Kansas City Southern Reports Gain in First Quarter 2005 Results

Kansas City Southern Reports Gain in First Quarter 2005 Results

    Business Editors

    KANSAS CITY, Mo.--(BUSINESS WIRE)--May 3, 2005--First Quarter 2005 KCS Highlights:

--	Kansas City Southern records first quarter revenues of $198.2 million.
--	KCS operating income of $24.8 million increased 42.5% over first quarter 2004.
--	Mexrail, Inc. consolidated under KCS control January 1, 2005.
--	Acquisition of controlling interest in Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM) completed April 1, 2005.

    Kansas City Southern (KCS or Company) (NYSE:KSU) today reported first quarter 2005 financial results which show substantial quarter-over-quarter gains in revenues and operating profit. Driven by record revenues from The Kansas City Southern Railway Company (KCSR), its principal U.S. subsidiary, and by the inclusion of the recently acquired Mexrail, Inc., KCS recorded consolidated revenues of $198.2 million. Total KCS operating expenses for the first quarter of 2005 were $173.4 million. Consolidated operating income was $24.8 million compared with $17.4 million in 2004. Net income available to common shareholders was $5.9 million, or $0.09 per diluted share for the first quarter of 2005 compared with $1.2 million, or $0.02 per diluted share for the first quarter of 2004.

    U.S. Domestic Rail Operations

    Revenues from KCS' Domestic rail operations, which are comprised of KCSR and Mexrail, Inc., and its subsidiary, The Texas Mexican Railway (Tex Mex), totaled $196.6 million for the first quarter of 2005. Total operating expenses were $168.1 million. Operating income for the quarter ended March 31, 2005, was $28.5 million.
    KCSR's revenues for the first quarter of 2005 were $179.3 million, a $32.3 million increase (22%) over the corresponding 2004 period. This increase was primarily the result of a 6.6% growth in carloadings, increased yields, and increased fuel surcharges. A new long haul coal contract that began in January 2005 was the primary catalyst for a 41.0% increase in unit coal revenues in the first quarter. Led by strong paper, woodchips and metals traffic, Paper & Forest Products registered its third consecutive quarter of double-digit growth with revenues 29.6% greater than first quarter 2004. Agriculture & Minerals revenues increased 23.9% with significant increases in food products, ores and minerals, and stone. Intermodal & Automotive traffic growth remained steady leading to a 14.0% increase in revenues over the same period in 2004. Impressive growth in agricultural chemicals traffic helped the Chemicals & Petroleum group increase revenues by 13.5% quarter over quarter.
    KCSR's first quarter expenses of $149.6 million were $26.1 million higher than the comparable period. Higher fuel costs were responsible for $9.1 million of the increase. Higher traffic volumes and increased headcount were the principal drivers of a $5.5 million increase in compensation and fringe benefits. First quarter of 2005 casualties and insurance expense increased $5.2 million. Casualties and insurance costs in the first quarter of 2004 were favorably affected by an insurance settlement of $2.4 million. A $3.6 million increase in material and supplies was primarily the result of higher prices and greater use of materials purchased by KCSR.
    KCSR's first quarter 2005 operating income was $29.7 million, an increase of $6.2 million, or 26.4%, over 2004. KCSR's operating ratio for the quarter was 83.4%, a slight improvement over 84.0% for the first quarter of 2004.
    Mexrail, Inc. and the operations of its subsidiary, Tex Mex, were consolidated under KCS control on January 1, 2005. The Tex Mex connects KCSR with TFM, S.A. de C.V. (TFM) at Laredo, Texas, the principal international gateway between the U.S. and Mexico. Mexrail, Inc. revenues for the first quarter of 2005 were $17.3 million and operating expenses were $18.5 million. This compares with Mexrail, Inc. revenues for the first quarter of 2004 of $13.8 million and operating expenses of $15.6 million when it was a wholly owned subsidiary of TFM.

