UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2013~~2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 333-08322

KANSAS CITY SOUTHERN DE MÉXICO, S.A. DE C.V.

(Exact name of Company as specified in its charter)

Kansas City Southern of Mexico

(Translation of Registrant’s name into English)



Mexico				98-0519243
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
Montes Urales 625 Lomas de Chapultepec 11000 Mexico, D.F. Mexico (Address of Principal Executive Offices)

(5255) 9178-5686

(Company’s telephone number, including area code)

No Changes

(Former name, former address and former fiscal year, if changed since last report.)

______________________________________________________________

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of ~~September~~June 30, ~~2013~~2014: 4,785,510,235

Kansas City Southern de México, S.A. de C.V. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Form 10-Q

~~September~~June 30, ~~2013~~2014

Index

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Introductory Comments	3
	Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income (Loss) — Three and Six Months Ended June 30, 2014 and 2013	4
	Consolidated Balance Sheets — September 30, 2013 and December 31, 2012	5
	Consolidated Balance Sheets — June 30, 2014 and December 31, 2013	5
	Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2013 and 2012	6
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2014 and 2013	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1312
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2322
Item 4.	Controls and Procedures	2322
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	2423
Item 1A.	Risk Factors	2423
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2423
Item 3.	Defaults Upon Senior Securities	2423
Item 4.	Mine Safety Disclosures	2423
Item 5.	Other Information	2423
Item 6.	Exhibits	2524
	SIGNATURES	2625

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Form 10-Q

~~September~~June 30, ~~2013~~2014

PART I—FINANCIAL INFORMATION


Item 1.	Financial Statements

Introductory Comments

The unaudited ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements included herein have been prepared by Kansas City Southern de México, S.A. de C.V. (“KCSM” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). For the purposes of this report, unless the context otherwise requires, all references herein to “KCSM” and the “Company” shall mean Kansas City Southern de México, S.A. de C.V. and its subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q should be read in conjunction with the consolidated financial statements and the related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013. Results for the three and ~~nine~~ six months ended ~~September~~June 30, ~~2013~~2014, are not necessarily indicative of the results expected for the full year ending December 31, ~~2013~~2014.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

	Three Months Ended						~~Nine~~Six Months Ended
	September 30,						September 30,
	June 30,						June 30,
	2013			2012			2013			2012
	2014			2013			2014			2013
	(In millions)(Unaudited)
Revenues	$	~~286~~305.65		$	266.15		$	~~808~~587.48		$	~~759~~521.58
Operating expenses:
Compensation and benefits	3334.15			2931.84			9366.13			9360.50
Purchased services	38.26			3633.37			~~107~~75.71			~~109~~69.25
Fuel	4854.96			4244.56			~~135~~104.54			~~121~~86.26
Equipment costs	2115.39			2018.69			6032.23			5738.49
Depreciation and amortization	2628.24			2325.03			7656.12			6749.59
Materials and other	1716.19			1719.26			5132.45			4134.63
Elimination of deferred statutory profit sharing liability, net	—			—			—			(43.0		)
Lease termination costs	3.8			—			20.1			—
Total operating expenses	~~184~~192.87			~~169~~173.45			~~524~~386.09			~~447~~339.42
Operating income	~~101~~112.8			9693.70			~~284~~200.49			~~312~~182.16
Equity in net earnings of unconsolidated affiliate	01.71			0.64			12.80			21.1
Interest expense	(1210.93		)	(2214.05		)	(4821.90		)	(6636.70		)
Debt retirement costs	~~(2.4~~—		)	—(109.9		)	(~~112.~~3.9		)	—(109.9		)
Foreign exchange gain (loss)	~~(1.~~5.3		)	4(17.85		)	(68.15		)	(4.96		)
Other expense, net	(0.2.1		)	~~(0.1~~—		)	(02.31		)	(0.21		)
Income before income taxes	85.5			80.0			118.6			252.2
Income (loss) before income taxes	106.8			(48.5		)	184.4			33.1
Income tax expense	26.0			39.5			40.3			103.5
Income tax expense (benefit)	31.5			(13.1		)	54.6			14.3
Net income	59.5			40.5			78.3			148.7
Net income (loss)	75.3			(35.4		)	129.8			18.8
Other comprehensive income, net of tax:
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax of $0.0 million for all periods presented	~~0.1~~—			(0.87		)	—			1.(0.1		)
Other comprehensive income	0.1			0.8			—			1.0
Comprehensive income (loss)	$	75.3		$	(36.1	)	$	129.8		$	18.7
Comprehensive income	$	59.6		$	41.3		$	78.3		$	149.7

See accompanying notes to consolidated financial statements.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Consolidated Balance Sheets

	September 30, 2013			December 31, 2012
	June 30, 2014			December 31, 2013
	(In millions, exceptshare amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	18178.90		$	9224.28
Accounts receivable, net	~~130~~126.21			~~109~~106.94
Related company receivables	024.15			4020.0
Materials and supplies	4440.81			3238.93
Deferred income taxes	4369.89			4269.81
Other current assets	9345.54			7977.06
Total current assets	~~331~~484.30			~~313~~536.82
Investments	1315.42			1314.17
Property and equipment (including concession assets), net	2,~~629~~773.67			2,~~522~~656.30
Other assets	2824.41			6028.38
Total assets	$	3,~~002~~297.70		$	23,~~909~~235.57
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Debt due within one year	$	19.38		$	1881.8
Accounts payable and accrued liabilities	9793.54			87.47
Related company payables	1923.13			654.93
Total current liabilities	~~135~~136.95			~~113~~223.18
Long-term debt	~~960~~1,112.04			~~938~~1,114.04
Related company debt	~~148~~79.29			~~178~~64.32
Deferred income taxes	~~134~~170.54			~~131~~164.61
Other noncurrent liabilities and deferred credits	7.60			108.32
Total liabilities	1,~~386~~506.2			1,~~371~~574.37
Commitments and contingencies	—			—
Stockholders’ equity:
Common stock, 4,785,510,235 shares authorized, issued without par value	286.1			286.1
Common stock, 4,785,510,235 shares authorized and outstanding, issued without par value	286.1			286.1
Additional paid-in capital	243.6			243.6
Retained earnings	1,~~090~~264.04			1,~~011~~134.76
Accumulated other comprehensive loss	(3.23		)	(3.23		)
Total stockholders’ equity	1,~~616~~790.58			1,~~538~~661.20
Total liabilities and stockholders’ equity	$	3,~~002~~297.70		$	23,~~909~~235.57

See accompanying notes to consolidated financial statements.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Consolidated Statements of Cash Flows

	Nine Months Ended
	Six Months Ended
	September 30,
	June 30,
	2013			2012
	2014			2013
	(In millions)(Unaudited)
Operating activities:
Net income	$	78129.38		$	~~148~~18.78
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7656.12			6749.59
Deferred income taxes	15.94			763.8
Equity in net earnings of unconsolidated affiliate	(12.80		)	(21.1		)
Deferred compensation	—			7.3
Distributions from unconsolidated affiliate	1.5			1.5
Elimination of deferred statutory profit sharing liability	—			(47.8		)
Debt retirement costs	3.9			109.9
Distributions from unconsolidated affiliate	1.5			2.3
Debt retirement costs	112.3			—
Changes in working capital items:
Accounts receivable	(2019.57		)	(326.43		)
Related companies	89(4.64		)	771.19
Materials and supplies	(91.59		)	4(15.80		)
Other current assets	~~(25~~1.83		)	(929.46		)
Accounts payable and accrued liabilities	1112.32			116.35
Other, net	(0.73		)	41.39
Net cash provided by operating activities	~~312~~182.76			~~238~~212.42
Investing activities:
Capital expenditures	(~~123~~76.75		)	(~~116~~78.4		)
Purchase of equipment under operating lease	(66.5		)	—
Purchase or replacement of equipment under operating leases	(98.2		)	(66.5		)
Proceeds from disposal of property	34.14			51.04
Other, net	(1.21		)	(0.74		)
Net cash used for investing activities	(~~188~~169.32		)	(~~112~~143.19		)
Financing activities:
Proceeds from issuance of long-term debt	~~980.8~~—			—927.8
Proceeds from related company debt	69.5			9.0
Repayment of long-term debt	(72.7		)	(882.1		)
Repayment of long-term debt	(964.0		)	(14.6		)
Proceeds from related company debt	15.6			52.5
Repayment of related company debt	~~(97.4~~—		)	(6559.64		)
Debt costs	(~~103~~3.61		)	—(100.5		)
Net cash used for financing activities	(~~114~~60.72		)	(7161.27		)
Cash and cash equivalents:
Net increase during each period	9.7			55.1
Net increase (decrease) during each period	(46.8		)	6.6
At beginning of year	9224.28			159.72
At end of period	$	18178.90		$	7015.8

See accompanying notes to consolidated financial statements.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Notes to Consolidated Financial Statements


1.	Accounting Policies, Interim Financial Statements and Basis of Presentation

In the opinion of the management of KCSM, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the results for interim periods. All adjustments made were of a normal and recurring nature. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2013~~2014.

2KCSM Servicios, S.A. ~~Elimination~~de C.V. (“KCSM Servicios”), a wholly-owned subsidiary of ~~Deferred~~Kansas ~~Statutory~~City ~~Profit~~Southern ~~Sharing~~(“KCS”), ~~Liability~~provides employee services to KCSM, ~~Net~~and KCSM pays KCSM Servicios market-based rates for these services. This market-based rate is determined by applying percentage mark-ups to amounts paid by KCSM Servicios to its employees and vendors. For comparative purposes, amounts paid to KCSM Servicios are classified according to the nature of the services provided to KCSM and the percentage mark-up portion of payments to KCSM Servicios is included within materials and other expense.

~~During~~In May 2014, the ~~second~~Financial ~~quarter~~Accounting ofStandards ~~2012~~Board issued ASU No. 2014-09, ~~Kansas~~Revenue ~~City~~from ~~Southern~~Contracts ~~(“KCS”)~~with ~~completed~~Customers, anwhich ~~organizational~~requires ~~restructuring~~companies ~~whereby~~to ~~employees~~recognize ofrevenue ~~KCSM~~to ~~became~~depict ~~employees~~the transfer of ~~KCSM~~promised ~~Servicios,~~goods ~~S.A.~~or deservices Cto customers in an amount that reflects the consideration it expects to be entitled in exchange for those goods or services.V. ~~(“KCSM~~The ~~Servicios”),~~standard awill ~~wholly-owned~~be ~~subsidiary~~effective for the Company beginning in the first quarter of ~~KCS~~2017 and early adoption is not permitted. ~~KCSM~~The ~~Servicios~~new ~~provides~~standard ~~employee~~permits ~~services~~the touse ~~KCSM,~~of ~~and~~either ~~KCSM~~the ~~pays~~retrospective ~~KCSM~~or ~~Servicios~~cumulative ~~market-based~~effect ~~rates~~transition ~~for~~method ~~these~~on ~~services~~adoption. The ~~effective~~Company ~~date~~is ofevaluating ~~this~~the ~~organizational~~effect ~~restructuring~~that ~~was~~ASU ~~May~~2014-09 1will have on its consolidated financial statements and related disclosures, ~~2012.~~including which transition method it will adopt.

~~Mexican employees are entitled to receive statutory profit sharing~~2. ~~The~~Lease ~~related~~Termination cash payment to employees is based on an employer’s net profit determined under accounting principles prescribed in Mexican law, rather than its net profit determined under U.S. GAAP. U.S. GAAP requires the recording of deferred liabilities or assets for financial reporting purposes on the differences between the amounts determined under the two different accounting principles. Costs

AsIn athe ~~result~~first half of 2014, the ~~organizational~~Company ~~restructuring,~~purchased ~~KCSM’s~~$96.8 ~~obligation~~million toof ~~pay~~equipment ~~statutory~~under ~~profit~~existing ~~sharing~~operating ~~terminated~~leases onand ~~the~~replacement ~~effective~~equipment ~~date.~~as ~~Accordingly,~~certain inoperating ~~the~~leases ~~second~~expired. ~~quarter~~These ofpurchases ~~2012,~~have ~~KCSM~~been ~~recognized~~funded with a ~~$43.0~~portion ~~million~~of ~~net~~the ~~reduction~~proceeds tofrom ~~operating~~the ~~expense.~~floating ~~This~~rate ~~reduction~~senior ~~includes~~notes issued during the ~~elimination~~fourth quarter of ~~$47.8~~2013 ~~million~~and ofavailable cash. For the ~~deferred~~three ~~statutory~~and ~~profit~~six ~~sharing~~months ~~liability~~ended June 30, ~~net~~2014, of the Company recognized $43.8 million and $20.1 million, respectively, of ~~transaction~~lease termination costs~~. KCSM~~ ~~Servicios~~(included ~~became~~in ~~obligated~~operating toexpenses) ~~pay~~due ~~statutory~~to ~~profit~~the ~~sharing~~early totermination ~~its~~of ~~employees~~certain ~~beginning~~operating onleases and the ~~effective~~related ~~date~~purchase of the ~~organizational restructuring~~equipment.


