TORONTO, Oct. 1, 2013 — CN (TSX: CNR) (NYSE: CNI) said today the commuter rail infrastructure projects it undertook for GO Transit in the Greater Toronto Area (GTA) were rigorously reviewed and that it rejects unfounded allegations that it defrauded the agency.
Sean Finn, CN executive vice-president, corporate services, and chief legal officer, said: “CN is deeply concerned with allegations of financial improprieties in connection with its work on behalf of GO Transit since 2004. CN and GO Transit developed a rigorous construction management process that assured financial integrity, cost certainty, quality work and strict oversight. CN categorically rejects allegations that it in any way defrauded the agency.”
All of CN’s construction projects for GO Transit were completed on a fixed-price basis that the parties agreed upon before work started. This approach required CN to maintain discipline in delivering projects within the agreed-upon price. This also provided GO Transit with cost certainty for each project, enabling it to manage expansion budgets without the risk of cost overruns.
The rigorous construction management process agreed to by CN and GO Transit contained four steps:
• Project scoping and definition: for each project there was a specific agreement on the scope of the work, which took into account the fact that freight, commuter and passenger trains share the same infrastructure and that no infrastructure is dedicated to GO Transit on CN’s network.
• Contractual agreement on fixed price: CN prepared -- and GO Transit reviewed and formally approved -- a detailed estimate for each project that formed the basis for the committed fixed price under which CN agreed to deliver the project. Only once satisfied with the details and price did GO Transit provide CN with a purchase order allowing for the work to commence. Such fixed-price purchase orders were seldom varied, and only with the consent of GO Transit and CN.
• On-site construction monitoring: regularly throughout each project, joint CN and GO Transit field inspection took place to ensure that the work was executed as planned and quantities installed in accordance with the agreed-to project scope. A highly experienced consulting firm was also hired by GO Transit to help carry out the inspection work.
• Post-completion inspection and final payment -- upon completion, a joint inspection was done in the field to confirm that the work was to GO Transit’s satisfaction. Final payment was made by GO Transit only after such inspection was completed.
Finn said: “This rigorous construction management process assured projects were completed as to agreed-upon specifications and on budget. Of equal importance, this rigorous process assured transparency and full accountability of CN. At no time has GO Transit expressed concerns with CN’s management of projects performed on its behalf.
”CN is very proud of the role it’s played in building the rail infrastructure that supports GO Transit’s highly successful rail commuter service in the GTA.”
Scott Holmes’ claims and allegations
Former CN employee Scott Holmes, who was the subject of a comprehensive fraud investigation, has made unfounded allegations of financial improprieties by CN, including the following:
Allegation: That GO Transit was unaware that CN was installing previously worn track materials as part of the contract to expand rail capacity on the agency’s Lakeshore West Line.
Fact: The Lakeshore West contract with GO Transit clearly identified that CN would install partially worn materials – a commonly-accepted practice -- for a short segment of track at the west end of CN’s Aldershot Yard. The on-site construction monitoring element of the construction management process gave the agency the ability to do site verification of these partially worn materials as they were installed.
Allegation: CN billed GO Transit and Ontario taxpayers for network improvements that were unnecessary for commuter rail, including undercutting the overpass at Snake Road to facilitate CN freight trains.
Fact: CN only performed work that GO Transit was aware of and had authorized as part of the detailed project scoping and definition step of the construction management process. As noted, while expanded capacity required for GO Transit service called for adding infrastructure, no one track is dedicated to GO Transit service. The work at Snake Road was done to ensure full corridor operating capacity for GO Transit and CN trains.
Allegation: CN billed GO Transit for unrelated expenses, including such items as hotel rooms outside of the Lakeshore West project territory.
Fact: Considering the fixed-price basis upon which the various projects were realized, the manner expenses were coded and reported internally at CN is a relevant matter for CN, but not for GO Transit, which paid only what it agreed to by contract. Under these types of arrangements, the key measure of performance hinges on whether the in-scope work was realized at the agreed-upon price. A verification of GO Transit-related project expenses has been started by CN. The review is on-going, but there is no indication of any financial improprieties other than indicated below with regard to Scott Holmes.
CN’s lawsuit against Scott Holmes
CN has a lawsuit against Scott Holmes before the Ontario Superior Court of Justice. From Sept. 25, 1999, Holmes was a program supervisor for CN based in Toronto. In that capacity, he was directly involved in construction programs in Ontario, including programs associated with GO Transit. In its action, CN contends that, while employed by CN, Holmes incorporated his own companies and participated in various other businesses providing services and equipment to CN, without disclosing his personal interest in those businesses, and that those businesses charged CN several millions of dollars for services that were not fully and properly rendered. As CN charged GO Transit a fixed price for the project, CN suffered any losses, not GO Transit. CN is suing Holmes to recover misappropriated funds. CN denies vigorously Holmes’ allegation that CN committed financial improprieties in the management of GO Transit projects.
CN (TSX: CNR)(NYSE: CNI) is a true backbone of the economy, transporting approximately C$250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network spanning Canada and mid-America. CN – Canadian National Railway Company, along with its operating railway subsidiaries -- serves the cities and ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth, Minn./Superior, Wis., and Jackson, Miss., with connections to all points in North America.
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