State of the Railroad: From the Desks of KCS CEO David L. Starling and President Patrick J. Ottensmeyer

January 04, 2016

According to Merriam-Webster, resilience is defined as an ability to recover from or adjust easily to misfortune or change.  In 2015, KCS demonstrated resilience in every aspect of its operations, finances and marketing. 

To weather 2015’s unexpected economic conditions, KCS engaged in strategic initiatives to manage costs, undertake planned maintenance, improve our infrastructure and expand our capacity.  KCS’ resilience ensured that, regardless of economic conditions, the company is on a strong financial and operational footing and is well-positioned for future growth.  By maintaining this approach to managing our business, we believe we are creating value for each of our stakeholder groups – from shareholders, to customers, to you, our valued employees.

As we look ahead to 2016, we see many of the same challenges that we faced throughout 2015.  We expect continued volatility in oil and natural gas pricing, which means our energy business, just like our peers’ businesses, will again be difficult to predict.  The strong U.S. dollar will make American exports more expensive and less attractive to other global producers, which may impact many of the products we move, such as steel and paper.  Beyond these key indicators, there are various other factors that signal softness in the global industrial economy, but we must focus on making the best of market dynamics at hand.

For these reasons, among others, we are cautious about our outlook for 2016.  Despite these challenges, we will proceed with many of the planned strategic capital expenditures that will drive our longer term growth in areas such as plastics, automotive and intermodal.  However, we will need to be extremely thoughtful about the cost side of our business and must ensure we are using our financial and human resources assets wisely.  As such, we will remain flexible and respond quickly to evolving circumstances in order to protect our profitability in the short term.

That said, we operate in an industry that must consider both the long and short term timeframes and we can say with confidence that our long term future is bright.  Just as in the past, we will get through this period of economic uncertainty and will make the appropriate strategic capital investments that will facilitate industry-leading growth when macro-economic dynamics shift in our favor.  For the foreseeable future, however, we will need to continue to be nimble and resilient.  KCS demonstrated its resiliency in 2015 and we should all be proud of our meaningful accomplishments.  We will operate with this hallmark mentality through 2016 and we should be excited by the future prospects for our great company.

This state of the railroad report provides an overview of KCS’ primary accomplishments in 2015 and the progress planned for 2016.

Operations

KCS’ U.S. and Mexico Operations teams are comprised of the Safety, Transportation and Engineering functions.  These men and women work to ensure the teams are prepared to work safely; manage the running of trains; and ensure the track is in top shape.

Safety
In 2015, the KCSR Operations team embraced the “I WILL” safety briefing and poster campaign to emphasize the importance of a personal commitment to safety.  Targeted messages with a common theme were developed for each of the Transportation, Mechanical and Engineering teams.  Also in support of safety, KCSR hosted open meetings with the Federal Railroad Administration (FRA), labor organizations and employees to collaborate on how to improve specific safety concerns and foster a better safety culture.  The Safety team plans to continue the momentum in 2016.

In Mexico, KCSMS Maintenance of Way made significant progress in their safety performance.  Their success could be attributed to a number of safety initiatives, including ongoing safety awareness and more targeted training sessions for management and union employees, STAR training for Engineering and Mechanical employees, daily safety messages from the KCSM Network Operations Center, a new flash lamps program, implementation of safety alerts, a new medical service at Monterrey yard, new first aid kits for maintenance of way trucks and a joint safety blitz between KCSM and KCSR.  

Transportation
This year, the Transportation department has been a tale of two countries.  In the U.S., we saw significant volume fluctuation, primarily related to the energy segment in the first half of the year.  In response, we managed expenses through temporary furloughs and the storing of equipment.  As quickly as volumes declined in the first half of the year, business levels rebounded in the third quarter and resources were restored to meet the demand.   Bulk traffic and gross tonnage on KCSR reached all-time highs exiting third quarter 2015. 

In Mexico, the tale has been of restoring staffing levels and focusing on improved service for our customers.  Hiring efforts and improved relations with the labor union is making a positive difference and we continue to train and promote workers to safely operate trains.  We anticipate being fully staffed by the end of first quarter 2016 which should allow for the continued improvement of our operating metrics.

We also continue to make progress toward strengthening our relationships with connecting carriers.  At the forefront of this effort was the agreement reached with Union Pacific to add capacity on their Brownsville subdivision which will support our cross-border network.  Design work on several of these projects has started and we look to see some of this work completed by the end of 2016.

The Sanchez Yard project Phase I was completed successfully and we opened eight new receiving and departing tracks at the facility.  Phase II work remains on target for 2016 with the opening of new classification tracks and improved mechanical repair space.  This project will improve network fluidity, relieve congestion at our Monterrey and Nuevo Laredo facilities, and improve cross-border traffic flow.

Today, the economy remains uncertain; however, the Transportation teams across our network remain focused on our customers and are working diligently to improve productivity to align our costs with the amount of traffic we move.

Engineering and Maintenance of Way
This year, KCSR Maintenance of Way and supporting crews installed approximately 540,000 ties and over 58 track-miles of rail.  Project highlights include:

• Installation of 40,000 ties and 20 track-miles of rail between Beaumont, Texas and Dequincy, La., completing a three-year program for track upgrades over this rail segment.
• Installation of 132,000 ties on the line from Kansas City, Mo. to East St. Louis, Ill.
• Installation of 76,000 ties and five track-miles of rail in the areas of Artesia, Columbus and Aberdeen, Miss.
• Continued annual tie cycle programs on the Pittsburg subdivision from Kansas City, Mo. to Pittsburg, Kan.; Laredo subdivision from Laredo to Corpus Christi, Texas; and New Orleans subdivision from Baton Rouge to New Orleans, La.
• Replaced 38 miles of curved rail and other priority rail areas across the system.

In July, KCSR opened a new, state-of-the-art intermodal terminal in Wylie, Texas, providing significantly increased capacity for our intermodal customers.  The new Wylie Intermodal Terminal provides an annual lift capacity of 342,000 containers, 1,500 parking spaces, and 400 container stack spots.  To maximize operational efficiency, the terminal utilizes an automated gate system with high definition imagers, optical character recognition and biometric driver identification.

Additional KCSR projects to increase capacity and support future business growth include:

• Extended sidings at Vandervoort, Ark. and McLaurin, Miss.
• Constructed a new 6,000 track-feet R&D track in Jackson, Miss. and extended the R&D track at Artesia.
• Constructed a new 8,500 track-feet mechanical inspection track at the KCSR intermodal facility in Kansas City.
• Completed Centralized Traffic Control (CTC) on the Laredo subdivision in Texas.

Next year’s plans include the replacement of approximately 500,000 ties and 50 track-miles of rail across the KCSR network.  Additional planned capacity programs include construction of two classification tracks in Jackson; a new switching lead at the intermodal shipper facility in Kendleton, Texas; and a mechanical inspection track and storage track at the intermodal facility in Kansas City.

In 2016, KCSR will continue constructing a storage-in-transit (SIT) yard in Mossville, La. to support Sasol’s new project in Lake Charles, La., as well as creating a new classification yard for KCSR operations.  KCSR will also continue to maintain the main line infrastructure for current needs, while keeping focus on multi-year plans for capacity expansion and future volume growth in the U.S. and Mexico.

