Company Sends Open Letter to Shareholders
CALGARY,
Jan. 9, 2012 /PRNewswire/ - Canadian
Pacific (TSX: CP) (NYSE: CP) today sent a letter to its
shareholders from John Cleghorn,
Chairman of the Board of Directors. Highlights of the letter
include:
- CP has a Multi-Year Plan verified and endorsed by the Board of
Directors to drive volume growth, expand the network and control
costs
- Board fully supports CEO and management team
- Pershing Square advocating change in management, but has not
presented any detailed, credible plan
- Pershing Square does not fully take into account structural
differences between CP and peers as well as rising annual pension
costs associated with CP's legacy pension plans
- Pershing Square suggests unrealistic operating ratio reduction
at pace never before achieved by any railway management team
- Board open to views of shareholders and encourages Mr. Ackman
to accept offer to join CP Board and participate with full
knowledge of the facts in execution of CP's Multi-Year Plan
The full text of the letter is below:
9 January 2012
Dear Fellow Shareholder:
I am writing to provide you with an update on
Canadian Pacific's Multi-Year Plan and certain developments
affecting your investment in the company. CP's Multi-Year
Plan has three key elements - driving volume growth, expanding
network capacity to safely and efficiently support higher volumes
and controlling costs. CP's management team is
aggressively executing on the company's Multi-Year Plan and has the
full support of the Board of Directors. The Board is working
closely with management and monitoring the company's performance
and will continue to hold CP's President and Chief Executive
Officer, Fred Green, and CP's senior
management, fully accountable for delivering on the Multi-Year
Plan. This plan has been specifically designed to generate
the best possible operational and financial results from CP's
unique assets and circumstances.
The Board is confident in CP's ability to reach an
operating ratio ("OR"), or operating expenses as a percentage of
revenue, in the low 70s in the next three years. We will not
stop there - as we achieve our goals, we will set new targets.
As early as 2010, the results of management's
execution against the Multi-Year Plan could be seen in a four
hundred basis point improvement in OR. The company responded
to an economic rebound that exceeded both CP's and our customers'
expectations by a significant margin, handling an unprecedented 17%
increase in workload. Our 2011 actions have included
increasing our locomotive fleet and manpower to improve reliability
for customers, and position ourselves for future growth.
Today, as management continues to execute on the Multi-Year Plan,
we expect to deliver meaningful improvements in CP's financial
performance starting in the first quarter of 2012.
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.
In addition, we are revitalizing operating
information technology systems to better manage our assets and
service levels and to seamlessly interface with our
customers. We expect these system upgrades to position CP
to achieve labour efficiencies, improve asset management and
provide better shipment visibility to all parties. We are
also driving forward with our plans to apply predictive
technologies in field operations to reduce costs, enhance supply
chain transparency and increase operational efficiency.
CP's market development efforts are a core
component of achieving the target of a low 70s OR within the next
three years, especially given that rising pension expense is
anticipated to offset a majority of operating cost reductions in
the near term. Growing volume demands positive and innovative
relationships with customers and supply chain partners.
Similarly, constructive and collaborative relationships with
municipalities, provincial, state and federal governments and First
Nations have allowed for the fast and cost-effective implementation
of major expansion projects such as the recent multi-year "Western
Corridor Expansion Program." CP's management team has
particular strengths in the area of relationship development.
Our long-standing relationships with customers, government and
regulatory officials, and members of the communities in which we
operate are built on trust and mutual respect.
CP shareholders have benefited - and will
continue to benefit - from the long-term contracts that management
has negotiated with industry-leading companies.
Innovative products and partnerships with new customers have opened
new opportunities such as long-haul full train loads of ethanol and
oil.
We are highly focused on delivering results through
the implementation of our Multi-Year Plan, which includes specific
targets reflecting enhanced asset velocity, labour productivity and
capacity utilization. As illustrated at our 2011 Investor Day, our
Multi-Year Plan will leverage our planned investments in the
network and use of distributed power technology to increase the
productivity of our Vancouver
export coal and potash trains by more than 15%. In doing so,
we will reduce the total number of trains required to service these
two core business segments and associated crew costs. In
addition to labour savings, these longer trains are more
fuel-efficient and reduce track wear.