3.	Property and Equipment (including Concession Assets)

Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):

	September 30, 2013		December 31, 2012
	June 30, 2014		December 31, 2013
Land	$	76.9	$	76.9
Concession land rights	141.2		141.2
Road property	2,~~323~~385.70		2,~~244~~342.17
Equipment	~~639~~779.21		~~552~~662.50
Technology and other	3438.57		3136.61
Construction in progress	3932.96		5040.45
Total property	3,~~255~~453.45		3,~~096~~299.74
Accumulated depreciation and amortization	~~625~~679.8		~~574~~643.4
Property and equipment (including concession assets), net	$	2,~~629~~773.67	$	2,~~522~~656.30

Concession assets, net of accumulated amortization of $~~431~~458.19 million and $~~402~~444.71 million, totaled $1,~~938~~969.32 million and $1,~~893~~951.90 million at ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)


4.	Fair Value Measurements

Assets and liabilities recognized at fair value are required to be classified into a three-level hierarchy. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.

The Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of foreign currency forward ~~contract agreements~~contracts, which are classified as Level 2 instruments. The Company determines the fair value of its derivative financial instrument positions based upon pricing models using inputs observed from actively quoted markets and also takes into consideration the contract terms as well as other inputs, including ~~forward interest rate curves and~~ market currency exchange rates. The fair value of the foreign currency forward contract ~~liabilities~~assets was $68.37 million as of ~~September~~June 30, 2014. There were no outstanding foreign currency forward contracts as of December 31, 2013.

The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short-term financial instruments approximates their fair value.

The fair value of the Company’s debt, including related company debt, is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $1,~~097~~195.3 million and $1,~~240~~215.98 million at ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013, respectively. The carrying value was $1,~~127~~212.51 million and $1,~~135~~260.14 million at ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013, respectively. If the Company’s debt were measured at fair value, the fair value measurements of the individual debt instruments would have been classified as either Level 1 or Level 2 in the fair value hierarchy.


5.	Derivative Instruments

InThe ~~general, the~~ Company enters into derivative transactions in certain situations based on management’s assessment of current market conditions and perceived risks. Management intends to respond to evolving business and market conditions and in doing so, may enter into such transactions as deemed appropriate.

Credit Risk. As a result of the use of derivative instruments, the Company is exposed to counterparty credit risk. The Company manages this risk by limiting its counterparties to large financial institutions which meet the Company’s credit rating standards and have an established banking relationship with the Company. As of ~~September~~June 30, ~~2013~~2014, the Company did not expect any losses as a result of default of its counterparties.

Foreign Currency Forward Contracts. The Company has net U.S. dollar-denominated liabilities (primarily debt) which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the ~~U.S.~~Mexican ~~dollar~~peso against the ~~Mexican~~U.S. ~~peso~~dollar. This revaluation creates fluctuations in the Company’s income tax expense and the amount of income taxes paid. ~~During~~The Company enters into foreign currency forward contracts to hedge its exposure to this risk. In the first ~~half~~quarter of ~~2013~~2014, the Company entered into foreign currency forward contracts with an aggregate notional amount of $~~325~~345.0 million. These contracts mature on December 31, 2014, and obligate the Company to ~~hedge~~purchase ~~its~~a ~~exposure~~total of Ps.4,642.5 million at a weighted average exchange rate of Ps.13.46 to ~~this~~each ~~risk~~U.S. ~~These~~dollar. In the first half of 2013, the Company entered into foreign currency forward contracts ~~mature~~with an aggregate notional amount of $325.0 million maturing on December 31, 2013,. ~~and~~These ~~obligate~~contracts obligated the Company to purchase a total of Ps.4,202.3 million at a weighted average exchange rate of Ps.12.93 to each U.S. dollar. The Company has not designated ~~these~~any of the foreign currency forward contracts as hedging instruments for accounting purposes. The Company measures the foreign currency forward contracts ~~are measured~~ at fair value each period and recognizes any change in fair value ~~is recognized~~ in foreign exchange gain (loss) within the consolidated statements of comprehensive income (loss).

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

	Derivative Liability
	Balance Sheet Location	September 30,2013		December 31,2012
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued liabilities	$	6.3	$	—
Total derivatives not designated as hedging instruments		6.3		—
Total derivative liability		$	6.3	$	—

The following table presents the fair value of derivative instruments included in the consolidated balance sheets (in millions):

The following table presents the amounts affecting the consolidated statements of comprehensive income for the three months ended September 30 (in millions):



	Derivative Assets
	Balance Sheet Location	June 30, 2014		December 31, 2013
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	8.7	$	—
Total derivative assets		$	8.7	$	—

	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Derivatives not designated as hedging instruments:		2013			2012
Foreign currency forward contracts	Foreign exchange gain (loss)	$	(1.3	)	$	—
Total		$	(1.3	)	$	—

The following table presents the amounts included in the consolidated statements of comprehensive income (loss):

	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Derivatives not designated as hedging instruments:		2013			2012
		Three months ended						Six months ended
Foreign currency forward contracts	Foreign exchange gain (loss)	$	(6.3	)	$	—
		June 30,						June 30,
Total		$	(6.3	)	$	—
Derivatives not designated as hedging instruments:		2014			2013			2014		2013
Foreign currency forward contracts	Foreign exchange gain (loss)	$	5.5		$	(14.1	)	$	8.7	$	(5.0	)
Total		$	5.5		$	(14.1	)	$	8.7	$	(5.0	)


6.	Long-Term Debt

~~12½%~~Credit ~~Senior~~Agreement ~~Notes~~Amendment and Commercial Paper Program. On ~~April 1~~January 30, ~~2013~~2014, ~~the~~KCSM ~~Company~~entered ~~redeemed~~into ~~all~~agreements ofto ~~the~~establish ~~remaining~~a $~~98.1~~200 million ~~aggregate~~commercial ~~principal~~paper ~~amount~~program (the “Commercial Paper Program”). Also on January 30, 2014, KCSM and certain of its subsidiaries that guaranty the ~~12½%~~2012 ~~senior~~Credit ~~unsecured~~Agreement ~~notes~~entered ~~due~~into ~~April 1,~~an ~~2016~~amendment to the 2012 Credit Agreement which eliminated certain representations as a condition to borrowing under the revolving facility (the “~~12½%~~Revolving ~~Senior Notes~~Facility”) atand aprovided ~~redemption~~for ~~price~~same-day ~~equal~~availability toof ~~106.250%~~borrowed offunds ~~the~~if ~~principal~~desired ~~amount~~by KCSM. The ~~Company~~Revolving ~~redeemed~~Facility serves as a backstop for the ~~12½%~~Commercial ~~Senior~~Paper ~~Notes~~Program, ~~using~~which ~~$65~~generally serves as KCSM’s primary means of short-term funding.0 ~~million~~As of ~~borrowings~~June 30, ~~under~~2014, ~~the~~KCSM ~~revolving~~had ~~credit~~no ~~facility~~outstanding ~~and~~amount ~~cash~~issued onunder ~~hand~~the Commercial Paper Program.

8.0% Senior Notes,. ~~65/8%~~On ~~Senior~~February 3, ~~Notes~~2014, ~~and~~the ~~61/8%~~Company ~~Senior~~redeemed ~~Notes.~~all Onof ~~April~~the ~~10,~~remaining ~~2013,~~$62.8 ~~KCSM~~million ~~commenced~~aggregate aprincipal ~~cash~~amount ~~tender~~of ~~offer for~~ the 8.0% senior unsecured notes due February 1, 2018 ~~(the “8.0% Senior Notes”)~~, ~~the~~at ~~65/8%~~a ~~senior~~redemption ~~unsecured~~price ~~notes due December 15, 2020~~ (~~the~~expressed ~~“65/8%~~as ~~Senior~~a ~~Notes”)~~percentage ~~and~~of the ~~61/8%~~principal ~~senior unsecured notes due June 15, 2021 (the “61/8% Senior Notes”~~amount). Inof ~~addition~~104.0%, ~~KCSM~~using ~~concurrently~~a ~~commenced~~portion ~~consent~~of ~~solicitations to amend~~ the ~~indentures~~proceeds ~~governing~~from the ~~8.0%~~floating ~~Senior~~rate ~~Notes~~senior ~~and~~unsecured ~~65/8%~~notes ~~Senior~~due ~~Notes~~October 28, to2016, ~~eliminate~~issued ~~substantially~~in ~~all of~~ the ~~restrictive~~fourth ~~covenants~~quarter ~~and certain events~~ of ~~default contained therein, which became operative on May 3,~~ 2013.

~~Through May 8, 2013, KCSM purchased $237.2 million principal amount of the tendered 8.0% Senior Notes, $181.0 million principal amount of the tendered 65/8% Senior Notes and $149.~~7 million principal amount of the tendered 61/8% Senior Notes (collectively, the “Senior Notes Tendered”), in accordance with the terms and conditions of the tender offer using a portion of the proceeds received from the issuance of $275.0 ~~million~~Commitments ~~principal amount of 2.35% senior unsecured notes due May 15, 2020 (the “2.35% Senior Notes”)~~ and ~~$450.0 million principal amount of 3.0% senior unsecured notes due May 15, 2023 (the “3.0% Senior Notes”).~~ Contingencies

~~Subsequent~~Concession toDuty. Under KCSM’s 50-year railroad concession from the ~~expiration~~Mexican ofgovernment (the ~~cash~~“Concession”), ~~tender~~which ~~offer~~would expire in 2047 unless extended, KCSM ~~redeemed~~pays ~~the~~concession ~~remaining~~duty $4expense of 1.025% ~~million~~of ~~outstanding~~gross ~~principal~~revenues. ~~amount~~For ofthe three and six months ended June 30, 2014, the ~~65/8%~~concession ~~Senior~~duty ~~Notes~~expense, which is recorded within materials and ~~purchased~~other anin ~~additional~~operating expenses, was $204.90 million ~~principal~~and ~~amount~~$7.6 ofmillion, ~~the~~respectively, ~~61/~~compared to $3.4 million and $6.8% ~~Senior~~million ~~Notes~~for the same periods in 2013.

Litigation. The Company is a party to various legal proceedings and administrative actions, all of which, except as set forth below, are of an ordinary, routine nature and incidental to its operations. KCSM aggressively defends these matters and has established liability provisions, which management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than those proceedings described in detail below, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial statements.

Environmental Liabilities. The Company’s operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws and temporarily or even permanently close non-complying facilities.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

~~2.35% Senior Notes. On May 3, 2013, KCSM issued $275.0 million principal amount of 2.35% Senior Notes, which bear interest semiannually at a fixed annual rate of 2.35%.~~ The ~~2.35%~~risk ~~Senior Notes were issued at a discount to par value, resulting in a $0.3 million discount and a yield to maturity~~ of ~~2.368%.~~incurring ~~KCSM~~environmental ~~used~~liability ~~the~~is ~~net~~inherent ~~proceeds from the issuance of the 2.35% Senior Notes and the 3.0% Senior Notes to purchase the Senior Notes Tendered, pay all fees and expenses incurred~~ in ~~connection with~~ the ~~2.35%~~railroad ~~Senior Notes and 3~~industry.0% ~~Senior~~As ~~Notes~~part ~~offerings~~of ~~and~~serving the ~~tender~~petroleum ~~offers, to finance the purchase of certain leased equipment~~ and ~~for~~chemicals ~~other general corporate purposes. The 2.35% Senior Notes are redeemable at KCSM’s option~~industry, ~~in whole or in part, prior to April 15, 2020, by paying~~ the ~~greater~~Company oftransports ~~either~~hazardous ~~(i)~~materials ~~100% of the principal amount of the 2.35% Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal~~ and ~~interest~~has ~~(exclusive of interest accrued to the date of redemption) discounted to the date of redemption on~~ a ~~semiannual~~professional ~~basis~~team ~~(assuming~~available ~~a 360-day year consisting of twelve 30-day months) at the then-current U.S. Treasury rate plus 20 basis points, plus accrued interest and any additional amounts~~ to ~~but~~respond ~~excluding the redemption date. On or after April 15, 2020, the 2.35% Senior Notes may be redeemed at KCSM’s option, in whole or in part, at any time at a redemption price equal~~ to ~~100% of the principal amount, plus any accrued~~ and ~~unpaid~~mitigate ~~interest.~~environmental Inissues ~~addition,~~that ~~the~~might ~~notes~~occur ~~are redeemable,~~ in ~~whole but not in part, at KCSM’s option at their principal amount, plus any accrued unpaid interest in~~ the ~~event~~transport of ~~certain~~such ~~changes in the Mexican withholding tax rate~~materials.

