Final+CP NS+Action+Plan+11 30+PDF

Canadian Pacific Action Plan 17 Nov 2015
Canadian Pacific-Norfolk Southern

Presentation by HSMT Financial Group
Eric Hetzke, James Sorrentino, Dominic Macri, Nick Tiongson
1
Agenda
• Executive Summary
• External Background
• Norfolk Southern Overview
• Opportunity
• Valuation
• Conclusion
2
Executive Summary
▪ Canadian Pacific has optimized efficiency internally
Brief Overview ▪ Railways grow best through mergers and acquisitions

▪ Ideal company: Norfolk Southern Corporation
▪ Hostile Takeover of NS at a price of $100 per share

Proposed Offer ▪ Tender offer at 26% premium
▪ 30 days follow up offer of $110 per share which is a 38% premium
▪ Cash: 2%
Deal Structure ▪ Debt: 38%
▪ Equity: 60%
3
External Background
▪ Current US GDP conditions are favorable
General
Environment ▪ US inflation has been increasing regularly in recent years

▪ The US economy is growing normally
▪ Railroad industry has become deregulated

Historical Industry
Overview ▪ Industry growth slowed due to high costs of infrastructure
▪ Major gridlock problems in major US cities
▪ 25% of U.S. rail traffic passed through Chicago

Current Industry
Situation ▪ U.S. 60 billion dollar rail industry
▪ NS revenue market share 13.1%
4
Norfolk Southern at a Glance
Business Overview Basic Information Share Price: $86.97
Basic Information
▪ Freight transportation railroad company Market Cap $26.2 Billion

▪ Transports freight over a network in the eastern half EV $34.2 Billion
of the US, Ontario and Quebec CEO James A. Squires
▪ Transport coal, and general merchandise, including 52 Week High/Low $117/$72
automotive products and chemicals
Beta 1.3
Historical Stock Price Historical Revenue
$11,500
$120
$11,000
$110
$100 $10,500
$90 $10,000
$80
$9,500
$70
$60 $9,000
2011 2012 2013 2014 2015
Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15
5
Opportunity
▪ CP operating ratio lowered from 81% to 61% over five years
Optimize
Efficiency ▪ NS maintains high operating ratio at 71%

▪ CP’s strong management team
Stagnated ▪ Difficult to expand rail lines

Infrastructure ▪ High cost of infrastructure
Growth
▪ Only way to maintain growth is through M&A
▪ CP and NS meet end to end in Chicago and Detroit

Potential For
New Territory ▪ NS rails cover the east coast of the United States
▪ CP rails cover the majority of Canada
6
Strengthened Network
Combined
Rails
Reconstruct
Chicago
Lower
Operating Ratio
for NS
7
Operating Ratio Comparison
NS and CP Operating Ratios
85% Norfolk Southern’s
80%
Operating Ratio:
71.2%
75%
70%
Canadian Pacific’s
65%
Operating Ratio:
60% 60.9%
2011 2012 2013 2014 2015
NS Operating Ratio CP Operating Ratio
8
CP Operating Ratio Breakdown
▪ Removed hundreds of unnecessary locomotives
Eliminate
Unnecessary Costs ▪ Eliminated unnecessary executive positions

▪ Cut workforce down from 19,500 to 15,000
▪ Inefficient freight transportation

Increased Average
Train Length ▪ Increased average train length from 6,000 feet to 8,000 feet
▪ Increased average tonnage of freight from 6,000 to 8,000
▪ Closure of intermodal yards

Consolidate Rail
Yards ▪ Consolidation of Montreal yards
▪ Sale of parts of the rail network
9
Operating Ratio Breakdown Continued
Cost
CostSynergies
Synergies Carloads per Employee
Carloads Per Employee

6% 264
262
35%
260
21%
258
256
254
38%
252
250
Management Fuel 248
Excess Rail/Car Workforce Reductions 246

2006 2015
10
Synergies
Projected Synergies Over 5 Years
$800
$700 Cost Synergies $2.62 Billion
$600
$500
$400
$300
$930
$200 Revenue Synergies
Million
$100
$0
2015 2016 2017 2018 2019 2020
Cost Synergies Revenue Synergies

11
Valuation
Unaffected: Offer 1: Offer 2:
$80 $100 $110
EV/EBIT $101 $129

EV/EBITDA $76 $131
TV/EBIT $127
DCF with Synergies $126 $161
DCF Analysis $96 $126
$70 $80 $90 $100 $110 $120 $130 $140 $150 $160 $170
12
Why Tender Offer?
Past Attempts ▪ Friendly offers declined
Failed
▪ Noted as grossly inadequate by NS board
CEO James A. ▪ Lifelong employee of NS

Squires
▪ Personal connection; reluctant to cede control
Lack of Defensive
▪ No defensive mechanisms in by-laws
Measures
▪ Enables easy takeover
13
Implementation
After 30 Days
Tender Offer Final Counter
$100 per share $110 per share $115 per share
26% premium 38% premium 44% premium
Release public statements
noting the 26% drop in
NS share price
Today Max Hold
14
Deal Structure
Accretion at $110 Per Share $110 Per Share
Cash $823 2%
4.5% 4.3%
Debt $15,643 38%
4.0%
Equity $24,700 60%
3.5%
3.0%
EV $41,166 100%
2.5%
2.0%
Leverage Ratios
2.0%
1.5% Debt/EBITDA 4.05x

