Canadian Pacific Railway Limited

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Canadian Pacific Railway Limited

Gulf Canada Square
401 - 9th Avenue SW, Suite 500
Calgary, Alberta T2P 4Z4
Canada
Telephone: (403) 319-7000
Fax: (403) 319-7567
Web site: http://www.cpr.ca

Public Company
Incorporated: 1881 as Canadian Pacific Railway Company
Employees: 17,519
Sales: C$3.66 billion (US$2.44 billion) (2000)
Stock Exchanges: Toronto New York
Ticker Symbol: CP
NAIC: 482111 Line-Haul Railroads; 485112 Commuter Rail Systems; 487110 Scenic and Sightseeing Transportation, Land; 488210 Support Activities for Rail Transportation

Canadian Pacific Railway Limited is the smallest of the six major North American railways, known as Class 1 railways. Its 14,000-mile network includes a transcontinental main line in Canada extending from Vancouver to Montreal, as well as a number of collector and feeder lines; the Canadian network extends for about 9,300 miles. In the United States, the company’s rail lines consist of 3,200 miles in the Midwest operated by Soo Line Corporation, a subsidiary; and 1,500 miles in the Northeast operated by another subsidiary, Delaware and Hudson Railway Company, Inc. Alliances with Union Pacific Corporation and other rail firms extends Canadian Pacific’s rail services throughout the other areas of the United States and into Mexico as well. While its core business is the transport of bulk cargo, containers, and automobiles, Canadian Pacific also runs commuter rail services in Vancouver, Toronto, and Montreal and a tourist train located in the Canadian Rockies. The company also offers intermodal services through a network of 23 intermodal terminals and nine major rail yards as well as supply chain management services through subsidiary Tronicus Inc.

Canadian Pacific Railway Company was formed in 1881, and four years later it completed construction of the first transcontinental railway in Canada. Over the succeeding decades, the company expanded into a number of other industries, including hotels, steamships, oil and gas, mining, airlines, telecommunications, and shipping services. In 1971 a new holding company was formed called Canadian Pacific Limited, with Canadian Pacific Railway and the other businesses becoming subsidiaries of the new parent. On October 1, 2001, Canadian Pacific Limited was broken up into five separate publicly traded companies, one of which was called Canadian Pacific Railway Limited and consisted of the original railway and related operations.

Late 19th Century: Founding of CPR and Completion of Transcontinental Railway

The building of the Canadian Pacific Railway was a demanding battle, both physically and politically. After negative reports from both explorers and surveyors, a long and sometimes bitter parliamentary dispute, and threats of refusal by British Columbia to become part of the Canadian Dominion, a contract to build the rail line was finally approved by royal assent on February 15, 1881. The following day, the Canadian Pacific Railway Company (CPR) was incorporated. The company established its headquarters in Montreal. A group of railroad professionals, known as The Syndicate, who had come to Canada from Scotland as fur traders, headed up the railroad’s first management team. The Syndicate chose George Stephen, a former president of the Bank of Montreal and one of the principals involved in the organization of the St. Paul, Minneapolis and Manitoba Railway as CPR’s first president. Stephen was assisted by CPR Vice-President Duncan Mclntyre, who left his post as president of the Canada Central Railway to help build the country’s first and only transcontinental railroad.

Under the terms of the government contract, CPR received $25 million in investor-subscribed funds and 25 million acres of timberland, which eventually included the land’s subsurface resources. These important assets provided the basis for the company to raise more capital. Several stock issues were floated, and large loans were made to further finance the project. In 1882 the company issued $30 million worth of CPR stock to various New York investment syndicates, followed by the sale of 200,000 shares of common stock on the New York Stock Exchange (NYSE) the following year—becoming in the process the first non-American firm to be listed on the NYSE (CPR shares were first listed on the Toronto Stock Exchange in 1892). To complete the project, CPR floated a $15 million bond issue through a London-based investment house. Although the company’s contract allowed CPR ten years to complete the railroad’s construction, the project took less than half that time. Construction of the main line was completed on November 7, 1885. At the time the Canadian Pacific Railway was the longest and costliest railroad line ever built. The first regular passenger train to use the new line, the “Pacific Express,” departed from Montreal on June 28, 1886, arriving in Port Moody, British Columbia, on July 4.

