Rating Action: Moody's affirms ratings of Kansas City Southern, senior unsecured at Baa2; outlook stableGlobal Credit Research - 17 Mar 2022New York, March 17, 2022 -- Moody's Investors Service ("Moody's") affirmed the ratings of freight rail operator Kansas City Southern and its subsidiary The Kansas City Railway Company, including the Baa2 senior unsecured rating and the Prime-2 short-term rating. The outlook remains stable.The affirmation of the ratings reflects Moody's expectation that during the review by the Surface Transportation Board of the proposed combination with Canadian Pacific Railway Limited ("Canadian Pacific"), Kansas City Southern will continue to demonstrate robust financial performance and pursue a balanced financial policy, notwithstanding planned dividend distributions to Canadian Pacific during the review.In the event the Surface Transportation Board approves the proposed combination with Canadian Pacific, and in the absence of formal support from Canadian Pacific, the ratings on Kansas City Southern debt would be based on the credit quality of its rail operations, along with Moody's expectations for internal capital deployment. If, following the completion of the combination Canadian Pacific provides no formal support to the Kansas City Southern debt obligations and there is insufficient financial information to assess the credit quality of Kansas City Southern, the ratings could be withdrawn.Affirmations:..Issuer: Kansas City Southern....Senior Unsecured Bank Credit Facility, Affirmed Baa2....Backed Commercial Paper, Affirmed P-2....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2..Issuer: Kansas City Southern Railway Company (The)....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2Outlook Actions:..Issuer: Kansas City Southern....Outlook, Remains Stable..Issuer: Kansas City Southern Railway Company (The)....Outlook, Remains StableRATINGS RATIONALEThe Baa2 senior unsecured rating is supported by Kansas City Southern's attractive north to south rail network through the central US and the industrialized northeastern and central regions of Mexico. The network enables the company to benefit from growth opportunities offered by trade relations between the US and Mexico, while its diversified freight mix mitigates the impact of potential declines in a particular freight segment.Moody's expects Kansas City Southern's operating margin to exceed 40% in 2022, after a steady upward trajectory for several years driven by substantial operational improvements based on the principles of precision scheduled railroading. Financial leverage is moderate, with adjusted debt to LTM EBITDA trending down to 2.3 times in 2022, following a peak of 2.8 times in 2020.Moody's expects that liquidity will remain very good, notwithstanding planned dividend distributions to Canadian Pacific during the review by the Surface Transportation Board of the proposed combination. While the cash balance could be modest at times, liquidity is supported by considerable cash flow, a $600 million credit facility and the ability to repatriate cash from Mexico without U.S. tax costs.The stable outlook is predicated on Moody's expectation that Kansas City Southern successfully realizes the growth opportunities that its network offers and that the operating margin continues its upward trajectory, after the company resolved the network congestion issues that hampered the efficiency of its operations in the first half of 2021.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if the operating margin is sustained well above 35%, debt/EBITDA is maintained at around 2 times, and Kansas City Southern maintains very good liquidity with very limited use of commercial paper or other short-term borrowings. Consistently good network fluidity and service levels are also considerations for a ratings upgrade, as is clarity with respect to the combination with Canadian Pacific and the related decisions about the debt structure.The ratings could be downgraded if Moody's expects that the operating margin will decrease towards 30%. The ratings could also be downgraded if Moody's anticipates that debt/EBITDA will increase to more than 2.75 times or if (retained cash flow minus capital expenditures)/debt is less than 10%. Extensive use of commercial paper concurrent with a modest cash balance or without ample credit facility back-up could also pressure the ratings.The principal methodology used in these ratings was Surface Transportation and Logistics published in December 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296092. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Kansas City Southern operates a Class I freight railroad in the central U.S., The Kansas City Southern Railway Company, and, through its wholly-owned subsidiary Kansas City Southern de Mexico, S.A. de C.V., owns a concession to operate Mexico's northeastern railroad. Revenue in 2021 was $2.9 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Rene Lipsch VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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