~~3.0% Senior Notes. On May 3, 2013, KCSM issued $450.0 million principal amount of the 3.0% Senior Notes, which bear interest semiannually at a fixed annual rate of 3.0%.~~ The ~~3.0%~~Company ~~Senior~~performs ~~Notes~~ongoing ~~were~~reviews ~~issued at a discount to par value, resulting in a $1.9 million discount~~ and aevaluations ~~yield to maturity~~ of ~~3.048%. KCSM used~~ the ~~net~~various ~~proceeds~~environmental ~~from~~programs ~~the issuance of the 3.0% Senior Notes~~ and ~~the~~issues ~~2.35%~~within ~~Senior Notes to purchase~~ the Senior Notes Tendered, pay all fees and expenses incurred in connection with the 2.35% Senior Notes and 3.0% Senior Notes offerings and the tender offers, to finance the purchase of certain leased equipment and for other general corporate purposes. The 3.0% Senior Notes are redeemable at KCSMCompany’s ~~option,~~operations ~~in whole or in part~~and, ~~prior~~as ~~to February 15~~necessary, ~~2023,~~takes byactions ~~paying~~intended ~~the greater of either (i) 100% of the principal amount of the 3.0% Senior Notes~~ to belimit ~~redeemed or (ii)~~ the ~~sum~~Company’s ofexposure ~~the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued~~ to ~~the~~potential ~~date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the then-current U~~liability.S. ~~Treasury~~Although ~~rate~~these ~~plus~~costs 20cannot ~~basis points, plus accrued interest and any additional amounts to but excluding the redemption date. On or after February 15, 2023, the 3.0% Senior Notes may~~ be ~~redeemed~~predicted atwith ~~KCSM’s option~~certainty, inmanagement ~~whole~~believes orthat inthe ~~part,~~ultimate atoutcome ~~any time at a redemption price equal to 100%~~ of ~~the~~identified ~~principal~~matters ~~amount~~will ~~plus,~~not ~~any~~have ~~accrued~~a ~~and~~material ~~unpaid~~adverse ~~interest.~~effect Inon ~~addition,~~ the ~~notes are redeemable, in whole but not in part, at KCSM~~Company’s ~~option~~consolidated atfinancial ~~their principal amount, plus any accrued unpaid interest in the event of certain changes in the Mexican withholding tax rate~~statements.

~~The~~Certain 2Disputes with Ferromex.~~35%~~ KCSM ~~Senior~~and ~~Notes~~Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) use certain trackage rights, haulage rights and 3interline services (the “Services”) provided by each other.0% ~~Senior~~The ~~Notes~~rates to be charged after January 1, 2009, were agreed to pursuant to the Trackage Rights Agreement, dated February 9, 2010 (the “Trackage Rights Agreement”), between KCSM and Ferromex. The rates payable for these Services for the period beginning in 1998 through December 31, 2008, are ~~denominated~~still not resolved. KCSM is currently involved in Udiscussions with Ferromex regarding the amounts payable to each other for the Services for this period.S. ~~dollars;~~If KCSM cannot reach an agreement with Ferromex for rates applicable for Services which were provided prior to January 1, 2009, which are ~~unsecured~~not subject to the Trackage Rights Agreement, ~~unsubordinated~~the ~~obligations;~~Secretaría ~~rank~~de ~~pari~~Comunicaciones ~~passu~~y inTransportes ~~right~~(“Secretary of ~~payment~~Communications and Transportation” or “SCT”) is entitled to set the rates in accordance with ~~KCSM’s~~Mexican ~~existing~~law and ~~future~~regulations. ~~unsecured,~~KCSM ~~unsubordinated~~and ~~obligations;~~Ferromex both initiated administrative proceedings seeking a determination by the SCT of the rates that KCSM and ~~are~~Ferromex ~~senior~~should pay each other in ~~right~~connection ofwith ~~payment~~the toServices. The SCT issued rulings in 2002 and 2008 setting the rates for the Services, and both KCSM’s ~~future~~and ~~subordinated~~Ferromex ~~indebtedness~~challenged these rulings. InAlthough ~~addition~~KCSM and Ferromex have challenged these matters based on different grounds and these cases continue to evolve, management believes the ~~senior~~amounts ~~notes~~recorded ~~include~~related ~~certain~~to ~~covenants~~these ~~which~~matters are ~~customary~~adequate. ~~for~~While ~~these~~the ~~types~~outcome of ~~debt~~these ~~instruments~~matters ~~issued~~cannot bybe ~~borrowers~~predicted with ~~similar~~certainty, ~~credit~~the ~~ratings~~Company does not believe that, when resolved, these disputes will have a material effect on its consolidated financial statements.

~~Revolving~~Contractual ~~Credit Facility~~Agreements. AsIn the normal course of ~~September~~business, 30the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, ~~2013~~product loss or damage, charges and ~~December~~interpretations 31related to these agreements. While the outcome of these matters cannot be predicted with certainty, ~~2012~~the Company does not believe that, ~~KCSM~~when ~~had~~resolved, nothese ~~amount~~disputes ~~outstanding~~will ~~under~~have ~~the~~a ~~revolving~~material ~~credit~~effect ~~facility~~on its consolidated financial statements.

~~Related Company Revolving~~ Credit ~~Agreement~~Risk. The ~~Kansas~~Company ~~City~~continually ~~Southern~~monitors ~~Railway~~risks ~~Company~~related ~~(“KCSR”),~~to aseconomic achanges ~~lender,~~ and ~~KCSM,~~certain ascustomer areceivables ~~borrower,~~concentrations. ~~entered~~Significant ~~into~~changes ain ~~Revolving~~customer ~~Credit~~concentration ~~Agreement~~or ~~effective~~payment ~~as of June 7~~terms, ~~2013~~deterioration ~~(the~~of ~~“Revolving~~customer ~~Agreement”),~~creditworthiness ~~pursuant~~or tofurther ~~the~~weakening ~~terms~~in ofeconomic ~~which~~trends ~~KCSM~~could ~~may~~have ~~borrow~~a upsignificant toimpact ~~$100.0 million from KCSR~~ on athe ~~revolving~~collectability ~~basis~~of atKCSM’s ~~any~~receivables ~~time~~and ~~during~~its ~~the~~operating ~~term~~results. ofIf the ~~Revolving~~financial ~~Agreement.~~condition ~~The~~of ~~Revolving~~KCSM’s ~~Agreement~~customers iswere ~~unsecured~~to deteriorate and ~~terminates~~result onin ~~December~~an ~~31,~~impairment ~~2018.~~of Astheir ofability ~~September~~to ~~30,~~make ~~2013~~payments, ~~KCSM~~additional ~~had~~allowances ~~borrowed~~may ~~$31~~be required.5 ~~million~~The ~~under~~Company ~~the~~has ~~terms~~recorded ofprovisions ~~the~~for ~~Revolving~~uncollectability ~~Agreement~~based aton aits ~~weighted~~best ~~average~~estimate ~~interest~~at ~~rate~~June 30, ~~of 1~~2014.~~47%.~~

~~Debt~~Income ~~Retirement~~Tax. Tax ~~Costs~~returns filed for periods after 2007 were filed on a separate company basis and remain open to examination by the taxing authorities. ~~The~~KCSM’s ~~Company~~2007 ~~recognized~~and ~~debt~~2010 ~~retirement~~tax ~~costs~~returns are currently under examination by the Servicio de Administración Tributaria (the “SAT”), the Mexican equivalent of ~~$112~~the U.3S. ~~million~~Internal ~~during~~Revenue Service. The Company is litigating an audit assessment from the ~~nine~~SAT ~~months~~for the year ended ~~September~~December 3031, ~~2013,~~2005. ~~related~~The toCompany ~~the~~believes ~~tender~~it ~~and~~is ~~call~~more ~~premiums~~likely asthan ~~well~~not asthat it will prevail in challenging the ~~write-off~~2005 assessment. While the outcome of ~~unamortized~~this ~~debt~~matter ~~issuance~~cannot ~~costs~~be ~~and~~predicted with certainty, the ~~original~~Company ~~issue~~does ~~discounts~~not asbelieve, when resolved, that this dispute will have a ~~result~~material ofeffect on its consolidated financial statements. However, an unexpected adverse resolution could have a material effect on the ~~refinancing~~consolidated ~~and~~financial ~~purchasing~~statements ~~activities~~in ~~described~~a ~~above~~particular quarter or fiscal year.

Tax Contingencies. The Company has not historically assessed Value Added Tax (“VAT”) on international import transportation services provided to its customers based on a written ruling that the Company obtained from the SAT in 2008 stating that such services were exempt from VAT (the “2008 Ruling”). Notwithstanding the 2008 Ruling, in December 2013, the SAT unofficially informed the Company of an intended implementation of a new criteria effective as of January 1, 2014, pursuant to which VAT would be assessed on all international import transportation services on the portion of the services provided within Mexico. Additionally, in November 2013, the SAT filed an action to nullify the 2008 Ruling, potentially exposing the application of the new criteria to open tax years. In February 2014, the Company filed an action opposing the SAT’s nullification action. While the SAT’s unofficial communication to the Company is not enforceable and the 2008 Ruling continues to be in effect, the Company notified its customers in December 2013 of the potential assessment of VAT on international import transportation services as of January 1, 2014, and is considering potential changes to the Company billing

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

7.systems; ~~Commitments~~however, implementation of any VAT assessment will depend on future developments and ~~Contingencies~~guidance expected to be published by the SAT. Due to the pass-through nature of VAT assessed on services provided to customers, the Company does not believe any ultimate requirement to assess VAT on international import transportation services will have a significant effect on its consolidated financial statements. However, unexpected adverse implementation criteria imposed by the SAT for open tax years could have a material effect on the consolidated financial statements of the Company in a particular quarter or fiscal year.

~~Concession~~Mexican ~~Duty~~Legislation. ~~Under~~In ~~KCSM’s~~Mexico, ~~50-year~~proposed ~~railroad~~legislation ~~concession~~was ~~from~~introduced ~~the~~in ~~Mexican~~2013 ~~government~~in (the ~~“Concession”),~~House ~~KCSM paid concession duty expense~~ of ~~0.5%~~Deputies ofto ~~gross~~amend ~~revenues~~certain ~~for~~provisions in the ~~first~~Mexican 15Regulatory ~~years~~Railroad ofService ~~the~~Law. In ~~Concession~~February ~~period~~2014, ~~and~~this onproposed ~~June 24,~~legislation ~~2012,~~was ~~KCSM~~approved ~~began~~by ~~paying~~the ~~1.25%~~Mexican House of ~~gross~~Deputies. ~~revenues,~~The ~~which~~proposed islegislation ~~effective~~was ~~for~~not ~~the~~acted ~~remaining~~on ~~years~~by of the ~~Concession.~~Mexican ~~For~~Senate in the ~~three~~congressional ~~and~~period ~~nine~~which ~~months~~ ended ~~September~~ on April 30, ~~2013~~2014, and is expected to be considered in the ~~concession~~next ~~duty~~congressional ~~expense~~period, which begins September 1, 2014. Because any final legislation is ~~recorded~~still ~~within~~subject ~~materials~~to discussion and ~~other~~revision in ~~operating~~the ~~expenses~~Mexican Senate, ~~was~~and ~~$3.7~~requires ~~million~~the ~~and~~signature ~~$10.5~~of ~~million,~~the ~~respectively~~President of Mexico, ~~compared~~it is too early to ~~$3.5~~determine ~~million~~what, ~~and~~if ~~$6.2~~any, ~~million~~impact ~~for~~the proposed rail legislation could have on the ~~same~~Mexican ~~periods~~railroad inindustry ~~2012~~and its customers.

~~Litigation.~~In ~~The~~May ~~Company~~2014, isnew aMexican ~~party~~antitrust tolegislation ~~various~~was ~~legal~~approved, ~~proceedings~~ and ~~administrative~~became ~~actions,~~effective ~~all~~on ofJuly ~~which~~7, ~~except as set forth below, are of an ordinary, routine nature and incidental to its operations~~2014. ~~KCSM~~This ~~aggressively~~new ~~defends~~law ~~these~~replaces ~~matters~~antitrust ~~and~~law ~~has~~that ~~established~~had ~~liability~~been ~~provisions,~~effective ~~which~~since ~~management believes are adequate to cover expected costs~~1993. ~~Although~~The itCompany iswill ~~not~~continue ~~possible~~ to ~~predict~~evaluate the ~~outcome~~Mexican of any legal proceeding, in the opinion of management, other than those proceedings described in detail below, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Companygovernment’s ~~consolidated~~implementation ~~financial~~of ~~statements.~~this legislation.

The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle environmental issues that might occur in the transport of such materials.

The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated financial statements.

Certain Disputes with Ferromex. KCSM and Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) use certain trackage rights, haulage rights and interline services (the “Services”) provided by each other. The rates to be charged after January 1, 2009, were agreed to pursuant to the Trackage Rights Agreement, dated February 9, 2010 (the “Trackage Rights Agreement”), between KCSM and Ferromex. The rates payable for these Services for the period beginning in 1998 through December 31, 2008, are still not resolved. KCSM is currently involved in discussions with Ferromex regarding the amounts payable to each other for the Services for this period. If KCSM cannot reach an agreement with Ferromex for rates applicable for Services which were provided prior to January 1, 2009, which are not subject to the Trackage Rights Agreement, the Secretaría de Comunicaciones y Transportes (“Secretary of Communications and Transportation” or “SCT”) is entitled to set the rates in accordance with Mexican law and regulations. KCSM and Ferromex both initiated administrative proceedings seeking a determination by the SCT of the rates that KCSM and Ferromex should pay each other in connection with the Services. The SCT issued rulings in 2002 and 2008 setting the rates for the Services, and both KCSM and Ferromex challenged these rulings. Although KCSM and Ferromex have challenged these matters based on different grounds and these cases continue to evolve, management believes the amounts recorded related to these matters are adequate.