1.0%
0.6%
Interest Coverage
0.5% 4.04x
Ratio
–
2016E 2017E 2018E
15
Regulatory Consideration
STB rules no major STB rules no difference
overlaps that cause lack in competitiveness
of competition between regions
Date 8/3/95 Date 7/23/12
Acquirer Union Pacific Acquirer Genesee and

Corp. Wyoming
Target Southern Target RailAmerica
Pacific Corp.
Size 20,400 miles Size 15,100 miles
EBITDA 4.66x EBITDA 7.60x

Multiple Multiple
Notes Western region Notes Conglomerate

less congested of various small
than East rails
16
Transaction Risks/Mitigations
▪ Same industry/size of competitors
Company becomes
too large to manage ▪ CP-NS: 32,000 miles of track BNSF: 33,000 miles track
effectively
▪ CP’s strong management team
▪ Cost and revenue synergies from the merger

Higher costs of
premiums ▪ Deal is still accretive at 4.4% at $115 per share
▪ CP can access more value in NS because of the rail network
▪ Valuation metrics suggest NS is undervalued

Synergies are not
fully realized ▪ Conservative estimates on synergies
▪ Our timeline to access synergies is slow and conservative
17
Thank You
18
Questions?
Appendix
Income Statements 20-22
Balance Sheets 23-25

Cash Flows 26-27
Assumptions 28-30
Accretion 31-33
DCF Analysis 34-35
Synergies 36
Comparable Companies 37
Precedent Transactions 38-40
WACC Sensitivity 41
STB Approval Process 42
Debt Structure 43
Cash, Debt, and Equity Considerations 44-46
Deal Structure 47
19
NS Income Statement
(in millions) 2011 2012 2013 2014 Q4 2015 2015E 2016E 2017E 2018E 2019E 2020E
Operating Revenue 11,172 11,040 11,245 11,624 2,867 10,860 11,403 11,974 12,572 13,201 13,861
Compensation and Benefits 2,974 2,960 3,002 2,897 642 2,851 2,993 3,143 3,300 3,465 3,638
Materials, Services, and other 2,534 2,463 2,457 2,627 354 2,389 2,509 2,634 2,766 2,904 3,049
Fuel 1,589 1,577 1,613 1,574 247 987 1,038 1,090 1,144 1,201 1,261
D&A 862 916 916 951 146 913 1,296 1,528 1,763 2,003 2,248
Total Operating Expense 7,959 7,916 7,988 8,049 1,389 7,140 7,836 8,394 8,973 9,574 10,198
EBIT 3,213 3,124 3,257 3,575 1,478 3,720 3,567 3,579 3,599 3,627 3,663
Interest Expense 455 495 525 545 545 572 601 631 662 696 730
Unusual Items 160 129 233 104 104 157 157 157 157 157 157
Profit Before Tax 2,918 2,758 2,965 3,134 1,037 3,304 3,123 3,105 3,093 3,088 3,090
Income Tax Expense 1,002 1,009 1,055 1,134 375 1,179 1,114 1,108 1,103 1,101 1,102
Net Income 1,916 1,749 1,910 2,000 662 2,126 2,009 1,997 1,990 1,986 1,987
Growth Y/Y -1.18% 1.86% 3.37% -6.57% 5.00% 5.00% 5.00% 5.00% 5.00%
Tax Rate 34% 37% 36% 36% 36% 36% 36% 36% 36% 36% 36%
FCFF 556 432 884 708 962 1,411 1,627 1,853 2,089 2,334
COGS 7,097 7,000 7,072 7,098 1,243 6,227 6,540 6,867 7,210 7,571 7,949
EBITDA 4,075 4,040 4,173 4,526 1,625 4,634 4,864 5,107 5,362 5,630 5,912
Operating Ratio 71% 72% 71% 69% 48% 66% 69% 70% 71% 73% 74%
EPS 5.5 5.42 6.1 6.34 5.11 7.05 6.67 6.63 6.60 6.59 6.59
20
CP Income Statement
(in millions) 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Operating Revenue 5,092 5,714 5,773 5,716 5,434 5,597 5,765 5,938 6,116 6,299
Compensation&Benefits 1,403 1,479 1,297 1,164 1,079 1,111 1,145 1,179 1,214 1,251
Materials, Services, and other 1,304 1,421 1,253 1,151 1,125 1,159 1,194 1,229 1,266 1,304
Fuel 952 1,002 945 905 643 662 682 703 724 745
D&A 482 541 532 477 463 477 491 506 521 537
Total Operating Expenses 4,141 4,443 4,027 3,697 3,310 3,409 3,512 3,617 3,725 3,837
Operating Income 951 1,271 1,746 2,019 2,124 2,188 2,253 2,321 2,391 2,462
Interest Expense 248 277 262 244 274 261 261 261 261 261
Unusual Items (18) (356) (426) (16) (141) (191) (191) (191) (191) (191)
Profit Before Tax 685 638 1,058 1,759 1,709 1,735 1,801 1,869 1,938 2,010
Income Tax Expense 125 153 235 485 512 423 439 456 473 490
Net Income 560 485 823 1,274 1,197 1,312 1,362 1,413 1,465 1,520
Tax Rate 18.2% 24.0% 22.2% 27.6% 30.0% 24.4% 24.4% 24.4% 24.4% 24.4%
Profit Margins 11.0% 8.5% 14.3% 22.3% 22.0% 23.4% 23.6% 23.8% 24.0% 24.1%
Margins
Compensation 27.6% 25.9% 22.5% 20.4% 19.9% 19.9% 19.9% 19.9% 19.9% 19.9%
Materials and other 25.6% 24.9% 21.7% 20.1% 20.7% 20.7% 20.7% 20.7% 20.7% 20.7%
Fuel 18.7% 17.5% 16.4% 15.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8%
D&A 9.5% 9.5% 9.2% 8.3% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Shares Outstanding 157.6 157.6 157.6 157.6 157.6 157.6 157.6 157.6 157.6 157.6
Basic EPS 3.55 3.08 5.22 8.08 7.60 8.32 8.64 8.96 9.30 9.64
EBITDA 1,433 1,812 2,278 2,496 2,587 2,665 2,745 2,827 2,912 2,999
21
Pro Forma Income Statement
(in millions) 2016E 2017E 2018E 2019E 2020E
Operating Revenue 17,109 17,881 18,690 19,537 20,424
Compensation and Benefits 4,076 4,199 4,297 4,431 4,571
Materials, Services, and other 3,608 3,702 3,798 3,963 4,136

