Canadian Pacific says it’s on the right track, battles investor

The Canadian Pacific Railway (TSX: CP) (NYSE: CP) sent a letter March 7 to shareholders that, among other things, said the CP plans to grow its rail network capacity in western Canada to accommodate the expansion plans of Teck Resources (TSX:TCK.A/TCK.B, NYSE:TCK), Canada’s largest producer of metallurgical coal.

The letter is an outgrowth of a power struggle with at least one investment manager, Pershing Square Capital Management LP, which wants to seize partial control of the railroad. The CP not only serves Canada, but has routes in the U.S. largely through its 2008 buy of the Dakota, Minnesota & Eastern and  Iowa, Chicago & Eastern railroads.

“CP’s capital investments to enhance our network give our customers added confidence in CP’s ability to efficiently move not only current volume but volume growth such as that planned by Teck, CP’s largest customer,” said the letter. “Teck is investing over [C]$1 billion to expand its coal production to more than 30 million metric tons, a 30 per cent increase from 2010 production. CP’s plans include handling two-thirds of CP’s growth with Teck using existing trains by extending sidings and enabling longer trains. We expect both Canadian and U.S. coal volumes to strengthen in 2012.”

The letter said that CP’s management team is aggressively and successfully executing on the company’s Multi-Year Plan and has the full support of the board of directors. The board believes that Pershing Square’s demand that the CP replace its CEO, Fred Green, with Hunter Harrison would put at severe risk the significant forward momentum the company is making on the Multi-Year Plan, the letter added.

Longer-term contracts, such as those under which CP transports millions of tons of coal and potash, have price escalation and full fuel recovery built in, and planned capital investment to improve productivity is expected to further improve profitability over the term of these contracts, the letter said. 

CP said it is making strategic investments across its network that are aligned with growth opportunities. These investments include enhanced infrastructure in the Western corridor to support productivity and growth and increased train sizes in coal, potash, and intermodal. In total, CP intends to invest between C$1.1bn and C$1.2bn each year through 2014 in order to be able to deliver quality service and provide the network capacity to fully capitalize on market opportunities and volume growth, as well as enhance productivity and reduce costs.

During the fourth quarter of 2011, CP achieved record operating performance including in car miles per car day and terminal dwell, which both improved 20% from a year earlier. CP also made further improvements in 2012. Through February, CP saw significant improvements over its February three-year averages in terminal dwell (23%), active cars online (21%), AAR train speed (13%) and car miles per car day (26%), which set a new performance record of 208 miles per day.

Don Lindsay, President and CEO of Teck, was quoted in the CP letter as stating: “As CP’s largest customer, we’ve been pleased with their dedication to ensuring that we get the rail service we need and their deep understanding of our current and long-term needs. That is why we recently increased the volume of business we allocate to CP and, today, both companies are seeing growing economic returns. Fred Green understands that to grow the economy, especially in Western Canada, we need to work together to get the most out of the rail network. We are pleased with his leadership and support of the team in making our joint growth targets achievable.”

“Given the clear progress being made by CP’s management team implementing the Multi-Year Plan, the board of CP believes that Pershing Square’s demand that CP replace the company’s CEO with Mr. Harrison would be detrimental to the company,” said the letter. “Such a step would undermine and delay CP’s ongoing initiatives to increase volume, improve operations and profitability, and create greater shareholder value. Given that Pershing Square has presented no credible, detailed plan, the approach advocated by Pershing Square and its nominees, none of whom has any operational experience with Class I railroads, risks moving CP in the opposite direction. It is exactly the wrong thing to do at exactly the wrong time.”

Pershing Square, at a website dedicated to its battle with CP management, www.cprising,ca, said that that it has proposed six shareholder nominees for election to the board of CP, which currently has 15 members. “Pershing Square believes that election of the shareholder nominees will revitalize Canadian Pacific’s Board of Directors, and catalyze substantial operating and financial improvements through a CEO change,” said the website. “Pershing Square recommends replacing Canadian Pacific Railway CEO, Fred Green, with Hunter Harrison, a proven leader and established veteran of the railway industry.”

This fight may not be resolved until CP’s May 17 annual shareholders meeting, when new board members will be elected.

Pershing Square, a U.S.-based investment advisor, manages funds that collectively own 24.2 million common shares of CP with full voting power, the website said.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.