In 2015, KCSMS Maintenance of Way installed approximately 268,337 ties and over 74 track-miles of rail.  Project highlights include:

• From August to November, the team installed 10,000 wood ties and relayed 14.6 track kilometers of new welded rail in curves on the Caltzontzin district line N - 85 percent 136-pound and 15 percent 115-pound rail.
• Installed 79,900 concrete ties and 40 tk/km of 136-pound welded rail on the B line from Monterrey to Nuevo Laredo.
• Installed 64,500 concrete ties and replaced 115-pound rail with 136-pound rail, increasing speed on several segments of the network.
• Installed 15,400 concrete ties on the BF line and relayed 1.5 tk/km of rail, replacing 115-pound rail with 136-pound rail.
• Installed 40,000 ties on the Toluca district, 10,000 concrete ties on the N line and relayed the rail in curves.
• Installed 33,000 concrete ties on the F line between Monterrey and Reynosa and upgraded the welded rail.
• Relayed rail on the Tula district on the BC line and upgraded the rail from 115- to 136-pound.
In 2015, Phase 1 of construction at Sanchez yard was completed with the development of 30KM (20 miles) of new track for receiving and light mechanical repairs.  Next year, the team will continue track to the classification yard, including a wye and lead tracks to expedite cross-border track.

Additional KCSMS projects in 2015 to increase capacity and support future business growth include:

• Reconstruction of the B line bridge, including constructing two central supports and replacing the existing metal girders for ballast concrete beams to increase train speed limits.
• Reinforcing embankments on the NF line, enhancing security.
• Track realignment on the Toluca district to reduce impact of landslides during rainy season.
• Construction of a new office building in Queretaro to be used by Transportation and Security.
• Installation of three high mast lights at the San Luis Potosi yard and Antigua Toluca station.
• Installation of 26 new 136-pound turnouts on main corridors.

Next year’s plans include:

• Phase II of the installation of a Broken Rail Detection system on the Caltzontzin District.
• A 40 KM expansion of Centralized Traffic Control to Acambaro.
• Siding construction and expansion projects at Quirio and La Costura and double track in the industrial area.
• Construction of support tracks inside the API Lazaro Cardenas port.
• Expansion projects at Interpuerto San Luis Potosi and Salinas Victoria Nuevo Leon.

Operations Support

The Operations Support team is comprised of KCSR’s and KCSM’s Mechanical, Network Design, Information Technology (IT) and Business Process Improvement (BPI) groups.

Mechanical
The KCSR and KCSMS Mechanical team keeps the company’s rolling stock - locomotives and cars - moving and ready for freight rail service.  First among equals, Mechanical is proud to report that the team’s employee safety performance improved year over year.

To improve network safety In 2015, the Mechanical team began providing hands-on, locomotive and rail car safety and inspection training for all KCSR Operations employees.  The training, led by senior Locomotive and Car Shop managers, helped satisfy technical knowledge and proficiency requirements set forth in the Code of Federal Regulations.  Also, in April, the team started inspecting crude trains that move 500+ miles on the KCS network and increased inspections of grain trains/cars through Shreveport to reduce line of road failures.  

A key effort for the Mechanical team in 2015 was bringing more maintenance work in house to reduce costs and improve quality and availability.  This affected 48 AC4400 locomotives in Kansas City, Mo.  In Monterrey, Nuevo Leon and San Luis Potosi, SLP, 238 locomotives were transitioned between maintenance providers.  Along with the transition, KCSM mechanical managers were assigned to manage the operation at each location.  The locomotive fleet grew in 2015 with the purchase of 50 Tier 3 locomotives, and the team completed a hopper car rebuild program, including 24 covered hoppers, 96 KCSM ammonium nitrate hoppers (with 30 more in progress) and 499 Pemex calibration cars.

To increase Mechanical capacity in 2015, a new shop was opened in Jackson, Miss. and expediter track and inspection tracks were installed in Kansas City, Mo.  A temporary repair track was added to Sanchez Yard to eliminate back hauling of bad orders to Nuevo Laredo, Tamaulipas.  At Shreveport, La., Kansas City and Port Arthur, Texas, the Mechanical team adopted the BPI program’s recommendation to implement the 5S’ (standardize, sort, set in order, shine and sustain).

Project Lightning, an Enterprise Resource Planning and BPI initiative, continued in 2015.  The cross-functional project team of Mechanical, Purchasing and Information Technology professionals focused primarily on software design, with plans for implementation in Mechanical facilities throughout 2016.

The Mechanical team’s initiatives resulted in a cumulative savings exceeding $15 million.

Network Design
The KCS Network Design team is comprised of the Service Design and Optimization, Asset Utilization and Management, Interline Operations and Advanced Systems groups.  In 2015, this team executed a number of initiatives to optimize the fluidity of the network.

Service Design
• Implemented a more consistent and reliable schedule for intermodal trains moving from San Luis Potosi and Salinas Victoria across the border. 
• Implemented a simplified blocking scheme at the border to facilitate fluidity and reduce dwell on northbound cross-border traffic.
• Implemented a daily Laredo, Texas to Jackson, Miss. train to improve Shreveport inventory and congestion.

Asset Utilization and Management 
• Purchased 800 new grain cars and 380 auto racks improving equipment quality and capacity.
• Continued the lease conversion program with 1,900 more assets converted from lease to ownership.
• Increased participation in the North American Boxcar Pool on 50’ standard boxcars and 60’ hopper cars to increase capacity with fewer assets, thereby reducing expenses.
• Sidelined 235 high-maintenance-cost covered hoppers and boxcars.
• Implemented standard lead time requirements for customers ordering empty equipment in MyKCS, improving the consistency, reliability and predictability of car supply.
• Implemented a comprehensive Automotive Network Scorecard, fully automated and available to the Operations and Sales and Marketing teams in December.

Interline Operations
• Partnered with Transportation and multiple entities to open the first new rail bridge in 100+ years across the Rio Grande/Rio Bravo at Matamoros/Brownsville.
• Worked with IT to automate a rail manifest process with Mexico Aduana (Customs).

Advanced Systems
• Conducted a locomotive Trip Optimizer pilot aimed at improving train handling and reducing fuel expenses.
• Signed a contract to purchase 120 Trip Optimizer units with installation beginning April 2016 and full deployment in December 2017.
• Implemented an Excessive Idle Program in the U.S. to complement Mexico’s existing program, significantly reducing fuel expenses.
• Enhanced change management reporting and communications procedures with field book inserts, wallet cards and flyers distributed throughout the network.
• Started predictive capacity modeling in conjunction with the Network Services Business Model.
• Incorporated geographic image system data into departmental procedures and Wi-Tronix data queries, paving the way for implementation of PTC.

Positive Train Control
KCSR’s implementation of PTC is well underway.  PTC is a set of highly advanced technologies designed to automatically stop a train if it exceeds certain operating parameters. 

This fall, the PTC implementation deadline was extended by legislation passed by Congress and signed into law by the President.  With the extension comes new regulatory requirements, including monthly updates to the Federal Railroad Administration on our progress.
 
Nonetheless, KCSR is working tirelessly to implement PTC as safely and efficiently as possible.  A number of initiatives, such as the PTC Change Agent Network, are in place to ensure the accurate spread of PTC information throughout the company.  The Change Agent Network is comprised of 100+ KCSR employees, many of whom are directly involved in the planning, testing and execution of PTC.  The Network will expand to include other departments as we get closer to Field Integration Testing in March 2016.