Fuel 1,626 1,668 1,710 1,782 1,857
D&A 1,773 2,019 2,269 2,525 2,785
Total Operating Expense 11,083 11,588 12,074 12,700 13,349
EBIT 6,026 6,293 6,616 6,836 7,076

Interest Expense 912 927 957 989 1,022
Unusual Items (348) (348) (348) (348) (348)
Profit Before Tax 6,590 6,872 7,225 7,477 7,750
Income Tax Expense 2,351 2,451 2,577 2,667 2,764
Net Income 4,239 4,421 4,648 4,810 4,985
Growth Y/Y N/A 4.51% 4.52% 4.53% 4.54%

Tax Rate 36% 36% 36% 36% 36%
FCFF 3,469 3,864 4,300 4,674 5,066
EBITDA 7,799 8,311 8,885 9,361 9,861
22
NS Balance Sheet
(in millions) 2011.0 2012.0 2013.0 2014.0 2015E 2016E 2017E 2018E 2019E 2020E
Assets
Cash and ST Investments 301.0 668.0 1561.0 973.0 875.8 875.8 875.8 875.8 875.8 875.8
Accounts Receivable 1022.0 1109.0 1024.0 1055.0 1014.8 1065.5 1118.8 1174.7 1233.5 1295.1
AR Days 33.4 36.7 33.2 33.1 34.1 34.1 34.1 34.1 34.1 34.1
Inventory 209.0 216.0 223.0 236.0 194.7 204.5 214.7 225.5 236.8 248.6
INV Days 10.7 11.3 11.5 12.1 11.4 11.4 11.4 11.4 11.4 11.4
Other Current Assets 219.0 249.0 267.0 514.0 527.5 541.4 555.6 570.2 585.2 600.6
Total Current Asssets 1795.1 2289.9 3119.7 2823.3 2658.3 2732.7 2810.4 2891.7 2976.7 3065.6
Net PP&E 24469.0 25736.0 26645.0 27694.0 28422.4 29169.9 29937.0 30724.4 31532.4 32361.7
Investments 2234.0 2300.0 2439.0 2679.0 2839.7 3010.1 3190.7 3382.2 3585.1 3800.2
Other LT Assets 84.0 64.0 324.0 49.0 130.0 130.0 130.0 130.0 130.0 130.0
Total Assets 28582.1 30389.9 32527.7 33245.3 34050.4 35042.7 36068.2 37128.3 38224.3 39357.6
Liabilities and Shareholders Equity

