Calgary Alberta - To win control of Canadian Pacific Railway Ltd., activist investor William Ackman pitched an aggressive plan to turn "the worst performing railroad in North America" into one of the best.
 
Two years later, Hunter Harrison, the railroad veteran Mr. Ackman hired as CEO, is close to delivering on that promise.
 
Mr. Ackman's Pershing Square Capital Management LP has already tripled the value of its initial $1.07 billion investment, and Mr. Harrison has notched a third railroad turnaround based on a cost-cutting formula he says has changed little in two decades.
 
"I've been a CEO for 22 years now, and it's not been any different than in 1992," the Tennessean said of his aggressive drive to boost efficiency at CP.
 
But as Mr. Harrison hits the home stretch of his push toward Mr. Ackman's targets, his time-tried rail-management methods face new tests.
 
Driven by growth in shipments of shale oil by rail, the industry is undergoing a period of rapid change that is spurring tougher regulation and putting pressure on rail operators across North America.
 
On both sides of the border, regulators are taking action after a string of derailments of crude-carrying trains, including one in Lynchburg, Virginia, last month, and one that killed 47 people in Lake Megantic last summer.
 
Measures so far include stricter standards for the testing and transportation of crude, lower speeds for trains carrying hazardous materials, and in Canada, a deadline to phase out or retrofit 65,000 tank cars.
 
CP's crude business has boomed, making it the second-biggest rail shipper in North Dakota's Bakken region after BNSF Railway Co.
 
That places it among the companies that will be most affected by the new safety rules, as well as by measures aimed at preventing growth in crude shipments from displacing other commodities.
 
Rail executives, including Mr. Harrison, have criticized the moves, warning that such regulation could prove costly and onerous.
 
"Those bureaucrats have no transportation experience," he said, adding that reducing speed further for all cargo, including crude and other hazardous materials, as has been proposed, would be a "nightmare" for the railroad.
 
Already, some of the new rules have affected how CP and others operate.
 
The Canadian government imposed a weekly minimum for grain shipments on CP and rival Canadian National Railway after farmers complained their shipments were being squeezed by crude volume during a cold snap this winter that slowed all train traffic.
 
Last month the U.S. Surface Transportation Board directed CP and BNSF to provide weekly reports on their fertilizer shipments in the U.S. after farmers complained they wouldn't be able to plant their crop on time this spring because fertilizer wasn't being delivered.
 
But Mr. Harrison dismissed farmers' claims that the delays were caused by higher shipments of crude amid CP's cuts to its network.
 
The railroad's capacity was nearly slashed in half this winter, he said, because the locomotives' air brakes couldn't work as efficiently in colder temperatures, creating safety risks for trains traveling down steep hills.
 
"When you're going down a mountain on 2 percent grade, you better watch what you're doing," he said.
 
Meanwhile, CP's crude traffic has soared, increasing to 90,000 carloads last year from only 500 in 2009, and it's forecast to grow to between 140,000 and 210,000 carloads by the end of next year.
 
Mr. Harrison said he expects revenue from oil to double to about 10 percent of total CP revenue in the next two or three years.
 
Revenue at CP, driven by grains as well as crude, climbed to $6.1 billion in fiscal 2013, an 8 percent increase from the year before.
 
CP's adjusted earnings for the year were $1.1 billion, a 48 percent increase from fiscal 2012, as costs fell 2 percent to $4.3 billion.
 
Mr. Harrison, now 69 years old, is credited with turning around CP rival Canadian National a decade ago, before he retired to run horse farms in Florida and Connecticut.
 
His retirement was short-lived.
 
Paul Hilal, a partner at Pershing Square, cold-called him after researching Canadian railroads for investment, looking to develop his thesis that CP was struggling because of weak leadership and culture.
 
"People familiar with the companies said CP's culture was very weak," Mr. Hilal recalled recently.
 
"Under Mr. Harrison's leadership CN had developed a go-getter culture characterized by an urgency to win, attention to detail, conscientiousness, and deep respect for safety."
 
When Pershing Square launched its proxy fight, the firm argued that CP had structural advantages to Canadian National, including shorter routes through the Rocky Mountains.
 
And, Pershing Square said, CP should have benefited from shipping higher-margin bulk items and its access to the Bakken shale.
 
Instead, the activists said, it was less efficient than Canadian National.
 
When Pershing Square said it believed CP could hit an operating ratio of 65 percent, the company paid $5 million for a study that claimed Pershing Square's targets were "unrealistic and unachievable," Mr. Hilal said.
 
Now, CP is close to hitting that target.
 
Mr. Harrison quickly made cuts across the railroad's 14,700-mile network in Canada and the U.S., sidelining 400 locomotives and 12,500 rail cars, consolidating terminals, and cutting 4,700 jobs.
 
He also shut down unused rail car sidings and hump yards in four of CP's metropolitan hubs in Canada.
 
To improve transit times, he instituted a system to eliminate idling empty rail cars and to instead run fewer but fuller cars on a tighter schedule.
 
That approach, farmers say, led to delays in delivering cars to grain terminals when cold weather slowed the network this winter.
 
Gerrid Cust, who runs a 17,000-acre farm in Davidson, Saskatchewan, says he missed filling an order to ship canola to Japan in January, foregoing a $10-a-bushel premium and putting his future orders at risk.
 
"Japanese customers won't forget about a missed shipment for the next 50 years," he said.
 
Cuts to the network helped reduce CP's operating ratio, operating costs as a percentage of revenue, a key industry performance measure, to 69.9 percent in the last fiscal year from 81.3 percent, where it stood at the end of 2011 when Mr. Ackman called CP the "worst-performing" railroad in North America.
 
Indeed, Mr. Harrison says he is within reach of cutting the operating ratio to the low-60 percent range by next year, which would make it the top-performing North American Class 1 railroad.
 
"That's a hell of a change, to go from worst to first in not even two years," said Mr. Harrison, speaking with an easy-going Southern drawl and repeatedly banging his large gold ring on a table to emphasize his point.
 
The company's shares have more than doubled since June 2012, when Mr. Harrison took over, from $72.05 to $174.94 a share on the Toronto Stock Exchange.
 
To further improve efficiency, Mr. Harrison said he is negotiating with North American railroads to streamline rail traffic and thus reduce congestion in Chicago, a major rail gateway.
 
He also said he's overhauling CP's shipping protocols to schedule the railroad's rail cars by the hour instead of daily.
 
Despite Mr. Harrison's emphasis on safety, CP received a $5,000 fine Monday from New York's transportation agency for failing to report a small oil-car derailment on time.
 
The derailed cars remained upright, no oil was spilled, and CP saw a "disconnect" in reporting the incident to officials after it had been addressed internally, a railroad spokesman said.
 
Last week, CP's board extended Mr. Harrison's contract to 2017.
 
After that he is likely to hand over the railroad's reins to Keith Creel, the chief operating officer.
 
While he is critical of regulators, Mr. Harrison has been outspoken on safety issues.
 
When a CP train carrying crude derailed on a bridge near the company's headquarters in Ogden, Alberta, last June, Mr. Harrison arrived at the scene to inspect the damage himself.
 
"I crawled under the cars. I determined the cause in about 10 minutes," he said.
 
"The first responders hadn't been there. The Transportation Safety Board hadn't been there. I'm not being critical, I'm just naming facts."
 
David George-Cosh.
 
Corrections and Amplifications
 
William Ackman's firm is Pershing Square Capital Management. An earlier version of this article incorrectly gave the name as Pershing Capital Square Management. Also, the name of the U.S. Surface Transportation Board was incorrectly given as U.S. Service Transportation Board.