Kansas City Southern's focus to shift from deleveraging to investment

By Lisa Kerner

Charlotte, N.C., May 18 - Kansas City Southern's deleveraging strategy is almost complete, chief financial officer Michael Upchurch said at the Bank of America Merrill Lynch 2012 Global Transportation Conference in Boston on Friday.

The company made some "pretty significant" investments in the 2007 to 2009 timeframe and then shifted to reducing debt levels, according to Upchurch.

Kansas City Southern has reduced its debt level by $341 million, or 20%, since the end of 2009.

A combination of debt reduction and refinancing reduced the company's interest expense from "a peak of about $180 million a year to just north of $100 million a year," according to Upchurch, who said he is "pretty comfortable" with Kansas City Southern's debt levels.

At Dec. 31, 2009, the company had total debt of about $1.98 billion, liquidity of $203 million and a leverage ratio of 4.4 times, and its weighted average debt maturity was 4.89 years.

At Dec. 31, 2011, Kansas City Southern had total debt of about $1.64 billion, liquidity of $422 million and a leverage ratio of 2.1 times, and its weighted average debt maturity was 6.89 years.

Upchurch said that with the company being at the end of its deleveraging opportunities, excess cash will be invested in the business. For example, Kansas City Southern accelerated locomotive orders to 2012 from 2013 and took advantage of depreciation.

In March, excess cash was used to pay the first-ever quarterly dividend of $0.195 per share, or $21.4 million.

The Kansas City, Mo.-based freight transportation company generated free cash flow of $38 million in the first quarter and expects to close the year with about $2.3 billion of revenues.

"We've done a good job with the balance sheet," said Upchurch. "We are waiting to get to investment grade and make some improvements there."

Currently, the company is rated Ba1 by Moody's Investors Service and BB+ by Standard & Poor's.

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