The completion of the line had many effects on both the company and the Canadian economy. The subsurface resources acquired in the land deal with the Canadian Parliament put the company into the coal, zinc, lead, gold, silver, and—later—gas businesses. The railway opened the prairies for settlement, and CPR was involved in agricultural development, including irrigation and wheat farming. A rail connection from the more industrialized eastern regions to the Pacific Coast enabled the company to expand into the export shipping business and opened up many opportunities in the Far East. It was also believed that the railway’s consolidating effect on the Canadian provinces stifled further northern expansion by the United States. The company, then known to most Canadians as the CPR, continued its steady growth well into the mid-1900s.

Early Development of Related Activities

Moves into related activities began as early as 1886 when the company chartered seven ships to carry tea and silk from Asia to the West Coast of Canada, thereby providing eastbound freight for the railway. This marked the beginning of CPR’s steamship services—later known as CP Ships. In 1903 CP Ships began serving the trans-Atlantic market. CP Ships became renowned in the early decades of the 20th century for its luxury passenger liners—the famous Canadian Pacific Empress class ships. These boats sailed the world’s oceans from 1891 to 1970. The speed and reliability of the CP Ships fleet led to lucrative mail contracts on both trans-Pacific and trans-Atlantic routes. In 1922 CP Ships entered the cruise market.

CPR also began building hotels and dining rooms along the railway in order to provide passengers with food and shelter. The architect of this strategy was American railroader William Cornelius Van Home, who had joined the company as general

manager at the beginning of 1882. Van Home had previously served as general manager of the Chicago, Milwaukee & Saint Paul Railroad. He would succeed Stephen as second president of CPR in 1888. Envisioning a string of grand hotels along the railway, Van Home built the company’s first hotel, Mount Stephen House, high in the Canadian Rockies in 1886. Two years later came the opening of the famed Banff Springs hotel, located in the Canadian Rockies of Alberta. Next came Chateau Lake Louise, completed in 1890, and Le Chateau Frontenac, which opened its doors in 1893. Most of the hotels were modeled on French chateaus and eventually achieved landmark status. These operations formed the basis for Canadian Pacific Hotels, which eventually was running hotels and resorts in every major city serviced by the railway.

CPR’s involvement in the oil and gas industry also had an early start, although it would be many more years before energy became a significant part of the company operations. In 1883 a CPR crew drilling for water near Medicine Hat made the first natural gas discovery in Alberta. This was the Milk River formation, which remains one of the largest discoveries in western Canada. Initially, when CPR sold parts of its vast land holdings it would sell the mining and mineral rights as well. By 1912, however, this policy was reversed and CPR began reserving rights to “all mines and minerals under the lands” for property that it sold. This made possible the company’s later activities in both mining and energy.

The company in its early years added to its already rich natural resource holdings. In 1898 it acquired British Columbia Smelting and Refining Company, and in 1906 merged this and other properties into the Consolidated Mining and Smelting Company of Canada Limited, later known as Cominco Limited. In 1905 CPR purchased the Esquimalt and Namaimo Railway and 1.5 million acres of timber on Vancouver Island.

Yet another nonrailroad activity was undertaken in 1942 when CPR merged ten local airlines to form Canadian Pacific Air Lines (CP Air). In 1955 this airline pioneered the polar route when it began flying from Vancouver to Amsterdam over the North Pole. It would eventually become—for a time—Canada’s second largest airline.

As early as 1920 CPR began using all-steel railroad cars. In many instances these units weighed nearly 60 tons, which limited the number of cars that could be pulled by a steam-powered locomotive. The Great Depression and then World War II slowed the introduction of diesel-powered engines to the railroad industry. By 1954, however, CPR completed the conversion of its locomotives to diesel power. Because of the ruggedness of much of the terrain over which CPR operated, the company used some of the largest diesel-powered trains in the world. Eventually, these units were capable of hauling 10,000 tons of cargo and were powered by as many as 11 diesel engines.