Accounts Payable 1092.0 1362.0 1265.0 1233.0 1091.3 1146.1 1203.5 1263.6 1326.8 1393.1
AP Days 56.2 71.0 65.3 63.4 64.0 64.0 64.0 64.0 64.0 64.0
Short-term Debt 100.0 200.0 100.0 100.0 125.0 125.0 125.0 125.0 125.0 125.0
Current Maturities of LT Debt 50.0 50.0 445.0 2.0 137.0 137.0 137.0 137.0 137.0 137.0
Other Current Liabilities 459.0 469.0 495.0 445.0 467.0 467.0 467.0 467.0 467.0 467.0
Total Current Liabilities 1757.2 2152.0 2370.3 1843.4 1884.3 1939.1 1996.4 2056.6 2119.8 2186.1
Long Term Debt 7390.0 8432.0 8903.0 8883.0 8402.0 8402.0 8402.0 8402.0 8402.0 8402.0
Other Liabilities 2050.0 2237.0 1444.0 1312.0 1346.5 1381.9 1418.3 1455.6 1493.8 1533.1
Deferred Income Taxes 7486.0 7832.0 8542.0 8817.0 9346.0 9906.8 10501.2 11131.3 11799.1 12507.1
Total Liabilities 18683.2 20653.0 21259.3 20855.4 20978.8 21629.8 22317.9 23045.4 23814.8 24628.3
Shareholders Equity 9911.0 9760.0 11289.0 12408.0 13015.2 13412.9 13750.3 14082.9 14409.5 14729.2
Liabilities+Shareholders Equity 28594.2 30413.0 32548.3 33263.4 33994.0 35042.7 36068.2 37128.3 38224.3 39357.6
Net Working Capital 38.0 137.9 749.5 979.9 774.0 793.6 814.0 835.1 857.0 879.5
Change in NWC 99.9 611.5 230.4 205.8 19.5 20.4 21.1 21.8 22.6
Days in a Year 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0
23
CP Balance Sheet
(in millions) 2011.0 2012.0 2013.0 2014.0 2015E 2016E 2017E 2018E 2019E 2020E
Assets
Cash and ST Investments 301.0 668.0 1561.0 973.0 875.8 875.8 875.8 875.8 875.8 875.8
Accounts Receivable 1022.0 1109.0 1024.0 1055.0 1014.8 1065.5 1118.8 1174.7 1233.5 1295.1
AR Days 33.4 36.7 33.2 33.1 34.1 34.1 34.1 34.1 34.1 34.1
Inventory 209.0 216.0 223.0 236.0 194.7 204.5 214.7 225.5 236.8 248.6
INV Days 10.7 11.3 11.5 12.1 11.4 11.4 11.4 11.4 11.4 11.4
Other Current Assets 219.0 249.0 267.0 514.0 527.5 541.4 555.6 570.2 585.2 600.6
Total Current Asssets 1795.1 2289.9 3119.7 2823.3 2658.3 2732.7 2810.4 2891.7 2976.7 3065.6
Net PP&E 24469.0 25736.0 26645.0 27694.0 28422.4 29169.9 29937.0 30724.4 31532.4 32361.7
Investments 2234.0 2300.0 2439.0 2679.0 2839.7 3010.1 3190.7 3382.2 3585.1 3800.2
Other LT Assets 84.0 64.0 324.0 49.0 130.0 130.0 130.0 130.0 130.0 130.0
Total Assets 28582.1 30389.9 32527.7 33245.3 34050.4 35042.7 36068.2 37128.3 38224.3 39357.6
Liabilities and Shareholders Equity

Accounts Payable 1092.0 1362.0 1265.0 1233.0 1091.3 1146.1 1203.5 1263.6 1326.8 1393.1
AP Days 56.2 71.0 65.3 63.4 64.0 64.0 64.0 64.0 64.0 64.0
Short-term Debt 100.0 200.0 100.0 100.0 125.0 125.0 125.0 125.0 125.0 125.0
Current Maturities of LT Debt 50.0 50.0 445.0 2.0 137.0 137.0 137.0 137.0 137.0 137.0
Other Current Liabilities 459.0 469.0 495.0 445.0 467.0 467.0 467.0 467.0 467.0 467.0
Total Current Liabilities 1757.2 2152.0 2370.3 1843.4 1884.3 1939.1 1996.4 2056.6 2119.8 2186.1
Long Term Debt 7390.0 8432.0 8903.0 8883.0 8402.0 8402.0 8402.0 8402.0 8402.0 8402.0
Other Liabilities 2050.0 2237.0 1444.0 1312.0 1346.5 1381.9 1418.3 1455.6 1493.8 1533.1
Deferred Income Taxes 7486.0 7832.0 8542.0 8817.0 9346.0 9906.8 10501.2 11131.3 11799.1 12507.1
Total Liabilities 18683.2 20653.0 21259.3 20855.4 20978.8 21629.8 22317.9 23045.4 23814.8 24628.3
Shareholders Equity 9911.0 9760.0 11289.0 12408.0 13015.2 13412.9 13750.3 14082.9 14409.5 14729.2
Liabilities+Shareholders Equity 28594.2 30413.0 32548.3 33263.4 33994.0 35042.7 36068.2 37128.3 38224.3 39357.6
Net Working Capital 38.0 137.9 749.5 979.9 774.0 793.6 814.0 835.1 857.0 879.5
Change in NWC 99.9 611.5 230.4 205.8 19.5 20.4 21.1 21.8 22.6
Days in a Year 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0 365.0
24
Pro Forma Balance Sheet
(in millions) 2016E 2017E 2018E 2019E 2020E
Assets
Cash and ST Investments 1,243 1,243 1,243 1,243 1,243
Accounts Receivable 1,615 1,669 1,725 1,783 1,845
AR Days 34 34 34 33 33
Inventory 341 351 361 373 385
Inv Days 13 13 13 13 13
Other Current Assets 683 698 712 727 743
Total Current Assets 3,930 4,008 4,089 4,173 4,262
Net PP&E 41,645 42,412 43,200 44,008 44,837
Investments 3,118 3,298 3,490 3,693 3,908
Other LT Assets 810 810 810 810 810
Total Assets 49,503 50,529 51,588 52,684 53,817
Liabilities&Shareholders Equity
Accounts Payable 1,479 1,536 1,596 1,659 1,726
AP Days 30 30 30 30 30
Short-Term Debt 125 125 125 125 125
Current Maturities of LT Debt 186 186 186 186 186
Other Current Liabilities 1,248 1,248 1,248 1,248 1,248
Total Current Liabilities 3,068 3,125 3,185 3,248 3,315
Long-Term Debt 29,037 27,473 25,908 24,344 22,780
Other Liabilities 2,617 2,653 2,690 2,729 2,768
Deferred Income Taxes 12,158 12,753 13,383 14,051 14,759
Total Liabilities 46,880 46,003 45,167 44,372 43,621
Shareholders Equity 2,624 4,525 6,422 8,312 10,196
Liabilities+Shareholders Equity 49,503 50,529 51,588 52,684 53,817
Networking Capital 863 883 903 925 947
Change in Networking Capital 20 21 21 22
Days in a Year 365 365 365 365 365
25
NS Cash Flow
(in millions) 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
D&A 922 922 956 913 1,296 1,528 1,763 2,003 2,248
Account receivable (64) 85 (31)
Purchases of investments (23) (130) (104)