Information Technology
The IT team continued to focus on enhancing the availability of systems, increasing IT security and delivering services to support the business.  Key partnerships and projects in 2015 included:

• IT-Sales and Marketing-Corporate Communications: Delivered a new, mobile-friendly kcsouthern.com and MyKCS customer portal.
• IT-Operations Support-Mexico’s Aduana: Implemented a new cross-border rail manifest process for northbound traffic to speed the clearing of trains and reduce manual effort.
• IT-Finance: Delivered an upgrade to PowerPlan accounting and tax applications to help meet asset accounting and depreciation requirements.
• IT-Human Resources: Rewrote a key system supporting recruitment and on-boarding, and enhanced a collaborative off-boarding process.
• IT-Engineering-Real Estate-Environmental-Public Safety: Enhanced KCS’ Enterprise Geographic Information System (EGIS), including a new crossing management solution for providing FRA crossing inventory data and better visibility to critical environmental information.
• IT-Intermodal: Delivered an interface to the new Wylie Intermodal Terminal automated gate system for in-gate processing, improving data quality and productivity.

IT also took action to benefit enterprise-wide security, availability and delivery.  Examples include:
• Performed Microsoft Windows server upgrades on 70+ systems to mitigate security, supportability and availability risks to the enterprise.
• Implemented an Enterprise Backup and Recovery strategy to more efficiently recover data in the event of a disaster or data loss and to deliver on corporate backup retention requirements. 
• Formalized a Business Intelligence (BI) practice to improve enterprise information management and build a robust BI strategy, paving the way toward a data-driven organization.
• Enhanced an Enterprise Architecture Program to align IT efforts with business needs, facilitate an IT execution strategy and improve investment decisions and delivery.

In 2015, IT significantly increased the company’s ability to detect active threats, and implemented an application whitelisting system to proactively block malicious activity on company assets.  In the field, IT installed video systems in several locations to secure the company’s assets, monitor operations and comply with various authorities’ requirements.  Currently, KCS has a digital video system with more than 300 cameras across the network.

Business Process Improvement
KCS’ BPI program, based on Lean Six Sigma problem-solving methodologies, continues to produce results.  The current focus is on complex, cross-functional projects that represent opportunities to leverage resources against large-scale processes for maximum financial impact.  Among other things, these projects seek to improve fuel efficiency, terminal dwell and network capacity.
 
Black Belts assigned to these projects adhere to Lean Six Sigma Methodologies for planning, data analysis, root cause identification and solution development.  They collaborate with stakeholders and subject matter experts focusing on the following projects: 

• Eliminating northbound automotive, carload and intermodal set outs at Nuevo Laredo through improved information flows;
• Improving Lazaro Cardenas load planning via automation, improved loading/departing location and general rule updates;
• Improving rail capacity from Lazaro Cardenas to support incremental intermodal volumes;
• Improving on-time departure, yard processes and overall flow in KCSM yards;
• Increasing Laredo bridge utilization and throughput focusing on southbound traffic;
• Leveraging fuel cost variance between the U.S. and Mexico for refueling northbound locomotives; and
• Reducing KCSM dwell time on foreign equipment through robust process improvements to minimize excessive holds.
 
Separately, Black Belts recommended a “5S” (sort, shine, straighten, standardize, sustain) approach that has been adopted by most Intermodal and Mechanical teams in the U.S. and Mexico.  Physical and operational improvements are supported by employees in their respective work areas. 

For 2016, the BPI program will continue to drive improvement for business opportunities aligned with the company’s strategic plans, initiatives and outcomes.

Sales and Marketing

The KCSR and KCSMS Sales and Marketing teams are comprised of the Sales, Marketing, Pricing, Market Research, Sales Operations, Customer Solutions and Marketing Communications groups.  This year brought new leadership to the team as Pat Ottensmeyer was promoted to president and Brian Hancock joined the company as executive vice president and chief marketing officer.  Since his arrival, Hancock has been speaking to customers, partners, industry groups, his team and departments throughout the company about the value of focusing on the end consumer’s needs as we design, sell and deliver freight railroad services.  This approach aims to change the way KCS does business.

Automotive
KCS is well-positioned for the increases in Mexico automotive production and U.S. consumption.  Automotive production in Mexico continues to increase with projections over the next five years from 3.3 to five million vehicles manufactured between 2015 and 2020.  The company is seeing record growth in Automotive sales.  The Seasonally Adjusted Average Rate (SAAR) of sales in the U.S. is projected to be 17.3 million in 2015 and projected to increase to 17.6 million in 2016.  To put that into perspective, in January 2010, the SAAR was 12.6 million vehicles.  
 
There is excitement about the future of KCS’ Automotive business as three manufacturers began their first year production ramp up in 2014.  The growth from these plants is expected to climb as we move into full production in 2016.  One of the leading auto makers in Mexico said it is investing $5 billion between 2013 and 2018 to double capacity at its four plants in Mexico.  Another leading auto producer announced a $1B expansion to add 100,000 production capacity at its Mexico facility by 2017.

As our established manufacturers use the first part of 2016 to re-tool and position for significant long-term growth, so too will KCS with infrastructure improvements and operational readiness for the launch of a plant at Pesqueria, Nuevo Leon, Mexico and another plant at San Jose Chiapa, Puebla, Mexico - both planned to start in 2016.  Further fueling the automotive engine of growth are several new plant announcements planned in Mexico over the next few years.
 
Automotive manufacturers are taking advantage of KCS’ cross-border railroad network, Mexico’s skilled labor and lower manufacturing costs, proximity to U.S. and Canadian markets, and favorable trade agreements in Mexico.  North American automotive sales and production is expected to rise over the next several years, and KCS is a great transportation option to bridge the growing supply of automotive production from Mexico to North America’s growing demand.  KCS is well-positioned with the infrastructure capacity and network to serve these new facilities and growing traffic volumes. 

Carload
While 2015 economic conditions were tough, the company’s Carload group made solid gains.  In June, KCSR and Sasol Chemicals (USA) LLC announced an agreement for the construction and long-term lease of a storage-in-transit (SIT) rail yard to support Sasol’s new ethane cracker and derivatives project in Lake Charles, La.  In addition to building the SIT yard for lease to Sasol, KCS will replace and expand its existing rail car classification yard in Mossville, La.

Also this summer, Argus Media presented KCSM, Bulkmatic and Pemex with its Win-Win Award for a successful customer-carrier partnership.  KCSM had been moving fuel oil from the Pemex Tula refinery to the Port of Lazaro Cardenas in small block manifest, interline service for several years.  As Pemex volume requirements grew, driven by higher export demand, that logistics model could not handle the additional capacity on a service schedule that met the customer's needs.  Taking advantage of Pemex´s more flexible contracting authority under Mexican energy reform, KCSM partnered with Bulkmatic and Pemex and transitioned to a single railroad, unit train system that substantially increased volumes and lowered costs for Pemex.  KCSM believes this to be just one example of the midstream opportunities to come as Mexico opens its energy sector.

Intermodal
For the Intermodal group, we saw volumes decline from a very strong 2014 for a variety of reasons that we will touch on below.  Looking at 2015 over 2014, volume dropped around four percent.  While Lazaro Cardenas volumes grew marginally, all other intermodal segments showed weakness.

In the cross-border market, competition from other railroads and the trucking industry, combined with service challenges in early 2015, caused cargo to migrate to other routes and modes.  Service has recovered northbound in the second half of the year, and work is ongoing to improve consistency in both service and capacity southbound to cater to our customers’ need for container positioning into Mexico, including the southbound flow of auto parts and other time-sensitive commodities.

Likewise, the U.S. domestic business was hampered by service performance in early 2015.  While service has returned, volume is lower than anticipated in a somewhat depressed market.  With the new Wylie Intermodal Terminal that opened outside Dallas, Texas in July, KCS will be able to grow unhindered while cooperating with our interchange partners to secure and offer the best possible product.

