Dear Fellow Shareholder:bill ackman photo

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

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