Company Perspectives:

CPR’s focused growth strategy is driving us toward our goal of becoming the preferred business partner for rail-based transportation services in North America. Improved operating efficiencies, innovative products, strategic alliances and a motivated workforce lie at the heart of our plans to increase shareholder value.

1950s Through 1970s: Organizing and Further Exploiting Nonrailroad Assets

Throughout its first 75 years in business, CPR’s explosive growth resulted in poor record-keeping, and only in 1956 did the company institute a comprehensive inventory of its assets. The inventory took seven years. It quickly became apparent that the CPR’s vast holdings warranted further exploitation and development. CPR formed a wholly owned subsidiary, Canadian Pacific Oil and Gas Limited, in 1958 to develop and explore its mineral rights on more than 11 million acres of company-held western Canada land. With the completion of the CPR’s forest and real estate surveys, two more subsidiaries were formed. Marathon Realty Company Limited was incorporated to manage and develop the company’s vast, nationwide real estate holdings. Pacific Logging Company Limited was to be responsible for reforestation and the development of tree farming on CPR’s timberlands.

As the survey of company holdings reached completion, it became clear that the development of the CPR’s nonrailroad assets needed to be centralized under a separate holding company. CPR formed Canadian Pacific Investments Limited in 1962 to administer the development of CPR’s natural resources and real estate holdings and to operate as an investment holding company.

During most of CPR’s first 80 years, the company was owned by foreign interests, primarily English, French, and American. The transition to a majority of Canadian ownership began after the end of World War II and was completed in 1965. In that year, Ian Sinclair, CPR’s chairman, assumed control of the company’s burgeoning enterprises. Sinclair brought to bear his influence and power to finally reverse the flow of foreign investment into the company.

In November 1967 the company offered to the public $100 million in convertible preferred shares of CPR stock. At the time, it was the largest single stock issue in Canadian history and provided an opportunity for Canadians to share more directly in the resource development of their country. In a major reorganization in 1971, a new parent company was formed called Canadian Pacific Limited (CPL), with Canadian Pacific Railway becoming a subsidiary of the new company, as did the various other operations. In 1980 Canadian Pacific Investments Limited changed its name to Canadian Pacific Enterprises Limited (CP Enterprises).

There were also significant changes at Canadian Pacific Oil and Gas. In 1964 CP Oil and Gas purchased a stake in Central Del Rio Oils, based in Alberta. Central Del Rio had a large production base stemming from its discovery of the 1.5-billion-barrel Weyburn oil pool in southeast Saskatchewan. In 1969 CP Oil and Gas became a wholly owned subsidiary of Central Del Rio, giving CPR a stake in the publicly traded Central Del Rio. Two years later CP Oil and Gas and Central Del Rio were merged to form PanCanadian Petroleum Limited, one of Canada’s largest gas and oil companies. The publicly traded PanCanadian was now majority owned by Canadian Pacific Limited.

Sinclair took the company into the hotel business in the United States and to locations as distant as Jerusalem. An airline catering business in Mexico City was also purchased. Sinclair’s railroading focused on the transportation of goods and raw materials rather than people. In 1976 the Canadian government formed Via Rail Canada Inc. as a nationwide passenger rail service. Via Rail gradually began taking over responsibility for passenger train operation from both CPL and archrival Canadian National Railway Company (which had been formed by the Canadian government in 1917), a process largely complete by 1979. At the close of Sinclair’s tenure in 1981, CPL’s railroad inventory comprised 69,000 freight cars, 1,300 locomotives, 3,600 maintenance and equipment cars, and only 57 passenger cars.

Deep Difficulties in the 1980s

Sinclair was succeeded by Frederic Burbidge in 1981. Burbidge acquired leadership of a company that was about to have the worst decade in its history. A worldwide recession coupled with extremely poor crop years in the early 1980s in both Canada and the midwestern United States resulted in thousands of empty Canadian Pacific and Soo Line boxcars. Many of CPL’s nonrailroad businesses were highly cyclical. PanCanadian Petroleum helped compensate for the rail operations’ poor performance for a time, but with the collapse of oil prices in 1986, the company was faced with profound difficulties.