In Mexico, the network struggled with a number of disruptions in 2015 caused by outside factors, as well as some capacity constraints and lingering crew shortages, this hampered the efficient flow of rail cars and some of our cargo was diverted to truck.  The opportunities remain intact and the Mexican market is strong, as is the market between Lazaro Cardenas and the U.S. for truck to rail conversion.

With the continued cross-functional focus on building capacity and designing train schedules that offer the consistency and predictability intermodal customers require, next year will be a challenge - yet ripe with opportunity.

Energy
2015 brought new crude oil traffic to the Energy business unit with a facility at the Port of Beaumont, Texas expanding their capabilities and a new facility in Baton Rouge, La. beginning to receive trains from KCSR.  Canadian crude oil traffic will continue to grow as the KCSR network serves many refineries in the U.S. Gulf Coast region, which prefer to source the heavier crude oil produced in Western Canada.  While 2015 saw historically low oil prices, there continues to be significant investment in rail terminals on the KCSR franchise, which will provide the infrastructure needed to facilitate growth in the years ahead.

Coal fired electric utilities have been impacted by very low natural gas prices in 2015, which is challenging our utility customers to compete in the power market to sell their electricity.  Low natural gas prices, coupled with low crude oil prices, have impacted the demand for frac sand in our markets.  KCS’ nimble transportation network allows for a surge in unit train traffic when traffic demand requires and yet remain fluid throughout the year.

Agriculture and Minerals
Changes in the world market have kept the Agriculture and Minerals business unit flat, yet it remains a core strength for the company.  Historically, this business unit’s volumes grow at low single-digits and it mirrors the market.  Corn, wheat, soybeans, sand and rock are the primary commodities for this group.  The agricultural commodities are shipped throughout the U.S. and Mexico to primarily feed people and chickens in both countries.  KCS’ ores and minerals business is primarily rock from the middle of our U.S. network that helps build infrastructure in Oklahoma, Arkansas, Louisiana, Mississippi and Texas.  In Mexico, our main business is sand moving throughout the industrial regions. 

Business Solutions
The Business Solutions team is comprised of the Customer Solutions, Market Research, Business Development and Sales Operations functions.

• In 2015, the Customer Solutions team continued to enhance its technology and phone capabilities to better serve customers.  KCSR and KCSM’s phone system was fully integrated with its Customer Relationship Management (CRM) technology, so callers are identified and routed to the best customer solutions representative to serve their needs in an accurate and timely manner.  The process also ensures issues are appropriately logged and tracked.

• The Market Research team continues to seek ways to identify market trends and educate customers on supply chain shifts.  Educating customers and the KCSR and KCSMS commercial teams remains an important goal and the team looks forward to sharing new insight and white papers on kcsouthern.com in the year ahead.

• The Business Development team continues to work with Sales and Marketing team members to bring new opportunities to the network.  This team’s process is also now fully integrated into KCS’ CRM technology, and includes working closely with internal departments to drive visibility to projects and stress the importance of timely and accurate approvals.  Enhanced visibility to project approvals will better help KCS establish service level agreements to ensure projects maintain momentum and are completed in a timely fashion.

• The Sales Operations team continues to support the daily needs of the KCSR and KCSMS Sales and Marketing teams.  In addition to its ownership of the CRM technology, Sales Operations prepares consistently-branded presentations, reports, service insights, maps and more, ensuring the Sales team has the communications devices it needs for productive conversations with customers.

Marketing Communications
KCS’ Marketing Communications function provided key leadership to the new kcsouthern.com, which launched on October 4.  The year-long initiative focused on mobilization, enhanced user experience and search engine optimization.  The new kcsouthern.com includes a mobilized and updated MyKCS portal, as well as the new public site.    Now customers, prospects and investors are able to visit the KCS website and/or MyKCS to learn more and even transact on their accounts without having to be tethered to a desktop computer.  So far, analytics are showing an eight percent increase in new visitors to the site and an improvement in search results for key terms.  The new website and customer portal were designed to increase KCS brand awareness while empowering existing and potential customers to become more engaged with KCS to perform transactions whenever and wherever they have a need.  
 
Additionally, an enterprise-wide team worked collaboratively to redefine the customer satisfaction surveys ensuring both industry best practices as well as actionable organization-wide input was received.   Customer surveys were conducted in first and third quarters to measure both customer satisfaction and loyalty.   The Net Promoter Score, which indicates the percent of customers who would openly recommend KCS, fell from the Spring survey while 25 percent of respondents’ answers were consistent with loyal customers.  On-time and consistent service remain critical areas for improvement.  Most respondents said they believe KCSR and KCSM communicate openly and honestly and are committed to a win/win solution for their customers and partners.  Customers also responded favorably indicating they consider their Sales and Marketing contacts as strategic partners with 95 percent agreement for KCSR and 87 percent for KCSM.  To align with industry best practices and to respect our customers’ time, Customer Satisfaction Surveys will be conducted once a year in the late summer starting in 2016.

Finance

During 2015, the Finance organization continued to execute on its vision to be recognized as knowledgeable, collaborative business partners making innovative contributions to improve the profitability, cash flows and market value of KCS.

Improve Profitability
During 2015, Finance continued to work with the business to identify and execute actionable and integrated plans to achieve profitability targets expected by KCS’ investors, delivering more than $40 million in cost savings/avoidance. 

The Purchasing team facilitated sourcing strategies that are on track to secure $24 million of cost reductions in 2015.  These strategic sourcing efforts and related process improvements include competitive bidding, auctions, new sources of supply, more favorable contract terms and scrap disposal.

During 2015, the Purchasing team partnered with the Mechanical organization to renegotiate and restructure multiple legacy maintenance agreements in the U.S. and Mexico, and to secure financial compensation from a key supplier for underperformance.  Collectively, these efforts resulted in a year-over-year reduction in purchased services and material spend in excess of $6 million.  These efforts will provide increased financial benefits in 2016 and will provide flexibility in the future as the remaining maintenance agreements expire.

During 2015, Financial Planning & Analysis (FP&A) continued to partner with Operations to realize cost savings through various initiatives including terminal plan reviews and material logistics optimization.  FP&A also provided support to Operations through enhanced cost reporting which improved insight and accountability for cost drivers, leading to further cost reductions.  Areas of focus included labor cost drivers, particularly overtime and arbitraries; material planning, staging and consumption; purchase card spend; business process improvement support; and fuel efficiency drivers.  These collective efforts are on track to deliver $5 million in annualized cost savings in 2015. 

Finance continued to pursue revenue recovery and cost reduction/recovery opportunities.  The Internal Audit team leveraged audits and data/visual analytics technology to identify revenue recovery, cost savings and productivity gains that will deliver nearly $2.5 million in annualized value.  The Non-Freight Billing team worked with Operations and Marketing to leverage existing cost sharing/recovery agreements and to identify new opportunities, resulting in $2 million of additional annual benefit. 

Finance worked closely with Asset Management to execute and expand the company’s multi-year lease conversion strategy.  During 2015, KCS converted approximately 2,400 units of rolling stock, increasing the company’s ownership percentage of its rolling stock and locomotives to more than 60 percent from 51 percent at the end of 2014, and reducing 2015 operating expense by more than $5 million.

Optimize Capital Structure and Increase Liquidity
During 2015, Finance identified opportunities to further optimize KCS’ capital structure and liquidity, facilitating meaningful shareholder return and continued profitable investment in the business. 