While the outcome of these matters cannot be predicted with certainty, the Company does not believe that, when resolved, these disputes will have a material effect on its consolidated financial statements.

Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, product loss or damage, charges and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that, when resolved, these disputes will have a material effect on its consolidated financial statements.

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Kansas City Southern de México, S.A. de C.V. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness or further weakening in economic trends could have a significant impact on the collectability of KCSM’s receivables and its operating results. If the financial condition of KCSM’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for uncollectability based on its best estimate at September 30, 2013.

Income Tax. Tax returns filed for periods after 2006 remain open to examination by the taxing authorities. KCSM’s 2007 and 2010 tax returns are currently under examination by the Servicio de Administracion Tributaria (the “SAT”), the Mexican equivalent of the U.S. Internal Revenue Service. The Company received an audit assessment for the year ended December 31, 2005, from the SAT. The Company initiated administrative proceedings with the SAT, and if a settlement is not reached, the matter will be litigated. The Company believes it has strong legal arguments in its favor and more likely than not will prevail in challenging the 2005 assessment. The Company believes that an adequate provision has been made for any adjustment (taxes and interest) that will be due for all open years. However, an unexpected adverse resolution could have a material effect on the consolidated financial statements in a particular quarter or fiscal year.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements that are not based upon historical information. Readers can identify these forward-looking statements by the use of such verbs as “expects,” “anticipates,” “believes” or similar verbs or conjugations of such verbs. Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this Form 10-Q. However, such statements are dependent on and, therefore, can be influenced by, a number of external variables 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; revocation of KCSM’s concession; the termination of, or failure to renew, agreements with customers, other railroads and third parties; interest rates; access to capital; disruptions to the Company’s 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 developments and disputes; rail accidents or other incidents or accidents on KCSM’s rail network or at facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; fluctuation in prices 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 Mexico and the United States; and the outcome of claims and litigation involving the Company or its subsidiaries. For more discussion about each risk factor, see Part I, Item 1A –“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013, which is on file with the U.S. Securities and Exchange Commission (File No. 333-08322) and any updates contained herein. Readers are strongly encouraged to consider these factors when evaluating forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved. As a result, actual outcomes or results could materially differ from those indicated in forward-looking statements. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements.

This discussion is intended to clarify and focus on Kansas City Southern de México, S. A. de C.V.’s (“KCSM” or the “Company”) results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q, and has been abbreviated pursuant to General Instruction H(2)(a) of Form 10-Q. This discussion should be read in conjunction with those consolidated financial statements and the related notes and is qualified by reference to them.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial position and results of operations is based upon its consolidated financial statements. The preparation of these consolidated financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the accounting for assets and liabilities that are not readily apparent from other sources. If the estimates differ materially from actual results, the impact on the consolidated financial statements may be material. The Company’s critical accounting policies are disclosed in the ~~2012~~2013 Annual Report on Form 10-K.

~~Third Quarter Analysis~~Overview

~~The~~KCSM operates ~~Company~~a ~~reported~~key ~~net~~commercial ~~income~~corridor of ~~$59.5~~the ~~million~~Mexican ~~for~~railroad system, with the shortest, most direct rail passageway between Mexico City and Laredo, Texas. KCSM serves most of Mexico’s principal industrial cities and three ~~months~~of ~~ended~~its ~~September 30~~major seaports through its 50-year concession (the “Concession”) from the Mexican government, ~~2013~~which could expire in 2047 unless extended. KCSM’s rail lines provide exclusive rail access to the United States and Mexico border crossing at Nuevo Laredo, ~~compared~~Tamaulipas, the largest rail freight interchange point between the United States and Mexico. Under the Concession, KCSM has the right to ~~net~~control ~~income~~and operate the southern half of ~~$40.5~~the ~~million~~rail ~~for~~bridge at Laredo, Texas, which spans the ~~same~~Rio ~~period~~Grande inRiver ~~2012~~between the United States and Mexico. KCSM’s ultimate parent, Kansas City Southern (“KCS”), controls the northern half of the bridge through its wholly-owned subsidiary Mexrail, Inc.

~~The~~KCSM ~~Company~~Servicios, ~~reported~~S.A. ande 8%C.V. ~~increase~~(“KCSM ~~in revenues~~Servicios”), a 6%wholly-owned ~~increase~~subsidiary inof ~~revenue~~KCS, ~~per~~provides ~~carload/unit~~employee ~~and~~services ato 1%KCSM, ~~increase~~and inKCSM ~~carload/unit~~pays ~~volumes~~KCSM ~~during~~Servicios ~~the~~market-based ~~three~~rates ~~months~~for ~~ended~~these ~~September 30,~~services. ~~2013,~~This asmarket-based ~~compared~~rate tois ~~the~~determined ~~same~~by ~~period~~applying ina ~~2012.~~percentage ~~Revenues~~mark-up ~~increased~~to ~~for~~amounts ~~all~~paid ~~commodity~~by ~~groups~~KCSM ~~driven~~Servicios byto ~~positive~~its ~~pricing~~employees ~~impacts~~ and ~~fuel surcharge~~vendors. For comparative purposes,

Operating expenses increased 9% during the three months ended September 30, 2013, as compared to the same period in 2012, due to higher fuel prices, compensation and benefits, and depreciation and amortization expenses. Operating expenses as a percentage of revenues increased to 64.5% for the three months ended September 30, 2013, as compared to 63.7% for the same period in 2012. 12

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amounts paid to KCSM Servicios are classified according to the nature of the services provided to KCSM and the percentage mark-up portion of payments to KCSM Servicios is included within materials and other expense.

Second Quarter Analysis

The Company reported a 15% increase in revenues, an 8% increase in revenue per carload/unit and a 6% increase in carload/unit volumes during the three months ended June 30, 2014, as compared to the same period in 2013. The agriculture and minerals revenues increase was driven by a 34% increase in grain volumes and a 20% increase in grain revenue per carload/unit. During the first half of 2013, grain volumes and average length of haul were adversely affected as a result of the severe drought conditions experienced in the Midwest region of the United States during 2012. Revenue increases for other commodity groups were driven by carload/unit volumes and positive pricing impacts.

Operating expenses increased $19.2 million during the three months ended June 30, 2014, as compared to the same period in 2013, due to higher carload/unit volumes and lease termination costs, partially offset by the weakening of the Mexican peso against the U.S. dollar. Operating expenses as a percentage of revenues decreased to 63.1% for the three months ended June 30, 2014, as compared to 65.1% for the same period in 2013.

KCSM’s revenues and operating expenses are affected by fluctuations of the Mexican peso against the U.S. dollar. Based on the volume of revenue and expense transactions denominated in Mexican pesos, revenue and expense fluctuations generally offset, with insignificant net impacts to operating income.

During the second quarter of 2014, the Company purchased $13.1 million of equipment under existing operating leases and replacement equipment as certain operating leases expired. These purchases have been funded with a portion of the proceeds from the floating rate senior notes issued during the fourth quarter of 2013 and available cash. The Company also recognized $3.8 million of lease termination costs during the second quarter of 2014, which is included in operating expenses, due to the early termination of certain operating leases and the related purchase of the equipment.

The Company reported net income of $75.3 million for the three months ended June 30, 2014, compared to net loss of $35.4 million for the same period in 2013. The increase in net income is attributable to $109.9 million of debt retirement costs recognized in 2013. In addition, net income increased due to higher foreign exchange gain and operating income for the three months ended June 30, 2014, as compared to the same period in 2013.

Results of Operations

The following summarizes KCSM’s consolidated statements of comprehensive income (loss) components (in millions):

	Three Months Ended						ChangeDollars
	September 30,
	June 30, 2014
	2013			2012
	2014			2013
Revenues	$	~~286~~305.65		$	266.15		$	2039.50
Operating expenses	~~184~~192.87			~~169~~173.45			1519.42
Operating income	~~101~~112.8			9693.70			519.18
Equity in net earnings of unconsolidated affiliate	01.71			0.64			0.17
Interest expense	(1210.93		)	(2214.05		)	94.12
Debt retirement costs	~~(2.4~~—		)	—(109.9		)	(2109.49		)
Foreign exchange gain (loss)	~~(1.~~5.3		)	4(17.85		)	(622.38		)
Other expense, net	(0.2.1		)	~~(0.1~~—		)	(02.1		)
Income before income taxes	85.5			80.0			5.5
Income (loss) before income taxes	106.8			(48.5		)	155.3
Income tax expense	26.0			39.5			(13.5		)
Income tax expense (benefit)	31.5			(13.1		)	44.6
Net income	$	59.5		$	40.5		$	19.0
Net income (loss)	$	75.3		$	(35.4	)	$	110.7
	Nine Months Ended						ChangeDollars
	September 30,
	2013			2012
Revenues	$	808.4		$	759.5		$	48.9
Operating expenses	524.0			447.4			76.6
Operating income	284.4			312.1			(27.7		)
Equity in net earnings of unconsolidated affiliate	1.8			2.1			(0.3		)
Interest expense	(48.9		)	(66.7		)	17.8
Debt retirement costs	(112.3		)	—			(112.3		)
Foreign exchange gain (loss)	(6.1		)	4.9			(11.0		)
Other expense, net	(0.3		)	(0.2		)	(0.1		)
Income before income taxes	118.6			252.2			(133.6		)
Income tax expense	40.3			103.5			(63.2		)
Net income	$	78.3		$	148.7		$	(70.4	)

1413

Table of Contents

The following summarizes KCSM’s consolidated statements of comprehensive income components (in millions):




	Six Months Ended						Change Dollars
	June 30,
	2014			2013
Revenues	$	587.8		$	521.8		$	66.0
Operating expenses	386.9			339.2			47.7
Operating income	200.9			182.6			18.3
Equity in net earnings of unconsolidated affiliate	2.0			1.1			0.9
Interest expense	(21.0		)	(36.0		)	15.0
Debt retirement costs	(3.9		)	(109.9		)	106.0
Foreign exchange gain (loss)	8.5			(4.6		)	13.1
Other expense, net	(2.1		)	(0.1		)	(2.0		)
Income before income taxes	184.4			33.1			151.3
Income tax expense	54.6			14.3			40.3
Net income	$	129.8		$	18.8		$	111.0

Revenues

The following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:

	Revenues						Carloads and Units				Revenue per Carload/Unit
	Three Months EndedSeptember 30,						Three Months EndedSeptember 30,				Three Months Ended September 30,
	Three Months Ended						Three Months Ended				Three Months Ended
	2013		2012		% Change		2013	2012	% Change		2013		2012		% Change
	June 30,						June 30,				June 30,
Chemical and petroleum	$	52.9	$	51.8	2	%	24.0	26.4	(9	%)	$	2,204	$	1,962	12	%
	2014		2013		% Change		2014	2013	% Change		2014		2013		% Change
Industrial and consumer products	66.1		64.0		3	%	41.6	44.1	(6	%)	1,589		1,451		10	%
Chemical and petroleum	$	57.8	$	53.7	8	%	26.0	25.5	2	%	$	2,223	$	2,106	6	%
Agriculture and minerals	42.9		42.6		1	%	21.9	23.4	(6	%)	1,959		1,821		8	%
Industrial and consumer products	70.3		63.4		11	%	44.4	41.1	8	%	1,583		1,543		3	%
Energy	8.5		7.0		21	%	7.9	7.2	10	%	1,076		972		11	%
Agriculture and minerals	51.8		37.8		37	%	25.9	21.4	21	%	2,000		1,766		13	%
Intermodal	62.2		52.0		20	%	138.7	131.2	6	%	448		396		13	%
Energy	7.7		8.2		(6	%)	7.6	7.6	—		1,013		1,079		(6	%)
Automotive	47.2		43.6		8	%	25.1	24.8	1	%	1,880		1,758		7	%
Intermodal	60.6		55.0		10	%	125.6	123.4	2	%	482		446		8	%
Carload revenues, carloads and units	279.8		261.0		7	%	259.2	257.1	1	%	$	1,079	$	1,015	6	%
Automotive	52.4		43.0		22	%	27.2	22.8	19	%	1,926		1,886		2	%
Other revenue	6.8		5.1		33	%
Carload revenues, carloads and units	300.6		261.1		15	%	256.7	241.8	6	%	$	1,171	$	1,080	8	%
Total revenues (i)	$	286.6	$	266.1	8	%
Other revenue	4.9		5.4		(9	%)
Total revenues (i)	$	305.5	$	266.5	15	%
(i) Included in revenues:
Fuel surcharge	$	4846.03	$	3842.9

	Revenues						Carloads and Units				Revenue per Carload/Unit
	Nine Months EndedSeptember 30,						Nine Months EndedSeptember 30,				Nine Months EndedSeptember 30,
	2013		2012		% Change		2013	2012	% Change		2013		2012		% Change
Chemical and petroleum	$	156.1	$	143.3	9	%	73.2	73.9	(1	%)	$	2,133	$	1,939	10	%
Industrial and consumer products	196.3		184.6		6	%	125.8	126.1	—		1,560		1,464		7	%
Agriculture and minerals	113.8		143.1		(20	%)	62.5	77.9	(20	%)	1,821		1,837		(1	%)
Energy	23.7		20.0		19	%	22.6	21.5	5	%	1,049		930		13	%
Intermodal	167.4		141.0		19	%	376.6	360.6	4	%	445		391		14	%
Automotive	134.8		114.2		18	%	71.9	66.8	8	%	1,875		1,710		10	%
Carload revenues, carloads and units	792.1		746.2		6	%	732.6	726.8	1	%	$	1,081	$	1,027	5	%
Other revenue	16.3		13.3		23	%
Total revenues (i)	$	808.4	$	759.5	6	%
(i) Included in revenues:
Fuel surcharge	$	129.8	$	107.3