William Stinson replaced Burbidge as CPL’s chairman in 1985. Stinson, who had been with the company for 30 years, starting as a management trainee in 1955, was the youngest chairman in the company’s history. He set out to streamline the company’s operations.

Key Dates:

1881:: Canadian Pacific Railway Company (CPR) is formed to build a transcontinental railway; headquarters are established in Montreal.
1883:: CPR stock is listed on the New York Stock Exchange.
1885:: The company completes construction of Canada’s first transcontinental railway.
1886:: CPR charters seven ships to carry tea and silk from Asia to Canada, marking the beginning of steamship operations, later known as CP Ships; the company’s first hotel, Mount Stephen House, is completed, initiating what will later be called Canadian Pacific Hotels.
1958:: Canadian Pacific Oil and Gas Limited is formed as a subsidiary.
1971:: A new parent company, Canadian Pacific Limited (CPL), is formed, with CPR and the company’s other operations becoming subsidiaries; CP Oil and Gas merges with Central Del Rio Oils to form PanCanadian Petroleum Limited.
1990:: CPL takes full control of Soo Line Corporation.
1991:: Delaware and Hudson Railway Company, Inc. is acquired.
1995:: Company headquarters are moved to Calgary.
1999:: CP Hotels acquires Fairmont Hotels, leading to the creation of Fairmont Hotels and Resorts Inc.
2001:: CPL demerges into five separate publicly traded companies: Canadian Pacific Railway Limited, Pan-Canadian Petroleum, CP Ships, Fording Inc., and Fairmont Hotels.

Stinson oversaw the sale of CPL’s 52 percent interest in Cominco Limited, which had become one of the world’s largest zinc producers. By selling off what had been a money-loser since 1981, Stinson raised $472 million and removed an expensive liability. On the heels of the Cominco sell-off, the company divested itself of CP Air in a $300 million deal with Pacific Western Airlines in 1987. CP Air had not shown any profits since 1980; the sale also eliminated nearly $600 million in long-term debt. On December 6, 1985, with the consent of both companies’ stockholders, CPL and CP Enterprises merged into one company. Under the terms of the merger, CP Enterprises became a wholly owned subsidiary of CPL.

After the sale of Cominco and CP Air, Stinson worked to turn around three of CPL’s other subsidiaries: AMCA International Limited, a producer of structural steel, the Soo Line, and Algoma Steel Corporation, an Ontario-based steel manufacturer. Stinson’s plan was to focus CPL in four major core businesses: freight transportation, natural resources, real estate, and manufacturing. Stinson’s cutbacks, sales, and restructuring had a positive effect, and the company showed a profit of a little more than $58 million in 1987. One project that Stinson did not attempt to curtail was the construction of the longest railway tunnel in North America. The Macdonald Tunnel, located in British Columbia’s Selkirk Mountains and more than nine miles in length, was completed in 1988. That same year, CP Hotels bought the hotel chain of Canadian National Railway, gaining such properties as the Chateau Laurier in Ottawa and Jasper Park Lodge in Alberta and becoming the largest hotel operator in Canada. CPL also purchased a 47.2 percent voting interest in Laidlaw Inc., a waste management company, for C$499.3 million. There was one further divestment in the late 1990s, however, that of the company’s steel production operations, including Algoma Steel and AMCA International.

The years 1988 and 1989 showed little improvement for CPL’s financial outlook. The Canadian economy was in a weakened condition. The company’s forest products division reported a net operating loss of more than $190 million in 1989 because of the depressed market for paper products. Marathon Realty showed a net operating loss that same year of more than $17 million. The company’s rail division held its own in 1989, however, and Laidlaw had a record-breaking year.

Early 1990s: Restructuring and Recovery

As CPL entered the 1990s, the company’s restructuring efforts suffered a major setback in a ruling by the Supreme Court of Ontario. Under the court’s decision, CPL was prohibited from spinning off Marathon Realty as a separate public company. CPL had planned to distribute 80 percent of the shares of Marathon Realty to its common stockholders while retaining a 20 percent interest itself. The court ruled that the transaction would penalize CPL’s preferred stockholders. At the same time, it appeared that CPL’s performance would be further hindered by the lingering weakness in the company’s forest products division.