During 2015, the KCS board of directors, acting upon recommendations from the Finance team and KCS senior management, took actions to increase shareholder return.  In January 2015, the quarterly cash dividend was increased to $0.33 per share, an 18 percent increase from the 2014 quarterly dividend, and a 69 percent increase from the initial quarterly cash dividend in 2012.  In May 2015, the KCS board of directors further enhanced the total return to shareholders by authorizing the repurchase of up to $500 million of KCS common stock through June 2017.  Through the end of the 2015 third quarter, KCS had repurchased approximately 1.5 million shares at a total cost of $136.3 million. 

In mid-2015, the Finance team executed the issuance of $500 million of 30-year, 4.95% Senior Notes.  The cash proceeds were used to increase liquidity, fund share repurchases, and support business initiatives such as the lease conversion strategy.

During 2015, the Finance team executed a strategy to further optimize KCS’ capital structure.  An $800 million credit facility was established at KCS, replacing agreements at KCSR and KCSM which had an aggregate capacity of $650 million.  Additionally, $2 billion of Senior Notes issued by KCSR or KCSM were exchanged for Senior Notes issued by KCS.  Establishing a new KCS credit facility and migrating the Senior Notes from the operating subsidiaries to the parent company provides important benefits, including simplification of the company’s capital structure, expected future improvement in the company’s credit rating, expanded liquidity and borrowing capacity, and opportunities for optimizing cash availability.   

Effective management of KCS’ capital structure is evidenced by a weighted average coupon interest rate of 3.7 percent, the lowest in the railroad industry as of September 30, 2015, and by a weighted average debt maturity of 15.6 years, nearly one year longer than the railroad industry average as of September 30, 2015.  KCS’ annual interest expense has decreased more than $90 million from the peak experienced in 2009.

During 2015, Finance continued to work with Marketing, Operations and Engineering to increase cash flow by optimizing inventory levels, accelerating cash collections, and lengthening payment terms in KCS’ vendor contracts. 

Financial Planning & Analysis also partnered with the business to enhance the business case process to drive more robust decision-making, ensuring that investments are prioritized to the projects that will generate the best returns possible.

Support Market Value
Uncertainty over the pace of global and domestic economic growth and the impacts of any possible economic downturn on the U.S freight transportation industry weighed on the 2015 stock performance of all Class I railroads, including KCS.  With the stock price under pressure, it became more important than ever for KCS executives and the Investor Relations team to meet with investors on a continuous basis to assure them that the company’s long-range growth story was still very much intact.

During the year, KCS representatives presented and met with investors at 16 conferences, undertook eight city-specific trips to meet with investors, hosted 17 meetings at headquarters in Kansas City and logged 220 phone conference calls.

Protect Enterprise Value
Finance continued to proactively collaborate with the business to ensure that compliance and process considerations are integrated into business decisions.  Finance continued to leverage technology, solid processes and technical expertise to deliver timely, accurate and insightful financial information and solutions.

During 2015, Finance partnered with the IT team to improve several key business processes, and to further develop a Finance systems planning process that accelerates the identification and prioritization of system enhancements.  This process contributes to improved functionality and efficiency and quicker response to a rapidly changing environment.

Improved company-wide focus on internal controls and compliance was evident in 2015 as Internal Audit continued to report a decrease in the severity of audit findings and in the number of internal control deficiencies identified during audits.  In fact, there have been no unsatisfactory audit ratings in the last three years.

Finance continued to actively address the foreign exchange risk associated with a cross-border business, executing and managing $430 million of Mexican peso forward contracts and zero cost collars.

Finance Associate Development
In 2015, Finance continued to invest in the growth and development of its associates as open positions were actively managed to provide growth and rotational opportunities to Finance associates.  The Finance Brown Bag Learning Series, which provides opportunities for Finance associates to present and learn about diverse topics related to KCS and to the railroad industry, continued to expand with additional events and topics.

Human Resources and Labor Relations

The Human Resources (HR) and Labor Relations (LR) teams in the U.S. and Mexico work to attract and retain the right people to achieve KCSR and KCSM’s goals and objectives.  They also manage activities pertaining to employee relations, compensation, benefits, health and wellness, training and career development.

This year brought some organizational changes to the team.  Under the leadership of senior vice president human resources Lora Cheatum, Adam Godderz moved from Legal to the Labor group, while retaining his responsibilities as corporate secretary.  This is a rotational assignment that provides leadership to KCSR LR and coordination with KCSMS LR.

From December 1, 2014 to December 1, 2015, the KCSR HR team screened 43,921 applications and hired 369 (307 union and 62 management) employees for 34 different locations.  Another 97 internal candidates applied and were selected for positions within the company.  Since 2010, HR has hired 1,337 employees.

In Mexico, the HR team received 36,903 applications and hired 54 new employees across all departments.  A total of 27 internal promotions were made in accordance with KCSMS’ gender equity model.  Also this year, HR started an experiential talent development program with nine participants, one of whom was promoted to the position for which she applied.  In 2015, KCSMS received a new certification from the National Institute for Women for its practice of the Model of Gender Equity.

In the area of retention, compensation and benefits, KCS HR completed a gap analysis to determine how KCSR and KCSMS compare to other companies in Kansas City, Monterrey and Mexico City in regard to pay, benefits and work/life programs.  The team is now working on a strategy for a short- and long-term total rewards roadmap.  A new management employee benefits recruitment brochure was developed and the Benefits Resource Center portal was redesigned and rolled out prior to open enrollment for management employee benefits.

KCSMS HR worked with the Society of Human Resources Management and various internal departments on areas of opportunity brought to light by the 2013 Employee Engagement and Satisfaction Survey.  Other actions include the creation of a rewards and recognition program that allows employees to receive training for higher positions in the Operations department; and incorporation of the Intranet-based Be-Flex total compensation tool that allows employees to calculate the total value of their salary, benefits and perquisites and compare with companies that pay only statutory benefits.

To promote employee health and wellness, KCSR HR relaunched the On Track to a Healthier You program using Viverae.com as a platform for employee engagement activities to earn rewards.  Four challenges were completed focusing on better nutrition, increasing physical activity, walking and weight management.  The On Track program also offered biometric screenings, health assessments, lunch and learn events and an on-site health fair.  This year, HR named a new chief medical officer and occupational health nurse.

In 2015, KCSMS was certified by the Wellness and Prevention Council Chapter Mexico as a socially healthy enterprise.  Activities conducted throughout the year to promote health and wellness include: 

• Celebrating the 18th anniversary since the concession with a 5K run with participation from 850 employees and their families.
• Asterisks Diet consultation was available to all employees and dietary tips were sent to management employees each month.
• Exercise classes conducted by an external instructor were offered three times.
• 130+ management employees received vaccinations for H1N1 and the influenza virus.
• Special awareness events about heart health, diabetes and breast cancer were conducted.
• Biometric screenings and a health fair were conducted.
• Five employee soccer teams played four tournaments with about 70 participants per tournament.
• The employee runners club ran 10 runs of 5/10 Kilometers with 40 participants.
• And, KCSMS HR is working to obtain certification as a Socially Responsible Enterprise, which is anticipated to be awarded in May 2016.
 
In 2015, KCSR HR expanded its library of online courses available to employees.  Next year, employees will have access to additional compliance courses and operations-specific field training through the Safety team.  Also this year, 17 management employees participated in KCSR’s Education Assistance Program and 65 employees used the company-offered Rosetta Stone online language learning program.

KCSMS HR offered a number of continuing education programs.  In addition to the company’s managerial effectiveness leadership certification, approximately 450 employees participated in courses on coaching, personal effectiveness, continuous improvement, effective communication, building trust and teamwork, business etiquette and protocol, mindfulness, crucial conversations, gender equity, female leadership, generational differences, objective/goal development and English.  Twelve employees are working toward a master degree with support from the company.

