate derivative instruments, net of tax of $42.4 million, $4.6 million and $7.5 million			159.5						17.2						28.1
Reclassification of interest rate derivative instruments gain, net of tax of $(54.5) million			(204.8)						—						—
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.5 million for each year presented			1.9						2.0						1.9
Foreign currency translation adjustments			0.6						(0.2)						(0.5)
Other comprehensive income (loss)			(42.8)						19.0						29.5
Comprehensive income			941.0						546.0						648.6
Less: comprehensive income attributable to noncontrolling interest			1.6						1.8						2.1
Comprehensive income attributable to Kansas City Southern and subsidiaries			$	939.4					$	544.2					$	646.5

			2022						2021
			(In millions, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents			$	207.6					$	339.3
Accounts receivable, net			543.6						271.0
Materials and supplies			174.2						131.0
Other current assets			138.8						142.1
Total current assets			1,064.2						883.4
Operating lease right-of-use assets			100.9						69.6
Investments			55.8						48.3
Property and equipment (including concession assets), net			9,362.4						9,209.3
Other assets			94.1						217.5
Total assets			$	10,677.4					$	10,428.1
LIABILITIES AND EQUITY
Current liabilities:
Long-term debt due within one year			$	655.0					$	8.8
Accounts payable and accrued liabilities			635.7						479.7
Total current liabilities			1,290.7						488.5
Long-term operating lease liabilities			71.5						46.4
Long-term debt			3,124.6						3,768.8
Deferred income taxes			1,237.1						1,213.7
Other noncurrent liabilities and deferred credits			158.7						178.1
Total liabilities			5,882.6						5,695.5
Stockholder’s equity:
$0.01 par, common stock, 100 shares authorized, 100 shares issued; 100 shares outstanding at December 31, 2022 and 2021			—						—
Additional paid-in capital			860.6						860.6
Retained earnings			3,626.6						3,524.4
Accumulated other comprehensive income (loss)			(23.4)						19.4
Total stockholder’s equity			4,463.8						4,404.4
Noncontrolling interest			331.0						328.2
Total equity			4,794.8						4,732.6
Total liabilities and equity			$	10,677.4					$	10,428.1

			2022						2021						2020
			(In millions)
Operating activities:
Net income			$	983.8					$	527.0					$	619.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			390.9						365.8						357.9
Deferred income taxes			35.0						23.2						49.4
Equity in net (earnings) losses of affiliates			(8.7)						(16.7)						1.4
Share-based compensation			—						24.5						22.9
Loss on foreign currency derivative instruments			44.3						3.7						22.5
Foreign exchange (gain) loss			(11.1)						5.3						7.1
Merger costs, net			46.6						264.0						—
Restructuring charges			—						—						17.0
Gain on settlement of treasury lock agreements			(259.3)						—						—
Write-off of software development costs			—						—						13.6
Distributions from affiliates			6.5						12.0						4.5
Settlement of foreign currency derivative instruments			(5.1)						(1.9)						(20.0)
Cash payments for merger costs			(34.1)						(2,287.2)						—
Reimbursement of merger termination fees			—						2,100.0						—
Changes in working capital items:
Accounts receivable			(269.1)						(30.6)						25.5
Materials and supplies			(42.1)						1.9						21.7
Other current assets			89.3						(54.7)						(66.0)
Accounts payable and accrued liabilities			98.8						(9.9)						6.0
Other, net			7.4						9.4						(2.6)
Net cash provided by operating activities			1,073.1						935.8						1,080.0
Investing activities:
Capital expenditures			(529.0)						(496.8)						(411.9)
Settlement of treasury lock agreements			259.3						—						—
Purchase or replacement of assets under operating leases			—						—						(78.2)
Property investments in MSLLC			(27.1)						(24.2)						(24.8)
Investments in and advances to affiliates			(8.5)						(7.8)						(7.4)
Proceeds from disposal of property			6.5						6.4						12.9
Other, net			(13.7)						(8.8)						(16.6)
Net cash used for investing activities			(312.5)						(531.2)						(526.0)
Financing activities:
Proceeds from issuance of long-term debt			—						—						545.6
Repayment of long-term debt			(10.5)						(7.9)						(18.0)
Dividends paid			(880.0)						(188.0)						(152.3)
Shares repurchased			—						—						(888.9)
Debt issuance and retirement costs paid			—						—						(6.6)
Cash settlement of stock options			—						(75.2)						—
Proceeds from employee stock plans			—						19.9						9.9
Net cash used for financing activities			(890.5)						(251.2)						(510.3)
Effect of exchange rate changes on cash			(1.8)						(2.3)						(4.3)
Cash and cash equivalents:
Net increase (decrease) during each year			(131.7)						151.1						39.4
At beginning of year			339.3						188.2						148.8
At end of year			$	207.6					$	339.3					$	188.2
Supplemental information continued on next page.