The company’s rail business increased in 1990, largely because of a resurgence in grain shipments. That year CPL acquired the 44 percent of Soo Line that it did not already own. CPL officials expected the transaction to make possible greater integration of the rail systems. Early in 1991 CPL bought another rail company, the Delaware and Hudson Railway, operating in the northeastern United States. This bolstering of the U.S. rail operations was an important development given the increased U.S.-Canada trade that was already occurring as a result of the Canada-U.S. Free Trade Agreement of 1989.

CPL suffered during the economic downturn of the early 1990s. After posting a net income of $744 million in 1989 and $354 million in 1990, the company began to lose money. Part of the problem was a decline in rail traffic. But that lull was augmented by weak prices for oil and gas and a major slump in real estate markets, among other problems. Furthermore, the CPL organization was relatively bloated and inefficient, despite recent attempts to boost productivity. CPL executives responded to mounting losses by intensifying efforts to reorganize and increase efficiency. To that end, CPL jettisoned several poorly performing operations, including several lackluster rail lines. The company also sold its troubled forest products division, consisting of a 60.7 percent stake in Canadian Pacific Forest Products Limited, to a group of underwriters for C$697.8 million in 1993. At the same time, it beefed up its investments in its more successful divisions, particularly its shipping group.

Despite gains in its shipping division and a few other segments, CPL suffered losses totaling more than $1.5 million between 1991 and 1993, which was partly the result of restructuring write-offs and accounting changes. By 1994, though, restructuring initiatives were beginning to bear fruit. Indeed, CPL had slashed its workforce from more than 75,000 in the late 1980s to less than 40,000 by 1994, reflecting a significant liquidation of assets. Meanwhile, company sales plunged from more than $10 billion in 1990 to roughly $6.5 billion in 1993. Finally, in 1994, CPL returned to profitability with a net income of nearly $400 million.

In September 1994 CPL offered to pay C$1.4 billion (US$1.04 billion) for the Canadian National Railway’s rail operations in eastern Canada and the United States. CPL believed that the deal would benefit both companies, each of which had been racking up heavy losses in eastern Canada. The combination would eliminate excess rail capacity in eastern Canada. Canadian National opposed the unsolicited proposal, and in December 1994 the Canadian government blocked the deal.

By 1995, CPL had reorganized all of its operations into eight different companies. Transportation-related businesses, including rail (CPR) and container-shipping (CP Ships) operations, accounted for about 57 percent of total company revenues. Energy related businesses, which included oil and gas (PanCan-adian Petroleum) and coal (Fording Coal) segments, made up about 29 percent. Finally, hotel (CP Hotels) and real estate (Marathon Realty) businesses accounted for 14 percent of CPL’s sales. CPL also continued to hold a 47.2 percent interest in Laidlaw and a 48 percent stake in Unitel Communications Holdings Inc.

Unitel was a new name for CPL’s telecommunications arm, which had been known as CNCP Telecommunications Limited. Rogers Communications Inc. had acquired a 40 percent stake in CNCP in 1989. In June 1992 Unitel received permission from the Canadian Radio-Television and Telecommunications Commission to provide public long-distance telephone service. The following year, AT&T Corp. purchased a 20 percent stake in Unitel, reducing CPL’s stake to 48 percent and Rogers’ stake to 32 percent.

1996-2001: Deconglomerating Under O’Brien

David O’Brien became president of CPL in 1995 and then chairman and CEO, succeeding Stinson, the following year. Dramatic changes would take place under what would turn out to be his short tenure of leadership. O’Brien had begun his career as a trial lawyer in Montreal, before moving into the oil and gas industry in western Canada, eventually becoming executive vice-president of Petro-Canada Limited. In 1990 he became head of PanCanadian Petroleum. As president of CPL, O’Brien began shaking things up by moving the company’s headquarters from Montreal to Calgary in 1995. As Chairman and CEO O’Brien quickly jettisoned the firm’s three main noncore assets: the stakes in Unitel and Laidlaw were sold off in 1996 and 1997, respectively, and in 1996 CPL sold Marathon Realty for C$952 million (US$693.2 million) to a partnership formed by Oxford Properties Group Inc. and General Electric Capital Corporation. At this point, CPL consisted of five wholly or majority owned subsidiaries: Canadian Pacific Railway, CP Ships, PanCanadian Petroleum, Fording, and CP Hotels.