KCSMS HR was also instrumental in facilitating employee contributions to Tren Navideño and TELETON, the children’s school for Monterrey and Caritas.

The KCSR LR team was actively involved in negotiating 2015 contract revisions with 14 U.S. labor unions, which will govern the company’s working relationships with 2,700 union employees through December 31, 2019.  These revisions address a number of items with two key points: health and welfare benefits modified to address changes in the federally-mandated Affordable Care Act; and operational flexibilities tailored to provide greater service opportunities for our customers, transportation and support groups.  The revisions are expected to be complete in 2016 with no disruption to the operation.

The KCSM LR team facilitated transactions for 530 employees, including new hires, promotions and craft changes.  The team also started the second phase of training for supervisors.  

Administration and Corporate Affairs

The Administration and Corporate Affairs team is comprised of the Federal and State Regulatory Affairs, State and Local Relations including public-private project partnerships, Legal, Claims, Freight Claims, Facilities, Real Estate and Industrial Development, Public Safety, U.S. Security and Police, Environmental Protection, Corporate Communications and Community Affairs functions, as well as the company’s charitable activities and political action.

U.S. Federal and State regulatory issues affecting the industry and KCSR
In 2015, no legislation was passed by Congress that would significantly harm the U.S. rail industry; and in fact, many issues important to the U.S. rail industry were addressed by Congress that will have a very positive impact for the industry.

In early December, reauthorization of federal surface transportation programs, “the highway bill”, was passed by Congress and included several provisions relevant to the rail industry.  Most of the rail-related provisions within the bill were beneficial, including the establishment of a program to help fund rail infrastructure projects, improved requirements for tank cars carrying flammable liquids, and measures to improve environmental review of railroad projects.  Though some additional regulatory requirements related to safety and security were also included, the industry and KCSR see the bill as positive overall.

Also in early December, Congress passed and sent to the President legislation reauthorizing the Surface Transportation Board.  KCS and the U.S. rail industry welcomed the passage of the Surface Transportation Board Reauthorization Act of 2015 (S. 808).  The legislation affirms the critical need for railroads to be able to earn the necessary revenues to build, maintain, and further modernize the nation’s privately-owned rail network which is needed to meet current and future freight transportation demands.

Legislation to extend the 2015 deadline for implementation of Positive Train Control (PTC) was signed into law on October 29.  KCSR will file its revised PTC Implementation Plan by January 27, 2016 as required by the extension.

Due to concerns over the increased handling of crude oil and other hazardous commodities by rail, there were also several Congressional and agency efforts by the Federal Railroad Administration (FRA) and the Pipeline and Hazardous Materials Safety Administration (PHMSA) to regulate tank car design, track speeds, train size, crew size and other operational aspects of the industry. 

The Surface Transportation Board (STB) continues to consider several proceedings that could impact the U.S. rail industry.  KCSR is actively monitoring and participating in both the legislative and regulatory proceedings and watching them closely.  These STB proceedings and any related Congressional activity will continue to require close attention in 2016.

In 2015, the Federal Affairs team was involved in a number of initiatives and issues important to the company including:

• Active participation in industry meetings involving monitoring, negotiating, modifying and eventually passing the new five-year highway bill mentioned above.

• Participation in several STB, FRA and PHMSA proceedings impacting the rail industry.

• Monitoring and engaging in Congressional and regulatory actions involving the U.S. rail industry, including economic regulation, antitrust, passenger rail issues and Amtrak initiatives, and other safety and environmental initiatives.  This included analyzing their impacts, if any, on KCSR and defending against adverse impacts.

• Monitoring and engaging in federal regulatory actions that significantly expanded federal control of waterways to include railroad ditches, and increased regulation of the coal and utility industry in an effort to decrease coal usage.

• Interfacing with the PTC team to interpret ongoing legislative and regulatory changes affecting the PTC implementation deadline and KCSR’s revision of its PTC Implementation Plan.

• Working with the KCSR Environmental group on issues involving the ability to make beneficial use of ties removed from track as boiler fuel rather than landfilling them, on revised tank car standards, and on various environmental cleanup projects.

• Working with the Engineering team on tracking and responding to numerous changing safety requirements, and on asserting federal preemption to limit state and local involvement with expansion projects such as the new Wylie Intermodal Terminal.

• Appointments to federal agencies important to the U.S. rail industry.

KCSR State and Local Relations
KCSR State and Local Relations continues to strengthen relationships with the communities through which we operate by quickly responding to and addressing local needs and developing long-term viable solutions to issues that may have a major impact in the community.  In 2015, KCSR successfully addressed concerns about vegetation control, blocked crossings, crossing surfaces, noise, property maintenance, right of way protection and public safety.

In addition to addressing community concerns, KCSR helped lead efforts to prevent the passage of harmful legislation at the state level.  Legislation that proposed to allow for heavier truck size and weight increases and a required minimum of two-man crews were successfully defeated in many states where we operate.  KCSR continues its aggressive campaign to educate state legislators and local elected officials on the railroad industry’s many benefits and positive impacts to their communities.

KCS/KCSR and KCSM/KCSMS Legal
The Legal teams in the U.S. and Mexico serve as in-house counsel to the companies ensuring contract uniformity; compliance with legal, regulatory and concession obligations; and, sound management of litigation and regulatory risk.  They do so efficiently with modest in-house staff and a limited use of outside counsel.

The U.S. and Mexico Legal teams continue to work together to:
• Provide advice and interpretation regarding new transportation laws and regulations;
• Assist in developing intermodal terminal agreements;
• Provide advice and presentations on compliance efforts in areas such as the concession, terminals, Customs, the Foreign Corrupt Practices Act, antitrust and others;
• Supervise concession and terminal compliance;
• Coordinate investigations and litigation involving issues in both countries; and
• Assist in developing transportation and procurement agreements.

In addition to the normal contract drafting and review process, in 2015, KCS Legal initiated a process with the Sales and Marketing and IT teams to automatically put price authority provisions in place to more effectively limit the company’s liability for loss and damage to high value cargo.

In support of compliance matters, this year, KCS Legal developed and provided a number of presentations on antitrust; Mexico’s laws and regulations adopted in 2015; careful email communication; Equal Employment Opportunity; the Federal Rail Safety Act; and anti-harassment and anti-retaliation.

KCSR Claims
In 2015, the Claims team maintained full staffing, filling a position in Shreveport, La. with a manager who has 30+ years of railroad claims experience.  A new claim agent was hired in Laredo, Texas to fill a position open due to retirement.  Claims has been diligent in filling positions and providing training to ensure agents are prepared to respond and investigate incidents in a timely manner, properly evaluate claims exposures, and understand the impact of claims investigation activities on litigation. 

Through timely response to incidents and diligent follow-up work, in 2015 Claims maintained a comparable claims count despite the increase in the number of claims over the same period in 2014.  The team resolved half of the casualty claims with the greatest exposure to the company while maintaining a level claim payout, thereby reducing reserves without an increase in defense costs.

Team training was held on numerous topics including retrieving and preserving locomotive video evidence on the newest equipment; discovery responsibilities and procedures; negotiation and mediation; and use of new check printers.  Claim agents observed a mock trial in real time and two others previously recorded to better understand what happens and how the manner in which an investigation is conducted and documented affects the trial and jury deliberations.  Training like this is vital for new Claims agents and valuable to the entire team, because it improves the quality and efficiency of investigations in order to properly evaluate claims and control litigation costs.

Claims continued to review and assess processes and procedures for responding to possible future operational accidents, including a comprehensive review of the Claims plan for response to such accidents.  Claims also participated in cross-functional assessment and planning with other departments and external resources. 

