(The following story by John D. Boyd appeared on The Journal of Commerce website on October 8, 2009.)
WASHINGTON, D.C. — Kansas City Southern had predicted for months that finances for the rail company would improve after it wrapped up a costly track project near Houston and issued more stock. Now, a major credit agency is backing that view and upgrading its outlook for KCS.
Standard & Poor’s Ratings Services revised its outlook to stable from negative, saying the change “reflects our expectation that liquidity and credit metrics will improve over the next few quarters in response to meaningful cost reductions, modest pricing gains, and stabilizing volumes.”
The smallest of the Class I carriers operates two sizable rail units in the United States and Mexico and previously said that opening a new track segment in Texas was a key to boosting freight traffic linking both those operations.
When it opened the new Victoria-Rosenberg segment in June, KCS could quit shelling out construction costs that totaled $174 million. It also began to save more than $1 million monthly in track-use fees it paid around that zone to Union Pacific Railroad, and could boost revenue business for that corridor.
It also caught S&P’s eye with a new issuance of 4.3 million stock shares that raised a net $74 million.
The agency affirmed its previous “B” rating for long-term KCS debt, and said the better outlook for the rail firm “reflects KCS’ improved liquidity position following an equity issuance, diminishing capital-spending needs, and modest debt maturities over the next few years.”
S&P said the recessionary decline in freight volumes for KCS – a situation shared by other railroads – should moderate in coming months, and “we expect capital expenditures to be moderate for the duration of the year, at about $100 million.”
But it cautioned that “earnings and cash flow will remain under pressure in the near term.” The agency said KCS has more limited scale and market diversity than larger railroads, and “its earnings stability is somewhat weaker than its Class 1 peers.”
Its Kansas City Southern de Mexico unit last year contributed 44 percent of consolidated earnings, yet in 2009 it “experienced pressure due to weakness in the automotive and manufacturing-related sectors. KCS has partially offset the declines through aggressive cost savings from furloughing workers and idling equipment,” S&P said.