~ freelance journalist

The chairman and directors of CP have drawn the proverbial line in the sand for American hedge fund investor Pershing Square.

Caught flatfooted in late December when Pershing-inspired stories appeared in the business section of major newspapers critical of the railway’s senior management and financial performance, the company released an open letter from Chairman John Cleghorn Jan. 12 insisting a plan was in place to bring CP’s operations into the same league as other railways.

Pershing acquired a 14.2% stake in CP last year and has been pushing the company to improve the railway’s financial results through train operating improvements and other changes including the dismissal of President and CEO Fred Green.

The CP letter quotes the two most recent appointees to the Board to defend the railway’s plan. Veteran railroaders Tony Ingram and Ed Harris were considered as appeasements for Pershing because of their success on the operational side of other railways.

Ingram says Green “and his management team have developed a well thought out plan to improve CP's operating ratio and I look forward to the opportunity to work closely with management to ensure that the plan is executed with appropriate accountability.”

Harris, who has served as Executive VP of Operations for both CP and CN, says, “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.”

In the letter, Cleghorn says Pershing doesn’t have “a detailed, credible plan” for rejuvenating CP, which has the highest operating ratio among the major North American railways. “Pershing Square suggests an unrealistic operating ratio reduction at pace never before achieved by any railway management team.”

The Board says CP faces unique challenges and has to contend with “rising annual pension costs associated with CP’s legacy pension plans.”

Cleghorn says CP aims to cut its operating ratio to the low 70s from the current high 70s within 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 the operating ratio.”

The turnaround from the 2008 depression caught CP by surprise as traffic grew by an unprecedented 17% increase, Cleghorn said. “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 plan, we expect to deliver meaningful improvements in CP’s financial performance starting in the first quarter of 2012.”

Cleghorn also firmly rejected Pershing’s demand that Green be replaced by former CN CEO Hunter Harrison jeopardized “is not in the best interests of CP or its shareholders.”

CP is also working on boosting its traffic levels through “innovative relationships with customers and supply chain partners.”