KCSR and KCSM Damage Prevention and Freight Claims
In 2015, the Damage Prevention and Freight Claims team continued its focus on educating customers about damage prevention, which included:
• Performing 22 percent more customer visits (2015 over 2014) to discuss damage prevention issues with continuing education on AAR Loading Procedures;
• Performing 15 percent more ramp, yard and intermodal audits (2015 over 2014);
• Conducting individual audits of automotive customers in Mexico; and
• Assisting the AAR Origin and Destination Quality Review Audit Committee with their audits of automotive customers in Mexico, and working with the committee to develop follow up training.

The team continued to improve auto inspection data and processes at ramps and interchange points in Mexico.  In addition to full Electronic Data Interchange functionality from KCSM’s auto inspection provider, all inspection locations are now equipped with hand-held scanners so KCSM receives real-time data from inspections.  This timely information enhances the claims reporting and resolution process and is crucial for weekly Mexico/U.S. Automotive Railroad (MUAR) claims reviews with manufacturers.  In March, KCSM sponsored the annual MUAR meeting in Monterrey, Nuevo Leon, bringing together original equipment manufacturers, railroad vendors and railroads to discuss the security and efficiency of automotive traffic.

This was the first full year that the team offered online submission of freight claims in Mexico.  By mid-year, the new process had reduced the manual entry of freight claims into the system by 60 percent.  The goal is for at least 90 percent of claims from general cargo customers in Mexico to be submitted online.

As a result of the team’s efforts, through the first three quarters of 2015, the company showed strong performance in freight claim payouts per $100 in revenue.  Recent AAR data showed the industry average for all Class I carriers to be $0.14 payout per $100 in revenue.  KCSR is right at the industry average with $0.16 payout per $100 in revenue.  KCSM’s results are better than the industry average with $0.135 payout per $100 in revenue. 

Another strong performance indicator the team tracks is the number of claims filed per 10,000 shipments.  Through the first three quarters of 2015, KCSR averaged 2.8 claims filed per every 10,000 shipments, down from the last two years. 

KCSR Facilities
The KCSR Facilities team manages all company facilities in the U.S.  In 2015, the team completed a number of projects to improve the safety, energy-efficiency and sustainability of these facilities for years to come, including:

• Demolition of seven abandoned buildings;
• Working with KCSR Public Safety and Security/Police to add a combined total of 2,500+ feet of fencing at various locations to prohibit trespassing;
• Continuing retrofitting yard lighting by adding low-consumption LED fixtures in Kansas City, Mo., Shreveport, La. and Artesia, Miss.;
• Construction of the PTC development space inside the Winchester Underground in Kansas City;
• Adding an emergency backup generator system at Wylie, Texas;
• Replacing the emergency backup generator system at Knoche Yard in Kansas City, providing backup power to the yard office;
• Updating and enhancing the company’s online building management system, adding all backup generators, fuel tanks and new buildings;
• Converting light fixtures at corporate headquarters in Kansas City to LED bulbs, providing annual energy savings of $12,300 and a 2.6-year payback;
• Converting to high efficiency HVAC systems at several locations, including New Orleans, La., Corpus Christi, Texas, Shreveport and Kansas City;
• Adding card reader and video intercom-protected entry door to corporate headquarters dock area, eliminating need to raise large dock doors for small deliveries; and
• Replacing Shreveport’s card reader system with a newer, more cost efficient one.

KCSR Real Estate and Industrial Development
2015 was a transitional year for the KCSR Real Estate and Industrial Development team.  Despite the challenges associated with installation of a new team, the group accomplished many of its objectives.

The team developed and finalized 400+ agreements protecting and maximizing the value of the KCSR’s real estate assets.  Transactions included 264 permits issued year to date; $2.5 million generated in new revenue; 16 new storage track leases; $835,000 generated in new, recurring annual revenue; 42 new contracts finalized and circulated; 18 amendments to existing contracts; 25 parcel acquisitions related to commodity expansion projects; and 40 deed distributions.

In the second half of 2015, the team took over from KCSR Engineering the surveying of projects related to acquisitions, dispositions and encroachment identification, establishing, memorializing and preserving the company’s ownership rights. 

The team continues to make progress toward development and integration of KCS’ eGIS systems, digitization and aerial data gathering, and production.  This year, the remaining 4,000 conveyance deeds were integrated into the system and 27,300 deeds for each KCS-owned parcel are now stored electronically in-house, accessible through eGIS.  Next year’s enhancements will refine this information, make it available company-wide and give rise to savings in resources, materials and physical space.

KCSR Security and Public Safety 
While KCSR Security/Police and Public Safety are two separate functions, they have similar objectives and areas of overlap. A common priority and area of collaboration is building and maintaining positive relationships with law enforcement agencies and emergency responders through Officer on a Train events, Positive Enforcement details, Grade Crossing Collision Investigation courses and other training opportunities.

Additional Public Safety initiatives, included:
• Sponsoring billboard and gas pump topper ads for Operation Lifesaver’s nationwide See Tracks Think Train campaign;
• Distributing See Tracks Think Train promotional material at KCS Holiday Express stops;
• Working with state departments of transportation to support and implement new flashers and gates at 29 railroad crossings;
• Working with local officials to permanently close eight public and three private railroad crossings;
• Working toward an agreement to use the Rail Inventory Management System (RIMS), an online solution to maintain a current and efficient crossing inventory database.

Additional Security and Police initiatives, included:
• Conducting three Officer Schools for U.S. Border Patrol and Department of Homeland Security agents in Laredo, Texas to teach safety practices around railroad tracks and equipment;
• Making 257 direct trespasser contacts to enhance public safety and reduce incidents;
• Responding to 159 reports to the Call Program to investigate motorist behavior at crossings and trespassing incidents, collecting $10,000+ in restitution; and
• Engaging in U.S. rail industry security efforts, including AAR//Transportation Security Administration meetings, exercises and other security matters.

KCSR Environmental
In 2015, the KCS Environmental Team accomplished a number of safety and compliance initiatives.  To promote public safety, the team improved its program to cut vegetation at public grade crossings and manage its regular ongoing maintenance.  This included an accelerated spray program for brush-cutting.

In the hazmat area, the team created a Community Interaction Database for communicating with emergency responders in a hazmat incident; trained three new employees in hazmat response; and joined the industry’s effort to roll out the AskRailTM app.  The AskRailTM app is a safety tool that provides first responders immediate access to accurate, timely data about what type of hazardous materials a railcar is carrying so they can make an informed decision about how to respond to a rail emergency.  AskRail is a backup resource if information from the train conductor or train consist is not available. 

In keeping with KCSR’s TRANSCAER® commitment, the team worked with Mechanical to create a new specially-equipped training tank car to familiarize emergency responders with a tank car’s design and functionality and how to respond safely to hazmat incidents involving a tank car.  In 2015, the car was used to train 180 emergency responders.

In the area of compliance, the team completed the inspection and repair of fuel tanks in Kansas City and Shreveport; developed and implemented a fuel tank water management program; developed tank-coating specifications; and further developed the company’s tank inventory database.

Administratively, the team completed a Beta test for its electronic environmental compliance files for field locations; consolidated multiple environmental databases into one system; implemented an environmental financial database to ease budget management; and implemented its Port Arthur Spill Prevention Controls and Countermeasures (SPCC) capital upgrades and Locomotive Oil Recovery Systems upgrades at multiple system sites.