Common stock issued 89 131 130
Capital expenditure 2,241 1,971 2,118 2,139 2,161 2,182 2,204 2,226 2,248
26
CP Cash Flow
(in millions) 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Net income 484 875 1,476 1,197 1,312 1,362 1,413 1,465 1,520
D&A 539 565 552 547 477 491 506 521 537
Investment 265 435 0 0

Cash at beginning of period 47 333 476 226
Cash at end of period 333 476 226 240
Operating cash flow 1,328 1,950 2,123 2,013
Capital expenditure 1,148 1,236 1,449 1,376 1,390 1,404 1,418 1,432 1,446
27
CP Assumptions Income Statement
Income Statement
Growth Y/Y 3%
Compensation 20%
Materials and Other Services 21%
Fuel 12% (constant as prices drop)
D&A 9%
Interest Expense 261
Unusual Expense (191)
Tax Rate 24%
28
NS Balance Sheet Assumptions
Income Statement
Revenue 5.00% Q4-2015
Compensation and Benefits 26.25% 5.69%
Materials, Services, and other 22.00%

Fuel 9.10%
D&A 2015 2017 2018 2019 2020
% of Capital Expenditure 42.70% 70.00% 80.00% 90.00% 100.00%
Management Team Salary 32

NSC Share Price 11/17/15 86.97
Independent Operating Ratio 71.00%
COGS 26.50%
Fuel -5%
Interest income 5%
Unusual Items 157
Tax Expense 36%
29
CP Balance Sheet Assumption
Balance Sheet
Assets
Cash and ST Investments 368

Account Receivable 550
AR Days 36
Inventory 136
Inv Days 14
Other Current Assets 142
Net PP&E 12,475
Investments 108
LT Assets 680
Liabilities
Accounts Payable 332
Maturities of LT Debt 49
Other Current Liabilities 781
Other Liabilities 1,235
Deferred Income Taxes 2,252
30
Accretion at $100
Accretion / dilution
Acquirer net income $1,312.0 $1,361.6 $1,412.7

Target net income 2,008.86 1,997.25 1,989.60
Combined net income $3,320.9 $3,358.9 $3,402.3
Plus: Synergy adjustments (after-tax) 149.9 257.6 394.0
Less: Forgone interest on cash adjustments (after-tax) (3.2) (3.2) (3.2)
Less: Interest expense adjustments (after-tax) (606.2) (606.2) (606.2)
Pro forma net income $2,861.3 $3,007.0 $3,186.9
Pro forma shares 322.8 322.8 322.8
Pro forma EPS $8.86 $9.32 $9.87
Acquirer EPS 8.32 8.64 8.96
Accretion / dilution ($) $0.54 $0.68 $0.91
Accretion / dilution (%) 6.5% 7.8% 10.1%
31
Accretion at $110
Pro forma EPS $8.38 $8.81 $9.35
32
Accretion at $115
Pro forma EPS $8.33 $8.79 $9.36
33
NS Discounted Cash Flow
Q4 2015 2016E 2017E 2018E 2019E 2020E Equity Risk Premium 5%
EBIT 1,478 3,567 3,579 3,599 3,627 3,663
Tax rate 36% 36% 36% 36% 36% 36% 10 year T Bill 2.38%
NOPAT 951 2,295 2,302 2,315 2,333 2,357
Interest Expense 572 601 631 662 696 730 Market Value Equity 24112
CapEX (362) (2,139) (2,161) (2,182) (2,204) (2,226) Shares Outstanding 301.4
D&A 146 1,296 1,528 1,763 2,003 2,248 Stock Price 80
Change in NWC (481) (20) (20) (21) (22) (23) % of total capital 73%
FCFF $254.36 $1,432.33 $1,648.94 $1,874.97 $2,110.60 $2,356.26