    International Rail Operations

    KCS's international rail operations for the first quarter of 2005 were composed of equity investments in Grupo TFM and the Panama Canal Railway Company (PCRC). On April 1, 2005, KCS completed the acquisition of Grupo TMM, S.A.'s ownership of Grupo TFM. Beginning in the second quarter of 2005, the financial statements of Grupo TFM will be fully consolidated with the financial statements of KCS.
    KCS recorded equity in Grupo TFM losses for the first quarter of ($1.0) million compared to income of $1.3 million in last year's first quarter. Grupo TFM's losses were impacted primarily by higher fuel costs ($6.9 million) and a reduced income tax benefit ($3.6 million). TFM reported a quarter-over-quarter increase in revenues, excluding Mexrail, Inc., of $16.4 million to $170.1 million. Overall carloadings increased 5% led by an 18% increase in Industrial traffic and a 9% increase in Metals & Minerals traffic.
    KCS recorded its equity in PCRC's loss of approximately $1.8 million for the first quarter of 2005. This loss was primarily due to the redemption of the International Finance Corporation's (IFC) preferred shares in PCRC. The agreement reached with the IFC required PCRC to pay a premium of $2.8 million (a $1.4 million charge to KCS equity in PCRC). Redemption of the preferred shares will result in annual interest savings to PCRC of $0.5 million. This redemption eliminated a future monetary premium based on PCRC's future financial performance that would have been due the IFC at redemption after 2008 in the range of $9 to $12 million.

    Comments from the Chairman

    KCS' Chairman, President and Chief Executive Officer, Michael R. Haverty, commented: "It was encouraging to see that the continued strong revenue momentum built up during the second half of last year carried over into 2005 and even accelerated in some areas. KCSR's revenues increased 22% in the first quarter compared with the corresponding 2004 period, with all commodity segments performing well and demonstrating success in maximizing market opportunities.
    "Going forward in 2005 there will be a heightened emphasis on the control of operating expenses, which increased by $26.1 million at KCSR quarter over quarter. Higher fuel costs accounted for approximately 35% of the increase. KCSR is implementing a number of efficiency improvements in other areas where it has the ability to impact cost savings through greater budget discipline and streamlined operations, and is further emphasizing safety throughout the system.
    "On April 1, KCS acquired Grupo TMM's ownership shares of Grupo TFM. KCSR and TFM will be operated as separate subsidiary companies consolidated under the KCS holding company. Each subsidiary has its own CEO and management teams. Coordination of the companies will be managed at the KCS level, which will facilitate the development of a truly seamless North American rail corridor linking Mexico and the United States.
    "Vicente Corta has assumed the position of Interim CEO of TFM and is in place leading our Mexican management team at TFM. Vicente has achieved a distinguished career in government and private business and has the leadership qualities to take TFM to the next level. Under his leadership, a transition team is currently assessing all of TFM's engineering and operations, marketing, and accounting functions, and is providing advice and support to our Mexican management team.
    "On April 19, TFM issued $460 million of seven-year 9 3/8% Senior Notes for the purpose of refinancing $443 million of 11 3/4% Senior Debentures. On April 20, TFM redeemed approximately 87% of the 11 3/4% Senior Debentures and retired the balance on April 29. This refinancing will reduce interest costs approximately $10 million annually going forward. The interest savings reduction will cause the acquisition of TFM to be an accretive transaction for KCS shareholders and is the first step in our plans to improve TFM's profitability.
    "As the KCS strategy of developing a competitive North American rail system evolves, the extraordinary foresight demonstrated a decade ago by the Mexican government becomes increasingly apparent. Without doubt, the objectives of NAFTA have been furthered by the privatization of Mexico's rail network. The Mexican government's innovative actions have helped shift North American freight logistics, a shift that promises to be even further developed due to increased Asian traffic moving into Mexico and then on to the United States and Canada. KCS is excited to be working with Mexican officials to further bolster the country's rail network and provide further transportation options for North American shippers.
    "Considerably more needs to be done to streamline TFM operations and provide it with the resources to reach its vast potential. Under the direction of Vicente Corta, many hours and a dedicated commitment on the part of a group of people with extensive railroad experience are being devoted to getting the best operating practices into place. While the goal is to work through this transitional phase in a timely manner, the top priority is getting the job done right. That is what will best serve KCS and its shareholders in the long run. KCS management is more convinced than ever that the growth prospects for KCS' combined North American rail system are robust and that the potential exists for attractive returns for many years."