~~Freight~~Table revenues include revenue for transportation services and fuel surcharges. For the three months ended September 30, 2013, revenues and carload/unit volumes increased 8% and 1%, respectively, compared to the same period in 2012. For the nine months ended September 30, 2013, revenues and carload/unit volumes increased 6% and 1%, respectively, compared to the same period in 2012. For the nine months ended September 30, 2013, agriculture and minerals revenues decreased $29.3 million due to an 18% reduction in import grain volumes as the severe drought conditions experienced in the Midwestern region of the United States affected grain volumes in the third quarter of 2012 through the second quarter of 2013. Revenue per carload/unit increased by 6% and 5% for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, due to positive pricing impacts and fuel surcharge, partially offset by commodity mix. In addition, revenue per carload/unit increased for the nine months ended September 30, 2013 due to the strengthening of the Mexican peso against the U.S. dollar.Contents



	Revenues						Carloads and Units				Revenue per Carload/Unit
	Six Months Ended						Six Months Ended				Six Months Ended
	June 30,						June 30,				June 30,
	2014		2013		% Change		2014	2013	% Change		2014		2013		% Change
Chemical and petroleum	$	111.0	$	103.2	8	%	49.7	49.2	1	%	$	2,233	$	2,098	6	%
Industrial and consumer products	139.5		130.2		7	%	87.3	84.2	4	%	1,598		1,546		3	%
Agriculture and minerals	99.2		70.9		40	%	49.9	40.6	23	%	1,988		1,746		14	%
Energy	15.0		15.2		(1	%)	14.7	14.7	—		1,020		1,034		(1	%)
Intermodal	114.5		105.2		9	%	241.3	237.9	1	%	475		442		7	%
Automotive	100.0		87.6		14	%	53.0	46.8	13	%	1,887		1,872		1	%
Carload revenues, carloads and units	579.2		512.3		13	%	495.9	473.4	5	%	$	1,168	$	1,082	8	%
Other revenue	8.6		9.5		(9	%)
Total revenues (i)	$	587.8	$	521.8	13	%
(i) Included in revenues:
Fuel surcharge	$	88.3	$	81.8

Freight revenues include revenue for transportation services and fuel surcharges. For the three months ended June 30, 2014, revenues and carload/unit volumes increased 15% and 6%, respectively, compared to the same period in 2013. For the six months ended June 30, 2014, revenues and carload/unit volumes increased 13% and 5%, respectively, compared to the same period in 2013. Agriculture and minerals revenues increased $14.0 million and $28.3 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due to an increase of 34% and 36%, respectively, in grain volumes. During the first half of 2013, grain volumes and average length of haul were adversely affected as a result of the severe drought conditions experienced in the Midwest region of the United States during 2012. The Company expects revenue growth rates for the second half of 2014 to decline from growth rates for the first half of 2014, reflecting the improved grain shipments in the second half of 2013.

Revenue per carload/unit increased by 8% for the three and six months ended June 30, 2014, compared to the same periods in 2013, due to positive pricing impacts and commodity mix.

KCSM’s fuel surcharge is a mechanism to adjust revenue based upon changing fuel prices. Fuel surcharges are calculated differently depending on the type of commodity transported. For most commodities, fuel surcharge is calculated using a fuel price from a prior time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge may differ.

Table of Contents

KCSM’s fuel surcharge is a mechanism to adjust revenue based upon changing fuel prices. Fuel surcharge is calculated using a fuel price from a prior time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge may differ.

The following discussion provides an analysis of revenues by commodity group:

	Revenues by commodity groupfor the three months ended September 30, 2013
	Revenues by commodity groupfor the three months ended June 30, 2014
Chemical and petroleum. Revenues increased $1.1 million for the three months ended September 30, 2013, compared to the same period in 2012, due to a 12% increase in revenue per carload/unit, partially offset by a 9% decrease in carload/unit volumes due to lower petroleum volumes as a result of weather related delays. Revenues increased $12.8 million for the nine months ended September 30, 2013, compared to the same period in 2012, due to a 10% increase in revenue per carload/unit. Revenues increased due to positive pricing impacts for petroleum and plastics.
Chemical and petroleum. Revenues increased $4.1 million for the three months ended June 30, 2014, compared to the same period in 2013, due to a 6% increase in revenue per carload/unit and a 2% increase in carload/unit volumes. Revenues increased $7.8 million for the six months ended June 30, 2014, compared to the same period in 2013, due to a 6% increase in revenue per carload/unit and a 1% increase in carload/unit volumes. Revenues increased due to positive pricing impacts in petroleum and plastics. Volumes increased due to new chemical business, partially offset by decreased petroleum volumes due to increased reliance on hydro power during the first quarter of 2014.
Industrial and consumer products. Revenues increased $2.1 million for the three months ended September 30, 2013, compared to the same period in 2012, due to a 10% increase in revenue per carload/unit, partially offset by a 6% decrease in carload/unit volumes, due to lower other volumes as a result of lost business. Revenues increased $11.7 million for the nine months ended September 30, 2013, compared to the same period in 2012, due to a 7% increase in revenue per carload/unit. Metals and scrap revenues increased due to a longer average length of haul. In addition, revenues increased due to the strengthening of the Mexican peso against the U.S. dollar.
Industrial and consumer products. Revenues increased $6.9 million for the three months ended June 30, 2014, compared to the same period in 2013, due to an 8% increase in carload/unit volumes and a 3% increase in revenue per carload/unit. Revenues increased $9.3 million for the six months ended June 30, 2014, compared to the same period in 2013, due to a 4% increase in carload/unit volumes and a 3% increase in revenue per carload/unit. Metals and scrap revenues increased due to strong demand, positive pricing and increased length of haul.
Agriculture and minerals. Revenues increased $0.3 million for the three months ended September 30, 2013, compared to the same period in 2012, due to an 8% increase in revenue per carload/unit, partially offset by a 6% decrease in carload/unit volumes. For the nine months ended September 30, 2013, revenues decreased $29.3 million due to a 20% decrease in carload/unit volumes. Import grain volumes and average length of haul decreased in the third quarter of 2012 through the second quarter of 2013 as a result of the severe drought conditions experienced in the Midwestern region of the United States during 2012. Additionally, volumes decreased during the three and nine months ended September 30, 2013, as higher dried distillers grain prices for imports from the United States drove a product substitution in Mexico.
Agriculture and minerals. Revenues increased $14.0 million for the three months ended June 30, 2014, compared to the same period in 2013, due to a 21% increase in carload/unit volumes and a 13% increase in revenue per carload/unit. Revenues increased $28.3 million for the six months ended June 30, 2014, compared to the same period in 2013, due to a 23% increase in carload/unit volumes and a 14% increase in revenue per carload/unit. Grain volumes increased 34% and 36%, respectively and revenue per carload/unit increased 20% in both periods, as volumes and average length of haul were adversely affected in the first half of 2013 as a result of the severe drought conditions experienced in the Midwestern region of the United States during 2012. The Company expects revenue growth rates for the second half of 2014 to decline from growth rates for the first half of 2014, reflecting the improved grain shipments in the second half of 2013.

Table of Contents

Revenues by commodity groupfor the three months ended ~~September~~June 30, ~~2013~~2014 Energy. Revenues ~~increased~~decreased $10.5 million for the three months ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, due to ana 116% ~~increase~~decrease in revenue per carload/unit ~~and a 10% increase in carload/unit volumes~~. Revenues ~~increased~~decreased $30.72 million for the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, due to a 131% ~~increase~~decrease in revenue per carload/unit ~~and a 5% increase in carload/unit volumes~~. ~~The~~These ~~volume~~revenue ~~increases~~decreases were driven by ~~higher~~the ~~demand~~weakening ~~for~~of ~~pet~~the ~~coke~~Mexican ~~used~~peso inagainst ~~cement~~the ~~for~~U.S. ~~highway projects~~dollar.

Intermodal. Revenues increased $105.26 million for the three months ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, due to aan 138% increase in revenue per carload/unit and a 62% increase in carload/unit volumes. Revenues increased $269.43 million for the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, due to a 147% increase in revenue per carload/unit and a 41% increase in carload/unit volumes. Revenue per carload/unit increased as a result of cross border length of haul, and ~~volume growth was driven by conversion of cross border general commodity truck traffic to rail~~pricing.

Automotive. Revenues increased $39.64 million for the three months ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, due to a 719% increase in ~~revenue per~~ carload/unit volumes and a 12% increase in revenue per carload/unit ~~volumes~~. ~~Volume increased as a result of new business, partially offset by lower production due to demand and a customer’s plant shutdown.~~ Revenues increased $2012.64 million for the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, due to a 1013% increase in ~~revenue per~~ carload/unit ~~and an 8% increase in carload/unit~~ volumes. ~~For~~Growth ~~the nine months ended September 30, 2013, the growth~~ was driven by new cross border business, ~~increased~~and an increase in import/export ~~volume~~volumes through the Port of Lazaro Cardenas. ~~and~~In ~~strong~~addition, ~~year-over-year~~volumes ~~growth~~increased inas ~~North~~a ~~American~~result ~~automobile~~of ~~sales~~a ~~for~~customer’s ~~Original~~temporary ~~Equipment~~plant ~~Manufacturers~~shutdown ~~for~~during the ~~first~~second ~~half~~quarter of 2013. InThese ~~addition,~~increases in revenues ~~increased~~were ~~due~~partially tooffset by the ~~strengthening~~weakening of the Mexican peso against the U.S. dollar.

Operating Expenses

Operating expenses, as shown below (in millions), increased $1519.42 million ~~for the three months ended September 30, 2013, compared to the same period in 2012, due to higher fuel prices, compensation~~ and ~~benefits, and depreciation and amortization expense. Operating expenses increased~~ $7647.67 million for the ~~nine~~three and six months ended ~~September~~ June 30, ~~2013~~2014, respectively, compared to the same ~~period~~periods in ~~2012~~2013, due to ~~the~~higher ~~elimination~~carload/unit ofvolumes ~~deferred~~and ~~statutory~~lease ~~profit~~termination ~~sharing liability as a result of the organizational restructuring in 2012~~costs, ~~higher~~partially ~~fuel~~offset ~~prices~~by ~~and~~ the ~~strengthening~~weakening of the Mexican peso against the U.S. dollar.

KCSM pays KCSM Servicios, S.A. de C.V. (“KCSM Servicios”) a wholly-owned subsidiary of KCS, market-based rates for employee services. For comparative purposes, amounts paid to KCSM Servicios are classified according to the nature of the services provided to KCSM and the market-based premium paid to KCSM Servicios is included within materials and other expense.



	Three Months Ended
	June 30,				Change
	2014		2013		Dollars			Percent
Compensation and benefits	$	34.5	$	31.4	$	3.1		10	%
Purchased services	38.6		33.7		4.9			15	%
Fuel	54.6		44.6		10.0			22	%
Equipment costs	15.9		18.9		(3.0		)	(16	%)
Depreciation and amortization	28.4		25.3		3.1			12	%
Materials and other	16.9		19.6		(2.7		)	(14	%)
Lease termination costs	3.8		—		3.8			100	%
Total operating expenses	$	192.7	$	173.5	$	19.2		11	%

	Three Months Ended
	September 30,				Change
	2013		2012		Dollars			Percent
Compensation and benefits	$	33.1	$	29.8	$	3.3		11	%
Purchased services	38.2		36.3		1.9			5	%
Fuel	48.9		42.5		6.4			15	%
Equipment costs	21.3		20.6		0.7			3	%
Depreciation and amortization	26.2		23.0		3.2			14	%
Materials and other	17.1		17.2		(0.1		)	(1	%)
Total operating expenses	$	184.8	$	169.4	$	15.4		9	%

Table of Contents

	Nine Months Ended
	Six Months Ended
	September 30,					Change
	June 30,					Change
	2013		2012			Dollars			Percent
	2014		2013			Dollars			Percent
Compensation and benefits	$	9366.13	$	9360.50		$	(06.43	)	—11	%
Purchased services	~~107~~75.71		~~109~~69.25			~~(1.~~5.6		)	(18	%)
Fuel	~~135~~104.54		~~121~~86.26			1417.38			1221	%
Equipment costs	6032.23		5738.49			2(6.86		)	5(17	%)
Depreciation and amortization	7656.12		6749.59			8.6.3			13	%
Materials and other	5132.45		4134.63			9(1.8		)	24(5	%)
Elimination of deferred statutory profit sharing liability, net	—		(43.0		)	43.0			(100	%)
Lease termination costs	20.1		—			20.1			100	%
Total operating expenses	$	~~524~~386.09	$	~~447~~339.42		$	7647.67		1714	%

Compensation and benefits. Compensation and benefits increased $3.31 million ~~for the three months ended September 30, 2013, compared to the same period in 2012, due to annual salary~~ and ~~benefits rate increases and the strengthening of the Mexican peso against the U.S. dollar. Compensation and benefits decreased~~ $06.43 million for the ~~nine~~three and six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to the same ~~period~~periods in ~~2012~~2013, due to ahigher ~~$7.3~~carload/unit ~~million~~volumes ~~reduction~~and inannual ~~deferred~~salary ~~statutory~~rate ~~profit~~increases, ~~sharing expense as a result of the organizational restructuring in 2012. This decrease was~~ partially offset by the ~~strengthening~~weakening of the Mexican peso against the U.S. dollar ~~and annual salary and benefits rate increases~~.