Total Debt 8,985
Years out 0.25 1.25 2.25 3.25 4.25 5.25
PV Factor 0.98 0.91 0.85 0.79 0.73 0.68 Long Term Debt 8,985
% of total capital 27%
Beta 1.34
Terminal Value (growth) $43,147.51
Terminal Value (multiple) $56,368.34 Cost of Equity 9.40%
Discounted Free Cash Flow (growth)$249.76 $1,307.46 $1,399.26 $1,479.10 $1,547.81 $31,021.67 Cost of Debt 3% 3.28%
Discounted Free Cash Flow (multiple)
$249.76 $1,307.46 $1,399.26 $1,479.10 $1,547.81 $40,034.81
Interest Coverage Ratio 2.5830403
Enterprise Value (growth) $37,005.05 Enterprise Value (multiple)
$46,018.20 Prefered Stock 2
(-) Debt (8,985) (-) Debt (8,985) Spread 1.75%
(-) Preferred Stock (2) (-) Preferred Stock -2 Base Points 0.90%
(+) Cash 973 (+) Cash 973 Average Growth of the US GDP 2.00%
Equity Value $28,991.05 Equity Value $38,004.20 Exit Mulitple (EV/EBIT) 15.4
FDSO 301.4 FDSO 301.4
Implied Share Price $96.19 Implied Share Price $126.09 WACC 8% 7.74%
Premium 10.6% Premium 45.0%
34
NS Discounted Cash Flow with Synergies
Q4 2015 2016E 2017E 2018E 2019E 2020E Equity Risk Premium 5%
EBIT 1486 3914 3917 4128 4230 4345
Tax rate 36% 36% 36% 36% 36% 36% 10 year T Bill 2.38%
NOPAT 961 2557 2570 2719 2800 2889
Tax-affected Revenue Synergies 5 39 51 64 78 94

Interest Expense 572 601 631 662 696 730 Market Value Equity 24112
CapEX (362) (2,139) (2,161) (2,182) (2,204) (2,226) Shares Outstanding 301.4
D&A 146 1,296 1,528 1,763 2,003 2,248 Stock Price 80
Change in NWC (481) (20) (20) (21) (22) (23) % of total capital 73%
FCFF $264.62 $1,694.41 $1,916.95 $2,279.19 $2,577.15 $2,888.71

Synergies $232.98 $400.43 $612.50 $709.61 $812.13
FCFF + synergies 1,927 2,317 2,892 3,287 3,701 Total Debt 8,985
Years out 0.25 1.25 2.25 3.25 4.25 5.25
PV Factor 0.98 0.91 0.85 0.79 0.73 0.68 Long Term Debt 8,985
% of total capital 27%
Beta 1.34
Terminal Value (growth) $52,897.64
Terminal Value (multiple) $66,851.61 Cost of Equity 9.40%
Discounted Free Cash Flow (growth) $259.84 $1,759.36 $1,966.49 $2,281.14 $2,410.33 $38,031.70 Cost of Debt 3% 3.28%
Discounted Free Cash Flow (multiple) $259.84 $1,759.36 $1,966.49 $2,281.14 $2,410.33 $47,544.66
Interest Coverage Ratio 2.5970202
Enterprise Value (growth) $46,708.86 Enterprise Value (multiple) $56,221.82 Prefered Stock 2
(-) Debt (8,985) (-) Debt (8,985) Spread 1.75%
(-) Preferred Stock (2) (-) Preferred Stock (2) Base Points 0.90%
(+) Cash 973 (+) Cash 973 Average Growth of the US GDP 2.00%
Equity Value $38,694.86 Equity Value $48,207.82 Exit Mulitple (EV/EBIT) 15.4
FDSO 301.4 FDSO 301.4
Implied Share Price $128.38 Implied Share Price $159.95 WACC 8% 7.74%
35
Synergies
(in millions) 2015 2016 2017 2018 2019 2020 Subtotals
Synergies
Management 8 32 32 32 32 32 168
Cost Synergies 0 162 318 516 599 686 2,281
Total Cost Synergies $8 $194 $350 $548 $631 $718 2,449
Independent COGS 7,711 8,096 8,501 8,926 9,373 9,841

Independent Operating Ratio 71% 71% 71% 71% 71% 71%
Proforma COGS 7,711 7,902 8,152 8,378 8,741 9,123
Proforma Operating Ratio 71.0% 69.3% 68.1% 66.6% 66.2% 65.8%
(in millions) 2015 2016 2017 2018 2019 2020 Subtotals

Management 8 32 32 32 32 32 168
Fuel 0 74 104 136 143 150 607
Excess Rail/Car 0 60 125 198 207 218 808
Workforce Reductions 0 29 88 183 249 318 866
Total Cost Synergies $8 $194 $350 $548 $631 $718 2,449
Revenue Synergies 14 109 143 180 220 264 929
Tax affected Revenue Synergies 5 39 51 64 78 94 331
Total Synergies $13 $233 $400 $612 $710 $812.13 $2,781
36
Comparable Companies
Ticker Business Market cap LTM P/E EV / EBIT EV / EBITDA
CSX Rail Freight 27,686.23 13.5 10.0 7.6 Comps:

CNI Rail Freight 47,990.60 13.6 14.2 10.8 Average EV/EBIT
UNP Rail Freight 55,157.19 20.9 7.4 6.1 Median EV/EBIT
CP Rail Freight 32,667.50 25.0 15.9 14.2 Average EV/EBITDA
KSU Rail Freight 13,423.30 26.9 18.15 13.9 Median EV/EBITDA
Q1 EV/EBITDA 6.
Q3 EV/EBITDA 14
EV/EBIT (Median) EV/EBIT (Average) EV/EBITDA(Average) EV/EBITDA (Median) EV/EBITDA (Q1) EV/EBITDA (Q3)
38,553.93 46,908.02 47,594.87 48,809.81 30,981.35 63,600.91
(8,985) (8,985) (8,985) (8,985) (8,985) (8,985)
(2) (2) (2) (2) (2) (2)
973 973 973 973 973 973
30539.93 38894.02 39580.87 40795.81 22967.35 55586.91
301.40 301.40 301.40 301.40 301.40 301.40
101.33 129.04 131.32 135.35 76.20 184.43
37
Precedent Transactions
TV/EBITDA Q1 TV/EBITDA Q3 TV/EBITDA Median TV/EBITDA Average

19,062.97 34,404.09 29,539.12 27,668.73
(8,985.00) (8,985.00) (8,985.00) (8,985.00)
(2.00) (2.00) (2.00) (2.00)
973.00 973.00 973.00 973.00
11,048.97 26,390.09 21,525.12 19,654.73
301.40 301.40 301.40 301.40
36.66 87.56 71.42 65.21
38
Precedent Transactions Continued
TV/EBIT Q1 TV/EBIT Q3 TV/EBIT Median TV/EBIT Average
32,818.48 46,326.56 38,388.79 36,071.01
(8,985.00) (8,985.00) (8,985.00) (8,985.00)

(2.00) (2.00) (2.00) (2.00)
973.00 973.00 973.00 973.00
24,804.48 38,312.56 30,374.79 28,057.01
301.40 301.40 301.40 301.40
82.30 127.12 100.78 93.09
TV/Revenue Q1 TV/Revenue Q3 TV/Revenue Median TV/Revenue Average

22,325.64 46,496.25 31,562.62 33,461.50
(8,985.00) (8,985.00) (8,985.00) (8,985.00)
(2.00) (2.00) (2.00) (2.00)
973.00 973.00 973.00 973.00
14,311.64 38,482.25 23,548.62 25,447.50
301.40 301.40 301.40 301.40
47.48 127.68 78.13 84.43
39
Precedent Transactions Continued
11/3/2009 7/23/2012
TARGET ACQUIRER TARGET ACQUIRER
Burlington Northern Santa Fe Berkshire Hathaway Inc RailAmerica Inc Genesee & Wyoming Inc
Enterprise Value 42669 39674.5 Enterprise Value 1300 5781

EBITDA 4799 16671 EBITDA 190.3 264
Revenue 14016 111,706 Revenue 611 875
Synergies 0 0 Synergies 0 36
EBIT 3262 13544 EBIT 138.5 190
Offer Price 100 100 Offer Price 27.5
Unaffected Share Price 81.31 Unaffected Share Price 24.58
81.31 24.58
Deal Price 44000 Deal Price 1,400
8/3/1995 3/16/1998
TARGET ACQUIRER TARGET ACQUIRER
Southern Pacific Rail Corp. Union Pacific Corp. Illinois Central Corp Canadian National Rail
Enterprise Value 5419.8 Enterprise Value 2645.1
EBITDA 1180.9 EBITDA 306.9
Revenue 3060.5 Revenue 699.8
Synergies 1195.6 Synergies 1195.6
EBIT 1019.6 EBIT 263.9
Offer Price 24 Offer Price 39
Unaffected Share Price 17.96 Unaffected Share Price 32.175
Premium in Dollars 6.825
Deal Price 5500 Deal Price 3000
40
WACC Sensitivity
WACC
$96.19 6% 7% 8% 9% 10%
1% 116.13 91.29 70.20 60.32 50.03
1.50% 129.69 100.17 75.94 64.84 53.44
US GDP 2.00% 146.64 110.83 82.61 70.00 57.28
2.50% 168.44 123.86 90.43 75.95 61.62
3% 197.50 140.15 99.75 82.90 66.59
41
STB
42
Debt Structure
FY 2015 Debt Structure Details
Description Type Am ount Ow ed Rate Maturity Issue Seniority Secured Convertible
0-Year Notes Bonds and Notes 443.2 5.95% 2037 Senior No No
10.5-Year Notes Bonds and Notes 248.7 3.70% 2026 2015 Senior No No
100-Year Notes Bonds and Notes 898.0 6.13% 2115 2015 Senior No No
10-Year Medium Term Notes Bonds and Notes 269.6 6.25% 2018 2008 Senior No No
10-Year Medium Term Notes Bonds and Notes 90.1 5.10% 2022 2012 Senior No No
12.5-Year Notes Bonds and Notes 348.1 4.45% 2023 2011 Senior No No
Debentures Bonds and Notes 249.4 9.45% 2021 Senior No No
Equipment Trust Certificates Bonds and Notes 46.1 7.49% 2021 Senior Yes No
Obligations under Capital Capital Lease 124.0 6.313% - 6.990% 2022 - 2026 Senior Yes No
Leases
Other Long-Term Loans Term Loans 7.2 NA 2016 - 2025 Senior No No
Perpetual 4% Consolidated Bonds and Notes 30.3 4.00% Perpetual Senior No No
Debenture Stock
Perpetual 4% Consolidated Bonds and Notes 5.0 4.00% Perpetual Senior No No
Debenture Stock
Secured Equipment Notes Bonds and Notes 104.5 6.91% 2024 Senior Yes No
Senior Secured Notes Bonds and Notes 99.5 5.41% 2024 Senior Yes No
43
Cash, Debt, and Equity Consideration at $100
Cash consideration adjustments
Cash consideration $763.0
Interest on cash (%) 0.5%
Foregone interest on cash (pre-tax) $5.0

