Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

In 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 more frequently 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 March 31, 2013, the Company did not expect any losses as a result of default of its counterparties.

Interest Rate Swaps. In the first quarter of 2012, The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary of KCS, entered into four amortizing interest rate swaps with an aggregate notional amount of $320.0 million, which have been designated as cash flow hedges. The interest rate swaps effectively convert interest payments on a portion of outstanding term loans of KCSR from variable rates to fixed rates. The swaps are highly effective and as a result there will be minimal earnings impact associated with ineffectiveness of these hedges. As of March 31, 2013, the hedging instruments had an aggregate notional amount of $300.5 million at a fixed rate of 0.4942%. Settlements are indexed to the one-month London Interbank Offered Rate (“LIBOR”) and will occur monthly through March 31, 2014.

Foreign Currency Forward Contracts. The Company's Mexican subsidiaries have 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. dollar against the Mexican peso. This revaluation creates fluctuations in the Company's Mexican income tax expense and the amount of income taxes paid in Mexico. In the first quarter of 2013, the Company entered into foreign currency forward contracts with an aggregate notional amount of $250.0 million to hedge its exposure to this foreign currency risk. The contracts mature on December 31, 2013 and obligate the Company to purchase a total of Ps. 3,275.3 million at a weighted average exchange rate of Ps. 13.10 to each U.S. dollar. The Company has not designated these forward contracts as hedging instruments for accounting purposes. The Company marks the contracts to market and recognizes any gain or loss on the foreign currency forward contracts in foreign exchange gain (loss) within the consolidated statements of income.

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

	Asset Derivatives
	Balance Sheet Location	March 31, 2013		December 31, 2012
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	9.1	$	—
Total derivatives not designated as hedging instruments		9.1		—
Total asset derivatives		$	9.1	$	—

	Liability Derivatives
	Balance Sheet Location	March 31, 2013		December 31, 2012
Derivatives designated as hedging instruments:
Interest rate swaps	Accounts payable and accrued liabilities	$	0.7	$	—
Interest rate swaps	Other noncurrent liabilities & deferred credits	—		0.9
Total derivatives designated as hedging instruments		$	0.7	$	0.9
Total liability derivatives		$	0.7	$	0.9

The following table presents the amounts affecting the consolidated statements of income for the three months ended March 31(in millions):

Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain/(Loss) Reclassified from Accumulated  OCI into Income  (Effective Portion)	Amount of Gain/(Loss) Reclassified  from Accumulated  OCI into Income (Effective Portion)
	2013		2012				2013			2012
Interest rate swaps	$	—	$	(0.5	)	Interest expense	$	(0.2	)	$	—
Total	$	—	$	(0.5	)		$	(0.2	)	$	—
Derivatives not designated as hedging instruments						Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
							2013			2012
Foreign currency forward contracts						Foreign exchange gain	$	9.1		$	—
Total							$	9.1		$	—

For the three months ended March 31, 2013 and 2012, there was no ineffectiveness recognized related to cash flow hedges. As of March 31, 2013, the Company expects that approximately $0.7 million of net losses will be reclassified from accumulated other comprehensive loss into interest expense over the next 12 months.