In the instance of export coal, we anticipate
moving two-thirds of our largest customer Teck's planned growth
within existing train starts driving further productivity
improvements. Similar plans are in place to lengthen
transcontinental Intermodal trains, where we are projecting an 11%
increase in train lengths as we absorb incremental volume on
existing train starts.
At the same time we have taken actions to enhance
our financial flexibility to support the execution of our
plan. We have proactively managed debt maturities, utilized
debt capacity to pre-fund required pension contributions to enhance
near-term cash flow, and have been pursuing a wide range of
opportunities to monetize certain non-core assets.
The Board's overriding responsibility is to act
in the best interests of the company, and we believe that Pershing
Square's repeatedly stated agenda of management change would be
detrimental to the company and its shareholders.
The Board is confident in its approach and has
welcomed the investment of a new, significant shareholder.
This was evidenced when, only three business days after Pershing
Square filed its initial 13D with the U.S. Securities and Exchange
Commission on October 28, 2011, both
the Chairman of the Board and the Chief Executive Officer of CP met
in person with Bill Ackman and two
other representatives of Pershing Square. On December 11, 2011, the Nominating Committee met
with Bill Ackman and shortly
thereafter offered him a seat on the Board. Over the course
of the ten week period since October 28,
2011, there have also been subsequent in-person and
telephonic discussions between members of the CP Board and
representatives of Pershing Square, in addition to numerous
discussions between CP's financial and legal advisors and advisors
to Pershing Square.
CP is focused on delivering significant value
for all shareholders by executing on its publicly stated Multi-Year
Plan to achieve a low 70s operating ratio in the next three
years. We reiterate our offer to have Mr. Ackman join our
Board so that a constructive board-level dialogue based on all the
relevant facts and information can commence.
On behalf of the Board of Directors, we appreciate
the continued interest and support of all CP shareholders.
Sincerely,
/s/
John E. Cleghorn
Chairman of the Board
Advisors
Morgan Stanley & Co. LLC and RBC Capital Markets Corporation
are serving as CP's financial advisors and Paul, Weiss, Rifkind,
Wharton & Garrison LLP and Fasken Martineau DuMoulin LLP are
serving as CP's legal advisors.
Note on forward-looking information
This news release contains certain forward-looking statements
relating but not limited to our operations, proposed investments,
anticipated operating ratios and financial performance and business
prospects. Undue reliance should not be placed on forward-looking
information as actual results may differ materially.
By its nature, CP's forward-looking information
involves numerous assumptions, inherent risks and uncertainties.
Forward-looking statements are not guarantees of future
performance. Factors that could affect forward-looking information
include, but are not limited to: changes in business strategies;
general North American and global economic, credit and business
conditions; inflation; currency and interest rate fluctuations; the
availability and price of energy commodities; the effects of
competition and pricing pressures; industry capacity; shifts in
market demand; changes in laws and regulations, including
regulation of rates; changes in taxes and tax rates; actions by
regulators; potential increases in maintenance and operating costs;
uncertainties of litigation; risks and liabilities arising from
derailments; timing of completion of capital and maintenance
projects; currency and interest rate fluctuations; technological
changes; and various events that could disrupt operations,
including severe weather conditions, flooding, earthquakes, labour
disputes, risks and liabilities arising from derailments as well as
security threats and governmental response to them. Other risks are
detailed from time to time in reports filed by CP with securities
regulators in Canada and
the United States. Reference
should be made to "Management's Discussion and Analysis" in CP's
annual and interim reports, Annual Information Form and Form 40-F
for a summary of major risks.
Except as required by law, CP undertakes no
obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new
information, future events or otherwise.
About Canadian Pacific
Canadian Pacific (TSX:CP)(NYSE:CP) operates a North American
transcontinental railway providing freight transportation services,
logistics solutions and supply chain expertise. Incorporating
best-in-class technology and environmental practices, CP is
re-defining itself as a modern 21st century transportation company
built on safety, service reliability and operational efficiency.
Visit cpr.ca and see how Canadian Pacific is Driving the Digital
Railway.
SOURCE Canadian Pacific