Purchased services. Purchased services expense increased $14.9 million ~~for~~and ~~the three months ended September 30, 2013, compared to the same period in 2012, due to an increase in security services. Purchased services expense decreased~~ $1.5.6 million for the ~~nine~~three and six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to the same ~~period~~periods in ~~2012~~2013, due to aincreases ~~decrease~~ in track ~~and equipment~~ maintenance ~~expenses~~expense, ~~partially~~equipment ~~offset~~repairs byand ancorporate ~~increase in security services~~expenses. ~~Track maintenance expense decreased due to the termination of a maintenance contract as a result of in-sourcing of certain maintenance activities.~~

Fuel. Fuel expense increased $610.40 million and $1417.38 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to the same periods in ~~2012~~2013, due to higher consumption and diesel fuel prices. asThe ~~the~~ average price per gallon, including the effects of the ~~strengthening~~weakening of the Mexican peso against the U.S. dollar, was $23.9723 and $23.9517 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to $23.6100 and $2.5594 for the same periods in ~~2012. The increase for the nine months ended September 30,~~ 2013~~, compared to the same period in 2012, was partially offset by lower consumption and improved fuel efficiency~~.

Equipment costs. Equipment costs ~~increased~~decreased $03.70 million and $26.86 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to the same periods in ~~2012~~2013, due to anlower ~~increase~~lease inexpense ~~cycle time of other railroads’ freight cars~~ as a result of ~~weather~~the ~~related~~purchase ~~delays.~~of ~~These~~equipment ~~increases~~under ~~were~~existing ~~partially~~operating ~~offset~~leases byand ~~the~~replacement ~~decrease~~equipment inas ~~locomotive~~certain ~~lease~~operating ~~expense~~leases asexpired. As a result of ~~the~~reduced ~~purchase~~lease ofexpense 30from ~~locomotives~~the inconversion ~~June~~of ~~2013,~~equipment ~~which~~from ~~were previously~~ leased byto ~~the~~owned, ~~Company~~total ~~under~~equipment ~~an operating lease agreement. Equipment~~ costs are expected to decrease inby approximately 20% for the ~~fourth~~year ~~quarter~~ended ofDecember ~~2013~~31, 2014, as compared to the same period in ~~2012, by approximately $1~~2013.6 ~~million as a result of this locomotive lease buyout.~~

Depreciation and amortization. Depreciation and amortization expense increased $3.21 million and $8.6.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to the same periods in ~~2012~~2013, due to a larger asset base, including the purchase of 30equipment ~~locomotives~~under inexisting ~~June~~operating ~~2013,~~leases ~~which~~and ~~were~~replacement ~~previously~~equipment ~~leased~~as bycertain operating leases expired. As a result of expected capital expenditures and the ~~Company~~conversion ~~under~~of anequipment ~~operating~~from ~~lease~~leased ~~agreement.~~to ~~Depreciation~~owned, total depreciation and amortization expense is expected to increase inby approximately 10% for the ~~fourth~~year ~~quarter~~ended ofDecember ~~2013~~31, 2014, as compared to the same period in ~~2012, by approximately $0~~2013.9 ~~million as a result of the locomotive purchase.~~

Materials and other. Materials and other expense decreased $02.17 million ~~for the three months ended September 30, 2013, compared to the same period in 2012, due to a decrease in the use of roadway materials~~ and ~~other rent and lease expense, partially offset by higher casualty expense. Materials and other expense increased~~ $91.8 million for the ~~nine~~three and six months ended ~~September~~June 30, ~~2013~~2014, respectively, compared to the same periods in ~~2012~~2013, due to andecreases ~~increase~~ in casualty ~~and concession duty expenses. KCSM paid concession duty~~ expense ~~of 0.5% of gross revenues for the first 15 years of the Concession period~~ and onlower June 24, 2012, KCSM began paying 1.25% of gross revenues, which is effective for the remaining years of the Concession. In addition, materials and other expense increased for the nine months ended September 30, 2013, compared to the same period in 2012, due to the market-based ~~premium~~premiums for employee services paid to KCSM Servicios. asThese adecreases ~~result~~were ofpartially ~~the~~offset ~~organizational~~by ~~restructuring~~an increase in ~~the~~concession ~~second~~duty ~~quarter of 2012~~expense.

Lease termination costs. Lease termination costs were $3.8 million and $20.1 million for the three and six months ended June 30, 2014, respectively, due to the early termination of certain operating leases and the related purchase of the equipment.

Non-Operating Income and Expenses

Equity in net earnings of unconsolidated affiliate. Equity in net earnings from the operations of Ferrocarril y Terminal del Valle de Mexico, S.A. de C.V. (“FTVM”) increased $0.7 million and $0.9 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due to an increase in volumes.

Interest expense. Interest expense decreased $4.2 million and $15.0 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due to lower average interest rates as a result of the Company’s refinancing activities during 2013, partially offset by higher average debt balances driven by financing incurred in the second half of 2013 to fund the acquisition of equipment under existing operating leases and replacement equipment as certain operating leases expired. During the three and six months ended June 30, 2014, the average debt balances were $1,209.3 million and $1,216.0 million, respectively, compared to $1,112.9 million and $1,106.6 million for the same periods in 2013.

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~~Elimination~~Average ofinterest ~~deferred~~rates ~~statutory~~during ~~profit sharing liability, net. As a result of~~ the ~~organizational~~three ~~restructuring~~and insix ~~the~~months ~~second~~ended ~~quarter~~June ~~of 2012~~30, ~~KCSM’s~~2014 ~~obligation~~were to3.3% ~~pay~~and ~~statutory profit sharing terminated as of May 1~~3.4%, ~~2012~~respectively, ~~and~~compared ~~accordingly, KCSM recognized a $43.0 million net reduction~~ to ~~operating expense~~5.2% ~~This~~and ~~reduction includes the elimination of $47~~6.84% ~~million~~for of the ~~deferred~~same ~~statutory~~periods ~~profit~~in ~~sharing liability, net of $4~~2013.~~8 million of transaction costs.~~

~~Non~~Debt retirement costs. Debt retirement costs were $109.9 million for the three months ended June 30, 2013. The Company did not incur debt retirement costs during the second quarter of 2014. For the six months ended June 30, 2014 and 2013, debt retirement costs were $3.9 million and $109.9 million, respectively. The debt retirement costs include tender and call premiums, original issue discounts and the write-~~Operating~~off ~~Income~~of unamortized debt issuance costs associated with the various debt refinancing and ~~Expenses~~redemption activities.

~~Equity~~Foreign inexchange ~~net~~gain ~~earnings of unconsolidated affiliate~~(loss). ~~Equity~~For ~~in earnings from~~ the ~~operations~~three ofand ~~Ferrocarril~~six ymonths ~~Terminal~~ended ~~del~~June 30, ~~Valle de Mexico~~2014, ~~S.A.~~foreign deexchange ~~C.V.~~gain ~~(“FTVM”)~~was ~~increased~~ $05.13 million ~~for~~and ~~the~~$8.5 ~~three months ended September 30~~million, ~~2013~~respectively, compared to ~~the~~a ~~same~~foreign ~~period~~exchange inloss ~~2012,~~of ~~due~~$17.5 tomillion anand ~~increase in volumes~~$4.6 ~~Equity~~million, infor ~~earnings~~the ~~from~~same ~~the~~periods ~~operations~~in of2013. ~~FTVM~~Foreign ~~decreased~~exchange ~~$0.3~~gain ~~million~~(loss) ~~for~~includes the ~~nine~~re-measurement ~~months~~and ~~ended~~settlement ~~September 30,~~of ~~2013,~~monetary ~~compared~~assets toand ~~the~~liabilities ~~same~~denominated ~~period~~ in ~~2012,~~Mexican ~~due~~pesos toand ~~higher~~the ~~track~~gain ~~maintenance~~(loss) ~~costs,~~on ~~partially~~foreign ~~offset~~currency byforward ~~an increase in volumes~~contracts.

~~Interest~~For ~~expense. Interest expense decreased $9.1 million and $17.8 million for~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, ~~respectively, compared to~~ the ~~same~~re-measurement ~~periods~~and insettlement ~~2012, due to lower average interest rates as a result~~ of ~~the~~monetary ~~Company’s~~assets ~~refinancing activities. During the three~~ and ~~nine~~liabilities ~~months~~denominated ~~ended~~in ~~September 30,~~Mexican ~~2013,~~pesos ~~the~~resulted ~~average~~in ~~debt~~a ~~balances~~foreign ~~were~~exchange ~~$1,153.3~~loss ~~million~~of ~~and~~ $~~1,122~~0.12 million, ~~respectively,~~ compared to ~~$1,164.6~~a ~~million~~foreign ~~and~~exchange loss of $~~1,190.~~3.4 million, ~~for the same periods in 2012. Average interest rates during the three~~ and ~~nine~~a ~~months~~foreign ~~ended~~exchange ~~September 30,~~gain ~~2013~~of ~~were 4~~$0.~~3% and 5.7%, respectively, compared to 7.5% and 7.~~4%, ~~respectively~~million, for the same periods in ~~2012. Interest expense is expected to decrease in the fourth quarter of~~ 2013~~, as compared to the same period in 2012, by approximately $9~~.~~2 million as a result of the refinancing activities in the second quarter of 2013.~~

~~Debt~~The ~~retirement~~Company ~~costs.~~enters ~~Debt~~into ~~retirement~~foreign ~~costs~~currency ~~were~~forward ~~$2.4~~contracts ~~million~~to ~~and~~hedge ~~$112.3~~its ~~million~~net ~~for~~exposure ~~the~~to ~~three~~fluctuations ~~and~~in ~~nine~~income ~~months~~tax ~~ended~~cash ~~September 30,~~obligation ~~2013.~~due ~~During~~to ~~the~~changes ~~second~~in ~~and~~the ~~third~~value ~~quarter~~ of ~~2013,~~the ~~KCSM~~Mexican ~~recognized~~peso ~~debt~~against ~~retirement~~the ~~costs of $109~~U.9S ~~million and $2~~dollar.4 ~~million,~~For ~~respectively, related to~~ the ~~tender~~three and ~~call~~six ~~premiums~~months asended ~~well~~June 30, as2014, ~~the~~foreign ~~write-off~~exchange ofgain ~~unamortized~~on ~~debt~~foreign ~~issuance~~currency ~~costs~~forward ~~and~~contracts ~~the~~was ~~original~~$5.5 ~~issue~~million ~~discounts~~and ~~associated~~$8.7 ~~with~~million, ~~the~~respectively, ~~various~~compared ~~senior~~to ~~notes~~a ~~refinanced~~loss ~~and~~of ~~purchased~~$14.1 ~~The~~million ~~Company~~and ~~did~~$5.0 ~~not~~million ~~incur~~for ~~debt retirement costs during~~ the ~~first~~same ~~nine~~periods ~~months~~in ~~of 2012~~2013.

~~Foreign~~Other ~~exchange~~expense, ~~gain (loss)~~net. ~~Foreign~~Other ~~exchange~~expense, ~~gains~~net, ~~(losses)~~increased ~~are~~$2.1 ~~generated~~million ~~by the re-measurement~~ and ~~settlement of monetary assets and liabilities denominated in Mexican pesos~~$2.0 ~~For~~million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, ~~foreign exchange loss was $0.2 million and a foreign exchange gain of $0.2 million,~~ respectively, compared to athe ~~foreign~~same ~~exchange~~periods ~~gain~~in of2013, ~~$4.8~~due ~~million~~to ~~and~~higher ~~$4.9~~miscellaneous ~~million for the same periods in 2012~~fees.

~~During~~Income ~~the~~tax ~~first~~expense ~~half~~(benefit). ofIncome ~~2013,~~tax ~~the~~expense ~~Company~~was ~~entered~~$31.5 ~~into~~million ~~foreign~~for ~~currency~~the ~~forward~~three ~~contracts~~months ~~with~~ended June 30, 2014, compared to an ~~aggregate~~income ~~notional~~tax ~~amount~~benefit of $~~325~~13.01 million, ~~maturing~~for onthe ~~December~~same ~~31,~~period in 2013,. toFor ~~hedge~~the ~~its~~six ~~exposure~~months toended ~~fluctuations~~June 30, in2014, income tax expense ~~and~~was ~~the~~$54.6 ~~amount~~million, ofcompared ~~income~~to ~~taxes paid~~$14.3 ~~For~~million for the ~~three~~same ~~and~~period ~~nine~~in ~~months ended September 30,~~ 2013,. ~~foreign~~These ~~exchange~~increases ~~loss~~in onincome ~~the~~tax ~~foreign~~expense ~~currency~~were ~~forward~~due ~~contracts~~to ~~was~~higher $1pre-tax income.3 ~~million~~The ~~and~~components ~~$6.3~~of ~~million,~~the ~~respectively,~~effective ~~due~~tax torates for the ~~weakening~~three ofand ~~the~~six ~~forward~~months ~~exchange~~ended ~~rate~~June 30, of2014, compared to the ~~Mexican~~same ~~peso~~periods ~~against~~in ~~the~~2013 ~~U.S.~~are ~~dollar.~~as follows:

Other expense, net. Other expense, net, increased $0.1 million, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, due to higher miscellaneous expenses.