    Headquartered in Kansas City, Mo., KCS is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holdings include The Kansas City Southern Railway Company, founded in 1887, and The Texas Mexican Railway Company, founded in 1885, serving the central and south central U.S. Its international holdings include a controlling interest in TFM, S.A. de C.V., serving northeastern and central Mexico and the port cities of Lazaro Cardenas, Tampico and Veracruz, and a 50% interest in The Panama Canal Railway Company, providing ocean-to-ocean freight and passenger service along the Panama Canal. KCS' North American rail holdings and strategic alliances are primary components of a NAFTA Railway system, linking the commercial and industrial centers of the U.S., Canada and Mexico. Visit www.kcsi.com for more information.

    This press release includes statements concerning potential future events involving the Company, which could materially differ from the events that actually occur. The differences could be caused by a number of factors including those factors identified in the "Risk Factors" and the "Cautionary Information" sections of the Company's Form 10-K for the year ended December 31, 2004, filed by the Company with the Securities and Exchange Commission (SEC) (Commission file no. 1-4717). The Company will not update any forward-looking statements in this press release to reflect future events or developments.

KANSAS CITY SOUTHERN CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except share and per share data) (Unaudited) (Preliminary)

Three Months Ended March 31, ------------------ 2005 2004 -------- --------

Revenues $198.2 $147.8

Operating expenses Compensation and benefits 61.3 50.8 Purchased services 20.8 15.6 Fuel 26.5 14.8 Equipment costs 16.2 13.0 Depreciation and amortization 14.3 12.8 Casualties and insurance 12.7 5.7 Other leases 3.2 2.7 Other 18.4 15.0 ----- ----- Total operating expenses 173.4 130.4 ----- -----

Operating income 24.8 17.4

Equity in net earnings (losses) of unconsolidated affiliates: Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (1.0) 1.3 Other (1.0) 0.1 Interest expense (12.4) (10.8) Debt retirement costs - (4.2) Other income 3.3 1.5 ----- ----- Income before income taxes 13.7 5.3 Income tax provision 5.6 1.9 ----- -----

Net income 8.1 3.4 Preferred stock dividends 2.2 2.2 ----- ----- Net income available to Common shareholders $5.9 $1.2 ===== =====

Per Share Data ---------------------------------------------------------------------- Earnings per Common share -- basic $0.09 $0.02 ===== =====

Earnings per Common share -- diluted $0.09 $0.02 ===== =====

Weighted average Common shares outstanding (in thousands) Basic 63,554 62,504 Potential dilutive Common shares 1,222 1,307 ------ ------ Diluted 64,776 63,811 ====== ======

KANSAS CITY SOUTHERN RAILWAY OPERATING STATEMENTS - FIRST QUARTER, 2005 Dollars in Millions (Preliminary)

First Quarter First Quarter 2005 2004 ------------- ------------- Revenues Chemical and Petroleum $36.2 $32.0 Paper and Forest 47.6 36.7 Agricultural and Mineral 38.1 30.7 Intermodal and Automotive Revenue 16.7 14.6 Unit Coal Revenue 30.4 21.6 Haulage Revenue 0.4 2.6 Other Revenue 9.9 8.8 ----- ----- Total Revenues 179.3 147.0 ----- -----

Operating Expenses Compensation and Benefits 55.2 49.7 Purchased Services 13.7 13.8 Fuel 24.1 15.0 Equipment Costs 13.6 13.0 Casualties & Insurance 10.1 4.9 Material and Supplies 9.1 5.5 Other 3.5 2.5 ----- ----- Variable Operating Expenses 129.3 104.4 ----- -----