Tax rate 35.7%
Foregone interest on cash (after-tax) $3.2
Debt consideration adjustments
Debt consideration $14,497.8
Interest on debt (%) 6.5%
Interest expense (pre-tax) $942.4
Tax rate 35.7%
Interest expense (after-tax) $606.2
Equity consideration adjustments
Equity consideration $22,891.2
Acquirer stock price 138.6
New shares to be issued 165.2
Existing shares 157.6
Pro forma shares 322.8
44

Tax rate 35.7%
Interest expense (pre-tax) $1,016.8
Tax rate 35.7%
45

Tax rate 35.7%
Interest expense (pre-tax) $1,275.9
Tax rate 35.7%
46
Equity Exchange Rate
Deal structure at NS share $100
CP share $138.58 % Equity Cost of share with equity CP-NSC ratio Cost of share with Cash
50% $50.00 0.36 $50.00
60% $60.00 0.43 $40.00

74% $74.00 0.53 $26.00
75% $75.00 0.54 $25.00
25% $27.50 0.20 $72.50
60% $66.00 0.48 $44.00
74% $81.40 0.59 $18.60
75% $82.50 0.60 $17.50
25% $27.50 0.20 $72.50
60% $69.00 0.50 $46.00
74% $81.40 0.59 $18.60
75% $82.50 0.60 $17.50
47

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Canadian Pacific Action Plan 17 Nov 2015

Canadian Pacific-Norfolk Southern

Brief Overview ▪ Railways grow best through mergers and acquisitions

▪ Hostile Takeover of NS at a price of $100 per share

Environment ▪ US inflation has been increasing regularly in recent years

▪ Railroad industry has become deregulated

▪ 25% of U.S. rail traffic passed through Chicago

▪ Freight transportation railroad company Market Cap $26.2 Billion

Efficiency ▪ NS maintains high operating ratio at 71%

Stagnated ▪ Difficult to expand rail lines

▪ CP and NS meet end to end in Chicago and Detroit

NS Operating Ratio CP Operating Ratio

Unnecessary Costs ▪ Eliminated unnecessary executive positions

▪ Inefficient freight transportation

▪ Closure of intermodal yards

Carloads Per Employee

Management Fuel 248

Excess Rail/Car Workforce Reductions 246

Cost Synergies Revenue Synergies

EV/EBIT $101 $129

EV/EBITDA $76 $131

DCF with Synergies $126 $161

DCF Analysis $96 $126

CEO James A. ▪ Lifelong employee of NS

1.5% Debt/EBITDA 4.05x

of competition between regions

Date 8/3/95 Date 7/23/12

Acquirer Union Pacific Acquirer Genesee and

EBITDA 4.66x EBITDA 7.60x

Notes Western region Notes Conglomerate

▪ Cost and revenue synergies from the merger

▪ Valuation metrics suggest NS is undervalued

Balance Sheets 23-25

Materials, Services, and other 3,608 3,702 3,798 3,963 4,136

EBIT 6,026 6,293 6,616 6,836 7,076

Growth Y/Y N/A 4.51% 4.52% 4.53% 4.54%

Liabilities and Shareholders Equity

Liabilities and Shareholders Equity

Purchases of investments (23) (130) (104)

Investment 265 435 0 0

Materials, Services, and other 22.00%

Management Team Salary 32

Cash and ST Investments 368

Acquirer net income $1,312.0 $1,361.6 $1,412.7

FCFF $254.36 $1,432.33 $1,648.94 $1,874.97 $2,110.60 $2,356.26

Tax-affected Revenue Synergies 5 39 51 64 78 94

FCFF $264.62 $1,694.41 $1,916.95 $2,279.19 $2,577.15 $2,888.71

Independent COGS 7,711 8,096 8,501 8,926 9,373 9,841

(in millions) 2015 2016 2017 2018 2019 2020 Subtotals

CSX Rail Freight 27,686.23 13.5 10.0 7.6 Comps:

TV/EBITDA Q1 TV/EBITDA Q3 TV/EBITDA Median TV/EBITDA Average

(8,985.00) (8,985.00) (8,985.00) (8,985.00)

TV/Revenue Q1 TV/Revenue Q3 TV/Revenue Median TV/Revenue Average

Enterprise Value 42669 39674.5 Enterprise Value 1300 5781

Foregone interest on cash (pre-tax) $5.0

Foregone interest on cash (pre-tax) $5.0

Foregone interest on cash (pre-tax) $5.0

60% $60.00 0.43 $40.00

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