UPDATE 2-NAFTA future clouds Kansas City Southern earnings beat

(Recasts to focus on NAFTA, adds operating ratio)

Jan 19 (Reuters) - Kansas City Southern, a U.S. railroad with extensive operations in Mexico, sought to ease investor fears on Friday over the future of the North American Free Trade Agreement, touting forecasts of solid freight volumes and a stronger economy in 2018.

Uncertainty over the future of NAFTA looms over the Kansas City, Missouri-based company, which dominates cross-border rail trade between the United States and Mexico and draws about 30 percent of its revenue from U.S.-Mexico shipments.

"Next week could be a headline week for Kansas City Southern depending on the sentiment that comes out of negotiations," Ottensmeyer told analysts on a conference call after the company posted higher quarterly profit.

Despite beating on revenue, shares of the railroad were off 3 percent in early-morning trading.

President Donald Trump has threatened to withdraw from the accord and the next round of talks is due to begin in Montreal later this month.

Kansas City Southern said it expected a strengthening economy and cost control measures backed by strong volumes in grain, petroleum, and Mexican car production, to fuel momentum but said coal volumes would suffer from a coal-fired plant closure in Texas.

"90 percent of our business and commodity portfolio looks like it's going to be positive for 2018, with the only exception being energy where we've had a major plant closing that is just going to be hard for us to overcome," Ottensmeyer told analysts. Should NAFTA collapse, World Trade Organization rules and tariffs would apply to commodities and products covered by NAFTA, and those are not horrible, Ottensmeyer added. The railroad posted fourth-quarter net income of $552 million, or $5.33 per diluted share, up from $130 million, or $1.21 per diluted share a year, which it attributed to revenue growth across its energy, automotive and chemical and petroleum units, and included benefits from changes to the U.S. tax code.

After adjustments for one-time items, the railroad earned an all-time record $1.38 per share, versus the $1.37 analysts expected, the company said.

The railroad said it achieved record fourth quarter revenue of $660 million, with overall carload volumes up 5 percent compared with the prior year. For quarterly revenue, Wall Street analysts expected $656.28 million.

The railroad's operating ratio, a closely watched measure of operating costs as a percentage of revenue, was 64 percent, compared to 64.8 percent in fourth quarter 2016. A lower operating ratio shows improvement in profitability.

(Reporting by Eric M. Johnson in Seattle; Editing by Andrew Hay)