O’Brien believed that in the new era of free trade and globalization, CPL’s structure—a holding company for several companies that were major players in the Canadian market—no longer made sense. Increasingly powerful shareholders were demanding “pure plays” that could compete on an international basis. Thus, O’Brien reasoned that eventually CPL would need to be broken up. The separate operating companies, however, would need to be strengthened first before being left to fend for themselves.

The last years of the 20th century were therefore spent expanding and improving the profitability of the five businesses. CPR, for example, embarked on a multiyear program of jettisoning about 5,400 miles of underperforming track, aided by changes in Canadian regulations that made it easier to dispose of rail lines. At the same time it launched a massive capital improvement program to bring the railroad up to international standards. A number of new locomotives were purchased, bringing the average age down to 18 years, from 22. An impetus behind the increased investment in the railroad was the 1995 privatization of Canadian National Railway, which meant that CPR would no longer have to compete with a government-owned company that did not have shareholders clamoring for profits.

From 1997 to 2000 CP Ships completed several acquisitions, including Lykes Lines, Contship Containerlines, Ivaran Lines, and CCAL. Revenues during this period increased from US$1.6 billion to US$2.6 billion. Already the second largest energy producer in Canada, PanCanadian Petroleum completed the largest acquisition in its history in 2000, the oil and gas division of Montana Power Company.

A number of developments were also occurring at CP Hotels, the largest hotel operator in Canada. In 1997 CP Hotels spun off 11 of its hotels, mainly those located in large cities, into a real estate investment trust called Legacy Hotels. The company continued to run the hotels and kept a one-third interest in the REIT. CP Hotels maintained ownership of 16 hotels, particularly its historic resort properties. The Legacy deal raised almost C$600 million in capital for expansion. In early 1998 CP Hotels bought Delta Hotels Limited, a Canadian chain, for about C$94 million. This doubled the number of rooms under management and gave the company a moderately priced chain to go along with its traditional high-end properties. CP Hotels also gained its first properties outside of Canada in 1998 by paying US$540 million for Princess Hotels International Inc., an operator of seven resorts in sunny destinations in Barbados, Bermuda, Mexico, and Arizona. Continuing to seek international growth, CP Hotels in October 1999 acquired Fairmont Hotels, owner of seven high-end properties in the United States, including the Fairmont San Francisco (the first Fairmont hotel, having opened in 1907) and the Plaza in New York. This acquisition led to the creation of Fairmont Hotels and Resorts Inc. and the addition of the Fairmont name to the CP Hotels (e.g., the Fairmont Banff Springs).

Early 21st Century: A New Era of Independence

By late 2000, strong performances by all five of the CPL subsidiaries led O’Brien to conclude that the time had come to act. In February 2001 the company announced that it would split itself into five publicly traded independent companies—CPR, CP Ships, PanCanadian Petroleum, Fording Inc., and Fairmont Hotels and Resorts. The demerger was completed on October 3, 2001, with holders of CPL stock receiving various amounts of stock in the five companies, which, with the exception of the already public PanCanadian, each gained listings on both the Toronto and New York Stock Exchanges. Canadian Pacific Limited ceased to exist, and O’Brien became chairman of PanCanadian.

The railroad unit, through which the PCL conglomerate had been built, returned to its roots as a standalone publicly traded company under the slightly revised name Canadian Pacific Railway Limited. Robert J. Ritchie was president and CEO of the company, a position he had held since 1995. Although clearly a much stronger company than just a few years previous, thanks to the heavy capital investments and the efficiency initiatives of the 1990s, CPR faced a somewhat uncertain future given that its 14,000 miles of track made it the smallest of the six major North American rail systems. There was much speculation regarding the possibility of a merger with Union Pacific or with archrival Canadian National.