	Three Months Ended				Six months ended
	June 30,				June 30,
	2014		2013		2014		2013
Statutory rate in effect	30.0	%	30.0	%	30.0	%	30.0	%
Tax effect of:
Foreign exchange (i)	2.1	%	6.1	%	1.2	%	1.0	%
Inflation and other, net	(0.9	)%	(0.1	)%	(0.6	)	(1.1	)%
Reversal of previously recognized benefit due to court ruling	—		(9.0	)%	—		13.3	%
Change in valuation allowance	(1.7	)%	—		(1.0	)%	—
Effective tax rate	29.5	%	27.0	%	29.6	%	43.2	%

(i) Income ~~tax~~taxes ~~expense.~~paid ~~Income~~in ~~tax~~Mexico ~~expense~~are ~~decreased~~paid ~~$13.5~~in ~~million~~Mexican pesos, and ~~$63.2~~as ~~million~~a ~~for~~result, the ~~three~~effective ~~and~~income ~~nine~~tax ~~months~~rate ~~ended~~reflects ~~September~~fluctuations in the value of the Mexican peso against the U.S. dollar measured by the forward exchange rate. ~~30,~~Most ~~2013~~significantly, ~~respectively,~~any ~~compared~~gain toor loss from the ~~same~~revaluation ~~periods~~of net U.S. dollar-denominated monetary liabilities (primarily debt) into Mexican pesos is included in ~~2012,~~Mexican ~~due~~taxable toincome ~~lower~~under ~~pre-~~Mexican tax ~~income~~law. inAs a result, a strengthening of the ~~nine~~Mexican ~~months~~peso ~~ended~~against ~~September 30,~~the ~~2013,~~U.S. ~~and~~dollar afor ~~lower~~the ~~effective~~reporting ~~tax~~period ~~rate~~will ingenerally increase the ~~three~~Mexican cash tax obligation and ~~nine~~the ~~months~~effective ~~ended~~income ~~September 30~~tax rate, ~~2013.~~and ~~The~~a ~~components~~weakening of the ~~effective~~Mexican ~~tax~~peso ~~rates~~against the U.S. dollar for the ~~three~~reporting period will generally decrease the Mexican cash tax obligation and ~~nine~~the ~~months~~effective ~~ended~~tax ~~September~~rate. ~~30,~~To ~~2013,~~hedge ~~compared~~its exposure to this risk, the ~~same~~Company ~~periods~~enters ininto ~~2012~~foreign currency forward contracts, which are measured at fair value each period and any change in fair value is recognized in foreign exchange gain (loss) within the consolidated statements of comprehensive income (loss) as ~~follows:~~described above. Refer to Note 5 Derivative Instruments for more information.

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
Income tax expense using the statutory rate in effect	30.0	%	30.0	%	30.0	%	30.0	%
Tax effect of:
Foreign exchange (i)	—		18.4	%	0.3	%	9.4	%
Reversal of previously recognized benefit due to court ruling	—		—		3.7	%	—
Inflation and other, net	0.4	%	1.0	%	—		1.6	%
Effective tax rate	30.4	%	49.4	%	34.0	%	41.0	%

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(i) Income taxes paid in Mexico are paid in Mexican pesos, and as a result, the effective income tax rate reflects fluctuations in the value of the Mexican peso against the U.S. dollar measured by the forward exchange rate. Most significantly, any gain or loss from the revaluation of net U.S. dollar-denominated monetary liabilities (primarily debt) into Mexican pesos is included in Mexican taxable income under Mexican tax law. As a result, a strengthening of the Mexican peso against the U.S. dollar for the reporting period will generally increase the Mexican cash tax obligation and the effective income tax rate, and a weakening of the Mexican peso against the U.S. dollar for the reporting period will generally decrease the Mexican cash tax obligation and the effective tax rate. To hedge its exposure to this risk, during the first half of 2013, the Company entered into foreign currency forward contracts with an aggregate notional amount of $325.0 million. The foreign currency forward contracts are measured at fair value each period and any change in fair value is recognized in foreign exchange gain (loss) within the consolidated statements of comprehensive income as described above.

Liquidity and Capital Resources

Overview

InThe ~~recent~~Company ~~years,~~focuses ~~KCSM has improved~~ its ~~financial~~cash ~~strength~~ and ~~flexibility~~capital byresources ~~extending~~on ~~debt~~investing ~~maturities, increasing liquidity and reducing interest expense. As a result, the Company received investment grade credit ratings from rating agencies as described~~ in the ~~Credit~~business ~~Ratings~~and ~~section~~optimizing ~~below. This improved credit profile allowed the Company to refinance a significant portion of~~ its ~~existing~~capital ~~debt at lower interest rates and extend debt maturities during the second quarter of 2013~~structure. ~~The Company estimates annualized pre-tax interest savings as a result of this refinancing to be approximately $37.0 million.~~

~~Though~~The ~~KCSM’s~~Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, ~~from~~access ~~operations~~to ~~are~~debt capital markets, and other available financing resources will be sufficient to fund ~~operations~~anticipated operating expenses, capital expenditures, ~~and~~ debt service, costs and other commitments in the ~~Company~~foreseeable ~~may,~~future. ~~from~~The ~~time~~Company’s tocurrent ~~time,~~financing ~~incur~~instruments ~~debt~~contain torestrictive ~~refinance~~covenants ~~existing~~which ~~indebtedness,~~limit ~~purchase~~or ~~equipment~~preclude ~~under~~certain ~~operating~~actions; ~~leases~~however, orthe tocovenants ~~fund~~are ~~equipment~~structured ~~additions~~such orthat ~~new~~the ~~investments.~~Company Onhas ~~September 30,~~sufficient ~~2013,~~flexibility ~~total~~to ~~available~~conduct ~~liquidity~~its ~~(the~~operations. ~~unrestricted~~The ~~cash~~Company ~~balance~~was ~~plus~~in ~~revolving~~compliance ~~credit~~with ~~facility~~all ~~availability)~~of ~~was~~its ~~$287.4~~debt ~~million.~~covenants as of June 30, 2014.

~~12½%~~Though ~~Senior~~KCSM’s ~~Notes.~~cash Onflows ~~April 1,~~from ~~2013,~~operations ~~the~~are ~~Company~~expected ~~redeemed~~to ~~all~~be ofsufficient ~~the~~to ~~remaining~~fund ~~$98.1~~operations, ~~million~~capital ~~aggregate~~expenditures ~~principal~~and ~~amount~~debt ofservice, the ~~12½%~~Company ~~senior~~may, ~~unsecured~~from ~~notes~~time ~~due~~to ~~April 1~~time, ~~2016~~incur ~~(the~~debt ~~“12½% Senior Notes”) at a redemption price equal~~ to ~~106.250%~~refinance ofexisting ~~the~~indebtedness, ~~principal~~purchase ~~amount.~~equipment ~~The~~under ~~Company~~operating ~~redeemed~~leases, ~~the~~or ~~12½%~~to ~~Senior~~fund ~~Notes~~equipment ~~using~~additions ~~$65.0~~or ~~million~~new ~~of borrowings under the revolving credit facility and cash on hand~~investments.

~~8.0%~~During ~~Senior Notes, 65/8% Senior Notes and 61/8% Senior Notes. On April 10, 2013, KCSM commenced a cash tender offer for~~ the ~~8.0%~~first ~~senior~~half ~~unsecured~~of ~~notes due February 1~~2014, ~~2018 (~~the ~~“8.0%~~Company ~~Senior~~purchased ~~Notes”), the 65/~~$96.8% ~~senior~~million ~~unsecured~~of ~~notes~~equipment ~~due~~under ~~December 15,~~existing ~~2020~~operating ~~(the~~leases ~~“65/8% Senior Notes”)~~ and ~~the~~replacement ~~61/8%~~equipment ~~senior~~as ~~unsecured~~certain ~~notes~~operating ~~due~~leases ~~June 15, 2021 (the “61/8% Senior Notes”)~~expired. InThese ~~addition,~~purchases ~~KCSM~~have ~~concurrently~~been ~~commenced~~funded ~~consent~~with ~~solicitations~~a toportion ~~amend~~of the ~~indentures~~proceeds ~~governing~~from the ~~8.0%~~floating ~~Senior~~rate ~~Notes~~senior ~~and~~notes ~~65/8%~~issued ~~Senior~~during ~~Notes~~the tofourth ~~eliminate~~quarter ~~substantially all~~ of ~~the~~2013 ~~restrictive covenants~~ and ~~certain~~available ~~events of default contained therein, which became operative on May 3, 2013~~cash.

~~Through~~ ~~May~~On 8June 30, ~~2013~~2014, ~~KCSM~~total ~~purchased~~available ~~$237.2~~liquidity ~~million principal amount of the tendered 8.0% Senior Notes, $181.0 million principal amount of the tendered 65/8% Senior Notes and $149.7 million principal amount of the tendered 61/8% Senior Notes~~ (~~collectively,~~ the ~~“Senior~~unrestricted ~~Notes~~cash ~~Tendered”),~~balance inplus ~~accordance~~revolving ~~with~~credit ~~the~~facility ~~terms~~ and ~~conditions~~commercial ofpaper ~~the~~program ~~tender offer using a portion of the proceeds received from the issuance of $275.0 million principal amount of 2.35% senior unsecured notes due May 15, 2020 (the “2.35% Senior Notes”~~availability) ~~and~~was $~~450~~378.0 million ~~principal amount of 3~~.0% ~~senior unsecured notes due May 15, 2023 (the “3.0% Senior Notes”).~~

~~Subsequent~~In toJanuary 2014, the ~~expiration~~Company ofamended its credit agreement to eliminate certain representations as a condition to borrowing under the ~~cash~~revolving ~~tender~~facility. ~~offer~~In addition, ~~KCSM~~the ~~redeemed~~Company ~~the~~established ~~remaining~~a $4200.0 million ~~outstanding~~commercial ~~principal~~paper ~~amount~~program. ofThe Company’s revolving facility serves as a backstop for the ~~65/8%~~commercial ~~Senior~~paper ~~Notes~~program and ~~purchased~~this ancommercial ~~additional~~paper ~~$20~~program generally serves as the Company’s primary means of short-term funding.9 ~~million~~As ~~principal~~of June 30, 2014, KCSM had no outstanding amount ofissued under the ~~61/8%~~commercial ~~Senior~~paper ~~Notes~~program.

28.350% Senior Notes. On ~~May~~February 3, ~~2013~~2014, ~~KCSM~~the ~~issued~~Company ~~$275.0~~redeemed ~~million~~all ~~principal amount~~ of ~~2.35%~~the ~~Senior~~remaining ~~Notes, which bear interest semiannually at a fixed annual rate of 2.35%. The 2.35% Senior Notes were issued at a discount to par value, resulting in a~~ $062.38 million ~~discount~~aggregate ~~and~~principal aamount ~~yield to maturity~~ of ~~2.368%. KCSM used~~ the ~~net proceeds from the issuance of the 2~~8.~~35% Senior Notes and the 3.~~0% ~~Senior~~senior ~~Notes~~unsecured tonotes ~~purchase~~due ~~the Senior Notes Tendered~~February 1, ~~pay all fees and expenses incurred in connection with the 2.35% Senior Notes and 3.0% Senior Notes offerings and the tender offers~~2018, ~~to finance the purchase of certain leased equipment and for other general corporate purposes. The 2.35% Senior Notes are redeemable~~ at ~~KCSM’s~~a ~~option,~~redemption inprice ~~whole~~(expressed oras ina ~~part,~~percentage ~~prior to April 15, 2020, by paying the greater~~ of ~~either (i) 100% of~~ the principal amount) of ~~the 2~~104.350%, ~~Senior~~using ~~Notes~~a toportion ~~be redeemed or (ii) the sum~~ of the ~~present~~proceeds ~~values~~from of the ~~remaining~~floating ~~scheduled~~rate ~~payments~~senior ofunsecured ~~principal~~notes ~~and~~due ~~interest~~October ~~(exclusive~~28, of2016, ~~interest~~issued ~~accrued~~in to the ~~date~~fourth ofquarter ~~redemption) discounted to the date~~ of ~~redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the then-current U~~2013.~~S. Treasury rate plus 20 basis points, plus accrued interest and any additional amounts to but excluding the redemption date. On or after April 15, 2020, the 2.35% Senior Notes~~

For additional discussion of the agreements representing the indebtedness of KCSM, see “Item 8 Financial Statements and Supplemental Data – Note 6. Long-Term Debt” in KCSM’s Annual Report on Form 10-K for the year ended December 31, 2013.

