Canadian Pacific Announces Agreement to Acquire DM&E Railroad

CALGARY– Canadian Pacific Railway Limited said it has reached an agreement to acquire the Dakota, Minnesota & Eastern Railroad Corporation and its subsidiaries (DM&E) for $1.48 billion.

With this value-enhancing transaction, Canadian Pacific expands its current network by approximately 2,500 miles and increases its access to U.S. Midwest markets including agri-products, coal and ethanol. The deal consists of a $1.48 billion cash payment at closing and future contingent payments of up to approximately $1 billion.

Future contingent payments of $350 million will become due if construction starts on the Powder River Basin expansion project prior to December 31, 2025. Further future contingent payments of up to approximately US$700 million will become due upon the movement of specified volumes of coal from the Powder River Basin over the Powder River Basin extension prior to Dec. 31, 2025.

“The DM&E is an excellent fit for Canadian Pacific making this a strategic end-to-end addition to our network,” said Fred Green, president and chief executive officer of Canadian Pacific. “The DM&E is a high-quality, growing regional railroad that complements our existing franchise. This investment presents the opportunity for future growth through further expansion of our network and is accretive to our EPS in 2008.”

“There are natural synergies between our two railroads which make this a very attractive transaction. We have a solid transition plan that I am confident we will implement successfully. CP is the safest railroad in North America and we will work together to build on the significant improvements the DM&E has made in operating efficiency and safety over the past several years. This includes Canadian Pacific’s intention to spend an additional US$300 million of capital for further upgrading of the regional railroad over the next several years.”

“Canadian Pacific is our natural partner and we are very pleased with this deal. The logic of this acquisition is compelling,” said Kevin Schieffer, President and CEO of the DM&E. “I’m proud of the DM&E and the organization we’ve built; our operating ratio is one of the best in the industry. The combination of our two companies and the resulting efficiencies will be very positive for our customers. CP is not only a natural operating fit; we also share a commitment to our employees, our customers and the communities we serve as well as a vision for the potential of the Powder River Basin.”

The addition of the DM&E extends the reach of Canadian Pacific’s network. It increases the rail network, and adds new customers and expands the service available to customers of both companies.

The DM&E is the largest regional railroad in the U.S. and the only Class II railroad that connects and interchanges traffic with all seven Class I railroads, connecting with Canadian Pacific at Minneapolis, Winona, MN and Chicago.

It had 2006 freight revenues of approximately US$258 million, which is expected to grow to approximately US$280 million, or by nine per cent in 2007. The DM&E is headquartered in Sioux Falls, S.D., and has approximately 1,000 employees, 2,500 miles of track and rolling stock that includes 7,200 rail cars and 150 locomotives.

It serves eight states; Illinois, Iowa, Minnesota, Missouri, Nebraska, South Dakota, Wisconsin and Wyoming with access to Chicago, Minneapolis/St. Paul, Kansas City and key ports.

The DM&E has been pursuing a strategy to become the third rail carrier in Wyoming’s Powder River Basin. The Powder River Basin is North America’s largest and most rapidly growing source of low-cost, low-sulphur coal as well as the largest single rail market in terms of volume.

“Canadian Pacific is excited about the prospect for growth in the coal-rich Powder River Basin,” Green said. The DM&E’s favorable geographic position provides a unique ability to create an efficient and competitive additional link to midwestern and eastern utilities. We have created a disciplined plan aimed at facilitating a decision on the expansion and ensuring the investment provides returns that exceed our thresholds. Our purchase agreement has been structured to share further upside as the benefits of the expansion are realized. We are confident this will provide maximum long-term value for our shareholders.”

“With our strong balance sheet, this investment represents the best use of our free cash,” said Mike Lambert, Chief Financial Officer of Canadian Pacific “We have secured fully committed acquisition financing as part of this transaction. Permanent financing for this acquisition and future financing for a potential PRB expansion will be structured to preserve appropriate debt and coverage ratios for our investment grade rating.”

In conjunction with this purchase, Canadian Pacific has suspended activity under its current share repurchase program that commenced in March 2007. Canadian Pacific has purchased 3.2 million shares in 2007.

With the successful completion of this transaction, which is expected to close in the next 30 to 60 days, Canadian Pacific confirmed that its outlook in 2007 for diluted earnings per share, excluding foreign exchange gains and losses on long-term debt and other specified items, remains unchanged.

The CP/DM&E transaction is subject to review and approval by the Surface Transportation Board (STB), during which time the shares of DM&E will be placed into an independent voting trust. The review process is expected to take less than a year.

CP expects that the operation will become part of CP’s U.S. network upon completion of the review. The voting trust is required by US law so that CP does not exercise control over DM&E prior to approval of the transaction by the STB.

— PRNewswire-FirstCall