Fixed Expenses Other Lease 3.0 2.8 Depreciation 13.6 12.6 Taxes (Other Than Income) 3.7 3.7 ----- ----- Fixed Operating Expenses 20.3 19.1 ----- ----- Total Operating Expenses 149.6 123.5 ----- -----

Operating Income $29.7 $23.5 ===== =====

Operating Ratio 83.4% 84.0%

KANSAS CITY SOUTHERN RAILWAY CARLOADINGS BY COMMODITY - FIRST QUARTER, 2005 Dollars in Thousands (Preliminary)

Carloadings Revenue First Quarter % First Quarter % 2005 2004 Change 2005 2004 Change ---- ---- ------ ---- ---- ------ Coal 59,715 47,857 24.8% Unit Coal $30,394 $21,557 41.0% 528 682 (22.6)% Other Coal 224 364 (38.5)% ------ ------ ------ ------ 60,243 48,539 24.1% Total 30,618 21,921 39.7% ------ ------ ------ ------

Chemical & Petroleum Products 1,696 1,455 16.6% Agri Chemicals 1,252 911 37.4% 4,184 4,011 4.3% Gases 4,716 4,022 17.3% 7,596 7,042 7.9% Organic 7,045 6,397 10.1% 5,462 5,058 8.0% Inorganic 6,462 5,344 20.9% 14,100 13,603 3.7% Petroleum 11,149 9,950 12.1% 4,531 4,511 0.4% Plastics 5,625 5,327 5.6% ------ ------ ------ ------ 37,569 35,680 5.3% Total 36,249 31,951 13.5% ------ ------ ------ ------

Agriculture and Minerals 11,811 12,475 (5.3)% Domestic Grain 12,015 10,335 16.3% 7,025 7,490 (6.2)% Export Grain 7,659 7,115 7.6% 7,689 7,099 8.3% Food Products 7,633 6,052 26.1% 8,732 6,909 26.4% Ores and Minerals 5,858 3,994 46.7% Stone, Clay & 4,909 4,029 21.8% Glass 4,918 3,231 52.2% ------ ------ ------ ------ 40,166 38,002 5.7% Total 38,083 30,727 23.9% ------ ------ ------ ------

Paper & Forest Products 26,499 23,284 13.8% Pulp/Paper 22,974 18,791 22.3% 1,991 1,826 9.0% Scrap Paper 1,712 1,142 49.9% Pulpwood/Logs/ 8,395 6,542 28.3% Chips 5,352 2,922 83.2% 8,304 8,105 2.5% Lumber/Plywood 9,386 7,939 18.2% 6,055 4,365 38.7% Metal/Scrap 5,922 3,588 65.1% Military/Other 1,304 2,129 (38.8)% Carloads 2,233 2,334 (4.3)% ------ ------ ------ ------ 52,548 46,251 13.6% Total 47,579 36,716 29.6% ------ ------ ------ ------

Intermodal & Automotive 1,496 1,079 38.6% Automotive 1,237 871 42.0% 77,861 79,561 (2.1)% Intermodal 15,431 13,756 12.2% ------ ------ ------ ------ 79,357 80,640 (1.6)% Total 16,668 14,627 14.0% ------ ------ ------ ------

TOTAL FOR BUSINESS 269,883 249,112 8.3% UNITS 169,197 135,942 24.5% 359 4,621 (92.2)% Haulage 370 2,645 (86.0)% (755) (859) 12.1% Adjustments - - Other KCSR Revenue 8,391 ------- ------- ------- ------- 269,487 252,874 6.6% TOTAL $179,336 $146,978 22.0% ======= ======= ======= =======

--30--AMM/dx*

CONTACT: Kansas City Southern William H. Galligan, 816-983-1551 William.h.galligan@kcsr.com

KEYWORD: MISSOURI TEXAS MEXICO INTERNATIONAL LATIN AMERICA INDUSTRY KEYWORD: AIRLINES TRANSPORTATION EARNINGS SOURCE: Kansas City Southern

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