KCSM’s operating results and financing alternatives can be unexpectedly impacted by various factors, some of which are outside of its control. For example, if KCSM were to experience a reduction in revenues or a substantial increase in operating costs or other liabilities, its earnings could be significantly reduced, increasing the risk of non-compliance with debt covenants. Additionally, KCSM is subject to external factors impacting debt and capital markets and its ability to obtain financing under reasonable terms is subject to market conditions. Volatility in capital markets and the tightening of market liquidity could impact KCSM’s access to capital. Further, KCSM’s cost of debt can be impacted by independent rating agencies which assign debt ratings based on certain factors including credit measurements such as interest coverage and leverage ratios, liquidity and competitive position.

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may be redeemed at KCSM’s option, in whole or in part, at any time at a redemption price equal to 100% of the principal amount, plus any accrued and unpaid interest. In addition, the notes are redeemable, in whole but not in part, at KCSM’s option at their principal amount, plus any accrued unpaid interest in the event of certain changes in the Mexican withholding tax rate.

3.0% Senior Notes. On May 3, 2013, KCSM issued $450.0 million principal amount of the 3.0% Senior Notes, which bear interest semiannually at a fixed annual rate of 3.0%. The 3.0% Senior Notes were issued at a discount to par value, resulting in a $1.9 million discount and a yield to maturity of 3.048%. KCSM used the net proceeds from the issuance of the 3.0% Senior Notes and the 2.35% Senior Notes to purchase the Senior Notes Tendered, pay all fees and expenses incurred in connection with the 2.35% Senior Notes and 3.0% Senior Notes offerings and the tender offers, to finance the purchase of certain leased equipment and for other general corporate purposes. The 3.0% Senior Notes are redeemable at KCSM’s option, in whole or in part, prior to February 15, 2023, by paying the greater of either (i) 100% of the principal amount of the 3.0% Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the then-current U.S. Treasury rate plus 20 basis points, plus accrued interest and any additional amounts to but excluding the redemption date. On or after February 15, 2023, the 3.0% Senior Notes may be redeemed at KCSM’s option, in whole or in part, at any time at a redemption price equal to 100% of the principal amount, plus any accrued and unpaid interest. In addition, the notes are redeemable, in whole but not in part, at KCSM’s option at their principal amount, plus any accrued unpaid interest in the event of certain changes in the Mexican withholding tax rate.

The 2.35% Senior Notes and 3.0% Senior Notes are denominated in U.S. dollars; are unsecured, unsubordinated obligations; rank pari passu in right of payment with KCSM’s existing and future unsecured, unsubordinated obligations; and are senior in right of payment to KCSM’s future subordinated indebtedness. In addition, the senior notes include certain covenants which are customary for these types of debt instruments issued by borrowers with similar credit ratings.

Revolving Credit Facility. As of September 30, 2013, and December 31, 2012, KCSM had no amount outstanding under the revolving credit facility.

Related Company Revolving Credit Agreement. The Kansas City Southern Railway Company (“KCSR”), as a lender, and KCSM, as a borrower, entered into a Revolving Credit Agreement effective as of June 7, 2013 (the “Revolving Agreement”), pursuant to the terms of which KCSM may borrow up to $100.0 million from KCSR on a revolving basis at any time during the term of the Revolving Agreement. The Revolving Agreement is unsecured and terminates on December 31, 2018. As of September 30, 2013, KCSM had borrowed $31.5 million under the terms of the Revolving Agreement at a weighted average interest rate of 1.47%.

Debt Retirement Costs. The Company recognized debt retirement costs of $112.3 million during the nine months ended September 30, 2013, related to the tender and call premiums as well as the write-off of unamortized debt issuance costs and the original issue discounts as a result of the refinancing and purchasing activities described above.

The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, access to debt capital markets, and other available financing resources will be sufficient to fund anticipated operating expenses, capital expenditures, debt service costs and other commitments in the foreseeable future. The Company’s current financing instruments contain restrictive covenants which limit or preclude certain actions; however, the covenants are structured such that the Company has sufficient flexibility to conduct its operations. The Company was in compliance with all of its debt covenants as of September 30, 2013.

For additional discussion of the agreements representing the indebtedness of KCSM, see “Item 8 Financial Statements and Supplemental Data – Note 7. Long-Term Debt” in KCSM’s Annual Report on Form 10-K for the year ended December 31, 2012.

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Credit Ratings. Three credit rating agencies provide their views of the Company’s outlook and ratings. Standard & Poor’s Rating Services (“S&P”) rates the senior unsecured debt and corporate credit of KCSM as investment grade. Moody’s Investor Service (“Moody’s”) rates KCSM’s senior unsecured debt as investment grade. Fitch Ratings (“Fitch”) has assigned an investment grade Issuer Default Rating to KCSM and rates the senior unsecured debt as investment grade. Ratings and outlooks change from time to time and can be found on the websites of S&P, Moody’s and Fitch.

Cash Flow Information

Summary cash flow data follows (in millions):

	Nine Months Ended
	Six Months Ended
	September 30,
	June 30,
	2013			2012
	2014			2013
Cash flows provided by (used for):
Operating activities	$	~~312~~182.76		$	~~238~~212.42
Investing activities	(~~188~~169.32		)	(~~112~~143.19		)
Financing activities	(~~114~~60.72		)	(7161.27		)
Net increase in cash and cash equivalents	9.7			55.1
Net increase (decrease) in cash and cash equivalents	(46.8		)	6.6
Cash and cash equivalents beginning of year	9224.28			159.72
Cash and cash equivalents end of period	$	18178.90		$	7015.8

Cash flows from operating activities ~~increased~~decreased $7429.36 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2013~~2014, compared to the same period in ~~2012~~2013, ~~primarily~~ due to ana ~~increase~~decrease in changes in working capital items, resulting mainly from the timing of certain payments and receipts. Net cash used for investing activities increased $7625.23 million, due to ~~an increase in capital expenditures and~~ the purchase or replacement of equipment under anexisting operating ~~lease~~leases. Additional information regarding capital expenditures is provided below. ~~Net~~During ~~cash~~2014, ~~used~~net ~~for~~ financing ~~activities~~cash ~~increased~~outflows were $4360.52 million due to ~~debt~~the ~~refinancing~~net ~~activities~~repayment ~~and~~of ~~associated~~long-term debt. ~~cost~~During ~~payments~~2013, ~~incurred~~net ~~during~~financing ~~2013,~~cash outflows were $61.7 million due to the payment of $100.5 million in debt costs and net payment on related company debt activity, partially offset with the net proceeds from long-term borrowings of $45.7 million.

Capital Expenditures

KCSM’s ~~cash~~has ~~flows~~funded, ~~from~~and ~~operations~~expects ~~are~~to ~~sufficient~~continue to fund capital expenditures; ~~however,~~with ~~the~~operating ~~Company may, from time to time, use external sources of~~ cash ~~(principally bank debt~~flows, ~~public~~ debt ~~and~~financing ~~private debt) to fund capital expenditures~~ and ~~the purchase of~~ equipment ~~under operating~~ leases.

The following table summarizes capital expenditures by type (in millions):

	Nine Months Ended
	Six Months Ended
	September 30,
	June 30,
	2013		2012
	2014		2013
Roadway capital program	$	8352.91	$	8253.60
Equipment	18.2		12.0
Locomotives and freight cars	12.3		16.1
Information technology	3.4.8		2.52
Capacity	71.29		67.60
Other	90.76		50.39
Total capital expenditures (accrual basis)	~~122~~71.47		~~109~~79.02
Change in capital accruals	14.38		7(0.48		)
Total cash capital expenditures	$	~~123~~76.75	$	~~116~~78.4
Purchase or replacement of equipment under operating leases (accrual basis)	$	96.8	$	66.5
Change in capital accruals	1.4		—
Total cash purchase or replacement of equipment under operating leases	$	98.2	$	66.5

~~Purchase~~Generally, the Company’s capital program consists of capital replacement and equipment. For 2014, internally generated cash flows are expected to fund cash capital expenditures, which are currently estimated to be between $165.0 million and $185.0 million. In addition, the purchase or replacement of equipment under existing operating ~~lease~~leases $for 66the year 2014 is substantially complete.5 $However, —the Company is continuously reviewing its equipment under existing operating leases. Any additional purchase or replacement of equipment under operating leases through the end of 2014 is expected to be funded with internally generated cash flows or short-term borrowings.

For 2013, internally generated cash flows, excess proceeds from debt refinancing activities and other borrowings are expected to fund cash capital expenditures, which are currently estimated to be between $170.0 million and $180.0 million.21

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The Company is continuously reviewing its equipment under operating leases. Any additional purchases of equipment under operating leases through the end of 2013 are expected to be funded with external borrowings.

Other Matters

KCSM Servicios provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. KCSM Servicios union employees are covered by one labor agreement, which was signed on June 23, 1997, between KCSM and the Sindicato de Trabajadores Ferrocarrileros de la República Mexicana (“Mexican Railroad Union”), for a term of fifty years, for the purpose of regulating the relationship between the parties. Approximately 80% of KCSM Servicios employees are covered by this labor agreement. The compensation terms under this labor agreement are subject to renegotiation on an annual basis and all other benefits are subject to negotiation every two years. In July ~~of 2013~~2014, the negotiation of compensation terms ~~and all other benefits~~ was initiated with the Mexican Railroad Union. The anticipated resolution of this negotiation is not expected to have a material impact to the consolidated financial statements. The union labor negotiations with the Mexican Railroad Union have not historically resulted in any strike, boycott or other disruption in KCSM’s business operations.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Omitted pursuant to General Instruction H(2)(c) of Form 10-Q.


Item 4.	Controls and Procedures

(a) Disclosure Controls and Procedures.

As of the end of the period for which this Quarterly Report on Form 10-Q is filed, the Company’s President, ~~and~~ Executive Representative and General Manager and Chief Financial Officer have each reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the President, ~~and~~ Executive Representative and General Manager and Chief Financial Officer have each concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the President, ~~and~~ Executive Representative and General Manager and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting.

There have not been any changes in the Company’s internal control over financial reporting that occurred during the ~~third~~second quarter of ~~2013~~2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION


Item 1.	Legal Proceedings

For information related to the Company’s legal proceedings, see Note 7 “Commitments and Contingencies,” under Part I, Item 1, of this quarterly report on Form 10-Q.


Item 1A.	Risk Factors

There were no material changes during the quarter to the Risk Factors disclosed in Item 1A, “Risk Factors,” in KCSM’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.


Item 3.	Defaults Upon Senior Securities

Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.


Item 4.	Mine Safety Disclosures

Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.


Item 5.	Other Information

None.

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Item 6.	Exhibits

ExhibitNo.		Description of Exhibits Filed with this Report
31.1		Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1.
31.2		Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2.
32.1		Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1.
32.2		Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2.
101		The following unaudited financial information from Kansas City Southern de México, S.A. de C.V.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2013~~2014, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013, (ii) Consolidated Balance Sheets as of ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013, (iii) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013, and (iv) the Notes to Consolidated Financial Statements.

ExhibitNo.		Description of Exhibits Incorporated by Reference
4.1		Form of Rule 144A Restricted Global Note representing the 2.35% Senior Notes due 2020 (previously filed as Exhibit 4.4.1 to the Company’s Registration Statement on Form S-4 filed on August 26, 2013, File No. 333-190820) is incorporated herein by reference as Exhibit 4.1.
4.2		Form of Regulation S Restricted Global Note representing the 2.35% Senior Notes due 2020 (previously filed as Exhibit 4.4.2 to the Company’s Registration Statement on Form S-4 filed on August 26, 2013, File No. 333-190820) is incorporated herein by reference as Exhibit 4.2.
4.3		Special Global Note representing the 2.35% Senior Notes due 2020 (previously filed as Exhibit 4.4.3 to the Company’s Registration Statement on Form S-4 filed on August 26, 2013, File No. 333-190820) is incorporated herein by reference as Exhibit 4.3.
4.4		Form of Rule 144A Restricted Global Note representing the 3.0% Senior Notes due 2023 (previously filed as Exhibit 4.5.1 to the Company’s Registration Statement on Form S-4 filed on August 26, 2013, File No. 333-190820) is incorporated herein by reference as Exhibit 4.4.
4.5		Form of Regulation S Restricted Global Note representing the 3.0% Senior Notes due 2023 (previously filed as Exhibit 4.5.2 to the Company’s Registration Statement on Form S-4 filed on August 26, 2013, File No. 333-190820) is incorporated herein by reference as Exhibit 4.5.
4.6		Special Global Note representing the 3.0% Senior Notes due 2023 (previously filed as Exhibit 4.5.3 to the Company’s Registration Statement on Form S-4 filed on August 26, 2013, File No. 333-190820) is incorporated herein by reference as Exhibit 4.6.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on ~~October~~July 18, ~~2013~~2014.



	Kansas City Southern de México, S.A. de C.V.

	/s/ MICHAEL W. UPCHURCH
	Michael W. Upchurch
	Chief Financial Officer
	(Principal Financial Officer)

	/s/ MARY K. STADLER
	Mary K. Stadler
	Chief Accounting Officer
	(Principal Accounting Officer)

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Filing Compare · Kansas City Southern de Mexico, S.A. de C.V.