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CP ranks as the least efficient of North America’s Big Six railways, with operating costs equalling 82.4 per cent of its revenue in the first nine months of 2011. (Jack Kuiphoff/Canadian Pacific Railway/Jack Kuiphoff/Canadian Pacific Railway)
CP ranks as the least efficient of North America’s Big Six railways, with operating costs equalling 82.4 per cent of its revenue in the first nine months of 2011. (Jack Kuiphoff/Canadian Pacific Railway/Jack Kuiphoff/Canadian Pacific Railway)

CP sets up for proxy battle with brush off of Ackman Add to ...

CP has a strong management team and an independent Board made up of directors with extensive experience in railroads, energy, natural resources, food and agriculture, law, government, banking and finance. CP recently announced the addition of Tony Ingram and Ed Harris, both seasoned railroad executives, to the company’s Board. In Pershing Square’s letter to CP dated January 3, 2012, Pershing Square agreed “wholeheartedly” with the decision to add Mr. Ingram and Mr. Harris to the Board, stating that “they both bring valuable railroad industry expertise.”

Mr. Ingram and Mr. Harris, who between them have over 80 years of railroad experience, including senior operating experience at four of the seven Class I railroads in North America, will join the Safety, Operations and Environment Committee, chaired by Tim Faithfull. The Committee is tasked by the Board with monitoring progress against management’s Multi-Year Plan.

Mr. Ingram has told the Board, “I believe Fred Green and his management team have developed a well thought out plan to improve CP’s OR and I look forward to the opportunity to work closely with management to ensure that the plan is executed with appropriate accountability.”

The Board takes all suggestions from shareholders seriously and has carefully considered Pershing Square’s demand that CP replace the company’s Chief Executive Officer with Hunter Harrison, age 67, who retired from his position as President and Chief Executive Officer of Canadian National Railway on December 31, 2009. Having considered Pershing Square’s demand, the Board came to the unanimous conclusion that replacing the company’s Chief Executive Officer, and thereby jeopardizing the successful execution of the Multi-Year Plan, is not in the best interests of CP or its shareholders.

As part of its evaluation of Pershing Square’s demand, the Board took into account the fact that CP’s Multi-Year Plan is well underway and producing results, together with Pershing Square’s statement that Mr. Harrison has no detailed plan to improve CP’s operating performance. In addition, Pershing Square stated that Mr. Harrison would only begin to develop a detailed plan over a number of months. Despite the absence of a credible, detailed plan, Pershing Square has stated to CP that an improvement in OR from 78 in 2010 to 65 in 2015 is achievable. This pace of improvement, from this starting point, has never been achieved by any railway management team.

The Board also noted that Pershing Square’s presentation to CP on November 2, 2011 was predicated on a number of simplistic assumptions regarding the company. While the presentation only provided hypothetical mathematical examples of the effects of speculated improvements on operating metrics, Pershing Square did not provide a credible, detailed plan to improve CP’s operations or make any concrete suggestions – either in the presentation or in subsequent discussions. Pershing Square fails to take into account the structural differences that exist between CP and its peers, as well as the rising annual pension costs associated with its legacy pension plans. CP's Multi-Year Plan and its low 70s OR target take these factors into account.

As Ed Harris, who has served as Executive VP of Operations for both CP and CN, has told the Board, “It is a mistake to underestimate the differences between the infrastructure of CP and CN. On the one hand, in CN you have a railroad that was built by Canadian taxpayers with twice the proportion of sidings and double track and that therefore benefits from significantly enhanced operating flexibility. On the other hand, CP has to contend with greater geographic challenges. I am pleased to see significant improvement in CP’s operating metrics as a result of planned initiatives.”

We are focused on continuously improving service reliability, asset velocity, cost savings, productivity and achieving the financial flexibility necessary to increase shareholder value. Coming out of the 2008-2009 recession, CP accelerated its multi-year capital investment program, which we believe will materially enhance productivity, reduce costs and provide the quality service and network capacity to fully capitalize on market opportunities. As part of this plan, in the fall of 2010 the Board approved a four-year capital investment program of over $400 million to expand and improve the efficiency, flexibility, capacity and safety of our network. This included constructing additional passing sidings to facilitate our longer train strategy in the Western Corridor, North Line and the U.S. Midwest.

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