KCSR Corporate Communications and Community Affairs
KCSR’s Corporate Communications and Community Affairs efforts are focused on communicating with the media, employees, communities and other stakeholders on important topics through a variety of channels.  Among its 2015 priorities were communicating the company’s investments and initiatives in safety and capacity expansion, as well as strengthening relationships with emergency responders and planning for a crisis situation.

Now in its 15th year, the KCS Holiday Express fundraising campaign raised a total of $159,500 to purchase gift cards that were donated to The Salvation Army to provide warm clothing for children in need.  In addition, 85,464 visitors came through the train in 2015 in free public events, generating positive media coverage and tremendous goodwill in the communities we serve.

KCSM Public Policy and Regulatory Matters
KCSM conducts public affairs, legal issues, regulatory claims, state and local relations, public safety, security matters, corporate communications and community activities on behalf of the company in Mexico and in coordination with KCSR in the U.S.

After the Reform of the Mexican Regulatory Railroad Service Law was passed in January 2015, the Ministry of Communications and Transportation (SCT) focused on the development of the implementation of the Mexican Regulatory Railroad Service Law. KCSM was actively involved in this rulemaking.

KCSM president, general manager and executive representative Jose Zozaya led efforts to maintain close communications and coordination with relevant government, congressional and business stakeholders to provide information and contribute to the process of implementing the new law by the relevant Mexican government agencies to assure the competitiveness, efficiency and economic sustainability of Mexico’s freight railroad service.

In 2015, KCSM developed and launched a comprehensive communications strategy, highlighting the key benefits of freight railroads for Mexico’s economic and industrial growth, and stressing KCSM’s continuous investments and commitment to the country.  The communications strategy was aimed at key stakeholders, including government officials and regulators, legislators, chambers of commerce and transportation sector opinion leaders at the national, state and local levels. 

In 2015, KCSM continued implementing monitoring actions to ensure compliance with the concession, terminals, Customs and environmental matters with very positive results.

In August, the new West Rail Bypass International Bridge near Matamoros and Brownsville, Texas, the first new international rail crossing between Mexico and the U.S. opened since 1910, was inaugurated. Jose Zozaya from KCSM and others from the KCS management team participated in the inauguration ceremony with representatives of the Mexican and U.S. governments. The bridge connects KCSM on the Mexican side and Union Pacific on the U.S. side. 

Reform of the Mexican Regulatory Railroad Service Law
In October 2015, the Ministry of Communications and Transportation presented to the Federal Regulatory Improvement Commission a draft of the implementation decree of the Mexican Regulatory Railroad Service Law.  These drafts include (1.) a decree for the creation of the Rail Transportation Regulatory Agency that will regulate, promote, monitor and oversee the operation, use, conservation, maintenance and interconnection of the railway infrastructure and public service in Mexico; and (2.) a decree to amend the Railroad Service Regulation.

The Federal Regulatory Improvement Commission will issue the final version of both decrees after having coordinated their discussion and the public consultation process among interested stakeholders of the transportation sector, currently under way.

KCSM worked actively in establishing contact and coordination with the Ministry of Communications and Transportation, as well as with the Federal Regulatory Improvement Commission to provide information and ideas for the implementing decrees for the creation of the Agency and for the amendment of the Railroad Service Regulation.

KCSM also held calls and meetings with Mexico’s Competition Commission president Alejandra Palacios Prieto to maintain and improve constant communication channels and reinforce the specific characteristics of the freight railway system in Mexico.

KCSM has maintained ongoing open communication with the governors of the states of Nuevo Leon, Tamaulipas, San Luis Potosí, Querétaro, Guanajuato, Michoacán, and with the mayors of various municipalities, including Nuevo Laredo and Tampico, Tamaulipas; Morelia, Michoacán; Querétaro, Querétaro and Celaya, Guanajuato.  All but Tamaulipas and Guanajuato have newly-appointed officials after mid-term elections this past summer.

To encourage coordination regarding Mexico's freight rail sector with North American Free Trade Agreement markets, KCSM maintains ongoing communication with the U.S. Embassy to Mexico and presidents of major national chambers of commerce and industry in Canada, the U.S. and Mexico.

KCSM Corporate Communications and Community Affairs
KCSM continues to foster positive working relationships with the media in Mexico by setting clear expectations, practicing constant communication and offering timely responses to their information requirements.

This year, KCSM’s communication strategy focused on stressing the company’s continuous investments in Mexico as a clear sign of commitment to the country’s economic growth and development.  The strategy also highlighted the positive impacts of the automotive industry boom and opening of Mexico's energy sector.

KCSM continued to participate in meetings with key opinion leaders, as well as national and international media to communicate the company’s contributions to Mexico’s development and competitiveness.  These communications help position KCSM as a socially and economically-committed company with a relevant role in Mexico’s industrial supply chain for both domestic and foreign markets.

KCSM’s communication strategy included an advertising campaign in print, broadcast, movie theatres and mobile media that started in July after Mexico’s mid-term elections and ran through late October.  The campaign updated the public image of railroads by presenting the industry’s contributions to Mexico’s economy and its presence in the daily lives of Mexican families.  It also raised awareness of KCSM and its commitment to Mexico’s development.

Finally, KCSM completed its fifth annual run of Tren Navideño with approximately 11,750 visitors in 10 communities.   This festive holiday train is comprised of a caboose and a boxcar decorated with holiday images, the Alto Total (Operation Lifesaver) caboose, the commemorative Mexican Revolution caboose and an environmentally-friendly locomotive.  Visitors can walk through holiday displays inside the rail cars, see a movie and enjoy refreshments.  KCSM helps make the holidays a little brighter with these free, public events aimed at reaching people living with limited resources in vulnerable areas.  The events garner positive media attention and tremendous goodwill in the community.

Thank You

On behalf of the entire KCS management team, we thank you for your hard work and dedication.  We wish you all the best for health and prosperity in the New Year!

Safe Harbor Statement

This presentation contains “forward-looking statements” within the meaning of the securities laws concerning potential future events involving KCS and its subsidiaries, which could materially differ from the events that actually occur.  Words such as “projects”, “estimates”, “forecasts”, “believes” and “intends”, “expects”, “anticipates” and similar expressions are intended to identify many of these forward-looking statements.  Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this presentation.  Differences that actually occur could be caused by a number of external factors over which management has little or no control, including: competition and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; loss of the rail concession of KCS’ subsidiary, Kansas City Southern de Mexico, S.A. de C.V.; the termination of, or failure to renew, agreements with customers, other railroads and third parties; interest rates; access to capital; disruptions to KCS’ technology infrastructure, including its computer systems; natural events such as severe weather, hurricanes and floods; market and regulatory responses to climate change; credit risk of customers and counterparties and their failure to meet their financial obligations; legislative and regulatory development and disputes; rail accidents or other incidents or accidents on KCS’ rail network or at KCS’ facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; fluctuation in process or availability of key materials, in particular diesel fuel; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; loss of key personnel; labor difficulties, including strikes and work stoppages; insufficiency of insurance to cover lost revenue, profits or other damages; acts of terrorism or risk of terrorist activities; war or risk of war; domestic and international economic conditions; political and economic conditions in Mexico and the level of trade between the United States and Mexico; the outcomes of claims and litigation involving KCS or its subsidiaries; and other factors affecting the operation of the business.  More detailed information about factors that could affect future events may be found in filings by KCS with the Securities and Exchange Commission, including KCS’ Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 1-4717) and subsequent reports.  Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved.  As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements.  KCS is not obligated to update any forward-looking statements in this presentation to reflect future events or developments.  All reconciliations to GAAP can be found on the KCS website, kcsouthern.com/investors.